UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from -------------------------------------------------
Commission file number 000-50113
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Golar LNG Limited
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(Exact name of Registrant as specified in its charter)
Golar LNG Limited
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(Translation of Registrant's name into English)
Bermuda
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(Jurisdiction of incorporation or organization)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
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(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
None
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Securities registered or to be registered pursuant to section 12(g) of the Act.
Common Shares, par value $1.00
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(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
65,612,000 Common Shares, par value $1.00
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 [X]
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS.............. 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE............................ 3
ITEM 3. KEY INFORMATION.................................................... 3
ITEM 4. INFORMATION ON THE COMPANY......................................... 12
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................... 25
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................... 40
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS....................................................... 42
ITEM 8. FINANCIAL INFORMATION.............................................. 45
ITEM 9. THE OFFER AND LISTING.............................................. 45
ITEM 10. ADDITIONAL INFORMATION............................................. 46
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................. 56
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES.................................................. 67
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................... 57
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS................................................ 57
ITEM 15. CONTROLS AND PROCEDURES............................................ 57
ITEM 16. RESERVED .......................................................... 57
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT................................... 57
ITEM 16B CODE OF ETHICS..................................................... 57
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES............................. 57
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES......... 57
PART III
ITEM 17. FINANCIAL STATEMENTS............................................... 58
ITEM 18. FINANCIAL STATEMENTS............................................... 58
ITEM 19. EXHIBITS .......................................................... 58
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This document contains assumptions, expectations, projections,
intentions and beliefs about future events, in particular under Item 4,
"Information on the Company - Our Business Strategy" and Item 5, "Operating and
Financial Review and Prospects". These statements are intended as
"forward-looking statements." We may also from time to time make forward-looking
statements in our periodic reports to the United States Securities and Exchange
Commission, other information sent to our stockholders, and other written
materials. We caution that assumptions, expectations, projections, intentions
and beliefs about future events may and often do vary from actual results and
the differences can be material.
All statements in this document that are not statements of historical
fact are forward-looking statements. Forward-looking statements include, but are
not limited to, such matters as:
o future operating or financial results;
o statements about future, pending or recent acquisitions, business
strategy, areas of possible expansion, and expected capital
spending or operating expenses;
o statements about LNG market trends, including charter rates,
development of a spot market, factors affecting supply and
demand, and opportunities for the profitable trading of LNG;
o expectations about the availability of vessels to purchase, the
time which it may take to construct new vessels, or vessels'
useful lives; and
o our ability to obtain additional financing.
When used in this document, words such as "believe," "intend,"
"anticipate," "estimate," "project," "forecast," "plan," "potential," "will,"
"may," "should," and "expect" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
We undertake no obligation to publicly update or revise any
forward-looking statements contained in this document, whether as a result of
new information, future events or otherwise, except as required by law. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed in this document might not occur, and our actual results could differ
materially from those anticipated in these forward-looking statements.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated and combined financial and other
data summarize our historical consolidated and combined financial information.
We derived the information as at December 31, 2004 and 2003 and for each of the
years in the three-year period ended December 31, 2004 from our audited
Consolidated Financial Statements included in Item 18 of this annual report on
Form 20-F, prepared in accordance with accounting principles generally accepted
in the United States, or U.S. GAAP. The selected income statement data with
respect to the years ended December 31, 2001 and 2000 and the selected balance
sheet data as at December 31, 2002, 2001 and 2000, has been derived from audited
combined and consolidated financial statements prepared in accordance with U.S.
GAAP not included herein. We are a holding company that was formed on May 10,
2001. We acquired our liquefied natural gas, or LNG, operations from Osprey
Maritime Limited, or Osprey, a company indirectly controlled by our Chairman and
President and major shareholder, John Fredriksen. The LNG operations were a
fully integrated business of Osprey prior to our acquisition of them.
Accordingly, the following financial information for the year ended December 31,
2000 and for the period that includes the five months to May 31, 2001 has been
derived from the financial statements and accounting records of Osprey and
reflects significant assumptions and allocations. Our financial position,
results of operations and cash flows could have differed from those that would
have resulted if we had operated autonomously or as an entity independent of
Osprey in the period for which historical financial data is presented for the
year ended December 31, 2000 and for period that includes the five months to May
31, 2001 below and, similarly may not be indicative of our future operating
results or financial performance.
The amount previously reported in our annual report on Form 20-F for
the year ended December 31, 2003 as stockholders' equity as of December 31, 2003
differs from the amount shown below. In addition, the balance previously
reflected as marketable securities is now restated and described as "equity in
net assets of non-consolidated investee" below. These amounts have been restated
to reflect a change to the equity method of accounting for an investment
previously accounted for as "available for sale". The change to the equity
method of accounting is a result of an increase in the Company's level of
ownership that has given it the ability to exercise significant influence over
the investee subsequent to December 31, 2003. This restatement had no effect on
net income for periods prior to and including the year ended December 31, 2003.
The following table should also be read in conjunction with Item 5.
"Operating and Financial Review and Prospects" and the Company's Consolidated
Financial Statements and Notes thereto included herein.
At or for the Fiscal Year Ended
December 31
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(in thousands of $, except per common share data (restated)
and fleet data)
Income Statement Data:
Total operating revenues 163,410 132,765 130,611 114,223 113,009
Vessel operating expenses (1) 35,759 30,156 28,061 24,537 20,973
Voyage expenses (5) 2,561 2,187 - - -
Administrative expenses 8,471 7,138 6,127 8,232 7,715
Restructuring costs - - - 1,894 -
Depreciation and amortization 40,502 31,147 31,300 31,614 36,488
Operating income 76,117 62,137 65,123 47,946 47,833
Net financial expenses (25,304) (15,140) (40,367) (41,617) (44,820)
Income before equity in net earnings of investee,
income taxes and minority interests 50,813 46,997 24,756 6,329 3,013
Income taxes and minority interests (7,995) (7,427) (2,381) 1,963 3,517
Equity in net earnings of investee 13,015 - - - -
Net income (loss) 55,833 39,570 27,137 4,366 (504)
Earnings (loss) per common share
- basic (2) 0.85 0.68 0.48 0.08 (0.01)
- diluted (2) 0.84 0.68 0.48 0.08 (0.01)
Cash dividends per common share - - - - -
Weighted average number of shares - basic 65,612 58,533 56,012 56,012 56,012
Weighted average number of shares - diluted (2) 65,690 58,569 56,021 56,019 56,012
Balance Sheet Data (at end of year):
Cash and cash equivalents 51,598 117,883 52,741 57,569 5,741
Restricted cash and short-term investments 41,953 32,095 12,760 14,163 13,091
Short-term investments - - - - 14,231
Amounts due from related parties 294 180 281 261 -
Long-term restricted cash 714,802 623,179 - - -
Equity in net assets of non-consolidated investee
(7) 48,869 12,176 - - -
Newbuildings 145,233 207,797 291,671 132,856 -
Vessels and equipment, net 371,866 211,098 617,583 641,371 765,559
Vessels under capital lease, net 706,516 553,385 - - -
Total assets (7) 2,110,329 1,783,968 987,935 855,991 817,990
Current portion of long-term debt 66,457 61,331 48,437 41,053 10,171
Current indebtedness due to related parties - - 32,703 85,278 12,000
Current portion of obligations under capital leases 2,662 - - - -
Long-term debt 636,497 593,904 629,173 483,276 204,329
Long-term debt due to related parties - - - - 287,400
Long-term obligations under capital leases 842,853 616,210 - - -
Minority interest 26,282 18,706 13,349 25,820 26,011
Stockholders' equity (7) 402,770 338,801 196,136 174,397 257,034
Common shares outstanding (2) 65,612 65,612 56,012 56,012 56,012
Fleet Data (unaudited)
Number of vessels at end of year (3) 9 7 6 6 6
Average number of vessels during year (3) 8.33 6.34 6 6 6
Average age of vessels (years) 15.9 19.3 21.4 20.4 19.4
Total calendar days for fleet 2,919 2,315 2,190 2,190 2,182
Total operating days for fleet (4) 2,660 2,140 2,166 2,060 2,103
Average daily time charter equivalent earnings (5) $54,900 $57,300 $59,000 $53,600 $50,900
Average daily vessel operating costs (6) $11,800 $13,000 $12,800 $11,200 $9,600
Footnotes
(1) Vessel operating expenses are the direct costs associated with running a
vessel including crew wages, vessel supplies, routine repairs, maintenance
and insurance. In addition, they include an allocation of overheads
allocable to vessel operating expenses.
(2) Since our financial results for the year ended December 31, 2000 and for
the period that includes the five months to May 31, 2001, were "carved out"
of those of Osprey, we did not record any specific share capital for the
period before we acquired Osprey's LNG assets and operations. To provide a
measurement of earnings per share for those periods, we use for basic
earnings per share the 12,000 shares issued in connection with the
formation of Golar on May 10, 2001 and the subsequent issuance of 56
million shares in our Norwegian placement as described in Note 1 to our
Consolidated Financial Statements. Basic earnings (loss) per share is
computed based on the income (loss) available to common shareholders and
the weighted average number of shares outstanding. The computation of
diluted earnings per share assumes the conversion of potentially dilutive
instruments.
(3) In each of the periods presented above, we had a 60 per cent interest in
one of our vessels and a 100 per cent interest in our remaining vessels.
(4) The operating days for our fleet is the total number of days in a given
period that the vessels were in our possession less the total number of
days offhire. We define days offhire as days spent on repairs, drydockings,
special surveys and vessel upgrades or awaiting employment during which we
do not earn charter hire.
(5) The majority of our vessels are operated under time charters. However some
of our newer vessels operated under voyage charters during 2003 and 2004.
Under a time charter, the charterer pays substantially all of the vessel
voyage costs whereas under a voyage charter, the vessel owner pays such
costs. Vessel voyage costs are primarily fuel and port charges.
Accordingly, charter income from a voyage charter would be greater than
that from an equally profitable time charter to take account of the owner's
payment of vessel voyage costs. In order to compare vessels trading under
different types of charters, it is standard industry practice to measure
the revenue performance of a vessel in terms of average daily time charter
equivalent earnings, or "TCEs". For time charters, this is calculated by
dividing time charter revenues by the number of calendar days minus days
for scheduled offhire. We perform this calculation on a vessel by vessel
basis. For voyage charters, this is calculated by dividing voyage revenues,
net of vessel voyage costs, by the number of calendar days minus days for
scheduled off-hire. Net voyage revenues, a non-GAAP measure, provides more
meaningful information to us about the operating revenues generated from
our voyage charters than gross voyage revenues, the most directly
comparable GAAP measure. Net voyage revenues are also widely used by
investors and analysts in the tanker shipping industry for comparing
financial performance between companies and to industry averages. The
following table reconciles our net voyage revenues to voyage revenues for
the year ended December 31, 2004 and 2003. For each of the years ended
December 31, 2002, 2001 and 2000 we did not earn any voyage revenues.
(in thousands of $) 2004 2003
---------------------------------------------
Voyage revenues 2,412 9,062
Voyage expenses (2,561) (2,187)
Net voyage revenues (149) 6,875
(6) We calculate average daily vessel operating costs by dividing vessel
operating costs by the number of calendar days. We do this calculation on a
vessel by vessel basis.
(7) Amounts in 2003 have been restated to reflect retroactive application of
equity method of accounting related to our 21.09% interest in Korea Line
Corporation (`KLC'), a shipping company listed on the Korean Stock
Exchange, which was previously accounted for as an "available for sale"
marketable security. See Note 2 to our consolidated financial statements
beginning on page F-1 of this annual report.
B. Capitalization and Indebtedness
Not Applicable
C. Reasons for the Offer and Use of Proceeds
Not Applicable
D. Risk Factors
Some of the following risks relate principally to our business or to
the industry in which we operate. Other risks relate principally to the
securities market and ownership of our shares. Any of these risks, or any
additional risks not presently known to us or that we currently deem immaterial,
could significantly and adversely affect our business, our financial condition,
our operating results and the trading price of our common shares.
Risks Related to our Business
We generate a substantial majority of our revenue under seven long-term
agreements with two customers, and the unanticipated loss of one or more of
these agreements or either of these customers would likely interrupt our related
cash flow.
We receive a substantial majority of our revenue from seven long-term
charters with two large and established customers. In the year ended December
31, 2004, BG Group plc, or BG, accounted for 50.3 per cent and Pertamina (the
state owned oil and gas company of Indonesia) accounted for 40.1 per cent of our
total operating revenues, respectively. Pertamina chartered two of our vessels
during 2004 and BG chartered five of our vessels during 2004. All of our
charters have fixed terms, but might nevertheless be lost in the event of
unanticipated developments such as a customer's breach. Our customers may
terminate their charters with us if, among other events, the relevant vessel is
lost or damaged beyond repair. The unanticipated loss of any of these charters
or either customer would likely interrupt our related cash flow because we
cannot be sure that we would be able to enter into attractive replacement
charters on short notice. A persistent and continued interruption of our cash
flow could, in turn, substantially and adversely affect our financial condition.
Completion of our newbuilding program is dependent on our obtaining additional
financing.
We have installment payments to make relating to the construction cost
of our three newbuildings still under construction, which are due in 2006 and
2007. We currently do not have financing in place to meet all of the payments
for two of these newbuildings due in May 2006 and thereafter. In order to meet
these financial commitments, we will need to obtain further loans or other
financing in the amount of approximately $242 million. We have taken delivery of
two vessels in 2004 and one vessel in 2005 and have obtained financing for all
three. Additionally we have obtained financing for our newbuild due to be
delivered in January 2006. It is standard in the shipping industry to finance
between 50 and 80 per cent of the purchase price of vessels, or construction
cost in the case of newbuildings, through bank financing. In the case of vessels
that have charter coverage, the debt finance percentage may increase
significantly. If we were to obtain 50 per cent debt financing to cover the
instalments due on our two remaining unfinanced newbuildings, this would equate
to additional finance of approximately $151 million of the $242 million
required. For further information concerning our future financing plans, see
Item 5 "Operating and Financial Review and Prospects, Liquidity and Capital
Resources - Newbuilding Contracts and Capital Commitments". While we believe we
will be able to arrange financing for the full amount of newbuilding payments
due, to the extent we do not timely obtain necessary financing for a
newbuilding, the completion of that newbuilding could be delayed or we could
suffer financial loss, including the loss of all or a portion of the progress
payments we had made to the shipyard and any deficiency if the shipyard is not
able to recover its costs from the sale of the newbuilding.
We are considering various alternatives for the employment of our newbuildings,
failure to find profitable employment for them could adversely affect our
operations.
The Golar Winter (our newbuilding delivered in April 2004) started a
ten month charter on May 31, 2004. In February 2005 the Golar Winter was
substituted by the Golar Viking, our newbuilding delivered in January 2005 for
the remaining 1.5 months of this charter but has been re-employed on a five
month charter from April 2005. The Golar Frost (our newbuilding delivered in
June 2004) and the Golar Viking have both performed short term charters but have
also incurred substantial commercial waiting time (i.e. awaiting a charter). We
are considering various employment opportunities for our newbuildings, the Golar
Winter, Golar Frost and Golar Viking and our three newbuildings that are
currently under construction. These employment opportunities may include
short-term (less than one year), medium-term or long-term charter contracts and
entering LNG trading as a principal and, in the case of the Golar Frost, use as
a floating LNG terminal. If we cannot obtain profitable employment for these
vessels, our earnings will suffer. If we are unable to secure term charter
coverage for a newbuilding, we may be unable to obtain the financing necessary
to complete that newbuilding. In addition, whether or not we employ our
newbuildings profitably, we must service the debt that we incur to finance them
as well as pay for operating costs.
If we do not accomplish our strategic objective of profitably entering into
other areas of the LNG industry, we may incur losses and our strategy to
continue growing and increasing operating margins may not be realized.
A part of our strategy reflects our assessment that we should be able
to expand profitably into areas of the LNG industry other than the carriage of
LNG. We have not previously been involved in other LNG industry businesses and
our expansion into these areas may not be profitable and we may incur losses
including losses in respect of expenses incurred in relation to project
development. Our plan to consider opportunities to integrate vertically into
upstream and downstream LNG activities depends materially on our ability to
identify attractive partners and projects and obtain project financing at a
reasonable cost.
Our loan and lease agreements impose restrictions that may adversely affect our
earnings or may prevent us from taking actions that could be in our
shareholders' best interest.
Covenants in our loan and lease agreements limit our ability to:
o merge into or consolidate with any other entity or sell or
otherwise dispose of all or substantially all of their
assets;
o make or pay equity distributions;
o incur additional indebtedness;
o incur or make any capital expenditure; or
o materially amend, or terminate, any of our current charter
contracts or management agreements.
If the ownership interest in us of John Fredriksen, our chairman, and
his affiliated entities falls below 25 per cent of our share capital, a default
of some of our loan agreements and lease agreements to which we are a party
would occur.
Covenants in our loan and lease agreements may effectively prevent us
from paying dividends should our board of directors wish to do so and may
require us to obtain permission from our lenders and lessors to engage in some
other corporate actions. Our lenders' and lessors' interests may be different
from those of our shareholders and we cannot guarantee investors that we will be
able to obtain our lenders' and lessors' permission when needed. This may
adversely affect our earnings and prevent us from taking actions that could be
in our shareholders' best interests.
If we do not maintain the financial ratios contained in our loan and lease
agreements, we could face acceleration of the due date of our debt and the loss
of our vessels.
Our loan and lease agreements require us to maintain specific
financial levels and ratios, including minimum available cash, ratios of current
assets to current liabilities (excluding current long-term debt), ratios of net
debt to earnings before interest, tax, depreciation and amortization and the
level of stockholders' equity. Although we currently comply with these
requirements, if we were to fall below these levels we would be in default of
our loans and lease agreements and the due date of our debt could be accelerated
and our lease agreements terminated, which could result in the loss of our
vessels.
Provisions in our loan and lease agreements may limit our flexibility.
In addition to the general restrictions, our loan agreements and UK
vessel lease agreements place certain restrictions on our ability to charter our
vessels without the consent of the relevant lender or lessor. In addition the
lease agreements in respect of six of our vessels limit our ability to enter
into time charters other than with BG and Pertamina, who do not have credit
ratings of at least BBB+, unless we post additional security over and above the
letters of credit already provided as security for our lease obligations. This
will impact us when these vessels finish their long-term charters. These
restrictions could limit our operational flexibility and negatively impact our
financial position or cash flows in the future.
We no longer have legal title to our seven currently operating vessels and one
newbuilding under construction that are subject to UK vessel leases and in the
event of any adverse tax rate changes or rulings we may be required to make
additional payments to the UK vessel lessor, which could adversely affect our
results and financial position.
While we have complete operational control and responsibility for our
seven currently operating vessels and one newbuilding under construction that
are subject to UK vessel leases, we do not have legal title to them. In the
event that we were in default under a lease agreement, the lessor could
terminate those leases potentially resulting in the sale of the vessels. While
we would realize 99.9 per cent of the net proceeds of the sale of the vessels,
it may not be in our best interests to sell the vessels at that time. In
addition, our ability to realize our portion of the net proceeds will depend on
the cooperation of our lessors, who are recognized UK financial institutions
that have secured their obligations to us, and in relation to the seven
currently operating vessels the willingness of buyers to take the vessels
subject to our time charters with BG and Pertamina, to whom our lessors and we
have given the right of quiet enjoyment in respect of some of our leases. This
means that any sale in relation to the seven currently operating vessels would
be subject to the buyer's continuing to perform the BG and Pertamina time
charters of the vessels. Any funds that we receive on the sale of the vessels
following a lease termination will also be subordinate to lien claimants, and
claims of our lenders and our lessors for unpaid amounts. In the event of any
adverse tax rate changes or rulings, we may be required to return all or a
portion of, or in certain circumstances more than, the cash inflow
(approximately $51 million) that we received in connection with the lease
financing transactions, post additional security or make additional payments to
our lessors.
Servicing our debt and lease agreements substantially limits our funds available
for other purposes.
A large part of our cash flow from operations must go to paying
principal and interest on our debt and lease agreements. As of December 31,
2004, our net total indebtedness (including capital lease obligations) was $740
million and our ratio of net indebtedness to total capital was 0.63. As of May
31, 2005 our net indebtedness was approximately $829 million. In addition we
have committed financing of approximately $105 million in respect of one of our
newbuildings yet to be delivered and we may incur additional debt of at least as
much as $151 million to fund completion of our two unfinanced newbuildings. We
may also incur additional indebtedness to fund our possible expansion into other
areas of the LNG industry. Debt payments reduce our funds available for
expansion into other parts of the LNG industry, working capital, capital
expenditures and other purposes. In addition, our business is capital intensive
and requires significant capital outlays that result in high fixed costs. We
cannot assure investors that our existing and future contracts will provide
revenues adequate to cover all of our fixed and variable costs.
It may be difficult to serve process on or enforce a United States judgment
against us, our officers, our directors or some of our experts or to initiate an
action based on United States federal or state securities laws outside of the
United States.
We are a Bermuda corporation and our executive offices are located
outside of the United States. Our officers and directors reside outside of the
United States. In addition, substantially all of our assets and the assets of
our officers, directors and some of our experts are located outside of the
United States. As a result, you may have difficulty serving legal process within
the United States upon us or any of these persons or enforcing a judgment
obtained in a U.S. court to the extent assets located in the United States are
insufficient to satisfy the judgment. In addition, there is uncertainty as to
whether the courts outside of the United States would enforce judgments of
United States courts obtained against us or our officers and directors or
entertain original actions predicated on the civil liability provisions of the
United States federal or state securities laws. As a result, it may be difficult
for you to enforce judgments obtained in United States courts against our
directors, officers and non-U.S. experts or to bring an action against our
directors, officers or non-U.S. experts outside of the United States that is
based on United States federal or state securities law.
We may not be exempt from U.S. taxation on our U.S. source shipping income,
which would reduce our net income and cash flow by the amount of the applicable
tax.
We currently believe we are exempt from tax under either Section 883
of the U.S Internal Revenue Code("Code"), or the U.S.-U.K. Income Tax Treaty
("U.K Treaty") in effect throughout 2004. However, as a result of new
requirements imposed by the new Section 883 regulations and a new U.K Treaty,
which replaces the current treaty, there are factual circumstances beyond our
control that could cause us to loose the benefit of exemption from 2005 onward.
If we, for whatever reason, were not eligible for exemption from tax
under Code Section 883 and the U.K. Treaty, we would be subject to a four
percent tax on our U.S. source shipping income, which is comprised of 50 percent
of our shipping income attributable to the transport of cargoes to or from
United States ports. In the absence of such exemption, our potential tax
liability for the calendar years 2002, 2003 and 2004 would have been $337,400,
$571,000 and $880,000 respectively.
We may be unable to attract and retain key management personnel in the LNG
industry, which may negatively impact the effectiveness of our management and
our results of operation.
Our success depends to a significant extent upon the abilities and the
efforts of our senior executives, and particularly John Fredriksen, our Chairman
and Tor Olav Tr0im, our Chief Executive Officer, for the management of our
activities and strategic guidance. While we believe that we have an experienced
management team, the loss or unavailability of one or more of our senior
executives, and particularly Mr. Fredriksen or Mr. Tr0im, for any extended
period of time could have an adverse effect on our business and results of
operations.
If construction of any of the three LNG carriers we have ordered and which are
yet to be delivered were to be substantially delayed or left incomplete, our
earnings and financial condition could suffer.
We have binding contracts for the construction of three new LNG
carriers, or newbuildings, by an established Korean shipyard, which have yet to
be delivered. While each shipbuilding contract contains a liquidated damages
clause requiring the shipyard to refund a portion of the purchase price if
delivery of a vessel is delayed more than 30 days, any such delay could
adversely affect our earnings and our financial condition. In addition, if these
shipyards were unable to deliver a particular vessel on time, we might be unable
to perform related short or long-term charters and our earnings and financial
condition could suffer.
If we are treated as a passive foreign investment company, a U.S. investor in
our common shares would be subject to disadvantageous rules under U.S. tax laws.
If we are treated as a passive foreign investment company in any year,
U.S. holders of our shares would be subject to unfavorable U.S. federal income
tax treatment. We do not believe that we were a passive foreign investment
company in 2004 or will be in any future year. However, passive foreign
investment company classification is a factual determination made annually and
thus may be subject to change if the portion of our income derived from other
passive sources, including the spot trading of LNG for our own account, were to
develop or to increase substantially. Moreover, the Internal Revenue Services
may disagree with our position that time charters do not give rise to passive
income for purposes of the passive foreign investment company rules.
Accordingly, there is a possibility that we could be treated as a passive
foreign investment company for 2004 or for any future year. The passive foreign
investment company rules are discussed in more detail in Item 10 of this annual
report under the heading "Additional Information; Taxation - U.S. Taxation of
U.S. Holders".
Terrorist attacks, such as the attacks on the United States on September 11,
2001, and other acts of violence or war may affect the financial markets and our
business, results of operations and financial condition.
Terrorist attacks such as the attacks on the United States on
September 11, 2001 and the United States' continuing response to these attacks,
as well as the threat of future terrorist attacks, continues to cause
uncertainty in the world financial markets. The conflict in Iraq may lead to
additional acts of terrorism and armed conflict around the world, which may
contribute to further economic instability in the global financial markets,
including the energy markets. These uncertainties could also adversely affect
our ability to obtain additional financing on terms acceptable to us or at all.
Future terrorist attacks, may also negatively affect our operations and
financial condition and directly impact our vessels or our customers. Future
terrorist attacks could result in increased volatility of the financial markets
in the United States and globally and could result in an economic recession in
the United States or the world. Any of these occurrences could have a material
adverse impact on our operating results, revenue, and costs.
An increase in costs could materially and adversely affect our financial
performance.
Our vessel operating expenses depend on a variety of factors including
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, many of which are beyond our control and affect the
entire shipping industry. These may increase vessel operating expenses further.
If costs continue to rise, that could materially and adversely affect our
results of operations.
An increase in interest rates could materially and adversely affect our
financial performance
At December 31, 2004 we had a total long-term debt and net capital
lease obligations outstanding of $805 million. As at March 31, 2005 we had a
total long-term debt and net capital lease obligations of $965 million of which
currently $830 million is floating rate debt. We also use interest rate swaps to
manage interest rate risk. As at December 31, 2004 our interest rate swap
arrangements effectively fix the interest rate exposure on $293.7 million of
floating rate bank debt and capital lease obligation and since December 31, 2004
we have entered into interest rate swaps in respect of a further $110 million of
debt. If interest rates rise significantly, that could materially and adversely
affect our results of operations. Additionally, to the extent that our lease
obligations are secured by restricted cash deposits, our exposure to interest
rate movements are hedged to a large extent. However, movements in interest
rates may require us to place more cash into our restricted deposits and this
could also materially and adversely affect our results of operations.
During 2003 and 2004 we acquired 21 percent of the share capital of Korea Line
Corporation, a Korean shipping company listed on the Korean Stock Exchange, at a
cost of $34 million. The value of these shares could decline and we may lose all
or a portion of our investment.
The value of our investment in Korea Line Corporation could be impacted by,
amongst other things, the future results of Korea Line as well as general Korean
stock market movement and other events over which we have no control.
Risks Related to the LNG Shipping Industry
Risks involved with operating ocean-going vessels could affect our business and
reputation, which could adversely affect our revenues.
The operation of an ocean-going vessel carries inherent risks. These
risks include the possibility of:
o Marine disaster;
o Piracy
o Environmental accidents; and
o Business interruptions caused by mechanical failure, human
error, war, terrorism, political action in various
countries, labour strikes, or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower
our revenues. The involvement of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable LNG
carrier operator.
Over time, charter rates for LNG carriers may fluctuate substantially. If rates
happen to be lower at a time when we are seeking a charter for a vessel, our
earnings will suffer.
Charter rates for LNG carriers fluctuate over time as a result of
changes in the supply-demand balance relating to current and future LNG carrier
capacity. This supply-demand relationship largely depends on a number of factors
outside our control. The LNG market is closely connected to world natural gas
prices and energy markets, which we cannot predict. A substantial or extended
decline in natural gas prices could adversely affect our charter business as
well as our business opportunities. Our ability from time to time to charter or
re-charter any vessel at attractive rates will depend on, among other things,
then prevailing economic conditions in the LNG industry.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow.
If we are in default on some kinds of obligations, such as those to
our crew members, suppliers of goods and services to our vessels or shippers of
cargo, these parties may be entitled to a maritime lien against one or more of
our vessels. In many jurisdictions, a maritime lien holder may enforce its lien
by arresting a vessel through foreclosure proceedings. In a few jurisdictions,
claimants could try to assert "sister ship" liability against one vessel in our
fleet for claims relating to another of our vessels. The arrest or attachment of
one or more of our vessels could interrupt our cash flow and require us to pay
to have the arrest lifted. Under some of our present charters, if the vessel is
arrested or detained for as little as 14 days as a result of a claim against us,
we may be in default of our charter and the charterer may terminate the charter.
The LNG transportation industry is competitive and if we do not continue to
compete successfully, our earnings could be adversely affected.
Although we currently generate a majority of our revenue under
long-term contracts, the LNG transportation industry is competitive, especially
with respect to the negotiation of long-term charters. Furthermore, new
competitors have entered the market and further new competitors with greater
resources could enter the industry and operate larger fleets through
consolidations, acquisitions, or the purchase of new vessels, and may be able to
offer lower charter rates and more modern fleets. If we do not continue to
compete successfully, our earnings could be adversely affected. Competition may
also prevent us from achieving our goal of profitably expanding into other areas
of the LNG industry.
Shipping companies generally must conduct operations in many parts of the world,
and accordingly their vessels are exposed to international risks, which could
reduce revenue or increase expenses.
Shipping companies, including those that own LNG carriers, conduct
global operations. Changing economic, regulatory and political conditions in
some countries, including political and military conflicts, have from time to
time resulted in attacks on vessels, mining of waterways, piracy, terrorism and
other efforts to disrupt shipping. The terrorist attacks against targets in the
United States on September 11, 2001, the military response by the United States
and the conflict in Iraq may increase the likelihood of acts of terrorism
worldwide. Acts of terrorism, regional hostilities or other political
instability could affect LNG trade patterns and reduce our revenue or increase
our expenses. Further, we could be forced to incur additional and unexpected
costs in order to comply with changes in the laws or regulations of the nations
in which our vessels operate. These additional costs could have a material
adverse impact on our operating results, revenue, and costs.
Our insurance coverage may not suffice in the case of an accident or incident.
The operation of any ocean-going vessel carries an inherent risk of
catastrophic marine disaster and property loss caused by adverse weather
conditions, mechanical failures, human error, hostilities and other
circumstances or events. The transportation of LNG is subject to the risk of LNG
leakage and business interruptions due to political circumstances in foreign
countries, hostilities and labor strikes. The occurrence of one or more of these
events may result in lost revenues and increased costs for us.
We carry insurance to protect against the accident-related risks
involved in the conduct of our business and environmental damage and pollution
insurance. However, we cannot assure investors that we have adequately insured
ourselves against all risks, that any particular claim will be paid out of such
insurance or that we will be able to procure adequate insurance coverage at
commercially reasonable rates or at all in the future. More stringent
environmental regulations that are currently being considered or that may be
implemented in the future may result in increased costs for insurance against
the risks of environmental damage or pollution. Our insurance policies contain
deductibles for which we will be responsible. They also contain limitations and
exclusions that, although we believe them to be standard in the shipping
industry, may increase our costs or lower our profits. Moreover, if the mutual
insurance protection and indemnity association that provides our tort insurance
coverage were to suffer large unanticipated claims related to the vessel owners,
including us, that it covers, we could face additional insurance costs.
If any of our LNG carriers discharged fuel oil into the environment, we might
incur significant liability that would increase our expenses.
As with all vessels using fuel oil for their engines, international
environmental conventions, laws and regulations, including United States'
federal laws, apply to our LNG carriers. If any of the vessels that we own or
operate were to discharge fuel oil into the environment, we could face claims
under these conventions, laws and regulations. We must also carry evidence of
financial responsibility for our vessels under these regulations. United States
law also permits individual states to impose their own liability regimes with
regard to oil pollution incidents occurring within their boundaries, and a
number of states have enacted legislation providing for unlimited liability for
oil spills.
Any future changes to the laws and regulations governing LNG carrier vessels
could increase our expenses to remain in compliance.
The laws of the nations where our vessels operate as well as
international treaties and conventions regulate the production, storage, and
transportation of LNG. While we believe that we comply with current regulations
of the International Maritime Organization, or IMO, any future non-compliance
could subject us to increased liability, lead to decreases in available
insurance coverage for affected vessels and result in the denial of access to,
or detention in, some ports. Furthermore, in order to continue complying in the
future with United States federal and state laws and regulations as then in
force, or with then current regulations adopted by the IMO, and with any other
future regulations, we may be forced to incur additional costs relating to such
matters as LNG carrier construction, maintenance and inspection requirements,
development of contingency plans for potential leakages and insurance coverage.
Risks Related to our Common Shares
Our Chairman may have the ability to effectively control the outcome of
significant corporate actions.
John Fredriksen, our chairman, and his affiliated entities
beneficially own 43.2 per cent of our outstanding common shares. As a result,
Mr. Fredriksen and his affiliated entities have the potential ability to
effectively control the outcome of matters on which our shareholders are
entitled to vote, including the election of all directors and other significant
corporate actions.
Because we are a Bermuda corporation, you may have less recourse against us or
our directors than shareholders of a U.S. company have against the directors of
that U.S. Company.
Because we are a Bermuda company the rights of holders of our common
shares will be governed by Bermuda law and our memorandum of association and
bye-laws. The rights of shareholders under Bermuda law may differ from the
rights of shareholders in other jurisdictions. Among these differences is a
Bermuda law provision that permits a company to exempt a director from liability
for any negligence, default, or breach of a fiduciary duty except for liability
resulting directly from that director's fraud or dishonesty. Our bye-laws
provide that no director or officer shall be liable to us or our shareholders
unless the director's or officer's liability results from that person's fraud or
dishonesty. Our bye-laws also require us to indemnify a director or officer
against any losses incurred by that director or officer resulting from their
negligence or breach of duty except where such losses are the result of fraud or
dishonesty. In addition, under Bermuda law the directors of a Bermuda company
owe their duties to that company, not to the shareholders. Bermuda law does not
generally permit shareholders of a Bermuda company to bring an action for a
wrongdoing against the company, but rather the company itself is generally the
proper plaintiff in an action against the directors for a breach of their
fiduciary duties. These provisions of Bermuda law and our bye-laws, as well as
other provisions not discussed here, may differ from the law of jurisdictions
with which investors may be more familiar and may substantially limit or
prohibit shareholders ability to bring suit against our directors.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a LNG Shipping company formed on May 10, 2001. We currently own
and/or operate a fleet of ten liquefied natural gas, or LNG, carriers (or
vessels), of which one was delivered in January 2005. We are engaged in the
acquisition, ownership, operation and chartering of LNG carriers through our
subsidiaries. We operate nine of our vessels through wholly-owned subsidiaries
and we have a 60 per cent interest in the owning company of our tenth vessel,
the Golar Mazo. We have also entered into contracts for the construction of
three additional LNG carriers, which we expect to take delivery of in 2006 and
2007. Seven of our LNG carriers are all currently employed under long-term
charter contracts. One of our LNG carriers is employed on a short term charter
and two are currently waiting for employment in the spot market.
We are incorporated under the laws of the Islands of Bermuda and
maintain our principal executive headquarters at Par-la-Ville Place, 14
Par-la-Ville Road, Hamilton, Bermuda. Our telephone number at that address is
(+1) 441-295-4705. Our principal ship-management offices are located at 30 Marsh
Wall, London, United Kingdom.
Our business was originally founded in 1946 as Gotaas-Larsen Shipping
Corporation. Gotaas-Larsen entered the LNG shipping business in 1970 and was
acquired by Osprey Maritime Limited, then a Singapore listed publicly traded
company, in 1997. In August 2000, World Shipholding Ltd., a company indirectly
controlled by John Fredriksen, our chairman and president, commenced an
acquisition of Osprey. World Shipholding gained a controlling interest of more
than 50 per cent of Osprey in November 2000 and increased this interest to over
90 per cent in January 2001. World Shipholding completed its acquisition in May
2001, at which time Osprey was delisted from the Singapore Stock Exchange.
On May 21, 2001, we acquired the LNG shipping interests of Osprey,
which included one newbuilding contract and an option for a further newbuilding
contract. We also entered into a purchase agreement with Seatankers Management
Company Ltd., a company indirectly controlled by our chairman and president,
John Fredriksen, to purchase its one newbuilding contract for an LNG carrier and
its options to build three new LNG carriers. Two of the newbuilding options have
since been exercised and two have expired.
We listed on the Oslo Stock Exchange in July 2001 and on Nasdaq in
December 2002.
On 18 June 2003, Osprey transferred its assets and liabilities, and
consequently its holding of our shares, to World Shipholding. As of that date
World Shipholding held 50.01 per cent of our issued and outstanding share
capital. World Shipholding currently owns 43.2 per cent of our issued and
outstanding common shares following issuance of further shares by us during 2003
and World Shipholding's acquisition of 300,000 shares in December 2004 and April
2005.
In July 2003 we issued 5.6 million shares via a direct offering
raising $55.2 million and in December 2003 we issued a further 4.0 million
shares via a direct offering raising $51.0 million.
In August 2003 we took delivery of our first newbuilding, the Methane
Princess. In September 2003 we signed a contract for the construction of a fifth
newbuilding together with the option for two further newbuildings. In February
2004 we exercised one of the options and signed a sixth newbuilding contract. In
August 2004 we exercised the remaining option for our seventh newbuilding. In
April 2004 we took delivery of our second newbuilding, the Golar Winter, and in
June 2004 we took delivery of our third newbuilding, the Golar Frost. In January
2005 we took delivery of our fourth newbuilding, the Golar Viking.
As at December 31, 2003 we had invested $12.2 million in Korea Line
Corporation, a Korean shipping company listed on the Korean stock exchange.
During the first six months of 2004 we purchased additional shares at a cost of
$21.9 million. As at December 31, 2004 we owned 21.09% of Korea Line.
B. Business Overview
We are a leading independent owner and operator of liquid natural gas
(or "LNG") vessels. We have a fleet of ten LNG vessels (including one delivered
in January 2005) and a further three that are under construction, two of which
we expect to take delivery of in the first half of 2006 and the third in the
latter half of 2007. We are also seeking to develop our business in other areas
of the LNG supply chain, in particular innovative marine based solutions such as
floating LNG regasification terminals.
The Natural Gas Industry
Natural gas is one of the world's fastest growing energy sources and
is likely to continue to be so for at least the next 20 years. Already
responsible for approximately 22 per cent of the world's energy supply, the
International Energy Outlook, or IEO, projects that demand for natural gas will
rise by approximately 2.2 per cent per annum over the next two decades.
According to the IEO, unprecedented growth in new gas fired power plants are
expected to provide a substantial part of this incremental demand.
The rate of growth of natural gas consumption has been almost twice
that of oil consumption during the last decade. The primary factors contributing
to the growth of natural gas demand include:
o Costs: Technological advances and economies of scale have lowered
capital expenditure requirements.
o Environmental: Natural gas is a clean-burning fuel. It produces
less carbon dioxide and other pollutants and particles per unit
of energy production than coal, fuel oil and other common
hydrocarbon fuel sources.
o Demand from Power Generation: According to the IEO, natural gas
is the fastest growing fuel source for electricity generation
worldwide.
o Market Deregulation: Deregulation of the gas and electric power
industry in the United States, Europe and Japan, has resulted in
new entrants and an increased market for natural gas
o Significant Natural Gas Reserves: Approximately half of the
world's remaining hydrocarbon reserves are natural gas.
The LNG Industry
Overview
LNG is liquefied natural gas, produced by cooling natural gas to
-163(degree)C (-256(Degree) Fahrenheit), or just below the boiling point of
LNG's main constituent, methane. LNG is produced in liquefaction plants situated
around the globe near gas deposits. In its liquefied state, LNG occupies
approximately 1/600th the volume of its gaseous state. Liquefaction makes it
possible to transport natural gas efficiently and safely by sea in specialized
vessels known as LNG carriers. LNG is stored at atmospheric pressure in
cryogenic tanks. LNG is converted back to natural gas in regasification plants
by raising its temperature.
The first LNG project was developed in the mid-1960s and by the
mid-1970s LNG had begun to play a larger role as energy companies developed
remote gas reserves that could not be served by pipelines in a cost-efficient
manner. The LNG industry is highly capital intensive and has historically been
characterised by long-term contracts. The long-term charter of LNG carriers to
carry the LNG is, and remains, an integral part of almost every project.
Over the last 10 years, LNG consumption has shown sustained annual
growth of approximately 6.75 per cent per year. The Energy Information
Administration of the United States Department of Energy forecasts annual growth
of LNG imports into the United States through 2025 amounting to approximately 9
per cent per year.
Production
There are three major regional areas that supply LNG. These are (i)
Southeast Asia, including Australia, Malaysia, Brunei and Indonesia, (ii) the
Middle East, including Qatar, Oman and United Arab Emirates (with facilities
planned in Iran and Yemen), and (iii) the Atlantic Basin countries, including
Algeria, Libya, Nigeria and Trinidad with facilities under construction in Egypt
and Norway and planned in Equitorial New Guinea, Angola and Venezuela. Qatar,
Oman, Trinidad and Nigeria have all begun large scale LNG production in recent
years. The expansion of existing LNG production facilities is one of the major
sources of growth in LNG production and most projects with gas reserves
available are considering growth of production.
Consumption
The two major geographic areas that dominate worldwide consumption of
LNG are East Asia; including Japan, which remains by far the biggest importer in
the world, South Korea and Taiwan; and Europe, specifically Spain, France,
Italy, Belgium and Turkey. East Asia currently accounts for approximately 66 per
cent of the global LNG market while Europe accounts for approximately 22 per
cent. The United States presently accounts for approximately 10 per cent of the
global LNG market, but is by far the fastest growing market with an increase of
more than 28.4 per cent in 2004 alone.
There are currently 14 LNG importing countries with 47 importing
terminals. Japan and South Korea are currently the two largest importers of LNG,
accounting for approximately 60 per cent of the world total LNG imports in 2004.
Almost all natural gas consumption in Japan and South Korea is based on LNG
imports.
The cost of constructing LNG import facilities has decreased in real
terms. This has helped small or low volume markets such as Puerto Rico, Turkey
and Greece to receive imports on a cost-effective basis.
Four LNG import terminals operate in the United States, namely; Lake
Charles, Louisiana, Boston, Massachusetts, Elba Island, Georgia and Cove Point,
Maryland. Cove Point re-opened during the second half of 2003. Expansion plans
exist for the Lake Charles, Elba Island and Cove Point facilities and in
addition as many as 20 companies are currently pursuing more than 30 possible
onshore regasification plants aimed at significantly increasing domestic import
capacity, notably Excelerate Energy commissioned its energy bridge technology at
Gulf gateway in early 2005. However, it is likely that the majority of these
plants will not be constructed, due to cost and environmental restrictions.
The LNG Fleet
As of end of May 2005, the world LNG carrier fleet consisted of 180
LNG carriers with a total capacity of approximately 19.5 million cubic meters
(cbm). The average age of the fleet was approximately 14 years. Currently there
are orders for around 114 new LNG carriers with expected delivery dates from the
second quarter of 2005 through 2008.
The current `standard' size for LNG carriers is approximately 155,000
cubic meters (`cbm'), up from 125,000 cbm during the 1970's. To assist with
transportation unit cost reduction the average size of vessels is rising
steadily and there are fairly advanced plans for vessels of up to 250,000 cbm.
There are also some smaller LNG carriers, mainly built for dedicated short
distance trades. Apart from one, all the newbuildings to be delivered from 2005
through 2008 are 137,000 cbm or more. The cost of LNG carriers has fluctuated
from $280 million in the early 1990s to approximately $200 million currently for
the current standard size.
LNG carriers are designed for an economic life of approximately 40
years. Therefore all but a very few of the LNG carriers built in the 1970s still
actively trade. In recent contract renewals, LNG vessels have been placed under
time charters with terms surpassing those vessels' 40th anniversaries, which
demonstrates the economic life for such older vessels. As a result, limited
scrapping of LNG carriers has occurred or is likely to occur in the near future.
In view of the fact that LNG is much less of a pollutant than other products
such as oil and given that much more is spent on maintenance of LNG vessels than
oil tankers, the pressure to phase out older vessels has been much less than for
crude oil tankers. We cannot, however, say that such pressure will not begin to
build in the future.
The current worldwide maximum production capacity of shipyards for LNG
carriers is close to 40 ships a year after rapid expansion of production
facilities over the past 5 years, particularly in Korea. The actual output
depends upon the relative cost of LNG ships to other vessels and the relative
demand for both. The construction period for an LNG carrier is approximately
30-34 months. However, based on current yard availability, the earliest delivery
date for a new LNG vessel ordered today is likely to be in 2008. Any new
project/trade with LNG vessel demand before then will have to rely on third
party vessels until potential new orders can be delivered.
Our Business Strategy
We are a leading independent owner and operator of LNG vessels and, we
believe, the only shipping company dedicated exclusively to LNG transportation.
Our objective is to provide safe, reliable and efficient LNG transportation
services to our customers and to use this as the foundation to fulfil our vision
of becoming an industry leader in LNG transportation services and of expansion
into other profitable areas of the LNG chain. Our strategy is therefore to
expand and diversify our LNG shipping operations, concentrating on our existing
customers whilst offering the same level of service to selected new customers,
and in this way to capitalise on our shipping assets and thirty years of
industry experience by investing upstream and downstream in the LNG chain.
In respect of our shipping operations we intend to build on our
relationships with existing customers and continue to develop relationships with
those who require a shipping partner for whom LNG transportation is the core
business. We will primarily concentrate on customers and partners who are
relatively close to their markets geographically, in the same way that our
existing customers are. For example BG, are mainly based around the Atlantic,
and Pertamina and CPC are based in the Far East based. We thereby hope to
achieve higher margins while maintaining strong service-based relationships
because our customers will have the confidence to place their `shipping risk'
with us on the basis that our core business is safe and reliable ship operation,
while theirs is the profitable sale of gas.
We have three vessels currently trading in the spot or short-term
market for which we are seeking longer-term employment. However, in the meantime
in order to improve the service available to customers in the short-term LNG
market by having a larger available fleet and to hedge the risk of operating in
this market we have entered into an agreement with Exmar Marine NV ("Exmar") to
participate in a new joint arrangement in respect of which we will time charter
selected vessels to the venture for trade on the spot market.
In furtherance of our strategy to enhance our core margins we are
actively seeking opportunities to invest upstream and downstream in the LNG
supply chain, where our shipping experience can add value. We believe we can
achieve this aim while at the same time diversifying our sources of income from
LNG and thereby strengthen the Company.
We are considering investing in both established LNG operations and
technologies as well as newly developing technologies, such as offshore
liquefaction and regasification operations. We are continuing our participation
the Italian (Livorno) Floating Regasification Terminal project, which is now
reaching a significant state of development with the permit process nearing
completion. It is anticipated that the project will use the Golar Frost as a
floating terminal by installing regasification equipment on board the vessel and
permanently mooring her off the coast of Italy. We have invested $3 million in
TORP Technology AS, which holds the rights to the "Hiload LNG Re-gasification
Technology" developed by Remora Technology AS. TORP is planning to apply for a
permit to build an offshore LNG regasification terminal in the Gulf of Mexico.
We are also actively looking at other projects, which include the provision of
technical marine and LNG expertise for floating terminal projects such as
Livorno, and for other technically innovative projects such as the generation of
electricity on board a floating terminal as well as the provision of shipping
requirements for these projects.
Additionally, there is the potential to use our industry experience in
other areas including buying and selling of physical cargoes of LNG on a
back-to-back basis, i.e. for any firm purchase there is also a firm sale, where
it compliments the provision of services to our customers.
During the latter part of 2003 and first half of 2004 we acquired,
through market purchases, 21.09 % of the shares in the Korean shipping company
Korea Line Corporation ("Korea Line"), which is listed on the Seoul Stock
Exchange. Korea Line owns two modern LNG carriers on long-term charter to KOGAS
and also has a smaller ownership (less than 15 per cent) in four other large LNG
carriers as well as a number of drybulk vessels. We see the investment in Korea
Line as an opportunity to develop a positive relationship with a leading Korean
shipping company, which could lead to further LNG business development.
Our Strategic position and competitive strengths.
We believe we have established ourselves as a leading independent owner and
operator of LNG ships. Listed below are what we believe to be our key
competitive strengths:
o Customer relationships. Our customers and partners include some
of the biggest participants in the LNG market: BG Group,
Pertamina, Malaysia International Shipping Corporation and
Chinese Petroleum Corporation.
o High level of committed revenue. Seven of our existing ten ships
are on long-term charter, which provides us with a relatively
secure and stable cash flow for the majority of our fleet.
o LNG shipping experience: We have 30 years of experience of
operating LNG ships and we have access to a large pool of
experienced LNG crew through contracts with our third party
managers and through our own pool of officers.
o Our newbuildings. We currently have three new vessels uncommitted
on a long-term basis and three newbuildings, also not committed
to charter contracts; two are due to be delivered in the first
half of 2006 and one in 2007. These vessels and newbuilding
contracts may provide us with a unique strategic advantage in
terms of early delivery and multi-ship solutions. The early
delivery of our vessels may mean that a customer can avoid costly
time delays due to the prevailing lack of early availability at
the world's LNG shipyards.
o Our experience and our management. With our LNG assets, extensive
experience and our management's skill we believe we are able to
take advantage of market opportunities as they arise such as the
offshore terminal projects we are involved in.
Customers
We currently have long-term customer relationships with two large
participants in the LNG industry, and most of our revenues are derived from
these two customers, namely BG Group and its subsidiaries, and Pertamina, the
state-owned oil and gas company of Indonesia.
We and our predecessors have had charters with Pertamina since 1989.
Our revenues from Pertamina were $65.6 million in 2004, $61.9 million in 2003
and $61.0 million in 2002. This constitutes 40.1 per cent, 47 per cent and 47
per cent of our revenues for those years, respectively. BG has chartered LNG
carriers from us and our predecessors since 2000. Our revenue from BG was $82.2
million in 2004, $64.8 million in 2003 and $68.1 million in 2002, constituting
50.3 per cent, 49 per cent and 52 per cent of our revenues for those years
respectively. BG currently charters five vessels from us.
We have a commercial relationship with Malaysia International Shipping
Corporation (MISC) for whom we have provided vessels for several short-term
charters during 2004. Additionally, until January 2005 we provided ship
management services to the state-owned oil and gas company, the National Gas
Shipping Company (NGSCO) of Abu Dhabi.
Competition
While virtually all of the existing world LNG carrier fleet is still
committed to long-term charters, there is competition for employment of vessels
whose charters are expiring and vessels that are under construction. Competition
for long-term LNG charters is based primarily on price, vessel availability,
size, age and condition of the vessel, relationships with LNG carrier users and
the quality, LNG experience and reputation of the operator. In addition, vessels
coming off charter and newly constructed vessels may operate in the emerging LNG
carrier spot market that covers short-term charters of one year or less as well
as voyage charters.
While we believe that we are the only independent LNG carrier owner
and operator that focuses solely on LNG, other independent shipping companies
also own and operate LNG carriers and have new vessels under construction. These
companies include Bergesen DY ASA (Norway), Exmar S.A. (Belgium) and Teekay LNG
Partners, L.P. Three Japanese ship owning groups, Mitsui O.S.K. Lines, Nippon
Yusen Kaisha and K Line, all of whom used to provide LNG shipping services
exclusively to Japanese LNG companies, are now aggressively moving into the
western markets. New competitors have also recently entered the market and
include Maran Navigation of Greece, A P Moller of Denmark, Teekay Shipping of
Canada, Overseas Shipholding Group of USA and Pronav ship management, and all
have shown significant intent to compete in the LNG shipping market. There are
other owners who may also attempt to participate in the LNG market if possible.
In addition to independent LNG operators, some of the major oil and
gas producers, including Royal Dutch/Shell, BP Amoco, and BG who own LNG
carriers and are reported to have contracted for the construction of new LNG
carriers.
As discussed above we are considering strategic opportunities in other
areas of the LNG industry. To the extent we do expand into new businesses, there
can be no assurance that we will be able to compete successfully in those areas.
Our new businesses may involve competitive factors that differ from those in the
carriage of LNG and may include participants that have greater financial
strength and capital resources than us.
Our Fleet
Current Fleet
We currently lease seven LNG carriers under long-term leases (between
20 and 30 years), we own two vessels and we have a 60 per cent interest in
another LNG carrier through a joint arrangement with the Chinese Petroleum
Corporation, the Taiwanese state oil and gas company. Two of our vessels serve
routes between Indonesia and Taiwan and South Korea, while five are involved in
the transportation of LNG from facilities in the Middle East, North Africa and
Trinidad to ports principally in the United States and Europe but also Japan.
Three or our vessels are currently operating within a spot market revenue
pooling arrangement we have with Exmar S.A. One of these vessels is on a
short-term charter to Sonatrach and two of the vessels are currently awaiting
employment.
The following table lists the LNG carriers in our current fleet:
Year of Capacity, Current Current Charter
Vessel Name Delivery cbm. Charterer Expiration
------------------------------------------------------------------------------
Hilli 1975 125,000 BG 2011
Gimi 1976 125,000 BG 2010
Golar Freeze 1977 125,000 BG 2008
Khannur 1977 125,000 BG 2009
Golar Spirit 1981 128,000 Pertamina 2006
Golar Mazo(1) 2000 135,000 Pertamina 2017
Methane Princess 2003 138,000 BG 2024
Golar Winter 2004 138,000 Sonatrach 2005
Golar Frost 2004 137,000 - -
Golar Viking 2005 140,000 - -
1 We own a 60 per cent interest in the Golar Mazo with the remaining 40 per cent
owned by Chinese Petroleum Corporation.
Our currently trading fleet represents approximately 6 per cent of the
worldwide fleet by number of vessels.
Newbuildings
We have entered into newbuilding contracts for the delivery of seven
LNG carriers since the beginning of 2001 four of which have already been
delivered. The following table summarizes our newbuildings currently under
construction, all of which have capacities of 145,700 cbm:
Hull number Shipbuilder Expected Delivery Date
----------- ----------- ----------------------
2226 Daewoo January 2006
2234 Daewoo May 2006
2244 Daewoo June 2007
The contract prices for the above vessels totals $472 million.
Two newbuildings were delivered during 2004; the Golar Winter in March
2004 and after substantial delays the Golar Frost in June 2004. The delivery of
Golar Frost was delayed due to a technical problem. The shipyard satisfactorily
modified this, without additional cost to us. We also received compensation from
the shipyard for late delivery. A further newbuilding, the Golar Viking was
delivered in January 2005.
The selection of and investment in newbuildings is a key strategic
decision for us. We believe that our experience in the shipping industry have
equipped our senior management with the experience to determine when to acquire
options for newbuildings and when to order the construction of newbuildings and
the scope of those constructions. Our senior management has established
relationships with several shipyards, and this has enabled us to access the
currently limited shipyard slots to build LNG carriers.
Our Charters
Seven of our current LNG carriers are on long-term time charters to
LNG producers and importers. These charters generally provide us with stable
income and cash flows. In addition to their potential for earning revenues over
the course of their useful lives, we believe that our LNG carriers may also have
significant residual value when they are released from service.
Pertamina Charters. Two of our vessels, the Golar Mazo and the Golar
Spirit, are chartered by Pertamina, the state-owned oil and gas company of
Indonesia. The Golar Mazo, which we jointly own with the Chinese Petroleum
Corporation, transports LNG from Indonesia to Taiwan under an 18 year time
charter that expires at the end of 2017. The Golar Spirit is employed on a
20-year time charter that expires at the end of 2006. Pertamina has options to
extend the Golar Mazo charter for two additional periods of five years each, and
to extend the Golar Spirit charter for up to two years.
Under the Pertamina charters, the operating and drydocking costs of
the vessel are borne by Pertamina on a cost pass-through basis. Pertamina also
pay for hire of the vessels during scheduled drydockings up to a specified
number of days for every two to three year period.
BG Charters. BG, through its subsidiaries, charters five of our
vessels on long-term time charters. These vessels, the Golar Freeze, Khannur,
Gimi, Hilli and since February of 2004, the Methane Princess each transport LNG
from export facilities in the Middle East and Atlantic Basin nations to ports on
the east coast of the United States, Europe and Japan. The trading routes of
these vessels are determined by BG. The Golar Freeze commenced a five-year
charter with BG on March 31, 2003. The charter for the Khannur expires in the
third quarter of 2009, the charter for the Gimi expires in the fourth quarter of
2010 and the charter for the Hilli expires in the first quarter of 2011. The
charter for the Methane Princess is for 20 years and therefore expires in 2024.
Our charterers may suspend their payment obligations under the charter
agreements for periods when the vessels are not able to transport cargo for
various reasons. These periods, which are also called offhire periods, may
result from, among other causes, mechanical breakdown or other accident, the
inability of the crew to operate the vessel, the arrest or other detention of
the vessel as the result of a claim against us, or the cancellation of the
vessel's class certification. The charters automatically terminate in the event
of the loss of a vessel.
Charter Renewal Options
Pertamina Charters. Pertamina has the option to extend the charter of
the Golar Mazo and the Golar Spirit. Pertamina may extend the charter of Golar
Mazo that expires in 2017, for up to 10 years by exercising the right to extend
for one or two additional five-year periods. Pertamina must give two years
notice of any decision to extend. The revenue during the period of charter
extension will be subject to adjustments based on our actual operating costs
during the period of the extension. For the Golar Spirit, Pertamina may extend
the charter beyond its current expiration in 2006 for up to two years. As with
the Golar Mazo, the hire rate during any extension is subject to adjustment to
reflect actual operating expenses during the term.
BG Charters. With the exception of the Golar Freeze charter, each of
the BG charters, including the charter for the Methane Princess, is subject to
outstanding options on the part of BG to extend those charters for two five-year
periods. The hire rates for Khannur, Gimi and Hilli will be increased from
January 1, 2010 onwards and thereafter subject to adjustments based on
escalation of three per cent per annum of the operating costs of the vessel.
The following chart summarizes the current charters and renewal
options for each of our vessels with charter coverage:
[OBJECT OMITTED]
Golar Management (UK) Limited
Golar Management (UK) Limited, or Golar Management, a wholly owned
subsidiary of ours, operates seven of our vessels under long-term leases. Golar
Management, which has offices in London, also provides commercial, operational
and technical support and supervision and accounting and treasury services to
us.
Prior to February 2005, Golar Management provided all services related
to the management of our vessels other than some of our crewing activities.
Since February 2005, Golar Management has subcontracted to two third party ship
management companies day-to-day vessel management activities including routine
maintenance and repairs; arranging supply of stores and equipment; ensuring
compliance with applicable regulations, including licensing and certification
requirements and engagement and provision of qualified crews.
Ultimate responsibility for the management of our vessels, however,
remains with Golar Management.
Ship Management and Maintenance
We are focused on operating our LNG carriers at the highest safety and
industry standards and at the same time maximizing revenue from each vessel. It
is our policy to have our crews perform planned maintenance on our vessels while
underway, to reduced time required for repairs during dry-docking. This will
reduce the overall off-hire period required for dockings and repairs. Since we
generally do not earn hire from a vessel while it is in dry-dock we believe that
the additional revenue that we receive from reduced off-hire periods outweighs
the expense of the additional crewmembers.
To further minimize technical failure, off-hire and ensure compliance
with the latest safety and industry standards, we are near completion of a $34
million program to refurbish and modernize our four LNG/C built in the 1970s.
The Hilli underwent extensive refurbishment during its drydocking in 2003; the
Golar Freeze and Gimi similarly in 2004 and the Khannur in early 2005. In
addition these vessels have been undergoing a ballast tank re-coating programme
whilst in service. We expect completion of this programme early in 2006.
We anticipate that the upgrading program will allow us to operate each
of these vessels to their 40th anniversary. We believe that the capital
expenditure of this program will result in lower maintenance costs and improved
performance in the future. We also believe this program will help us maintain
our proven safety record and ability to meet customer expectations.
Third Party Ship Management
In addition to managing our own fleet, we have provided management
services to LNG carriers owned by third party ship owners. During 2004 we
managed four vessels for the National Gas Shipping Company (NGSCO), a subsidiary
of the Abu Dhabi National Oil Company. It has been the intention from the start
of the project in 1996 that NGSCO should take over management when they had
developed their own in-house ship management department. Two ships were
delivered back to NGSCO in July 2004, and the remaining two in January 2005.
Insurance
The operation of any vessel, including LNG carriers, has inherent
risks. These risks include mechanical failure, personal injury, collision,
property loss, vessel or cargo loss or damage and business interruption due to
political circumstances in foreign countries or hostilities. In addition, there
is always an inherent possibility of marine disaster, including explosion,
spills and other environmental mishaps, and the liabilities arising from owning
and operating vessels in international trade.
We believe that our present insurance coverage is adequate to protect
us against the accident related risks involved in the conduct of our business
and that we maintain appropriate levels of environmental damage and pollution
insurance coverage consistent with standard industry practice. However, not all
risks can be insured, and there can be no guarantee that any specific claim will
be paid, or that we will always be able to obtain adequate insurance coverage at
reasonable rates.
We have obtained hull and machinery insurance on all our vessels
against marine and war risks, which include the risks of damage to our vessels,
salvage or towing costs, and also insure against actual or constructive total
loss of any of our vessels. However, our insurance policies contain deductible
amounts for which we will be responsible. We have also arranged additional total
loss coverage for each vessel. This coverage, which is called hull interest and
freight interest coverage, provides us additional coverage in the event of the
total loss of a vessel.
We have also obtained loss of hire insurance to protect us against
loss of income in the event one of our vessels cannot be employed due to damage
that is covered under the terms of our hull and machinery insurance. Under our
loss of hire policies, our insurer will pay us the daily rate agreed in respect
of each vessel for each day, in excess of a certain number of deductible days,
for the time that the vessel is out of service as a result of damage, for a
maximum of 240 days. The number of deductible days varies from 14 days for the
new ships to 30 days for the older ships, depending on the type of damage;
machinery or hull damage.
Protection and indemnity insurance, which covers our third-party legal
liabilities in connection with our shipping activities, is provided by a mutual
protection and indemnity association, or P&I club. This includes third-party
liability and other expenses related to the injury or death of crew members,
passengers and other third-party persons, loss or damage to cargo, claims
arising from collisions with other vessels or from contact with jetties or
wharves and other damage to other third-party property, including pollution
arising from oil or other substances, and other related costs, including wreck
removal. Subject to the capping discussed below, our coverage, except for
pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution
is $1 billion per vessel per incident. The thirteen P&I clubs that comprise the
International Group of Protection and Indemnity Clubs insure approximately 90
per cent of the world's commercial tonnage and have entered into a pooling
agreement to reinsure each association's liabilities. Each P&I club has capped
its exposure in this pooling agreement so that the maximum claim covered by the
pool and its reinsurance would be approximately $4.25 billion per accident or
occurrence. We are a member of the "UK Club" which is the largest P&I club in
the International Group. As a member of the P&I club, we are subject to a call
for additional premiums based on the club's claims record, as well as the claims
record of all other members of the P&I clubs comprising the International Group.
However, our P&I club has reinsured the risk of additional premium calls to
limit our additional exposure. This reinsurance is subject to a cap, and there
is the risk that the full amount of the additional call would not be covered by
this reinsurance.
Environmental and other Regulations
Governmental and international agencies extensively regulate the
handling and carriage of LNG. These regulations include international
conventions and national, state and local laws and regulations in the countries
where our vessels operate or where our vessels are registered. We cannot predict
the ultimate cost of complying with these regulations, or the impact that these
regulations will have on the resale value or useful lives of our vessels.
Various governmental and quasi-governmental agencies require us to obtain
permits, licenses and certificates for the operation of our vessels. Although we
believe that we are substantially in compliance with applicable environmental
laws and regulations and have all permits, licenses and certificates required
for our operations, future non- compliance or failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend operation of one or more of our vessels.
A variety of governmental and private entities inspect our vessels on
both a scheduled and unscheduled basis. These entities, each of which may have
unique requirements and each of which conducts frequent vessel inspections,
include local port authorities, such as the U.S. Coast Guard, harbor master or
equivalent, classification societies, flag state, or the administration of the
country of registry, charterers, terminal operators and LNG producers.
Golar Management is certified to the International Standards
Organization (ISO) Environmental Standard for the management of the significant
environmental aspects associated with the ownership and operation of a fleet of
liquefied natural gas carriers. This certification requires that the Company
commit managerial resources to act on its environmental policy through an
effective management system.
Regulation by the International Maritime Organization
The International Maritime Organization (IMO) is a United Nations
agency that provides international regulations affecting the practices of those
in shipping and international maritime trade. The requirements contained in the
International Management Code for the Safe Operation of Ships and for Pollution
Prevention, or ISM Code, promulgated by the IMO, govern our operations. The ISM
Code requires the party with operational control of a vessel to develop an
extensive safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and also describing
procedures for responding to emergencies. Golar Management is certified as an
approved ship manager under the ISM Code.
The ISM Code requires that vessel operators obtain a safety management
certificate, issued by each flag state, for each vessel they operate. This
certificate evidences onboard compliance with code requirements. No vessel can
obtain a certificate unless its shore-based manager has also been awarded and
maintains a Document of Compliance, issued under the ISM Code. Each of the
vessels in our fleet has received a safety management certificate.
Vessels that transport gas, including LNG carriers, are also subject
to regulation under the International Gas Carrier Code, or IGC, published by the
IMO. The IGC provides a standard for the safe carriage of LNG and certain other
liquid gases by proscribing the design and construction standards of vessels
involved in such carriage. Compliance with the IGC must be evidenced by a
Certificate of Fitness for the Carriage of Liquefied Gases of Bulk. Each of our
vessels is in compliance with the IGC and each of our newbuilding contracts
requires that the vessel receive certification that it is in compliance with
applicable regulations before it is delivered. Non-compliance with the IGC or
other applicable IMO regulations, may subject a shipowner or a bareboat
charterer to increased liability, may lead to decreases in available insurance
coverage for affected vessels and may result in the denial of access to, or
detention in, some ports.
The IMO also promulgates ongoing amendments to the international
convention for the Safety of Life at Sea 1974 and its protocol of 1988,
otherwise known as SOLAS. This provides rules for the construction of ships and
regulations for their operation with respect to safety issues. It requires the
provision of lifeboats and other life-saving appliances, requires the use of the
Global Maritime Distress and Safety System which is an international radio
equipment and watchkeeping standard, afloat and at shore stations, and relates
to the Treaty on the Standards of Training and Certification of Watchkeeping
Officers, or STCW, also promulgated by IMO. Flag states, which have ratified the
convention and the treaty generally, employ the classification societies, which
have incorporated SOLAS and STCW requirements into their class rules, to
undertake surveys to confirm compliance.
The most recent directive from the IMO, issued in the wake of
increased worldwide security concerns, is the International Security Code for
Ports and Ships (ISPS). The objective of the ISPS, which came into effect on
July 1, 2004, is to detect security threats and take preventive measures against
security incidents affecting ships or port facilities. We have developed
Security Plans, appointed and trained Ship and Office Security Officers and all
ships have been certified to meet the new ISPS Code well in advance of the date
the code comes into force.
Environmental Regulation--OPA/CERCLA
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for environmental protection and clean up of oil
spills. OPA affects all owners and operators whose vessels trade with the United
States or its territories or possessions, or whose vessels operate in the waters
of the United States, which include the U.S. territorial waters and the two
hundred nautical mile exclusive economic zone of the United States. The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
CERCLA, applies to the discharge of hazardous substances whether on land or at
sea. While OPA and CERCLA would not apply to the discharge of LNG, they may
affect us because we carry oil as fuel and lubricants for our engines, and the
discharge of these could cause an environmental hazard. Under OPA, vessel
operators, including vessel owners, managers and bareboat or "demise"
charterers, are "responsible parties" who are all liable regardless of fault,
individually and as a group, for all containment and clean-up costs and other
damages arising from oil spills from their vessels. These "responsible parties"
would not be liable if the spill results solely from the act or omission of a
third party, an act of God or an act of war. The other damages aside from
clean-up and containment costs are defined broadly to include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings
capacity;
o net cost of public services necessitated by a spill response,
such as protection from fire, safety or health hazards; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties for vessels other than
crude oil tankers to the greater of $600 per gross ton or $500,000 per vessel.
These limits of liability do not apply, however, where the incident is caused by
violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or wilful
misconduct. These limits likewise do not apply if the responsible party fails or
refuses to report the incident or to cooperate and assist in connection with the
substance removal activities. This limit is subject to possible adjustment for
inflation. OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for discharge of pollutants within their waters. In some cases,
states, which have enacted their own legislation, have not yet issued
implementing regulations defining shipowners' responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels,
contains a similar liability regime and provides for cleanup, removal and
natural resource damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $5 million. As with OPA, these limits of liability do not
apply where the incident is caused by violation of applicable U.S. federal
safety, construction or operating regulations, or by the responsible party's
gross negligence or wilful misconduct or if the responsible party fails or
refuses to report the incident or to cooperate and assist in connection with the
substance removal activities. OPA and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law. We anticipate that we
will be in compliance with OPA, CERCLA and all applicable state regulations in
the ports where our vessels will call.
OPA requires owners and operators of vessels to establish and maintain
with the U.S. Coast Guard evidence of financial responsibility sufficient to
meet the limit of their potential strict liability under OPA. The U.S. Coast
Guard has enacted regulations requiring evidence of financial responsibility in
the amount of $900 per gross ton for vessels other than oil tankers, coupling
the OPA limitation on liability of $600 per gross ton with the CERCLA liability
limit of $300 per gross ton. Under the regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. Under OPA regulations, an owner or operator of more than one vessel is
required to demonstrate evidence of financial responsibility for the entire
fleet in an amount equal only to the financial responsibility requirement of the
vessel having the greatest maximum liability under OPA/CERCLA. Each of our
shipowning subsidiaries that has vessels trading in U.S. waters has applied for,
and obtained from the U.S. Coast Guard National Pollution Funds Center,
three-year certificates of financial responsibility, supported by guarantees
which we purchased from an insurance-based provider. We believe that we will be
able to continue to obtain the requisite guarantees and that we will continue to
be granted certificates of financial responsibility from the U.S. Coast Guard
for each of our vessels that is required to have one.
International Ship and Port Security Act.
The International Ship and Port Security Act came into force on July
1, 2004. The Company obtained approval and certification of its security manuals
well prior to the deadline and has trained shipboard and office security
officers to comply with the new regulation. There have been no security threats
to our ships during 2004 and we have not received any adverse comments from any
enforcement agency auditing our ship security systems.
Environmental Regulation--Other
Most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal law. The
European Union has proposed regulations, which, if adopted, may regulate the
transmission, distribution, supply and storage of natural gas and LNG at land
based facilities. It is not clear what form these regulations, if adopted, would
take.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society.
The classification society certifies that the vessel is "in class," signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
that particular class of vessel as laid down by that society.
For maintenance of the class certificate, regular and extraordinary
surveys of hull, machinery, including the electrical plant and any special
equipment classed, are required to be performed by the classification society,
to ensure continuing compliance. Most vessels are drydocked twice during a
5-year class cycle for inspection of the underwater parts and for repairs
related to inspections. If any defects are found, the classification surveyor
will issue a "recommendation" which must be rectified by the shipowner within
prescribed time limits. The classification society also undertakes on request of
the flag state other surveys and checks that are required by the regulations and
requirements of that flag state. These surveys are subject to agreements made in
each individual case and/or to the regulations of the country concerned.
Most insurance underwriters make it a condition for insurance coverage
that a vessel be certified as "in class" by a classification society, which is a
member of the International Association of Classification Societies. All of our
vessels have been certified as being "in class". The Golar Mazo is certified by
Lloyds Register, and our other vessels are each certified by Det norske Veritas,
both members of the International Association of Classification Societies.
In-House Inspections
We inspect all of our vessels on a regular basis; both at sea and
while the vessels are in port. Each vessel in our fleet is inspected on an
annual basis by our fleet safety officer, annually by an independent third party
safety auditor and at four-month intervals by one of our technical
superintendents. The results of these inspections, which are conducted both in
port and underway, result in a report containing recommendations for
improvements to the overall condition of the vessel, maintenance, safety and
crew welfare. Based in part on these evaluations, we create and implement a
program of continual maintenance for our vessels and their systems. These
programs are subject to a computer based tracking system in order to assure
compliance.
C. Organizational Structure
As is customary in the shipping industry, we own, lease and operate
our vessels, and our newbuildings while under construction, through separate
subsidiaries. With the exception of the Golar Mazo, the Golar Frost and the
Golar Viking, we lease our vessels from lessors, who are all subsidiaries of UK
Banks. We own a 100 per cent interest in the owning subsidiaries of two of our
newbuildings yet to be delivered and we will lease the third vessel upon
delivery. We own the Golar Mazo in a joint arrangement with the Chinese
Petroleum Corporation in which we own 60 per cent and Chinese Petroleum owns the
remaining 40 per cent of the vessel owning company.
The table below lists each of our significant subsidiaries, the
subsidiaries' purpose, or the vessel it owns, leases or operates, and its
country of incorporation as at June 30, 2005. Unless otherwise indicated, we own
100 per cent of each subsidiary.
Subsidiary Jurisdiction of Incorporation Purpose
---------- ----------------------------- -------
Golar Gas Holding Company Inc. Republic of Liberia Holding Company and leases five
vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Republic of Liberia Holding Company
Oxbow Holdings Inc. British Virgin Islands Holding Company
Faraway Maritime Shipping Inc. Republic of Liberia Owns Golar Mazo
(60% ownership)
Golar LNG 2215 Corporation Republic of Liberia Leases Methane Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns Golar Viking
Golar LNG 2220 Corporation Republic of Liberia Leases Golar Winter
Golar LNG 2234 Corporation Republic of Liberia Owns newbuilding Hull 2234
Golar LNG 2244 Corporation Republic of Liberia Owns newbuilding Hull 2244
Golar LNG 2226 Corporation Marshall Islands Will lease Hull 2226
Golar International Ltd. Republic of Liberia Vessel management
Golar Maritime Services, S.A. Spain Vessel management
Gotaas-Larsen International Ltd. Republic of Liberia Vessel management
Golar Management Limited Bermuda Management
Golar Maritime Limited Bermuda Management
Golar Management (UK) Limited United Kingdom OperatesiGolarUFreezeited
Golar Khannur (UK) Limited United Kingdom Operates Khannur
Golar Gimi (UK) Limited United Kingdom Operates Gimi
Golar Hilli (UK) Limited United Kingdom Operates Hilli
Golar Spirit (UK) Limited United Kingdom Operates Golar Spirit
Golar 2215 (UK) Limited United Kingdom Operates Methane Princess
Golar Winter (UK) Limited United Kingdom Operates Golar Winter
Golar 2226 (UK) Limited United Kingdom Will operate Hull 2226
D. Property, Plant and Equipment
The Company's Vessels
The following tables set forth the fleet that we operate and the newbuildings
that we have on order:
Capacity Current Current Charter
Vessel Delivered cbm. Flag Charterer Expiration
------ --------- ---- ---- --------- ----------
Golar Viking 2005 140,000 MI - n/a
Golar Frost 2004 137,000 LIB - n/a
Golar Winter 2004 138,000 UK Sonatrach 2005
Methane Princess 2003 138,000 UK BG 2024
Golar Mazo 2000 135,000 LIB Pertamina 2017
Golar Spirit 1981 128,000 MI Pertamina 2006
Golar Freeze 1977 125,000 UK BG 2008
Khannur 1977 125,000 UK BG 2009
Gimi 1976 125,000 UK BG 2010
Hilli 1975 125,000 UK BG 2011
Expected Date Capacity Current Charter
Newbuilding of Delivery cbm. Flag Charterer Expiration
----------- ----------- ---- ---- --------- ----------
Hull No. 2226 January 2006 145,700 - n/a n/a
Hull No. 2234 May 2006 145,700 - n/a n/a
Hull No. 2244 June 2007 145,000 - n/a n/a
Key to Flags:
LIB - Liberian, UK - United Kingdom, MI - Marshall Islands
We do not own any interest in real property. We sublease approximately
8,000 square feet of office space in London for our ship management operations.
We lease approximately 540 square feet of office space in Bilbao, Spain for our
crewing operations.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Overview and Background
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes, and the other financial information included elsewhere in this
document. Our financial statements have been prepared in accordance with U.S.
GAAP. This discussion includes forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from those
contained in the forward-looking statements.
Current Business
Our activities are currently focused on the chartering of our LNG
carriers and the development of LNG supply chain projects and potential
investments, in particular offshore regasification terminals. Seven of our ten
vessels are on long-term charters, which provide us with stable and predictable
cash flows for the majority of our business.
Vessels may operate under different charter arrangements including
time charters, voyage charters and bareboat charters. A time charter is a
contract for the use of a vessel for a specific period of time at a specified
daily rate. Under a time charter, the charterer pays substantially all of the
vessel voyage costs, which consist primarily of fuel and port charges. A
bareboat charter is also a contract for the use of a vessel for a specific
period of time at a specified daily rate but the charterer pays the vessel
operating costs as well as voyage costs. Operating costs include crew wages,
vessel supplies, routine repairs, maintenance, lubricating oils and insurance. A
voyage charter is generally for a specific voyage but the charterer does not pay
the voyage costs. We define charters for a period of less than one year as
short-term, charters for a period of between one and four years as medium-term
and charters for a period of more than four years as long-term.
Seven of our currently trading LNG carriers are employed under
long-term time charters, which do not come up for renewal until 2006 and later.
The following table sets out our current charters, including future committed
charters, and their expirations:
Approximate Annual Current Charter
Vessel Name Charter Hire Expiration Charterers Renewal Option Periods
----------------------------------------------------------------------------------------------------------
Golar Mazo (1) $31 million / year 2017 5 years plus 5 years
Golar Spirit (2) $21 million / year 2006 1 year plus 1 year
Khannur $15.3 million / year 2009 5 years plus 5 years
Golar Freeze $19.6 million / year 2008 None
Gimi $15.3 million / year 2010 5 years plus 5 years
Hilli $15.3 million / year 2011 5 years plus 5 years
Methane Princess $24.3 million / year 2024 5 years plus 5 years
(1) On a wholly owned basis and excluding operating cost recovery from
charterer (see below).
(2) Excludes operating cost recovery from charterer (see below).
The long-term contracts for the Golar Spirit and Golar Mazo are time
charters but the economic terms are analogous to bareboat contracts, under which
the vessels are paid a fixed rate of hire, being the rate in the above table,
and the vessel operating costs are borne by the charterer on a cost pass through
basis. These contracts contain no escalation clauses.
Employment History
The following table sets out the employment of the LNG carriers now
owned and/or operated by us during the period 2000 to 2004.
Vessel Name 2000 to 2004
----------- ------------
Golar Mazo Long-term time charter to Pertamina commenced on delivery in January 2000
Golar Spirit Long-term time charter to Pertamina
Khannur Short-term charters until start of long-term time charter with BG in December 2000
Golar Freeze Short-term charters until start of medium-term
time charter with BG in November 2000. Long-term time
charter with BG from March 2003.
Gimi Short-term charters until start of long-term time charter with BG in May 2001
Hilli Medium-term charter until start of long-term time charter with BG in September 2000
Methane Princess Delivered in August 2003. Short-term charters until start of long-term time charter with BG
in February 2004
Golar Winter Delivered in April 2004. Commenced short-term charter with MISC in June 2004.
Golar Frost Delivered in June 2004. On the spot market since delivery.
Possible Future LNG Industry Business Activities
We currently have three vessels and three newbuildings not committed
to long-term contracts. We intend to find medium or long-term charters for these
vessels or alternatively utilise them within some of the LNG infrastructure
projects we are developing.
In the meantime, three of our current vessels (one of which was
delivered in January 2005) are available for trade in the short-term or "spot"
market. The LNG spot market has only recently developed and it is at an early
stage. Rates payable in this market may be uncertain and volatile although
potentially higher than rates for long-term charters. The supply and demand
balance for LNG carriers is also uncertain. During 2004 the excess supply of
vessels over demand had negatively impacted our results and is likely to
negatively impact them in 2005. These factors could also influence the results
of operations from spot market activities beyond 2005.
All future possible LNG activities are also dependant on our
management's decisions regarding the utilization of our assets. In the longer
term, results of operations may also be affected by strategic decisions by
management as opportunities arise to make investments in LNG logistics
infrastructure facilities to secure access to markets as well as to take
advantage of potential industry consolidation.
In June 2002, we announced that we had signed a heads of agreement
(letter of intent) with the Italian offshore and contracting company Saipem SPA
for the joint marketing and development of Floating Regasification Terminals, or
FRT's, for the Italian gas market. The concept is based on the conversion of a
Moss type LNG carrier (`Moss type' is in reference to the type and shape of the
cargo tanks), either existing or newly built. The activities will be managed
through a dedicated joint venture, where Saipem will handle the engineering and
technical aspects of the FRT's. We will contribute to the joint venture by
identifying suitable LNG carriers as well as providing maritime expertise.
Progress has been made in respect of this project with a potential customer,
Cross Energy S.R.L. who is planning to site a FRT off the coast of Livorno in
Italy. A final decision on the permit for this FRT is expected to be made by the
Italian authorities some time during 2005 but we cannot be certain of this time
frame. The ultimate size of our investment has yet to be determined, but the
permitting process for this project has been based on the Golar Frost and it is
therefore anticipated that this vessel will be utilised in the project if it is
successful.
In October 2004, we announced that we had entered into an agreement
with Exmar Marine NV ("Exmar") to participate in a new joint arrangement. As
part of this arrangement we will timecharter selected vessels to the venture for
trade on the spot and short term LNG market. Initially the Golar Frost and one
of Exmar's vessels were subject to this arrangement. The vessels are to be
jointly marketed for charters of up to two years. Net hire from all vessels
(i.e. after deduction of voyage related expenses) is distributed in proportion
to the points attributed to the respective vessels; such points being determined
on the basis of the vessels capacity, speed and fuel consumption and boil off.
The initial two vessels carried equal points. Operating costs and debt service
cost are excluded from the calculations of net hire i.e. they remain each
company's responsibility. Since December 31, 2004 the Golar Viking and the Golar
Winter have been included in this arrangement.
In January 2005, we announced that we had signed a heads of agreement
with Remora Technology to invest $3 million in TORP technology and acquire an
option to use 33.4% of the capacity of TORP's offshore regasification terminal.
TORP Technology holds the rights to the HiLoad LNG Re-gasification and is
planning to build an offshore LNG Re-gasification terminal 75 miles offshore in
the U.S. Gulf of Mexico, expected to be operational in 2008. The HiLoad LNG
Re-gasification unit is a floating L-shaped terminal that docks onto the LNG
carrier using the patented friction based attachment system (rubber suction
cups) creating no relative motion between the carrier and the terminal. The
HiLoad LNG Re-gasification unit is equipped with standard re-gasification
equipment (LNG loading arms, pumps and vaporizers) and can accommodate any LNG
carrier without the use of any special equipment. The terminal uses seawater for
heating the LNG, saving fuel costs. TORP Technology will file a permit for a LNG
receiving and regasification terminal in the U.S. Gulf of Mexico. It is
envisaged the application will be filed by end of 2005. In February 2005, in
accordance with the heads of agreement we invested $3 million into TORP
Technology in a share issue. We currently hold a 16.1% interest in TORP
Technology.
In conjunction with Saipem SPA we have been developing a floating
power generating plant (FPGP). The concept is based on the conversion of an
existing LNG carrier by attaching combined cycle gas turbine generators capable
of producing around 240 megawatts of power which is carried ashore via sub sea
cables. In this regard we have applied to the Cyprus Energy Regulatory Authority
for licences to construct and operate an FPGP to supply electricity to the
Cypriot market. Although at an early stage of development we wee this as a
logical extension of the floating regasification and storage projects as noted
above, that we have been working on.
During the latter part of 2003 and first half of 2004 we acquired,
through market purchases, 21.09 % of the shares in the Korean shipping company
Korea Line Corporation ("Korea Line"), which is listed on the Seoul Stock
Exchange. Korea Line owns two modern LNG carriers on long-term charters to KOGAS
and also has a smaller ownership (less than 15 per cent) in four other large LNG
carriers as well as a number of drybulk vessels. We see the investment in Korea
Line as an opportunity to develop a positive relationship with a leading Korean
shipping company, which could lead to further LNG business development.
In 2002, we entered into a joint development arrangement headed by
Marathon Oil Company to construct and operate a major LNG import facility on
Mexico's Baja Peninsula. Other participants in the project include Grupo GGS,
S.A. de C.V., a subsidiary of GGS Holdings Limited, or GGS. In May 2005, a
settlement agreement was reached between Marathon and ourselves to terminate the
Baja LNG import and power project. Under the agreement, we have agreed to pay
the sum of $1.2 million to settle our obligations in full.
Factors Affecting Our Results
The principal factors that have affected, and are expected to continue
to affect, our business are:
o The employment of our vessels, daily charter rates and the number
of unscheduled offhire days
o Non-utilization for vessels not subject to charters
o Vessel operating expenses
o Administrative expenses
o Pension expenses
o Useful lives of our fleet and the related depreciation and
amortization expense
o Net financial expenses including mark to market charges for
interest rate and foreign currency swaps and interest rates and
foreign exchange gains or losses that arise on the translation of
our lease obligations and the cash deposits that secure them.
o Equity in net earnings of investee
o The success or failure of the LNG infrastructure projects that we
are working on or may work in the future.
Operating revenues are primarily generated by charter rates paid for
our short-term, medium-term and long-term charters and are therefore related to
both our ability to secure continuous employment for our vessels as well as the
rates that we secure for these charters. Seven of our currently trading vessels
are fixed on long-term time charters with either fixed or predictable hire
rates. Three of our vessels are currently trading in the spot or short-term
market where rates can vary dramatically and are difficult to predict from one
charter to the next.
The number of days that our vessels earn hire substantially influences
our results. Our vessels may be out of service, that is, offhire, for three main
reasons: scheduled drydocking or special survey or maintenance, which we refer
to as scheduled offhire, days spent waiting for a charter, which we refer to as
commercial waiting time and unscheduled repairs or maintenance, which we refer
to as unscheduled offhire. Generally, for vessels that are under a time charter,
hire is paid for each day that a vessel is available for service. However, two
of our long-term charters provide for an allowance of a specified number of days
every two to three years that our vessels may be in drydock, for one vessel the
allowance is fixed whilst the other vessel will only be placed offhire if the
number of days in drydock every two years exceeds that allowance. The shipping
industry uses average daily time charter earnings, or TCE, to measure revenues
per vessel in dollars per day for vessels on charters. We calculate TCE by
taking time charter revenues, or voyage revenues, net of voyage expenses,
recognized ratably over the period of the voyage, earned and dividing by the
number of days in the period less scheduled offhire.
We attempt to minimize unscheduled offhire by conducting a program of
continual maintenance for our vessels. The charter coverage we have for all our
vessels has resulted in a minimal number of waiting days in 2002 and 2003. In
2004, we took delivery of two newbuildings (Golar Frost and Golar Winter)
neither of which is committed to long or medium term charter contracts. The
Golar Winter was fixed on a short-term charter for most of 2004 but the Golar
Frost incurred significant commercial waiting time. In January 2005, we took
delivery of a third vessel not committed to a charter and we expect all three to
incur significant commercial waiting time during 2005.
Voyage expenses are primarily expenses such as fuel and port charges,
which are paid by us under voyage charters. Under time charters our customers
pay for such voyage expenses. Accordingly voyage expenses will vary depending on
the number of vessels we have operating on voyage charters.
Vessel operating expenses include direct vessel operating costs
associated with running a vessel and an allocation of shore-based overhead costs
directly related to vessel management. Vessel operating costs include crew
wages, which are the most significant component, vessel supplies, routine
repairs, maintenance, lubricating oils and insurance. Accordingly, the level of
this operating cost is directly related to the number of vessels we operate.
Overhead allocated to vessels includes certain technical and operational
support, information technology, legal, accounting and corporate costs that are
related to vessel operating activity. These costs are allocated based on
internal cost studies, which management believes are reasonable estimates.
Operating expenses increased during 2002 mainly due to increased crew and
related pension costs and insurance costs and in 2003 and 2004 principally
because of the addition to the fleet of the Methane Princess in 2003, and the
Golar Winter and Golar Frost in 2004. Operating expenses include the costs
associated with the pension scheme we maintain for some of our seafarers (the
Marine Scheme). Although this scheme is now closed to new entrants the cost of
provision of this benefit will vary with the movement of actuarial variables and
the value of the pension fund assets.
Administrative expenses are composed of general corporate overhead
including primarily personnel costs, legal and professional fees, costs
associated with project development, corporate services, public filing fees,
property costs and other general administration costs. Personnel costs comprise
approximately 60 per cent of our administrative expenses and include salaries,
pension costs, fringe benefits, travel costs and social insurance. In January
2005, we announced the outsourcing of our day-to-day fleet management activities
to established third party ship managers. We have also opened an office in Oslo.
This reorganisation has resulted in some severance costs of approximately $1.1
million as a result of redundancies at our London offices. The restructuring
cost is not reflected in the current year's results. We expect ongoing personnel
costs to be reduced as a result of this reorganisation. Historically, we have
incurred costs associated with the development of various projects and we expect
to incur further costs in the future. Administrative expenses include the costs
associated with the pension scheme we maintain for some of our office-based
employees (the UK Scheme). Although this scheme is now closed to new entrants
the cost of provision of this benefit will vary with the movement of actuarial
variables and the value of the pension fund assets.
Depreciation and amortization expense, or the periodic cost charged to
our income for the reduction in usefulness and long-term value of our ships, is
also related to the number of vessels we own or operate under long term capital
leases. We depreciate the cost of our owned vessels, less their estimated
residual value, and amortize the amount of our capital lease assets, over their
estimated useful lives on a straight-line basis. We amortize our deferred
drydocking costs over two to five years based on each vessel's next anticipated
drydocking. No charge is made for depreciation of newbuildings until they are
delivered. We amortize our office equipment and fittings over three to six years
based on estimated economic useful life. Income derived from sale and
subsequently leased assets is deferred and amortized in proportion to the
amortization of the leased assets.
Interest expense depends on the overall levels of borrowing we incur
and may significantly increase when we acquire or lease ships or on the delivery
of newbuildings. During a newbuilding construction period, interest expense
incurred is capitalized in the cost of the newbuilding. Interest expense may
also change with prevailing interest rates although interest rate swaps or other
derivative instruments may reduce the effect of these changes. Currently $135
million of debt under our Methane Princess facility has a fixed interest rate.
Furthermore, $397 million of our floating rate debt and capital lease
obligations is currently swapped to fixed rate, and we may enter into further
interest rate swap arrangements if this is considered to be advantageous to us.
In addition we have swapped $105 million of our future capital lease obligations
in respect of hull number 2226 to a fixed rate to commence in January 2006.
Interest income will also depend on prevailing interest rates and the
level of our cash deposits and restricted cash deposits.
Other financial items are composed of financing fee arrangement costs,
amortization of deferred financing costs, market valuation adjustments for
interest rate and currency derivatives and foreign exchange gains/losses. The
market valuation adjustment for our interest rate and currency derivatives may
have a significant impact on our results of operations and financial position
although it does not impact our liquidity. Foreign exchange gains and losses,
which were minimal prior to 2003 as our activities are primarily denominated in
US dollars, have since increased principally due to the lease finance
transactions that we entered into during 2003 and 2004, which are all
denominated in British Pounds. Foreign exchange gains or loss arises due to the
retranslation of our capital lease obligations and the cash deposits securing
those obligations. Any gain or loss represents an unrealised gain and will arise
over time as a result of exchange rate movements. Our liquidity position will
only be affected to the extent that we choose or are required to withdraw monies
from or pay additional monies into the deposits securing our capital lease
obligations. We have also entered into a currency swap of our lease obligation
in respect of the Golar Winter. The lease is denominated in British Pounds (GBP)
but is not fully hedged by a GBP cash deposit. We have therefore swapped our
obligation to pay rentals in GBP for an obligation to pay USD at a fixed rate of
exchange.
Equity in net earnings of investee refers to our interest in Korea
Line Corporation (Korea Line). Korea Line is a Korean Shipping company listed on
the Korean Stock Exchange. As of December 31, 2003 we had an interest of 9.97%
in Korea Line and accounted for the investment as an investment "available for
sale". From June 2004 we have had an interest of 21.09%. As a result of the
increase in our level of ownership, which has given us the ability to exercise
significant influence over Korea Line, we changed to the equity method of
accounting for the investment. The restatement to retroactively reflect the
change to the equity method of accounting had no effect on net income for
periods prior to and including the year ended December 31, 2003. Our future
equity in net earnings of investee will depend on the results of Korea Line and
our level of investment.
Since many of the above key items are directly related to the number
of LNG carriers we own or lease and their financing, the acquisition or
divestment of additional vessels and entry into additional newbuilding contracts
would cause corresponding changes in our results.
Although inflation has had a moderate impact on operating expenses,
interest costs, drydocking expenses and corporate overheads, management does not
expect inflation to have a significant impact on direct costs in the current and
foreseeable economic environment other than potentially in relation to insurance
costs and crew costs. It is anticipated that insurance costs, which have risen
considerably over the last three years, may well continue to rise over the next
few years. Two of our vessels charters are based on operating cost pass through
and a third has an insurance cost pass through and so we will be protected from
the full impact of such increases. LNG transportation is a specialized area and
the number of vessels is increasing rapidly. There will therefore be an
increased demand for qualified crew and this may put inflationary pressure on
crew costs. Only the two vessels on full cost pass through charters would be
protected from any crew cost increases.
A number of factors could substantially affect the results of
operations of our core long-term charter LNG shipping business as well as the
future expansion of any spot market business or the projects we are developing.
These factors include the pricing and level of demand and supply for natural gas
and specifically LNG. Other uncertainties that could also substantially affect
these results include changes in the number of new LNG importing countries and
regions and availability of surplus LNG from projects around the world, as well
as structural LNG market changes allowing greater flexibility and enhanced
competition with other energy sources.
Critical Accounting Policies
The preparation of the Company's financial statements in accordance
with accounting principles generally accepted in the United States requires that
management make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following is a discussion of the
accounting policies applied by the Company that are considered to involve a
higher degree of judgement in their application. See Note 2 to the Company's
audited Consolidated Financial Statements and Notes thereto included herein for
details of the Company's significant accounting policies.
Vessels and Depreciation and Amortization
The cost of the Company's vessels, less the estimated residual value,
is depreciated, (owned vessels) or amortized (leased vessels) on a straight-line
basis over the vessels' remaining economic useful lives. Management estimates
the useful life of the Company's vessels to be 40 years and this is a common
life expectancy applied in the LNG shipping industry. If the estimated economic
useful life is incorrect, an impairment loss could result in future periods.
Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
assessing the recoverability of our vessels' carrying amounts, we must make
assumptions regarding estimated future cash flows and estimates in respect of
residual or scrap value. We estimate those future cashflows based on the
existing service potential of our vessels, which on average for our fleet
extends over a 24 year period. We have assumed that we will be able to renew our
time charter contracts at their existing prices rather than at escalated rates,
and that the costs of operating those vessels reflects our average operating
costs experienced historically. Factors we consider important which could affect
recoverability and trigger impairment include significant underperformance
relative to expected operating results and significant negative industry or
economic trends.
We follow a traditional present value approach, whereby a single set
of future cash flows is estimated. If the carrying value of a vessel were to
exceed the undiscounted future cash flows, we would write the vessel down to its
fair value, which is calculated by using a risk-adjusted rate of interest. We
believe that the carrying value of many of our vessels is below their fair value
because we allocated negative goodwill to certain of the vessels associated with
our acquisition from Osprey. Since inception, our vessels have not been
impaired.
Time Charters
We account for time charters of vessels to our customers as operating
leases and record the customers' lease payments as time charter revenues. We
evaluate each contract to determine whether or not the time charter should be
treated as an operating or capital lease, which involves estimates about our
vessels' remaining economic useful lives, the fair value of our vessels, the
likelihood of a lessee renewal or extension, incremental borrowing rates and
other factors.
Our estimate of the remaining economic useful lives of our vessels is
based on the common life expectancy applied to similar vessels in the LNG
shipping industry. The fair value of our vessels is derived from our estimate of
expected present value, and is also benchmarked against open market values
considering the point of view of a potential buyer. The likelihood of a lessee
renewal or extension is based on current and projected demand and prices for
similar vessels which is based on our knowledge of trends in the industry,
historic experience with customers in addition to knowledge of our customers'
requirements. The incremental borrowing rate we use to discount expected lease
payments and time charter revenues are based on the rates at the time of
entering into the agreement.
A change in our estimates might impact the evaluation of our time
charters, and require that we classify our time charters as capital leases,
which would include recording an asset similar to a loan receivable and removing
the vessel from our balance sheet. The lease payments to us would reflect a
declining revenue stream to take into account our interest carrying costs, which
would impact the timing of our revenue stream.
Capital Leases
We have sold several of our vessels to, and subsequently leased the
vessels from UK financial institutions that routinely enter into finance leasing
arrangements. We have accounted for these arrangements as capital leases. As
identified in our critical accounting policy for time charters, we make
estimates and assumptions in determining the classification of our leases. In
addition, these estimates, such as incremental borrowing rates and the fair
value or remaining economic lives of the vessels, impact the measurement of our
vessels and liabilities subject to the capital leases. Changes to our estimates
could affect the carrying value of our lease assets and liabilities, which could
impact our results of operations. To illustrate, if the incremental borrowing
rate had been lower than our initial estimate this would result in a higher
lease liability being recorded due to a lower discount rate being applied to its
future lease rental payments.
We have also recorded deferred credits in connection with these lease
transactions. The deferred credits represent the upfront benefits derived from
undertaking financing in the form of UK leases. The deferred credits are
amortized over the remaining economic lives of the vessels to which the leases
relate on a straight-line basis. The benefits under lease financings are derived
primarily from tax depreciation assumed to be available to lessors as a result
of their investment in the vessels. If that tax depreciation ultimately proves
not to be available to the lessor, or is clawed back from the lessor (e.g. on a
change of tax law), the lessor will be entitled to adjust the rentals under the
relevant lease so as to maintain its after tax position, except in limited
circumstances. Any increase in rentals is likely to affect our ability to
amortize the deferred credits, increase our interest cost and consequently could
have a negative impact on our results and operations and our liquidity.
Insurance Receivables
We have recognized amounts related to various insurance claims in our
results of operations. We recognize such insurance claims when facts and
circumstances support the legal recovery and we believe it is virtually certain
that the insurance claims will be recovered. If our insurance companies dispute
our assessment of the facts and circumstances or refuse to honour all or a
portion of our claims, the amounts recognized for our insurance receivables may
not be collectible, which would adversely impact our results of operations.
Pension Benefits
The determination of our defined benefit pension obligations and
expense for pension benefits is dependent on our selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions are
described in note 20 of the notes to our Consolidated Financial Statements
included in this annual report and include, among others, the discount rate,
expected long-term rate of return on plan assets and rates of increase in
compensation. In accordance with U.S. generally accepted accounting principles,
actual results that differ from our assumptions are accumulated and amortized
over future periods and therefore, generally affect our recognized expense and
recorded obligation in such future periods. We are guided in selecting our
assumptions by our independent actuaries and, while we believe that our
assumptions are appropriate, significant differences in our actual experience or
significant changes in our assumptions may materially affect our pension
obligations and our future pensions expense.
Recently Issued Accounting Standards and Securities and Exchange Commission
Rules
FAS 151
In November 2004 the Financial Accounting Standards Board (FASB)
issued Financial Accounting Standard No. 151, Inventory Costs--an amendment of
ARB No. 43, Chapter 4 (revised) (FAS 151). FAS 151 amends the guidance in ARB
No. 43, Chapter 4, `Inventory Pricing,' to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that those items be recognized as current-period
charges. In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. We will adopt FAS 151 on January 1, 2006. The new
standard is not expected to have material impact on the Company's results of
operations and financial position.
FAS 123R
In December 2004 the FASB issued Financial Accounting Standard No.
123R, Share-Based Payment (FAS 123R). FAS 123R requires that companies expense
the value of employee stock options and other awards. FAS 123R allows companies
to choose an option pricing model that appropriately reflects their specific
circumstances and the economics of their transactions, and allows companies to
select from three transition methods for adoption of the provisions of the
standard. We will adopt FAS 123R effective January 1, 2006. The Company has
determined that this will not have an immediate impact upon Golar's financial
statements because as at December 31, 2004 all of Golar's stock options are
fully vested.
FAS 153
In December 2004 the FASB issued Financial Accounting Standard No.
153, Exchanges of Nonmonetary Assets (FAS 153). FAS 153 amends APB Opinion No.
29, Accounting for Nonmonetary Transactions, to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. We will adopt FAS 153 for nonmonetary exchanges occurring on or
after January 1, 2006. The new standard is not expected to have material impact
on the Company's results of operations and financial position.
EITF 03-01
In June 2004, the Emerging Issues Task Force finalized Issue No.
03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments (EITF 03-01). The issue was intended to address the meaning
of "other-than-temporary" impairment and its application to certain investments
in debt and equity securities. A consensus was reached regarding disclosure
requirements concerning unrealized losses on available-for-sale debt and equity
securities accounted for under Financial Accounting Standard No. 115, Accounting
for Certain Investments in Debt and Equity Securities (FAS 115) and Financial
Accounting Standard No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations (FAS 124). The guidance for evaluating whether an
investment is other-than-temporarily impaired should be applied in reporting
periods beginning after June 15, 2004. The disclosures are effective in annual
financial statements for fiscal years ending after December 31, 2003, for
investments accounted for under SFAS Nos. 115 and 124. For all other investments
within the scope of this EITF, the disclosures are effective for fiscal years
ending after June 15, 2004. Additional disclosures for cost method investments
are effective for fiscal years ending after June 15, 2004. The Company currently
does not have investments that fall within the scope of EITF 03-01, and has
therefore concluded that the guidance will not have an impact on its
consolidated results of operations or financial position.
FAS 154
In May 2005, the FASB issued Financial Accounting Standard No. 154,
Accounting Changes and Error Corrections (FAS 154). FAS 154 requires
retrospective application to prior periods' financial statements of changes in
accounting principle, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the period-specific effects of an accounting change
on one or more individual prior periods presented, the Statement requires that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings (or other appropriate components of equity
or net assets in the statement of financial position) for that period rather
than being reported in an income statement. When it is impracticable to
determine the cumulative effect of applying a change in accounting principle to
all prior periods, the Statement requires that the new accounting principle be
applied as if it were adopted prospectively from the earliest date practicable.
We will adopt FAS 154 for accounting changes and corrections of errors made
beginning January 1, 2006.
Results of operations
Our results for the years ended December 31, 2004, 2003 and 2002 were
affected by several key factors:
o the delivery of three newbuildings, the Methane Princess in
August 2003, the Golar Winter in April 2004 and the Golar Frost
in June 2004;
o lease finance arrangements that we entered into during 2003 and
2004; and
o equity accounting of our acquisition of equity securities in
Korea Line Corporation during 2003 and 2004.
The impact of these factors is discussed in more detail below.
Year ended December 31, 2004, compared with the year ended December 31,
2003
Operating Revenues. Total operating revenues of $163.4 million were
$30.6 million, or 23%, higher than last year. Although there was an increase in
the total number of offhire days incurred in 2004 compared to 2003, this was
offset by earnings from the addition of the Golar Winter and the Golar Frost to
the fleet in April 2004 and June 2004 respectively, and a full year's earnings
from the Methane Princess, delivered in August 2003. The increased number of
offhire days in 2004 was mainly due to the commercial waiting time in respect of
the two newbuildings Golar Winter and Golar Frost following their delivery
during the year, in addition to offhire incurred by the Methane Princess as a
result of waiting and positioning time prior to entering its long term charter
with BG in the year. Revenues earned by the Methane Princess during 2003 were
derived from voyage charters. Whilst the newbuildings commercial waiting time
increased the overall number of offhire days they still made a positive
contribution to revenues therefore, although total revenues have increased
during 2004, average revenue per vessel has reduced from an average daily time
charter equivalent rate of $57,300 in 2003 to $54,900 in 2004.
Vessel Operating Expenses. Vessel operating expenses increased 19 per
cent from $30.2 million in 2003 to $35.8 million in 2004. This was mainly
because of the addition of the Golar Winter and the Golar Frost to our fleet,
which contributed $4.3 million of the increase and the Methane Princess trading
for a full year, which contributed a further $1.8 million. This was partly
offset by our six other vessels' expenses being approximately $0.5 million lower
than 2004. In the years ended December 31, 2004 and 2003, the average daily
operating costs of our vessels were $11,137 and $13,000, respectively. Our daily
operating costs have declined because it is generally cheaper to operate new
ships than it is to operate older ships. Included in these amounts are $1,124
per day and $928 per day, respectively of overheads allocable to vessel
operating expenses. These are onshore costs such as technical and operational
staff support, information technology and legal, accounting and corporate costs
attributable to vessel operations. These costs are allocated based on internal
cost studies, which management believes are reasonable estimates.
Voyage expenses. Voyage expenses increased 17 per cent from $2.2
million in 2003 to $2.6 million in 2004 even though voyage revenues decreased by
74 per cent from $9.1 million in 2003 to $2.4 million in 2004. During 2003 our
first newbuilding the Methane Princess operated under voyage charters from
delivery in August 2003 until the end of the year. In contrast, our vessels were
mostly under time charters during 2004 albeit that some of these time charters
were for short periods of time. Under a time charter the charterer pays voyage
costs, mainly fuel costs, themselves. As soon as the time charter finishes or
when the vessel is waiting for employment (commercial waiting time) these costs
are payable by us. Therefore, whilst less voyage charters were performed in 2004
voyage expenses were incurred for the periods of commercial waiting in respect
of our newbuildings in 2004, which has meant voyage costs have actually
increased. The level of voyage expenses we incur will be largely dependent on
the number of vessels we have operating on voyage charters.
Administrative Expenses. Administrative expenses increased 19 per cent
from $7.1 million in 2003 to $8.5 million in 2004. The increase was mainly due
to higher salary and employee benefit costs due to increased head count and
salary increases; additional costs incurred as a result of our accounting and
auditing requirements in respect of our associate Korea Line and a general
increase of expenses arising in particular as a result of a 7.8 per cent
appreciation of the British Pound against the US Dollar. A significant
proportion of our administrative expenses are incurred in British Pounds (GBP)
at our office in London. Movement in the exchange rate of the U.S. dollar
against GBP will therefore impact our future administrative expenses. These
significant increases have been offset in part by a reduction of $1.8 million in
the charge in respect of our share of costs in the Baja project.
As noted above, since February 2005 we have employed two third party
ship managers to assist with our day-to-day fleet management activities. This
has resulted in the loss of some staff in our London office, which in turn will
reduce our salary costs in 2005. However, as a large part of these costs were
allocated to vessel operating expenses, as noted above the net impact on overall
administrative expenses will not be as great as it otherwise would have been.
Depreciation and Amortization. Depreciation and amortization increased
30 per cent from $31.1 million in 2003 to $40.5 million in 2004. The increase
was due to the addition of the Golar Winter and the Golar Frost to the fleet in
the year and the full year impact of the Methane Princess, which was delivered
mid 2003.
Net Financial Expenses. Interest income was $31.9 million and $14.8
million for the years ended December 31, 2004 and 2003, respectively. Interest
income includes an amount of $30.5 million in 2004 and $14.1 million in 2003
attributable to fixed cash deposits, which secure our capital lease obligations.
Interest expense was $62.0 million and $37.2 million for the years ended
December 31, 2004 and 2003, respectively. The expense includes an amount of
$33.9 million in 2004 and $14.6 million in 2003 attributable to our capital
lease obligations. The increase in both income and expense is due to the finance
lease transactions that we entered into during 2003 and the Golar Winter lease
entered into in 2004, in addition to debt finance for the Golar Frost entered
into during 2004 and in respect of the Methane Princess, which was entered into
during 2003. Other financial items decreased $2.3 million from net income of
$7.2 million for the year ended December 31, 2003 to net income of $4.8 million
in the year ended December 31, 2004. The change was primarily due to the decline
in the fair value of interest rate swaps, from a gain of $6.4 million in 2003
compared with a gain of $5.6 million in 2004, and a decrease of $1.5 million in
net foreign exchange gains from $3.0 million in 2003 compared with $1.5 million
in 2004. Foreign exchange gains and losses arise as a result of the
retranslation of our capital lease obligations, the cash deposits securing those
obligations and the movement in the fair value of the currency swap used to
hedge the Golar Winter lease transaction. Of the $1.5 million net foreign
exchange gain in 2004, a gain of $6.7 million (2003: $nil) arose in respect of
the mark to market valuation of the currency swap representing the movement in
the fair value. This swap entered into hedges the currency risk arising from
lease rentals due in respect of the Golar Winter GBP lease rental obligation, by
translating GBP payments into US dollar payments at a fixed GBP/USD exchange
rate (i.e Golar receives GBP and pays US dollars). The gain arose due to the
appreciation of the British Pound against the US Dollar during the year. This
gain represents an unrealised gain.
Minority Interest and Income Taxes. Minority interest, consisting of
the 40 per cent interest in the Golar Mazo, marginally increased from a charge
of $7.0 million in 2003 to a charge of $7.6 million in 2004. Income taxes relate
to the taxation of our UK management operations and also UK based vessel
operating companies we established subsequent to April 2003. Our income tax
charge is expected to increase as a function of the number of vessels we operate
in the UK and the profitability of the UK companies.
Equity in net earnings of investee. During the first half of the year
we increased our interest in Korea Line Corporation from 9.94 per cent at
December 31, 2003 to 21.09 per cent by June 2004. In accordance with Accounting
Principles Board Opinion No.18 "The Equity Method of Accounting for Investments
in Common Stock" we changed our accounting treatment of the investment to the
equity method of accounting to reflect our ability to exercise significant
influence over the investee subsequent to December 31, 2003. The investment had
previously been accounted for as "available for sale". The year ended 31
December, 2004 is the first year in which we have included a share of earnings
in Korea Line Corporation. Korea Line operates in the drybulk market, as well as
operating some LNG vessels, and charters out its own vessels as well as
chartered in vessels on short-term and long-term contracts. Korea Line have
capitalized on a good drybulk market during 2004 and their operating profit has
more than doubled from 2003.
Net Income. As a result of the foregoing, we earned net income of
$58.6 million in 2004, increased from $39.6 million in 2003.
Year ended December 31, 2003, compared with the year ended December 31,
2002
Operating Revenues. Total operating revenues of $132.8 million in 2003
were $2.2 million higher than in 2002 but after deducting voyage expenses of
$2.2 million incurred in 2003 in connection with the Methane Princess they were
the same for both years. Although there was an increase in the number of offhire
days incurred in 2003 compared to 2002, this was offset by earnings from the
addition of the Methane Princess to the fleet at the end of August 2003. The
increased number of offhire days in 2003 was due to two vessels drydocking and
offhire in respect of other maintenance and repairs. In contrast only one vessel
drydocked in 2002 but because of an allowance in the charter no offhire time was
incurred. Revenues earned by the Methane Princess during 2003 were derived from
voyage charters. All revenues earned during 2002 were derived from time
charters. The fleet earned an average daily time charter equivalent rate of
$57,300 and $59,000 in 2003 and 2002, respectively.
Vessel Operating Expenses. Vessel operating expenses increased 7 per
cent from $28.1 million in 2002 to $30.2 million in 2003. This was mainly
because of the addition of the Methane Princess to our fleet, which contributed
$1.3 million of the increase. Additional costs were also incurred in respect of
crew; costs associated with repairs to our vessels, including the cost of
repair, associated survey costs and the cost of insurance deductibles; and
higher insurance costs mainly due to additional war risk premium levied on two
of our ships trading in Indonesian waters on charter to Pertamina. This premium
ceased to apply in May 2003. Insurance costs were further affected by increase
in market rates. Some of these increased costs were offset by savings elsewhere
which resulted in an overall cost increase of $0.8 million in addition to the
$1.3 million contributed by the Methane Princess. In the years ended December
31, 2003 and 2002, the average daily operating costs of our vessels were $13,000
and $12,800, respectively. Included in these amounts are $928 per day and $1,027
per day, respectively of overheads allocable to vessel operating expenses. These
are onshore costs such as technical and operational staff support, information
technology and legal, accounting and corporate costs attributable to vessel
operations. These costs are allocated based on internal cost studies, which
management believes are reasonable estimates.
Voyage expenses. During 2002 all our vessels were on time charters and
therefore did not incur any voyage expenses because under a time charter our
customers pay for such expenses. During 2003 our first newbuilding, the Methane
Princess operated under voyage charters from delivery until the end of the year.
The level of voyage expenses we incur will be largely dependent on the number of
vessels we have operating on voyage charters.
Administrative Expenses. Administrative expenses increased 17 per cent
from $6.1 million in 2002 to $7.1 million in 2003. The increase was mainly due
to an increase of $1.0 million in our share of development costs in respect of
the Baja project during 2003. In preparation for increased ship operation
activities, our headcount increased from 2002 by seven in our London office and
as a result wages and other staff related costs also increased, but this was
largely off set by reduced costs elsewhere, principally the lack of costs
associated with the listing of our shares in the U.S. in 2002. A significant
proportion of our administrative expenses are incurred in British Pounds (GBP)
at our office in London. Movement in the exchange rate of the U.S. Dollar
against GBP will therefore impact our future administrative expenses.
Depreciation and Amortization. Depreciation and amortization decreased
marginally from $31.3 million in 2002 to $31.1 million in 2003. An increase due
to the addition of the Methane Princess to the fleet and higher drydock cost
amortization was off set by the amortization of the deferred gain credit from
our lease finance arrangements.
Net Financial Expenses. Interest income was $14.8 million and $1.1
million for the years ended December 31, 2003 and 2002, respectively. Interest
income in 2003 includes an amount of $14.1 million attributable to fixed cash
deposits, which secure our capital lease obligations. Interest expense was $37.2
million and $23.6 million for the years ended December 31, 2003 and 2002,
respectively. The expense for 2003 includes an amount of $14.6 million
attributable to our capital lease obligations. The increase in both income and
expense is due to the finance lease transactions that we entered into during
2003, the aim of which were to restructure our financing arrangements. Net
financial expenses were further affected by prevailing lower interest rates in
2003 compared to 2002. Other financial items changed from an expense of $17.9
million for the year ended December 31, 2002 to net income of $7.2 million in
the year ended December 31, 2003. The change was primarily due to the movement
in the fair value of interest rate swaps, which resulted in a charge of $16.5
million in 2002 compared with a gain of $6.4 million in 2003. Additionally a
foreign exchange gain of $3.0 million arose during 2003 as a result of the
retranslation of our capital lease obligations and the cash deposits securing
those obligations. The gain arose due to the appreciation of the British Pound
against the US Dollar during the year. This gain represents an unrealised gain.
Minority Interest and Income Taxes. Minority interest, consisting of
the 40 per cent interest in the Golar Mazo, increased from a credit of $2.5
million in 2002 to a charge of $7.0 million in 2003. The credit in 2002 was due
to the impact of the minority interests share of mark-to-market charge for
interest rate swaps amounting to $6.6 million. Income taxes relate to the
taxation of our UK vessel management operations and also to vessel operating
companies in 2003. As a result of transferring the operations of six of our
vessels to UK incorporated companies during the year our income tax charge in
2003 increased to $0.4 million. These UK companies did not exist in our group in
2002. Our income tax charge is expected to increase as a function of the number
of vessels we operate in the UK and the profitability of the UK companies.
Net Income. As a result of the foregoing, we earned net income of
$39.6 million in 2003, increased from $27.1 million in 2002.
B. Liquidity and Capital Resources
We operate in a capital intensive industry and we have historically
financed our purchase of LNG carriers and other capital expenditures through a
combination of borrowings from commercial banks, cash generated from operations
and equity capital. Our liquidity requirements relate to servicing our debt,
funding our newbuilding program, funding investments, including the equity
portion of investments in vessels, funding working capital and maintaining cash
reserves against fluctuations in operating cash flows.
Revenues from our time charters are received monthly in advance.
Inventory requirements, consisting primarily of fuel, lubricating oil and spare
parts, are low due to the major cost, fuel, of these items being paid for by the
charterer under time charters. We believe our current resources are sufficient
to meet our working capital requirements for our employed vessels; however, our
newbuilding program, currently consisting of three committed contracts for
vessels currently under construction, and to a lesser extent the three ships we
currently operate in the spot market depending on their employment, will result
in increased financing and working capital requirements. Payments for our
newbuildings are made as construction progresses in accordance with our
contracts with shipyards. The financing of our newbuilding program is discussed
further below.
We have sufficient facilities to meet our anticipated funding needs
until May 2006. As of June 30, 2005, additional facilities of $242 million will
be needed to meet commitments under the newbuilding construction program in May
2006 and thereafter. It is standard in the shipping industry to finance between
50 and 80 per cent of the purchase price of vessels, or construction cost in the
case of newbuildings, through traditional bank or lease financing. In the case
of vessels that have term charter coverage, the debt finance percentage may
increase significantly. We received 100 per cent financing for the cost of one
of our newbuildings that is on a long-term charter with BG. If we were to obtain
50 per cent debt financing to cover the instalments due on our two remaining
unfinanced newbuildings, this would result in additional financing of
approximately $151 million of the $242 million required.
It is intended that the funding for our commitments under the
newbuilding construction program will come from a combination of cash, debt
finance, lease arrangements and cash flow from operations. Alternatively, if
market and economic conditions favour equity financing, we may raise additional
equity. In 2003, we raised $106 million from equity offerings for newbuilding
commitments and other investments. Within the past eighteen months we have
raised bank and lease finance in respect of four vessels without time charter
contract commitments for between 60 and 70 per cent of the capital cost of the
vessel. This fact and the general discussions we have had with a number of banks
with whom we have close relation, leads us to believe that we will be able to
secure sufficient facilities to meet our construction commitments in full as
they fall due. Details of newbuilding commitments and proposed funding
arrangements are detailed below.
Our funding and treasury activities are conducted within corporate
policies to maximize investment returns while maintaining appropriate liquidity
for our requirements. Cash and cash equivalents are held primarily in U.S.
dollars with some balances held in British Pounds. We have not made use of
derivative instruments other than for interest rate and currency risk management
purposes.
The following table summarizes our cash flows from operating,
investing and financing activities:
Year Ended December 31,
2004 2003 2002
(in millions of $)
Net cash provided by operating activities 82.0 60.1 71.2
Net cash used in investing activities (356.1) (658.5) (163.3)
Net cash provided by financing activities 207.8 663.5 87.3
Net (decrease) increase in cash and cash equivalents (66.3) 65.1 (4.8)
Cash and cash equivalents at beginning of year 117.9 52.7 57.5
Cash and cash equivalents at end of year 51.6 117.9 52.7
As of December 31, 2004, 2003 and 2002 the Company had cash and cash
equivalents of $51.6 million, $117.9 million and $52.7 million, respectively.
The increase as at December 31, 2003 was a result of $106 million new equity,
raised during 2003. In addition, at December 31, 2004, 2003 and 2002 we had
restricted cash of $42.0 million, $32.1 million and $12.8 million, respectively
that represents balances retained on accounts in accordance with certain loan
and lease covenants. Our long-term restricted cash balances were $714.8 million,
$623.2 million and $nil as at December 31, 2004, 2003 and 2002 respectively.
These balances act as security for our capital lease obligations.
In 2004, we generated cash from operations of $82.0 million compared
with $60.1 million in 2003 and $71.2 million in 2002. The increase in 2004 from
2003 is largely due to the addition of the Golar Winter and Methane Princess to
the fleet. The Golar Winter was delivered in April 2004 and employed under a
short-term charter, the Methane Princess, delivered in August 2003, traded for
the majority of 2004 under its long-term charter.
Net cash used in investing activities in 2004 was $356.1 million of
which $278.6 million related to newbuilding purchase instalments; $47.2 million
related to placement of funds into deposits to provide security for capital
lease obligations; $21.9 million related to the purchase of equity securities in
Korea Line Corporation and $8.2 million was in respect of additions to vessels
and equipment. Net cash used in investing activities in 2003 was $658.5 million,
of which approximately $562.3 million related to placement of funds into
deposits to provide security for capital lease obligations; $77.8 million
related to newbuilding purchase instalments; $12.2 million related to the
purchase of equity securities in Korea Line Corporation and $6.3 million was in
respect of additions to vessels and equipment. Newbuilding instalment payments
made during 2003 and 2004 were net of an amount of $12.9 million and $9 million
received from shipyards in relation to the late delivery of the Methane Princess
and the Golar Frost, respectively. Net cash used in investing activities in 2002
was $163.3 million, of which $158.8 million related to newbuilding purchase
instalments and $5.9 million was in respect of additions to vessels and
equipment.
Net cash provided by financing activities was $207.8 million in 2004,
compared with $663.5 million and $87.3 million in the years ended December 31,
2003 and 2002, respectively. In 2004, we drew down a total of $110 million in
debt in relation to the Golar Frost and received proceeds of $163.7 million from
lease financing arrangements in relation to the Golar Winter. Repayments of debt
totalled $62.3 million in 2004. During 2003, we drew down a total of $506.1
million in debt and received proceeds from lease financing arrangements of
$616.3 million. Repayments of debt totalled $561.2 million in 2003, of which
$32.7 million was to a related party. Furthermore, during 2003, we raised $106.2
million from the issue of 9.6 million shares in two separate offerings, 5.6
million shares in July 2003 and 4.0 million in December 2003. During 2002, we
drew down a total of $210.6 million in debt, of which $16.3 million was from a
related party. Repayments of debt totalled $109.9 million in 2002, of which
$68.8 million was to a related party.
Long-Term Debt
Mazo facility
On November 26, 1997 Osprey entered into a loan facility of $214.5
million secured by a mortgage on the vessel Golar Mazo, which we refer to as the
Mazo facility. This facility, which we assumed from Osprey, bears floating rate
interest of LIBOR plus a margin. The loan is repayable in bi-annual instalments
that commenced on June 28, 2001. The balance of the facility, on a 100 per cent
basis, as at December 31, 2004 totalled $168.2 million. In connection with the
Mazo facility, Osprey entered into a collateral agreement with the banking
consortium and a bank Trust Company. This agreement requires that certain cash
balances, representing interest and principal payments for defined future
periods, be held by the Trust Company during the period of the loan.
In connection with the Mazo facility, Osprey entered into interest
rate swaps to reduce the impact of changes in interest rates. Gains and losses
due to the changes in the fair value of the interest rate swaps are recorded in
the income statement. The mark to market charge in the years ended December 31,
2004, 2003 and 2002 were $6,365,000 gain, $6,401,000 gain and $16,458,000 loss,
respectively.
Golar LNG facility and Golar LNG subordinated facility
In May 2001, we entered into a secured loan facility with a banking
consortium for an amount of $325.0 million, which we refer to as the Golar LNG
facility. The Golar LNG facility was first refinanced in April 2003, with cash,
in connection with a lease finance arrangement for five vessels, as discussed
further below, and an amount of $265 million was provided by the same syndicate
of banks; we refer to this loan as the New Golar LNG facility. The amount
outstanding on the old facility at the time of the first refinancing was $282.5
million and accordingly a net $17.5 million was repaid. The loan accrued
floating interest at a rate per annum equal to the aggregate of LIBOR plus a
margin. The loan had a term of four years and two months and was to be repaid in
16 quarterly instalments together with a final balloon payment of $138.8 million
due on May 31, 2007. The New Golar LNG facility was refinanced in March 2005 as
discussed in more detail below.
In October 2002, we entered into a secured subordinated loan facility
with a banking consortium for an amount of $60.0 million, to which we refer to
as the Golar LNG subordinated facility. This loan was also first refinanced in
April 2003. The new second priority loan, which we refer to as the New Golar LNG
subordinated facility, was also for an amount of $60 million provided by the
same syndicate of banks. It accrued floating interest at a rate per annum equal
to the aggregate of LIBOR, plus a margin, increasing by 0.25 percent per annum
on 30 November 2004 and 30 November 2005. The loan had a term of four years and
two months and was to be repaid in 15 quarterly instalments commencing in
November 2003. The New Golar LNG subordinated facility was refinanced in March
2005 as discussed in more detail below.
Methane Princess facility
On December 31, 2001, we signed a loan agreement with Lloyds TSB Bank
Plc to finance 100 per cent of the cost of one of our newbuildings, the Methane
Princess, after we secured a 20-year charter for this vessel, which we refer to
as the Methane Princess facility (previously referred to as the 2215 facility).
In August 2003, prior to the delivery of the vessel we refinanced this facility
in connection with a lease finance arrangement in respect of the Methane
Princess. The new facility is also for $180 million, with the same bank and has
a similar repayment profile. It accrues a floating rate of interest of LIBOR
plus a margin up to the date the vessel was delivered to the Charterer under the
BG Charter and thereafter at LIBOR plus a reduced margin determined by reference
to Standard and Poors ("S&P") rating of the Charterer from time to time. The
margin could increase if the rating for the Charterer at any time fell below an
S&P rating of "B". As at June 30, 2005, $135 million of debt in respect of the
Methane Princess facility was fixed interest rate debt. Of the $135 million,
$115 million is fixed until 2015, $10 million until 2009 and $10 million until
2007, at a current weighted average rate of 5.7 per cent (inclusive of margin).
Golar Frost facility
In March 2004, we entered into a secured loan facility with a banking
consortium for an amount of $110.0 million, in respect of the Golar Frost, which
we refer to as the Golar Frost Facility. The loan accrues floating interest at a
rate per annum equal to the aggregate of LIBOR plus a margin. The loan has a
term of three years, is repayable in 5 semi-annual instalments together with a
final balloon payment of $102.6 million. In June 2004 we drew down on the loan
to finance the delivery of the Golar Frost.
After these transactions, at December 31, 2004, we had total long-term
debt outstanding of $703 million, compared with $655.2 million and $710.3
million at December 31, 2003 and 2002, respectively.
The outstanding debt of $703 million as of December 31, 2004 was
repayable as follows:
Year ending December 31,
(in millions of $)
2005 66.5
2006 74.6
2007 280.4
2008 22.8
2009 24.6
2010 and later 234.1
----------------------------------------------------------------------
703.0
======================================================================
In January 2005, we entered into a secured loan facility for an amount
of $120.0 million, for the purpose of financing our newbuilding, the Golar
Viking, which we refer to as the Golar Viking facility. The facility bears a
floating rate of interest of LIBOR plus a margin, has an initial term of five
years and is repayable in 20 quarterly installments, commencing in April 2005
and a final balloon payment of $100 million.
In March 2005, a subsidiary of ours, Golar Gas Holding Company Inc.
(GGHC) entered into a refinancing transaction in respect of the New Golar LNG
Facility and the New Golar LNG subordinated facility. The new first priority
loan, which we refer to as Golar Gas Holding Facility, is for an amount of $300
million. The total amount outstanding under the old facility at the time of
refinancing was $242.3 million. The loan accrues floating interest at a rate per
annum equal to the aggregate of LIBOR plus a margin. The loan has a term of 6
years and is repayable in 24 quarterly instalments and a final balloon payment
of $79.4 million payable on April 14, 2011.
The Golar Gas Holding Facility is secured by mortgages on the vessels
Golar Spirit, Khannur, Gimi, Hilli and Golar Freeze, executed by the UK Lessor
of the vessels in favour of our subsidiary, GGHC, and by a mortgage transfer
executed by GGHC in favour of the lending banks. The new loan contains similar
provisions to the old loans in respect of restrictions and financial covenants.
As at December 31, 2004 we had entered into interest rate swaps in
respect of the above debt obligations other than that of the Mazo facility for
an amount of $50 million. In January 2005 we entered into $30 million of
interest rate swaps and in June 2005 a further $50 million. The periods of these
swaps are between 5 and 10 years.
The margins we pay under our current loan agreements over and above
LIBOR at a fixed or floating rate currently range from 0.865 per cent to 1.7 per
cent.
Capital Lease Obligations
Five ship leases
In April 2003 we entered into a lease finance arrangement, which we
refer to as the Five Ship Leases, in respect of five of our vessels (Golar
Spirit, Golar Freeze, Hilli, Gimi and Khannur), with a subsidiary of a major UK
bank, which we refer to as the UK Lessor. We sold five 100 per cent owned
subsidiaries which owned the relevant vessels, to the UK Lessor and received a
cash sum of $452.6 million through refinancing, by the UK Lessor, of debt owed
by the five subsidiary companies to us. Each of the five companies now owned by
the UK Lessor subsequently entered into 20 year leases with a subsidiary of
ours, Golar Gas Holding Company Inc., or GGHC, who in turn sub-leased the
vessels to five UK subsidiary companies newly incorporated by us for the purpose
of taking over the business of operating one each of the above named vessels.
We used $325 million of the proceeds we received together with $17.5
million of our cash reserves to repay two existing loans, the Golar LNG facility
and the Golar LNG subordinated facility. The outstanding amounts of these loans
upon repayment were $282.5 million and $60 million respectively. We then drew
down on two new facilities; $265 million secured by a mortgage executed by the
UK Lessor in favour of our subsidiary GGHC as security for the Lessor's
obligations to pay certain sums to GGHC under the lease agreements and by a
mortgage transfer executed by GGHC in favour of the lending banks; and $60
million secured by a similar but second priority mortgage. The total proceeds
from the new loans of $325 million together with $89.5 million of the proceeds
from the lease finance arrangement were used to make deposits with two banks
amounting to $414.5 million who then issued letters of credit securing GGHC's
obligations under the leases amounting to the present value of rentals due under
the leases. Lease rentals are payable quarterly. At the end of each quarter the
required deposit to secure the present value of rentals due under the leases
will be recalculated taking into account the rental payment due at the end of
the quarter. The surplus funds released as a result of the reduction in the
required deposit are available to pay the lease rentals due at the end of the
same quarter. After making this deposit and settling all outstanding fees
relating to the transaction the cash in flow was approximately $32.5 million.
Methane Princess lease
In August 2003, we entered into a lease finance arrangement in respect
of our first newbuilding the Methane Princess, to which we refer to as the
Methane Princess Lease. We arranged a new $180 million loan facility in respect
of the Methane Princess (Methane Princess facility) as noted above and at the
same time novated our shipbuilding contract to a subsidiary of a UK bank (UK
Lessor) under the terms of which the UK Lessor advanced an amount equal to the
amounts already paid by us under the shipbuilding contract to the Shipyard who
in turn repaid us the same amount. We subsequently entered into a 30-year lease
agreement in respect of the vessel with the UK Lessor. We used monies drawn down
from the Methane Princess facility (secured by a mortgage executed by the UK
Lessor in favour of us as security for the UK Lessor's obligations to pay
certain sums to us under the lease agreement and by a mortgage transfer executed
by us in favour of the lending bank) together with some of our own cash reserves
to make deposits with a bank ("LC Bank") who then issued a letter of credit
securing our obligations to the UK Lessor. We used the monies refunded by the
Shipyard under the novation agreement together with our own cash to repay the
original loan in respect of the Methane Princess. Upon delivery of the vessel
and payment of the final delivery instalment the total advanced by the UK Lessor
was $163.7 million and the amount placed on deposit with the LC Bank was $143.9
million. After settling all outstanding fees relating to the transaction the
cash in flow was approximately $18.5 million.
Golar Winter lease
In April 2004, we signed a lease agreement in respect our second
newbuilding, the Golar Winter, to which we refer to as the Golar Winter Lease,
with another UK bank (the `Winter Lessor') for a primary period of 28 years. The
vessel was also delivered in April 2004. Under the agreement we received an
amount of $166 million, before fees and expenses. Our obligations to the Lessor
under the lease are secured by (inter alia) a letter of credit provided by
another UK bank (the `LC Bank'). We have deposited $39 million with the LC bank
as security for the letter of credit. The effective amount of net financing
received is therefore $127 million before fees and expenses.
Hull 2226 lease
In April 2005, we signed a lease agreement in respect of our
newbuilding, hull number 2226. The anticipated date of delivery is January 2006.
Under the agreement we will receive a total amount of approximately $150
million, before fees and expenses, of which $47 million was received in April
2005 with the remainder due on delivery of the vessel. Our obligations to the
lessor under the lease are secured by (inter alia) a letter of credit provided
by another UK bank (`the LC bank') as security for the letter of credit. In
April 2005, we deposited $45 million with the LC banks as security for the
letter of credit. The effective amount of net financing is therefore $105
million, before fees and expenses.
As at 31 December 2004, the Company is committed to make minimum
rental payments under capital lease, as follows:
Year ending December 31, Five ship Methane Golar Total
Leases Princess Winter
Lease Lease
(in thousands of $)
2005 22,778 6,575 12,299 41,652
2006 24,150 6,920 12,299 43,369
2007 25,599 7,281 12,299 45,179
2008 27,075 7,609 12,299 46,938
2009 28,619 7,938 12,299 48,856
2010 and later 805,760 376,033 276,741 1,458,534
---------------------------------------------------------------------------------------------------------
Total minimum lease payments 933,981 412,356 338,236 1,684,573
Less: Imputed interest (431,023) (240,192) (167,843) (839,058)
---------------------------------------------------------------------------------------------------------
Present value of minimum lease payments 502,958 172,164 170,393 845,515
=========================================================================================================
The profiles of the Five Ship Leases are such that the lease liability
continues to increase until 2008 and thereafter decreases over the period to
2023 being the primary term of the leases. The value of deposits used to obtain
letters of credit to secure the lease obligations as of December 31, 2004 was
$523.5 million.
The profile of the Methane Princess lease is such that the lease
liability continues to increase until 2014 and thereafter decreases over the
period to 2034 being the primary term of the lease. The value of the deposit
used to obtain letters of credit to secure the lease obligations as of December
31, 2004 was $178.8 million.
In common with the Five Ship Leases and the Methane Princess lease the
Golar Winter lease is denominated in British pounds. However, unlike these other
leases the cash deposits securing the lease obligations are significantly less
than the lease obligation itself. The value of the deposit used to obtain a
letter of credit to secure the lease obligation in respect of the Golar Winter
as of December 31, 2004 was $41.5 million. In order to hedge the currency risk
arising from the GBP lease rental obligation we have entered into a 28 year
currency swap, to swap all lease rental payments into US dollars at a fixed
GBP/USD exchange rate, (i.e Golar receives GBP and pays US dollars).
For all our leases other than our latest lease in respect of hull
2226, lease rentals include an interest element that is accrued at a rate based
upon GBP LIBOR. In relation to the Winter lease, we have converted our GBP LIBOR
interest obligation to USD LIBOR by entering into the cross currency swap
referred to above. We receive interest income on our restricted cash deposits at
a rate based upon GBP LIBOR for the Five Ship leases and the Methane Princess
lease, and based upon USD LIBOR for the Winter Lease.
Our lease in respect of hull 2226 and the associated cash deposit is
denominated in USD.
At December 31, 2004 we had entered into interest rate swaps of $85
million in respect of our Winter lease obligations for periods ranging from
three to ten years. In January 2005, we entered into a further $30 million of
interest rate swaps. In May 2005, we entered into $105 million of interest rate
swaps in respect of our hull 2226 lease obligations for a period of 6 years
commencing January 2006.
Our existing financing agreements impose operation and financing
restrictions on us which may significantly limit or prohibit, among other
things, our ability to incur additional indebtedness, create liens, sell capital
shares of subsidiaries, make certain investments, engage in mergers and
acquisitions, purchase and sell vessels, transfer funds from subsidiary
companies to us, enter into time or consecutive voyage charters or pay dividends
without the consent of our lenders and Lessors. In addition, our lenders and
Lessors may accelerate the maturity of indebtedness under our financing
agreements and foreclose upon the collateral securing the indebtedness upon the
occurrence of certain events of default, including our failure to comply with
any of the covenants contained in our financing agreements. Various debt and
lease agreements of the Company contain covenants that require compliance with
certain financial ratios. Such ratios include equity ratio, working capital
ratios and earnings to net debt ratio covenants, minimum net worth covenants,
minimum value clauses, and minimum free cash restrictions in respect of our
subsidiaries and us. As of December 31, 2004, 2003 and 2002, we complied with
all covenants of our various debt and lease agreements.
In addition to mortgage security, some of our debt is also
collateralised through pledges of shares by guarantor subsidiaries of Golar.
Newbuilding Contracts and Capital Commitments
As of December 31, 2004, we had contracts to build four new LNG
carriers. We took delivery of our fourth newbuilding, the Golar Viking, in
January 2005, which was financed by the loan finance arrangement noted above.
As at June 30, 2005, we therefore have three newbuildings still under
construction. Amounts outstanding and payable under contracts to build these
three new LNG carriers as of June 30, 2005, total approximately $368.5 million,
excluding financing costs, and are due in instalments over the period to July
2007. We also have budgeted capital expenditure of approximately $8.5 million
over the period to December 2005, in connection with our vessels refurbishment
program and routine vessel drydocks.
As of June 30, 2005 we require additional financing of approximately
$242 million to fund all of our newbuilding construction commitments.
The commitments up to May 2006 will be funded from existing
facilities, cash reserves and cash generated from operations. Additional
facilities are required to meet a payment due in May 2006 and further progress
payments arising periodically thereafter until completion of the program in
2007.
As noted above, one vessel has been delivered since December 31, 2004.
The following table sets out as at December 31, 2004 and June 30, 2005 the
estimated timing of the remaining commitments under our present newbuilding
contracts. Actual dates for the payment of instalments may vary due to progress
of the construction.
(in millions of $) June 30, 2005 December 31, 2004
2005 - 135.9
2006 252.7 252.7
2007 115.8 115.8
-------------------------------------------------------------------------------
Total 368.5 504.4
===============================================================================
Our senior management evaluates funding alternatives depending on the
prevailing market conditions. We anticipate that the additional financing
required to fund the completion of the remaining newbuilding construction costs
will come from a combination of additional debt and lease financing, cash
reserves and cash from operations, supplemented by equity proceeds as
circumstances may warrant or permit. It is standard in the shipping industry to
finance between 50 and 80 per cent of the construction cost of newbuildings
through traditional bank financing and in the case of vessels that have charter
coverage the debt finance percentage may increase significantly. We may finance
up to 100 per cent of these newbuilding costs through additional tranches of
bank debt secured by the respective newbuildings. We would make such borrowings
as needed while construction proceeds. Alternatively, if market and economic
conditions favour equity financing at any such time, we may use somewhat less
debt and instead raise equity to fund a larger portion of these costs.
Currently, we are seeking a mixture of long-term, medium-term and short-term
charters for our three remaining newbuildings. The charter coverage of a
newbuilding may affect our ability to finance its completion.
C. Research and Development, Patents and Licenses
Not applicable
D. Trend Information
See our discussion above under `overview and background'.
E. Off-Balance Sheet Arrangements
As of December 31, 2004 we did not have any material off-balance sheet
arrangements.
F. Contractual Obligations
The following table sets forth our contractual obligations for the
periods indicated as at December 31, 2004:
(in millions of $) Total Due in Due in Due in Due
Obligation 2005 2006 2007 2008 - 2009 Thereafter
Long-Term Debt (3) 703.0 66.5 355.0 47.4 234.1
Capital Lease Obligations (1) (3) 845.5 (3.5) (2.2) 5.4 845.8
Operating Lease Obligations 1.2 0.3 0.5 0.4 -
Purchase Obligations
Newbuildings 504.4 135.9 368.5 - -
Other Long-Term Liabilities (2) - - - - -
-------------- ------------ --------------- -------------- --------------
Total 2,054.1 199.2 721.8 53.2 1,079.9
=============================================================================================================
(1) In the event of any adverse tax rate changes or rulings we may be required
to return all or a portion of, or, in certain circumstances, more than the
cash inflow (approximately $51 million) that we received in connection with
the lease financing transactions undertaken in 2003, post additional
security or make additional payments to the UK lessor in the form of lease
rentals.
(2) Our consolidated balance sheet as of December 31, 2004 includes $86 million
classified as "Other long-term liabilities." This caption consists
primarily of deferred credits related to our capital lease transactions and
liabilities under our pension plans. These liabilities have been excluded
from the above table as the timing and/or the amount of any cash payment is
uncertain. See Note 22 of the Notes to Consolidated Financial Statements
for additional information regarding our other long-term liabilities.
(3) As of December 31,2004 $376.3 million of our long-term debt and capital
lease obligations, net of restricted cash deposits, was floating rate debt
which accrued interest based on USD LIBOR, and $428.7 million of debt
accrued interest at a fixed interest rate.
A total of $136 million of newbuilding obligations due in 2005 have
been financed and paid during the period to June 30, 2005 .
See Item 11 for a discussion of quantitative and qualitative disclosures about
market risks.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Information concerning each of our directors and executive officers as
at June 30, 2005 is set forth below.
Name Age Position
John Fredriksen 61 Chairman of the Board, President and Director
Tor Olav Tr0im 42 Deputy Chairman of the Board, Chief Executive
Officer, Vice President and Director
Graeme McDonald 48 Group Technical Director
Graham Robjohns 40 Chief Accounting Officer and Group Financial
Controller
Charlie Peile 51 Head of Commercial
Olav Eikrem 49 General Manager of the Fleet
Kate Blankenship 40 Company Secretary and Director
Biographical information with respect to each of our directors and executive
officers is set forth below.
John Fredriksen has served as the chairman of our board of directors, our
president and a director since our inception in May 2001. He has been the chief
executive officer, chairman of the board, president and a director of Frontline
Ltd. since 1997. Frontline Ltd. is a Bermuda based tanker owner and operator
listed on the New York Stock Exchange and the Oslo Stock Exchange. Mr.
Fredriksen has served for over nine years as a director of Seatankers Management
Co. Ltd, a ship operating company and an affiliate of the Company's principal
shareholder Mr.Fredriksen indirectly controls Hemen Holding Ltd, a Cyprus
Company who is our principal shareholder. Mr. Fredriksen has been a director of
Golden Ocean Group Limited, a Bermudan company, since November 2004.
Tor Olav Tr0im has served as our chief executive officer, our vice-president and
a director since our inception in May 2001. He has been the vice president and a
director of Frontline Ltd. since 1996. He also served as deputy chairman of
Frontline Ltd. in 1997. Until April 2000, Mr. Tr0im was the chief executive
officer of Frontline Management AS, a management company that is a subsidiary of
Frontline Ltd. Mr. Tr0im also serves as a consultant to Seatankers and since May
2000, has been a director and vice-chairman of Knightsbridge Tankers Limited, a
Bermuda company listed on the Nasdaq National Market. He is a director of Aktiv
Inkasso ASA and Northern Oil ASA, both Norwegian Oslo Stock Exchange listed
companies and Golden Ocean Group Limited, a Bermuda company listed on the Oslo
Stock Exchange. Mr. Tr0im has been President and Chief Executive Officer of Ship
Finance International since October 15, 2003. Prior to his service with
Frontline, from January 1992, Mr. Tr0im served as managing director and a member
of the board of directors of DNO AS, a Norwegian oil company.
Graeme McDonald is our group technical director. He was previously general
manager of the fleet, a position he held with Osprey, since 1998. He has worked
in the shipping industry since 1973 and held various positions with Royal Dutch
Shell companies, including manager of LNG shipping services at Shell
International Trading and Shipping Company Ltd. and manager of LNG marine
operations at Shell Japan Ltd.
Kate Blankenship has served as our secretary since our inception in May 2001 and
as a director since July 2003. She served as our chief accounting officer from
May 2001 until May 31, 2003. She has been the chief accounting officer and
secretary of Frontline Ltd since 1994 and a director since August 2003. She has
also been chief financial officer of Knightsbridge Tankers Ltd since August 2000
and secretary of Knightsbridge since December 2000. Since October 2003, she has
served as secretary and a director of Ship Finance Ltd. Mrs. Blankenship has
been a director of Golden Ocean Group Limited since November 2004. Prior to
1994, she was a manager with KPMG Peat Marwick in Bermuda. She is a member of
the Institute of Chartered Accountants in England and Wales.
Graham Robjohns has served as our group financial controller since May 2001 and
as our chief accounting officer since June 1, 2003. He was financial controller
of Osprey Maritime (Europe) Ltd from March 2000 to May 2001. From 1992 to March
2000 he worked for Associated British Foods Plc. and then Case Technology Ltd
(Case), both manufacturing businesses, in various financial management positions
and as a director of Case. Prior to 1992, he worked for PricewaterhouseCoopers
in their corporation tax department. He is a member of the Institute of
Chartered Accountants in England and Wales.
Charlie Peile was appointed in September 2003 as Executive Vice President and
Head of Commercial. He was, for three years prior to that, Director of LNG
Shipping Solutions, the leading LNG advisory and consultancy company. For a
short period prior to that he was Managing Director of Stephenson Clarke Ltd., a
ship owning company based in Newcastle upon Tyne. He was with Gotaas-Larsen,
Golar's predecessors, from 1981 until 1997, for the last 7 years of which he was
Vice President Commercial, with special responsibility for LNG. He has been a
member of the Institute of Chartered Shipbrokers since 1977.
Olav Eikrem joined the company in October 2003 as General Manager Fleet. Mr.
Eikrem has an MSc degree in Mechanical Engineering from the Norwegian Institute
of Technology and is a Chief Engineer by profession. From 1997 to 2003 Mr.
Eikrem was Senior Manager and Director of Thome Ship Management, Singapore,
responsible for management of various different types of merchant ships. Prior
1997, he was Fleet Manager of Knutsen OAS Shipping, a Norwegian specialist
shuttle tanker operator and as Fleet Manager / Technical Superintendent of Jo
Tankers. Mr Eikrem has several years sea-going service in the capacity as
engineer and other positions onboard and has worked at shipyards in Norway.
B. Compensation
For the year ended December 31, 2004, we paid to our directors and
executive officers (seven persons) aggregate cash compensation of $1,220,002 and
an aggregate amount of $96,656 for pension and retirement benefits.
C. Board Practices
Our directors do not receive any benefits upon termination of their
directorships. The Board does not have any committees.
Exemptions from certain Nasdaq corporate governance rules
Nasdaq rules permit Nasdaq to provide exemptions from the Nasdaq
corporate governance standards to a foreign issuer when those standards are
contrary to a law, rule or regulation of any public authority exercising
jurisdiction over such issuer or contrary to generally accepted business
practices in the issuer's country of domicile. At the time that quotation of our
common shares on the Nasdaq National Market commenced, we received from Nasdaq
an exemption from compliance with certain corporate governance standards that
are contrary to the law, rules, regulations or generally accepted business
practices of Bermuda. The exemption, and the practices that we follow, are
described below:
o In keeping with Bermuda law and the rules of the Oslo Stock
Exchange, we are exempt from Nasdaq's requirement to maintain
three independent directors and currently no member's of its
board of directors are independent according to Nasdaq's
standards for independence.
o In keeping with common practices among companies listed on the
Oslo Stock Exchange, we are exempt from Nasdaq's requirement for
an audit committee and an audit committee charter. The Company's
full board of directors currently fulfils the function of an
audit committee. The Company's management is responsible for the
proper and timely preparation of the Company's annual reports and
are audited by independent auditors.
D. Employees
We hire our officers and crew through our manning offices in Bilbao,
in Spain and through our crewing agents and ship managers with whom we have
crewing agreements in Croatia, the Philippines, Indonesia and Singapore. All our
crew are as a minimum required to meet the qualification and training standards
defined by the IMO's International Convention on Standards of Training and
Watchkeeping for Seafarers (STCW 95). Our officers also undergo a structured
training scheme that we have developed to ensure that they will have the
required specialised knowledge and experience to operate our vessels. In
addition to the specialised knowledge required to handle LNG cargoes, LNG
carrier officers and crew must also have also have knowledge and experience in
operating vessels with steam turbine engines. As of December 31, 2004, we
employed approximately 515 people, either directly or through crewing agents,
consisting of 45 shore-based personnel, 470 seagoing employees serving on our
ships. Our masters and officers are mostly Spanish, Croatian and Scandinavian,
and our crews are mostly Filipino and Indonesian. Our shore-based personnel
included 40 employees in our office in London and 5 people in our manning office
in Bilbao. Our Filipino employees are subject to collective bargaining
agreements, which are requirements of the Philippine government. These
agreements set industry-wide minimum standards, terms and conditions. We have
not had any labour disputes with our employees under the collective bargaining
agreements and consider our workplace relations to be good.
In January 2005, we announced that we would reorganize our technical
fleet operations. We entered into management contracts with two established
third party ship managers in Singapore and Oslo to assist with the day-to-day
operations our ten LNG carriers. The restructuring has resulted in approximately
25 employees being made redundant.
E. Share ownership
The following table sets forth information as of June 30, 2005,
regarding the total amount of common shares owned by all of our officers and
directors on an individual basis: The beneficial interests of our Directors and
officers in the common shares of the Company as of June 30, 2005, were as
follows:
Percentage of
Common Shares of Common Shares
Director or Officer $1.00 each Outstanding
------------------- ---------------- -----------
John Fredriksen* 28,312,000 43.18%
Tor Olav Tr0im - - - -
Graeme McDonald - - - -
Charles Peile 195 **
Olav Eikrem - - - -
Graham Robjohns 500 **
Kate Blankenship 5,000 **
* Mr. Fredriksen does not own any of our shares directly. The shares shown
next to Mr. Fredriksen's name are held by World Shipholding Ltd. See Item
7, "Major Shareholders and Related Party Transactions." World Shipholding
Ltd. is wholly-owned by Greenwich, which is, in turn, indirectly controlled
by Mr. Fredriksen.
** Less than one per cent
In additional to the above shareholdings, as of June 30, 2005, Mr.
Tr0im has a forward contract with an obligation to buy 160,000 of our shares.
The contracts, which were acquired in the open market, become effective in
November and December 2005..
Option Plan
Our board of directors adopted the Golar LNG Limited Employee Share
Option Plan in February 2002. The plan authorizes our board to award, at its
discretion, options to purchase our common shares to employees of Golar LNG
Limited, and any of its subsidiaries, who are contracted to work more than 20
hours per week and to any director of Golar LNG Limited or its subsidiaries.
Under the terms of the plan, our board may determine the exercise price
of the options, provided that the exercise price per share is not lower than the
then current market value. No option may be exercised prior to the first
anniversary of the grant of the option except that the option will become
immediately exercisable if the option holder's employment is terminated (other
than for cause) or in the event of the option holder's death. All options will
expire on the tenth anniversary of the option's grant or at such earlier date as
the board may from time to time prescribe. The Plan will expire 10 years from
its date of adoption.
As of June 30, 2005, two million of the authorized and unissued common
shares were reserved for issue pursuant to subscription under options granted
under the Company's share option plan.
Details of share options held by the Company's Directors and officers
at June 30, 2005 are set out in the following table:
Number of Common Exercise Price per
Director or Officer Shares Subject to Option Ordinary Share Expiration Date
------------------- ------------------------ ------------------ ---------------
John Fredriksen 200,000 $5.75 July 2011
Tor Olav Tr0im 100,000 $5.75 July 2011
The above options vested in July 2002.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major shareholders
The Company is indirectly controlled by another corporation (see
below). The following table presents certain information regarding the current
ownership of the common shares with respect to (i) each person who is known by
the Company to own more than 5 per cent of the Company's outstanding common
shares; and (ii) all directors and officers as a group as of June 30, 2005.
Common Shares
Owner Amount Per cent
World Shipholding Ltd. (1) 28,312,000 43.18%
All Directors and Officers as a group (seven persons) 28,317,695 43.18%
(1) Our Chairman, John Fredriksen, indirectly controls World Shipholding Ltd.
Our major shareholders have the same voting rights as all other
holders of our Common Shares.
The Company is not aware of any arrangements, the operation of which
may at a subsequent date result in a change in control of the Company.
As at June 30, 2005, 6,842,732 of the Company's common shares are held
by thirty four holders of record in the United States.
B. Related party transactions
There are no provisions in our Memorandum of Association or Bye-Laws
regarding related party transactions. However, our management's policy is to
enter into related party transactions solely on terms that are at least
equivalent to terms we would be able to obtain from unrelated third parties. The
Bermuda Companies Act of 1981 provides that a company, or one of its
subsidiaries, may enter into a contract with an officer of the company, or an
entity in which an officer has a material interest, if the officer notifies the
Directors of its interest in the contract or proposed contract. The related
party transactions that we have entered into are discussed below.
Seatankers Management Company. Seatankers is indirectly controlled by
our Chairman, John Fredriksen In the years ended December 31, 2004 and 2003,
Seatankers has provided us with insurance administration services. In the years
ended December 31, 2004 and 2003, management fees to Seatankers of $35,000 and
$25,000, respectively, have been incurred by Golar. As at December 31, 2004 and
2003 no amounts were due to Seatankers in respect of these fees incurred. In
addition, certain amounts have been recharged at cost between both companies. As
at December 31, 2004 the Company owed $258,000 to Seatankers (2003:$45,000 due
from Seatankers) in respect of these recharges.
Frontline Management (Bermuda). Frontline Management is a subsidiary
of Frontline Ltd., a publicly listed company, and is indirectly controlled by
our chairman, John Fredriksen. With effect from June 1, 2001, we entered into an
agreement with Frontline Management (Bermuda) Ltd. pursuant to which Frontline
Management provides budgetary and accounting support services, maintains our
corporate records, technical vessel supervision services, ensures our compliance
with applicable laws and requirements and assists us with corporate finance
matters.
In the years ended December 31, 2004 and 2003, we have incurred
management fees to Frontline of $235,200 and $273,547, respectively. As at
December 31, 2004 and 2003, an amount of $nil and $122,079 was due to Frontline
in respect of these management fees and costs incurred. In addition, certain
amounts have been recharged at cost between both the companies. As at December
31, 2004 an amount of $177,000 (2003:$12,501) was due from Frontline in respect
of these recharges.
We believe that the compensation we pay to Frontline Management for
its administrative and management services is not more than the price we would
have paid to third parties in an arm's-length transaction and are under terms
similar to those that would be arranged with other parties.
Greenwich Holdings Limited ("Greenwich") - Newbuilding credit
facilities. Greenwich is indirectly controlled by our chairman, John Fredriksen.
During 2001 and 2002 Greenwich entered into loan agreements with Nordea Bank
Norge ASA and Den norske Bank ASA, as lenders and Nordea, as facility agent and
security agent. Pursuant to separate promissory notes, Greenwich on-loaned the
proceeds of its credit facilities with Nordea and Den norske Bank ASA to us. We
obtained loans totalling $85.3 million and $16.3 million from Greenwich during
2001 and 2002 respectively. During 2003 these loans were fully repaid.
In the years ended December 31, 2004 and 2003, we paid interest of
$nil and $779,000, respectively to Greenwich in respect of these loan
facilities. At December 31, 2004 no interest due to Greenwich was outstanding
(2003: $nil).
In relation to the loans from Greenwich noted above the Company paid
loan arrangement fees directly to the lending banks. These fees during the years
ended December 31, 2004 and 2003 amounted to $nil, and $81,756 respectively.
Faraway Maritime Limited
During the year ended December 31, 2004 Faraway Maritime Shipping
Inc., which is 60 per cent owned by us and 40 per cent owned by China Petroleum
Corporation ("CPC"), paid dividends totalling $nil (2003: $4.2 million).
Graeme McDonald
Golar Management held a promissory note executed by Mr. McDonald, an
officer of the Company, on April 21, 1998, under which Mr. McDonald promised to
pay to Golar Management the principal sum of (pound)20,900 in monthly
instalments of (pound)318. The note carried an interest rate of three per cent.
Payments under the note commenced in May 1998 and the principal balance as of
December 31, 2003 and 2002 was (pound)1,158 and (pound)4,974 or approximately
$2,000 and $9,000, respectively. The promissory note was repaid in full during
early 2004.
C. Interests of Experts and Counsel
Not Applicable
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
There are no legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on us, our financial
condition, profitability, liquidity or our results of operations. From time to
time in the future we or our subsidiaries may be subject to various legal
proceedings and claims in the ordinary course of business.
Dividend Distribution Policy
Any future dividends declared will be at the discretion of the board
of directors and will depend upon our financial condition, earnings and other
factors. Our ability to declare dividends is also regulated by Bermuda law,
which prohibits us from paying dividends if, at the time of distribution, we
will not be able to pay our liabilities as they fall due or the value of our
assets is less than the sum of our liabilities, issued share capital and share
premium.
In addition, since we are a holding company with no material assets
other than the shares of our subsidiaries through which we conduct our
operations, our ability to pay dividends will depend on our subsidiaries'
distributing to us their earnings and cash flow. Some of our loan agreements
limit or prohibit our and our subsidiaries' ability to make distributions to us
without the consent of our lenders.
B. Significant Changes
None
ITEM 9. THE OFFER AND LISTING
A. Listing Details and Markets
Not applicable except for Item 9.A. 4. and Item 9. C.
Our common shares have traded on the Oslo Stock Exchange (OSE) since
July 12, 2001 under the symbol "GOL" and on the Nasdaq National Market since
December 12, 2002 under the symbol "GLNG".
The following table sets forth, for the two most recent fiscal years
from January 1, 2002 and for the first quarter of 2005, the high and low prices
for the common shares on the Oslo Stock Exchange and the Nasdaq National Market.
OSE NASDAQ
High Low High Low
First Quarter 2005 NOK98.50 NOK78.00 $15.75 $12.50
Fiscal year ended December 31
2004 NOK125.50 NOK85.50 $18.66 $12.31
2003 NOK99.00 NOK35.00 $14.95 $5.00
2002 NOK62.00 NOK35.00 $7.75 $6.00
The following table sets forth, for each full financial quarter for
the two most recent fiscal years from January 1, 2003, the high and low prices
of the common shares on the Oslo Stock Exchange and the Nasdaq National Market.
OSE NASDAQ
High Low High Low
Fiscal year ended December 31, 2004
First quarter NOK125.50 NOK94.50 $18.36 $14.26
Second quarter NOK108.50 NOK85.75 $15.71 $12.31
Third quarter NOK110.00 NOK93.50 $15.83 $13.11
Fourth quarter NOK121.25 NOK85.50 $18.66 $13.83
OSE NASDAQ
High Low High Low
Fiscal year ended December 31, 2003
First quarter NOK45.00 NOK35.00 $6.75 $5.50
Second quarter NOK78.00 NOK36.00 $10.95 $5.00
Third quarter NOK91.00 NOK67.50 $12.14 $9.49
Fourth quarter NOK99.00 NOK74.50 $14.95 $11.74
The following table sets forth, for the most recent six months, the
high and low prices for our common shares on the OSE and the Nasdaq National
Market.
OSE NASDAQ
High Low High Low
May 2005 NOK81.50 NOK72.00 $13.04 $11.50
April 2005 NOK86.50 NOK73.25 $13.37 $11.60
March 2005 NOK89.50 NOK78.00 $14.10 $12.50
February 2005 NOK91.25 NOK84.50 $14.55 $12.95
January 2005 NOK98.50 NOK85.75 $15.75 $13.26
December 2004 NOK94.00 NOK85.50 $15.25 $13.83
* On May 31, 2005, the exchange rate between the Norwegian Kroner and the U.S.
dollar was NOK6.396 to one U.S. Dollar.
ITEM 10. ADDITIONAL INFORMATION
This section summarizes our share capital and the material provisions
of our Memorandum of Association and Bye-Laws, including rights of holders of
our shares. The description is only a summary and does not describe everything
that our Articles of Association and Bye-Laws contain. The Memorandum of
Association and the Bye Laws of the Company has previously been filed as
Exhibits 1.1 and 1.2, respectively to the Company's Registration Statement on
Form 20-F, (File No. 000-50113) filed with the Securities and Exchange
Commission on November 27, 2002, and are hereby incorporated by reference into
this Annual Report.
A. Share capital
Not Applicable
B. Memorandum of Association and Bye-Laws
Our Memorandum of Association and Bye-laws. The object of our
business, as stated in Section six of our Memorandum of Association, is to
engage in any lawful act or activity for which companies may be organized under
The Companies Act, 1981 of Bermuda, or the Companies Act, other than to issue
insurance or re-insurance, to act as a technical advisor to any other enterprise
or business or to carry on the business of a mutual fund. Our Memorandum of
Association and Bye-laws do not impose any limitations on the ownership rights
of our shareholders.
Under our Bye-laws, annual shareholder meetings will be held in
accordance with the Companies Act at a time and place selected by our board of
directors. The quorum at any annual or general meeting is equal to one or more
shareholders, either present in person or represented by proxy, holding in the
aggregate shares carrying 33 1/3 per cent of the exercisable voting rights. The
meetings may be held at any place, in or outside of Bermuda, that is not a
jurisdiction which applies a controlled foreign company tax legislation or
similar regime. Special meetings may be called at the discretion of the board of
directors and at the request of shareholders holding at least one-tenth of all
outstanding shares entitled to vote at a meeting. Annual shareholder meetings
and special meetings must be called by not less than seven days' prior written
notice specifying the place, day and time of the meeting. The board of directors
may fix any date as the record date for determining those shareholders eligible
to receive notice of and to vote at the meeting.
Directors. Our directors are elected by a majority of the votes cast
by the shareholders in general meeting. The quorum necessary for the transaction
of the business of the board of directors may be fixed by the board but unless
so fixed, equals those individuals constituting a majority of the board of
directors who are present in person or by proxy. Executive directors serve at
the discretion of the board of directors.
The minimum number of directors comprising the board of directors at
any time shall be two. The board of directors currently consists of three
directors. The minimum and maximum number of directors comprising the Board from
time to time shall be determined by way of an ordinary resolution of the
shareholders of the Company. The shareholders may, at general meeting by
ordinary resolution, determine that one or more vacancies in the board of
directors be deemed casual vacancies. The board of directors, so long as a
quorum remains in office, shall have the power to fill such casual vacancies.
Each director will hold office until the next annual general meeting or until
his successor is appointed or elected. The shareholders may call a Special
General Meeting for the purpose of removing a director, provided notice is
served upon the concerned director 14 days prior to the meeting and he is
entitled to be heard. Any vacancy created by such a removal may be filled at the
meeting by the election of another person by the shareholders or in the absence
of such election, by the board of directors.
Subject to the provisions of the Companies Act, a director of a
company may, notwithstanding his office, be a party to or be otherwise
interested in any transaction or arrangement with that company, and may act as
director, officer, or employee of any party to a transaction in which the
company is interested. Under our Bye-laws, provided an interested director
declares the nature of his or her interest immediately thereafter at a meeting
of the board of directors, or by writing to the directors as required by the
Companies Act, a director shall not by reason of his office be held accountable
for any benefit derived from any outside office or employment. The vote of an
interested director, provided he or she has complied with the provisions of the
Companies Act and our Bye-laws with regard to disclosure of his or her interest,
shall be counted for purposes of determining the existence of a quorum.
Dividends. Holders of common shares are entitled to receive dividend
and distribution payments, pro rata based on the number of common shares held,
when, as and if declared by the board of directors, in its sole discretion. Any
future dividends declared will be at the discretion of the board of directors
and will depend upon our financial condition, earnings and other factors.
As a Bermuda exempted company, we are subject to Bermuda law relating
to the payment of dividends. We have been advised by Bermuda counsel, Appleby,
Spurling & Kempe, that we may not pay any dividends if, at the time the dividend
is declared or at the time the dividend is paid, there are reasonable grounds
for believing that, after giving effect to that payment;
o we will not be able to pay our liabilities as they fall due; or
o the realizable value of our assets, is less than an amount that
is equal to the sum of our
(a) liabilities,
(b) issued share capital, which equals the product of the par
value of each common share and the number of common shares
then outstanding, and
(c) share premium, which equals the aggregate amount of
consideration paid to us for such common shares in excess of
their par value.
In addition, since we are a holding company with no material assets,
and conduct our operations through subsidiaries, our ability to pay any
dividends to shareholders will depend on our subsidiaries' distributing to us
their earnings and cash flow. Some of our loan agreements currently limit or
prohibit our subsidiaries' ability to make distributions to us and our ability
to make distributions to our shareholders.
C. Material contracts
Leases
In April 2003 we entered into a lease finance arrangement in respect
to five of our LNG carriers with a subsidiary of a major UK bank, to which we
refer as the UK Lessor. The five vessels are the Golar Spirit, Golar Freeze,
Hilli, Gimi and Khannur. As part of the UK vessel lease arrangement, we sold
five of our vessel-owning subsidiaries that owned the relevant vessels to the UK
Lessor and received a cash sum of $452.6 million through refinancing, by the UK
Lessor, of debt owed by the five subsidiaries to us. Each of the five companies,
now owned by the UK Lessor, subsequently entered into 20 year leases with Golar
Gas Holding Company Inc., or GGHC, a wholly owned subsidiary or ours. GGHC in
turn subleased the vessels to five UK subsidiary companies newly incorporated by
us for the purpose of assuming the business of operating each of the these
vessels. While the UK Lessor has legal title to the vessels, the lease are all
bareboat charters that give us complete operational control over, and
responsibility for, the vessels. In addition, on expiration of the leases, we
act as exclusive sales agent for the UK vessel lessor and receive 99.9 per cent
of the net proceeds in the form of a rebate to us of lease rentals. However, we
may not time charter the vessels to charterers, other than BG and Pertamina that
have credit ratings below BBB+, without the UK Lessor's consent.
We used $325 million of the proceeds that we received together with
$17.5 million of our cash reserves to repay two existing loans, the Golar LNG
facility and the Golar LNG subordinated facility. The outstanding amounts of
these loans upon repayment were $282.5 million and $60 million respectively. We
then drew down on two new facilities; $265 million secured by a mortgage
executed by the UK Lessor in favour of our subsidiary GGHC as security for the
lessor's obligations to pay certain sums to GGHC under the vessel lease
agreements and by a mortgage transfer executed by GGHC in favour of the lending
banks; and $60 million secured by a similar but second priority mortgage. The
total proceeds from the new loans of $325 million together with $89.5 million of
the proceeds from the vessel lease finance arrangement were used to make
deposits with two banks amounting to $414.5 million. These banks then issued
letters of credit securing our obligations under the vessel leases amounting to
the present value of rentals due under the leases. Lease rentals are payable
quarterly. At the end of each quarter the required deposit to secure the present
value of rentals due under the UK vessel leases will be recalculated taking into
account the rental payment due at the end of the quarter. The surplus funds
released as a result of the reduction in the required deposit are available to
pay the UK vessel lease rentals due at the end of the same quarter. After making
this deposit and settling all outstanding fees relating to the transaction, our
approximate cash inflow was approximately $32.5 million.
Each of the five UK vessel leases is for a period of 20 years that may
be extended by us annually thereafter as long as the vessels remain seaworthy,
and we are not otherwise in default of the leases. The principal security is
comprised of two cash deposits with two different banks that have issued letters
of credit securing our obligations under the UK vessel leases. The deposits are
equal to the net present value of the minimum lease payments. In addition to the
letters of credit. the UK Lessor's security includes a guarantee from us and a
third priority; pledge of the capital stock of our shipowning subsidiaries that
have subleased the vessels from GGHC, and an assignment of those vessels'
earnings, insurance, and charters to the UK Lessor. We have also indemnified the
UK Lessor against, among other things, increases in tax costs. We may terminate
the UK vessel leases by paying the UK Lessor a termination rental in such an
amount as will reduce the Lessor's investment balance, after taking into account
all tax effects, to zero. The UK vessel leases provide that we will receive
99.9% of the net proceeds of any sale of the vessels by the UK Lessor in the
form of a rebate of lease rentals, subject to claims by third parties, our
lenders, and the UK Lessor itself. If we terminate the UK vessel leases within
the first five years we would be liable to a termination fee which would also be
charged against the net proceeds. In addition, we have agreed to indemnify the
UK Lessor for any adverse tax consequences or rulings, which could result in our
returning all or a portion of the cash inflow that we have received, posting
additional security, or making other payments to the UK Lessor.
The UK vessel lease agreements and related documents also contain a
number of restrictive covenants that are similar to those of our New Golar LNG
Facility and the New Golar LNG Subordinated Facility. Violation of those
covenants and termination of the UK vessel leases could result in the sale of
the vessels at that time. As the leases contain a right of quiet enjoyment in
favour of BG and Pertamina, if there were a default and UK lease termination,
the price realized on sale of the vessels could depend in part on whether
potential buyers deem the assumption of the BG and Pertamina charters
advantageous at the time.
Golar Gas Holding Facility
In March 2005, we entered into a refinancing in respect of the New
Golar LNG Facility and the New Golar LNG subordinated facility. The new first
priority loan, or Golar Gas Holding Facility, is for an amount of $300 million.
The loan accrues floating interest at a rate per annum equal to the aggregate of
LIBOR plus a margin. The loan has a term of 6 years and is repayable in 24
quarterly instalments and a final balloon payment of $79.4 million payable on
April 14, 2011.
The Golar Gas Holding Facility is secured by a mortgage executed by
the UK Lessor in favour of our subsidiary GGHC as security for the Lessor's
obligations to pay certain sums to GGHC under the lease agreements and by a
mortgage transfer executed by GGHC in favour of the lending banks. Additionally,
the mortgages of the Golar Gas Holding Facility are secured by a guarantee from
us, a pledge of the capital stock of our shipowning subsidiaries, and an
assignment of our vessels' earnings, insurance, and the vessels' charters to the
lenders. The loan agreement and related documents also contain a number of
restrictive covenants that, subject to specified exceptions, limit our ability
and the ability of Golar Gas Holding Company and our shipowning subsidiaries' to
among other things:
o merge into or consolidate with another entity or sell or
otherwise dispose of all or substantially all of our assets;
o make or pay equity distributions;
o incur additional indebtedness;
o incur or make any capital expenditure, other than capital
expenditures for vessel upgrades required by our charterers;
o materially amend, or terminate, any of our current charter
contracts or management agreements; and
o enter into any business other than owning the shipowning
companies, in the case of Golar Gas Holding Company, and owning
and operating the ships, in the case of the shipowning
subsidiaries.
The agreement also contains an event of default if, among other
things, John Fredriksen and his affiliated entities cease to be the beneficial
or legal owner of at least 25 per cent of our common shares except where the
dilution is as a result of the introduction of additional capital.
D. Exchange Controls
None
E. Taxation
The following discussion is based upon the provisions of the United
States Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed United States Treasury Department regulations, administrative rulings,
pronouncements and judicial decisions, all as of the date of this Annual Report.
Taxation of Operating Income: In General
United States Taxation of our Company
Shipping income that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States will be
considered to be 50 per cent derived from sources within the United States.
Shipping income attributable to transportation that both begins and ends in the
United States will be considered to be 100 per cent derived from sources within
the United States. We do not engage in transportation that gives rise to 100 per
cent U.S. source income.
Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100 per cent derived from sources
outside the United States. Shipping income derived from sources outside the
United States will not be subject to U.S. federal income tax.
Unless exempt from U.S. taxation under Section 883 of the Code, or
under the United States-United Kingdom Income Tax Treaty in effect for the
calendar year 2004 (the "Treaty") in the case of the vessels operated by our
United Kingdom subsidiaries, we will be subject to U.S. federal income taxation,
in the manner discussed below, to the extent our shipping income is derived from
sources within the United States.
Based upon our anticipated shipping operations, our vessels will be
operated in various parts of the world, including to or from U.S. ports. For the
three calendar years 2002, 2003 and 2004 the U.S. source income that we derived
from our vessels trading to U.S. ports was $8,435,000, $14,283,000 and
$22,005,000, respectively, and the potential U.S. federal income tax liability
resulting from this income, in the absence of our qualification for exemption
from taxation under Section 883 and the treaty, as described below, would have
been $337,400, $571,320 and $880,000, respectively.
Application of Code Section 883
The ensuing discussion is applicable to, and references to
"subsidiaries" shall mean, only those of our subsidiaries that are incorporated
under the laws of jurisdictions other than the United Kingdom. Under Section 883
of the Code and the regulations thereunder, we, and each of our subsidiaries,
will be exempt from U.S. taxation on our respective U.S. source shipping income,
if both of the following conditions are met:
o we and each subsidiary are organized in a qualified foreign
country which is one that grants an equivalent exemption from tax
to corporations organized in the United States in respect of the
shipping income for which exemption is being claimed under
Section 883, which we refer to as "the country of organization
requirement"; and
o either
- more than 50 per cent of the value of our stock is treated
as owned, directly or indirectly, by individuals who are
"residents" of qualified foreign countries, which we refer
to as the "ownership requirement"; or
- our stock is "primarily and regularly traded on an
established securities market" in our country of
organization, another qualified foreign country, or the
United States, which we refer to as the "publicly-traded
requirement."
The U.S. Treasury Department has recognized (i) Bermuda, our country
of incorporation and (ii) the country of incorporation of each of our non-United
Kingdom subsidiaries, as a qualified foreign country. Accordingly, we and each
such subsidiary satisfy the country of organization requirement.
Final regulations interpreting Section 883 were promulgated by the
U.S. Treasury Department in August 2003, which we refer to as the "final
regulations." These regulations are effective for calendar year taxpayers like
ourselves beginning with the calendar year 2005. However, for purposes of the
discussion below, we have assumed that such regulations are effective for
calendar year 2004.
Due to the public nature of our shareholdings, we do not believe that
we will be able to substantiate that we satisfy the "ownership requirement."
However, as described below, we believe that we will be able to satisfy the
"publicly-traded requirement."
Our stock was "primarily traded" on the Oslo Stock Exchange, an
established securities market in a qualified foreign country, during 2004. The
final regulations provide, in pertinent part, that our stock will not be
considered to be "regularly traded" on an established securities market for any
taxable year in which 50 per cent or more of the outstanding shares of our
stock, by vote and value, is owned, for more than half the days of the taxable
year, by persons who each own 5 per cent or more of the vote and value of the
outstanding shares of that stock, known as the "5 per cent override rule". The 5
per cent override rule will not apply, however, if we can establish that
individual residents of qualified foreign countries, which we refer to as
"qualified shareholders", own sufficient shares of our stock to preclude
non-qualified shareholders from owning 50 per cent or more of the total vote and
value of our stock for more than half the number of days during the taxable year
which we refer to as the "5 per cent override exception".
Based on our existing shareholdings, we would not presently be subject
to the 5 per cent override rule for 2004. Therefore, we believe that we satisfy
the publicly- traded requirement and therefore, are entitled to exemption from
U.S. federal income tax under Section 883 in respect of our U.S.-source shipping
income.
However, if we were to be subject to the 5 per cent override rule in
the future (as a result of changes in ownership of our shares), it may be
difficult for us to establish that we qualify for the 5 per cent override
exception. If we were not eligible for the exemption under Section 883, our
U.S.-source shipping income would be subject to U.S. federal income tax as
described in more detail below.
United States-United Kingdom Income Tax Treaty
Our United Kingdom subsidiaries are eligible to claim the benefits of
the Treaty for 2004.
Article 8 of the Treaty provides, in pertinent part, that profits
derived from "the operation of ships in international traffic" shall be taxable
only in the United Kingdom. Since all the U.S. source shipping income of our
United Kingdom subsidiaries for 2004 was derived from the operation of ships in
international traffic, all such income is exempt from U.S. federal income tax.
Article 8 also exempts from U.S. federal income tax gain derived by our United
Kingdom subsidiaries from the sale of their vessels operated in international
traffic.
While Article 16 of the Treaty imposes certain beneficial ownership
requirements and other limitations on companies claiming benefits under the
Treaty, this Article does not extend to benefits claimed under Article 8.
Taxation in Absence of Internal Revenue Code Section 883 or Treaty Exemption
To the extent the benefits of Section 883 or the Treaty are
unavailable with respect to any item of U.S. source income, our U.S.-source
shipping income would be subject to a 4 per cent tax imposed by Code Section 887
on a gross basis, without benefit of deductions. Since under the sourcing rules
described above, no more than 50 per cent of our shipping income would be
derived from U.S. sources, the maximum effective rate of U.S. federal income tax
on our shipping income would never exceed 2 percent.
Gain on Sale of Vessels
To the extent any of our vessels makes more than an occasional voyage
to U.S. ports, we may be considered to be engaged in the conduct of a U.S. trade
or business. As a result, any U.S. source gain on the sale of a vessel may be
partly or wholly subject to U.S. federal income tax as "effectively connected"
income at a combined rate of up to 54.5 per cent. However, to the extent
circumstances permit, we intend to structure sales of our vessels in such a
manner, including effecting the sale and delivery of vessels outside of the
United States, so as to not give rise to U.S. source gain.
U.S. Taxation of U.S. Holders
The term "U.S. holder" means a beneficial owner of our common shares
that is a U.S. citizen or resident, U.S. corporation or other U.S. entity
taxable as a corporation, an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust if a court within
the U.S. is able to exercise primary jurisdiction over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust and owns our common shares as a capital asset, generally,
for investment purposes.
If a partnership holds our common shares, the tax treatment of a
partner will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner in a partnership holding our
common shares, you are encouraged to consult your tax advisor.
Distributions
Any distributions made by us with respect to our common shares to a
U.S. holder will generally constitute dividends, to the extent of our current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. We expect that dividends paid by us to a non-corporate U.S. holder
will be eligible for preferential U.S. federal income tax rates (through 2008)
provided that the U.S. non-corporate holder has owned our stock for more than 60
days in the 121-day period beginning 60 days before the date on which our stock
becomes ex-dividend. However, there is no assurance that any dividends paid by
us will be eligible for these preferential rates in the hands of a non-corporate
U.S. holder. Any dividends paid by us, which are not eligible for these
preferential rates will be taxed as ordinary income to a non-corporate U.S.
holder.
Distributions in excess of our earnings and profits will be treated
first as a non-taxable return of capital to the extent of the U.S. holder's tax
basis in his common shares on a dollar-for-dollar basis and thereafter as
capital gain.
Sale, Exchange or other Disposition of Our Common Shares
Subject to the discussion below under "Passive Foreign Investment
Company," a U.S. holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of our common shares in an amount equal to
the difference between the amount realized by the U.S. holder from such sale,
exchange or other disposition and the U.S. holder's tax basis in the common
shares. Such gain or loss will be treated as long-term capital gain or loss if
the U.S. holder's holding period in our stock is greater than one year at the
time of the sale, exchange or other disposition. A U.S. holder's ability to
deduct capital losses is subject to certain limitations.
Passive Foreign Investment Company
Notwithstanding the above rules regarding distributions and
dispositions, special rules may apply to some U.S. holders (or to the direct or
indirect beneficial owners of some non-U.S. holders) if we are treated as a
"passive foreign investment company" for United States federal income tax
purposes. We will be a "passive foreign investment company" if either:
o at least 75 per cent of our gross income in a taxable year is
passive income; or
o at least 50 per cent of our assets in a taxable year (averaged
over the year and generally determined based upon value) are held
for the production of, or produce, passive income.
For purposes of determining whether we are a passive foreign
investment company, we will be treated as earning and owning the income and
assets, respectively, of any of our subsidiary corporations in which we own 25
per cent or more of the value of the subsidiary's stock. To date, our
subsidiaries and we have derived most of our income from time and voyage
charters, and we expect to continue to do so. This income should be treated as
services income, which is not passive income for passive foreign investment
company purposes. However, passive income would include amounts derived by
reason of the temporary investment of funds raised in an offering and amounts
derived through spot trading of LNG for our own account.
On the basis of the above, we believe that we are not currently a
passive foreign investment company and do not expect to be a passive foreign
investment company in the foreseeable future. However, there can be no assurance
that we will not become a passive foreign investment company in any year.
If we become a passive foreign investment company (and regardless of
whether we remain a passive foreign investment company), each U.S. holder who is
treated as owning our shares during any period in which we are so classified,
for purposes of the passive foreign investment company rules would be liable to
pay tax, at the then highest applicable income tax rates on ordinary income,
plus interest, upon certain excess distributions and upon disposition of our
shares including, under certain circumstances, a disposition pursuant to an
otherwise tax free reorganization, as if the distribution or gain had been
recognized ratably over the U.S. holder's entire holding period of our shares.
An excess distribution generally includes dividends or other distributions
received from a passive foreign investment company in any taxable year of a U.S.
holder to the extent that the amount of those distributions exceeds 125 per cent
of the average distributions made by the passive foreign investment company
during a specified base period. The tax at ordinary rates and interest would not
be imposed if the U.S. holder makes a mark-to-market election, as discussed
below. Furthermore, any distributions paid by us to a U.S. non-corporate holder
would not be eligible for the preferential federal income tax rates described
above under "Distributions."
In some circumstances, shareholder in a passive foreign investment
company may avoid the unfavorable consequences of the passive foreign investment
company rules by making a qualified electing fund election. However, a U.S.
holder cannot make a qualified electing fund election with respect to us unless
we comply with certain reporting requirements and we do not intend to provide
the required information.
If we become a passive foreign investment company and, provided that,
as is currently the case, our shares are regularly traded on a "qualified
exchange," a U.S. holder may make a mark-to-market election with respect to our
shares. Under the election, any excess of the fair market value of the shares at
the close of any tax year over the U.S. holder's adjusted basis in the shares is
included in the U.S. holder's income as ordinary income. In addition, the
excess, if any, of the U.S. holder's adjusted basis at the close of any taxable
year over fair market value is deductible in an amount equal to the lesser of
the amount of the excess or the net mark-to-market gains on the shares that the
U.S. holder included in income in previous years. If a U.S. holder makes a
mark-to-market election after the beginning of its holding period, the U.S.
holder does not avoid the interest charge rule discussed above with respect to
the inclusion of ordinary income attributable to periods before the election.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made
within the U.S. to you will be subject to information reporting requirements.
Such payments will also be subject to "backup withholding" if you are a
non-corporate U.S. holder and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed to report
all interest or dividends required to be shown on your federal income tax
returns; or
o in certain circumstances, fail to comply with applicable certification
requirements.
Backup withholding is not an additional tax. Rather you generally may
obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the U.S. Internal
Revenue Service, provided that the required information is furnished to the
Internal Revenue Service.
F. Dividends and Paying Agents
Not Applicable
G. Statements by Experts
Not applicable
H. Documents on display
Our Registration Statement effective became effective on November 29,
2002 and we are now subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements we will
file reports and other information with the SEC. These materials, including this
document and the accompanying exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 100 Fifth Street,
N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling 1 (800) SEC-0330, and you may
obtain copies at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. 20549. The SEC maintains
a website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
I. Subsidiary Information
Not applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and
foreign currency exchange risks. We do not enter into derivative instruments for
speculative or trading purposes. In certain situations, we may enter into
derivative instruments to achieve an economic hedge of the risk exposure. Since
adoption of FAS 133, certain economic hedge relationships no longer qualify for
hedge accounting due to the extensive documentation and strict criteria of the
standard.
Interest rate risk. A significant portion of our long-term debt and
capital lease obligations is subject to adverse movements in interest rates. Our
interest rate risk management policy permits economic hedge relationships in
order to reduce the risk associated with adverse fluctuations in interest rates.
We use interest rate swaps and fixed rate debt to manage the exposure to adverse
movements in interest rates. Interest rate swaps are used to convert floating
rate debt obligations to a fixed rate in order to achieve an overall desired
position of fixed and floating rate debt. Credit exposures are monitored on a
counterparty basis, with all new transactions subject to senior management
approval.
As of December 31, 2004 and 2003 the notional amount of the interest
rate swaps outstanding in respect of our debt and net capital lease obligation
was $293.7 million and $171.8 million, respectively and the amount of debt with
a fixed rate of interest was $135 million and $105 million respectively. The
principal of the loans and net capital lease obligations outstanding as of
December 31, 2004 and 2003 was $805.0 million and $655.2 million, respectively.
Based on our floating rate debt at December 31, 2004, a one percentage point
increase in the floating interest rate would increase interest expense by $3.7
million per annum. For disclosures of the fair value of the derivatives and debt
obligations outstanding as of December 31, 2004 and 2003, see Note 24 to the
Financial Statements. Since December 31, 2004 we have entered into a further
$215 million of interest rate swaps, $105 million of which relates to the lease
in respect of hull 2226, which commences in January 2006 on delivery of the
vessel.
Foreign currency risk. Except in the course of our vessel leases, the
majority of our transactions, assets and liabilities are denominated in U.S.
dollars, our functional currency. Periodically, we may be exposed to foreign
currency exchange fluctuations as a result of expenses paid by certain
subsidiaries in currencies other than U.S. dollars, primarily British Pounds
(GBP) and Euros, in relation to management offices we have in the UK and Spain.
Based on our GBP and Euro expenses for 2004 a 5% depreciation of the US Dollar
against both GBP and Euros would increase our expenses by $0.5 million.
In addition our 21 per cent investment in Korea Line is exposed to
some extent to fluctuations of the US dollar against the South Korean Won.
Whilst Korea Line's functional currency is US dollar's some of its cash flows
are denominated in Won and its shares are traded in Won. There is a risk that
currency fluctuations will have a negative effect on the value of our cash flows
and investments.
We are exposed to some extent in respect of the lease transactions we
entered into during the year ended December 31, 2003, which are both denominated
in GBP, although these are hedged by the GBP cash deposits that secure these
obligations. We use cash from the deposits to make payments in respect of our
leases. Gains or losses that we incur are unrealised unless we choose or are
required to withdraw monies from or pay additional monies into the deposits
securing our capital lease obligations. Among other things movements in interest
rates give rise to a requirement for us to make adjustments to the amount of GBP
cash deposits. Based on these lease obligations and related cash deposits as at
December 31, 2004, a 5% appreciation in the US Dollar against GBP would give
rise to a loss of $1.4 million.
In April 2004 we entered into a lease arrangement in respect of the
Golar Winter (as noted above), the obligation in respect of which is also
denominated in GBP. However, the cash deposit which secures the letter of credit
which is used to secure the lease obligation is significantly less than the
lease obligation itself. We refer to this as a `funded' lease. We are therefore
exposed to currency movements on the difference between the lease obligation and
the cash deposit, approximately $129 million as at December 31, 2004. In order
to hedge this exposure we entered into a currency swap with a bank, which is
also our lessor, to exchange our GBP payment obligations into U.S. dollar
payment obligations. We could be exposed to a currency fluctuation risk if we
terminated this lease.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
ITEM 13. DIVIDEND ARREARAGES AND DELINQUENCIES
None
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
None
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, the Company
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the principal executive officers and
principal financial officers concluded that the Company's disclosure controls
and procedures are effective in alerting them timely to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
(b) Not Applicable
(c) Not Applicable
(d) Changes in internal controls over financial reporting
There have been no changes in internal controls over financial
reporting (identified in connection with management's evaluation of such
internal controls over financial reporting) that occurred during the year
covered by this annual report that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
ITEM 16. RESERVED
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company does not currently have a separate audit committee. The
Company is required and expects to establish an audit committee by July 31,
2005. At that time the Company will make the determination whether to include a
financial expert on that committee.
ITEM 16 B. CODE OF ETHICS.
The Company has adopted a Code of Ethics, filed as Exhibit 14.1 to
this Annual Report that applies to all employees. Furthermore, a copy of our
Code of Ethics can be found in our website (www.golarlng.com).
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The following table sets forth, for the two most recent fiscal years,
the aggregate fees billed for professional services rendered by the principal
accountant for the audit of the Company's annual financial statements and
services provided by the principal accountant in connection with statutory and
regulatory filings or engagements for the two most recent fiscal years.
Fiscal year ended December 31, 2004 $1,120,672
Fiscal year ended December 31, 2003 $ 447,191
(b) Audit -Related Fees
The following table sets forth, for the two most recent fiscal years,
the aggregate fees billed for professional services in respect of assurance and
related services rendered by the principal accountant related to the performance
of the audit or review of the Company's financial statements which have not been
reported under Audit Fees above. These services comprise assurance work in
connection with financing and other agreements.
Fiscal year ended December 31, 2004 $125,672
Fiscal year ended December 31, 2003 $ 91,263
(c) Tax Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning.
Fiscal year ended December 31, 2004 $ -0-
Fiscal year ended December 31, 2003 $ 7,419
(d) All Other Fees
For the fiscal years ended December 31, 2004 and 2003, there have been
no professional services rendered by the principal accountant for services other
than audit fees, audit-related fees and tax fees set forth above.
(e) Audit Committee's Pre-Approval Policies and Procedures
The Company's Board of Directors has adopted pre-approval policies and
procedures in compliance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X
that require the Board to approve the appointment of the independent auditor of
the Company before such auditor is engaged and approve each of the audit and
non-audit related services to be provided by such auditor under such engagement
by the Company. All services provided by the principal auditor in 2004 were
approved by the Board pursuant to the pre-approval policy.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
See Item 6(C).
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
We specifically incorporate by reference in response to this item the
report of the independent registered public accounting firm, the consolidated
financial statements and the notes to the consolidated financial statements
appearing on pages F-1 through F-37.
ITEM 19. EXHIBITS
Number Description of Exhibit
1.1* Memorandum of Association of Golar LNG Limited as adopted on
May 9, 2001, incorporated by reference to Exhibit 1.1 of the
Company's Registration Statement on Form 20-F, filed with
the SEC on November 27, 2002, File No. 000-50113 (the
"Original Registration Statement").
1.2* Bye-Laws of Golar LNG Limited as adopted on May 10, 2001,
incorporated by reference to Exhibit 1.2 of the Company's
Original Registration Statement.
1.3* Certificate of Incorporation as adopted on May 11, 2001,
incorporated by reference to Exhibit 1.3 of the Company's
Original Registration Statement.
1.4* Articles of Amendment of Memorandum of Association of Golar
LNG Limited as adopted by our shareholders on June 1, 2001
(increasing the Company's authorized capital), incorporated
by reference to Exhibit 1.4 of the Company's Original
Registration Statement.
4.1* Loan Agreement, between Golar LNG 2215 Corporation and
Lloyds TSB Bank, Plc, dated December 31, 2001, incorporated
by reference to Exhibit 4.1 of the Company's Original
Registration Statement.
4.2* Loan Agreement, between Golar Gas Holding Company, Inc. and
Christiania Bank og Kreditkasse, Den norske Bank, Citibank
and Fortis Bank, dated May 31, 2001, incorporated by
reference to Exhibit 4.2 of the Company's Original
Registration Statement.
4.3* Loan Agreement, between Faraway Maritime Shipping Company
and Bank of Taiwan dated November 26, 1997, incorporated by
reference to Exhibit 4.3 of the Company's Original
Registration Statement.
4.4* Purchase Agreement, between Golar LNG Limited and Osprey
Maritime Limited, dated May 21, 2001, incorporated by
reference to Exhibit 4.4 of the Company's Original
Registration Statement.
4.5* Sale and Purchase Agreement, between Golar LNG Limited and
Seatankers Management Co. Ltd., dated May 21, 2001,
incorporated by reference to Exhibit 4.5 of the Company's
Original Registration Statement.
4.6* Golar LNG Limited Stock Option Plan, incorporated by
reference to Exhibit 4.6 of the Company's Original
Registration Statement.
4.7* Service Agreement between Golar LNG Limited and Graeme
McDonald, incorporated by reference to Exhibit 4.7 of the
Company's Original Registration Statement.
4.8* Management Agreement between Golar LNG Limited and Frontline
Management (Bermuda) Limited, dated February 21, 2002,
incorporated by reference to Exhibit 4.8 of the Company's
Original Registration Statement.
4.9* Loan Agreement, between Golar Gas Holding Company, Inc. and
Nordea Bank Norge ASA as agent and Nordea Bank Norge ASA,
Den norske Bank ASA and Fortis Bank (Nederland) N.V., dated
October 11, 2002, incorporated by reference to Exhibit 4.9
of the Company's Original Registration Statement.
8.1 Golar LNG Limited subsidiaries
11.1 Golar LNG Limited Code of Ethics.
12.1 Certification of the Principal Executive Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
12.2 Certification of the Principal Accounting Officer under
Section 302 of the Sarbanes-Oxley Act of 2002
13.1 Certification under Section 906 of the Sarbanes-Oxley act of
2002 of the Principal Executive Officer
13.2 Certification under Section 906 of the Sarbanes-Oxley act of
2002 of the Principal Accounting Officer
15.1 Korea Line Corporation financial statements provided pursuant
to Regulation S-X Rule 3-09.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Golar LNG Limited
-------------------------------------
(Registrant)
Date June 30, 2005 By /s/ Graham Robjohns
----------------------------- ----------------------------------
Graham Robjohns
Principal Accounting Officer
GOLAR LNG LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm......................F-2
Audited Consolidated Statements of Operations for the years ended
December 31, 2004, 2003, and 2002 .........................................F-3
Audited Consolidated Statements of Comprehensive Income for the years
ended December 31, 2004, 2003, and 2002 ...................................F-4
Audited Consolidated Balance Sheets as of December 31, 2004 and 2003.........F-5
Audited Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003, and 2002 .........................................F-6
Audited Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2004, 2003, and 2002 .....................F-7
Notes to Consolidated Financial Statements...................................F-8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Golar LNG Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Golar LNG Limited and its subsidiaries (the "Company") at December
31, 2004 and 2003, and the results of their operations and their cash flows for
the years ended December 31, 2004, 2003, and 2002 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements under the heading
"Restatement", the Company changed its accounting for an available for sale
investment to the equity method and restated its shareholders' equity as at
December 31, 2003.
PricewaterhouseCoopers LLP
West London, United Kingdom
June 30, 2005
Golar LNG Limited
Consolidated Statements of Operations for the years ended December 31, 2004,
2003 and 2002 (in thousands of $, except per share data)
Note 2004 2003 2002
Operating revenues
Time charter revenues 159,854 122,198 129,076
Voyage charter revenues 2,412 9,062 -
Vessel management fees 1,144 1,505 1,535
--------- --------- ----------
Total operating revenues 163,410 132,765 130,611
Operating expenses
Vessel operating expenses 35,759 30,156 28,061
Voyage expenses 2,561 2,187 -
Administrative expenses 8,471 7,138 6,127
Depreciation and amortization 40,502 31,147 31,300
--------- --------- ----------
Total operating expenses 87,293 70,628 65,488
--------- --------- ----------
Operating income 76,117 62,137 65,123
--------- --------- ----------
Financial income (expenses)
Interest income 31,879 14,800 1,073
Interest expense (61,987) (37,157) (23,553)
Other financial items 6 4,804 7,217 (17,887)
--------- --------- ----------
Net financial expenses (25,304) (15,140) (40,367)
--------- --------- ----------
Income before equity in net earnings
of investee, income taxes and
minority interest 50,813 46,997 24,756
--------- --------- ----------
Minority interest in net income
of subsidiaries (7,575) (7,052) 2,469
Income taxes 7 (420) (375) (88)
Equity in net earnings of investee 10 13,015 - -
--------- --------- ----------
Net income 55,833 39,570 27,137
--------- --------- ----------
Earnings per share 8
Basic $0.85 $0.68 $0.48
Diluted $0.84 $0.68 $0.48
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Comprehensive Income for the years ended December 31,
2004, 2003 and 2002 (in thousands of $)
Note 2004 2003 2002
(restated)
Net income 55,833 39,570 27,137
Other Comprehensive income (loss),
net of tax:
Recognition of minimum
pension liability 6,235 (3,102) (5,398)
--------- --------- ----------
Other comprehensive income (loss) 6,235 (3,102) (5,398)
Comprehensive income 62,068 36,468 21,739
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Balance Sheets as of December 31, 2004 and 2003
(in thousands of $)
Note 2004 2003
ASSETS (restated)
Current Assets
Cash and cash equivalents 51,598 117,883
Restricted cash and short-term investments 16 41,953 32,095
Trade accounts receivable 11 572 1,488
Other receivables, prepaid expenses and
accrued income 12 18,230 15,907
Amounts due from related parties 13 294 180
Inventories 3,556 3,203
--------- ----------
Total current assets 116,203 170,756
Restricted cash 16 714,802 623,179
Equity in net assets of non-consolidated
investee 10 48,869 12,176
Newbuildings 14 145,233 207,797
Vessels and equipment, net 15 371,867 211,098
Vessels under capital leases, net 16 706,516 553,385
Deferred charges 17 6,720 5,480
Other long term assets 7 119 97
--------- ----------
Total assets 2,110,329 1,783,968
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt 21 66,457 61,331
Current portion of obligations under
capital leases 16 2,662 -
Trade accounts payable 2,940 5,106
Accrued expenses 18 17,054 20,035
Amounts due to related parties 374 600
Other current liabilities 19 26,407 35,049
--------- ----------
Total current liabilities 115,894 122,121
Long-term liabilities
Long-term debt 21 636,497 593,904
Obligations under capital leases 16 842,853 616,210
Other long-term liabilities 22 86,033 94,226
--------- ----------
Total liabilities 1,681,277 1,426,461
Commitments and contingencies (See Note 27)
Minority interest 26,282 18,706
Stockholders' equity
Share capital (65,612,000 common shares
of $1.00 each, issued and outstanding) 23 65,612 65,612
Additional paid-in capital 210,779 208,878
Accumulated other comprehensive income (3,737) (9,972)
Retained earnings 130,116 74,283
Total Stockholders' equity 402,770 338,801
--------- ----------
Total liabilities and stockholders' equity 2,110,329 1,783,968
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
2003 and 2002 (in thousands of $)
Note 2004 2003 2002
Operating activities
Net income 55,833 39,570 27,137
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 40,502 31,147 31,300
Amortization of deferred charges 1,270 1,574 972
Undistributed net earnings of
non-consolidated investee (12,844) - -
Income (loss) attributable to
minority interests 7,575 7,052 (2,469)
Unrealized foreign exchange gains 5,161 (2,993) -
Drydocking expenditure (13,299) (12,737) (1,600)
Trade accounts receivable 916 (1,488) 188
Inventories (353) (721) 168
Other receivables, prepaid expenses
and accrued income (2,201) (13,149) (156)
Amount due from/to related companies (340) 59 (427)
Trade accounts payable (2,166) 2,105 1,006
Accrued expenses (16) 9,863 3,518
Interest element included in longterm
lease obligations 6,321 2,660
Other current liabilities (4,331) (2,865) 11,579
--------- --------- ----------
Net cash provided by
operating activities 82,028 60,077 71,216
Investing activities
Additions to newbuildings 14 (278,560) (77,783) (158,815)
Additions to vessels and equipment (8,232) (6,308) (5,912)
Long-term restricted cash (37,515) (543,643) -
Investment in associated companies (21,948) (12,176) -
Restricted cash and short-term
investments (9,858) (18,605) 1,403
--------- --------- ----------
Net cash used in
investing activities (356,113) (658,515) (163,324)
Financing activities
Proceeds from long-term debt 21 110,000 506,128 194,335
Proceeds from short term debt
due to related parties 21 - - 16,259
Proceeds from long-term capital
lease obligations 163,715 616,298 -
Repayments of long-term capital
lease obligations (894) - -
Repayments of long-term debt (62,281) (528,505) (41,054)
Repayment of long term debt due
to related parties - (32,703) (68,834)
Financing costs paid (2,740) (2,140) (3,424)
Dividends paid to minority
shareholders 25 - (1,695) (10,002)
Proceeds from issuance of equity
net of issuance costs - 106,197 -
--------- --------- ----------
Net cash provided by
financing activities 207,800 663,580 87,280
Net (decrease) increase in cash
and cash equivalents (66,285) 65,142 (4,828)
Cash and cash equivalents at
beginning of period 117,883 52,741 57,569
Cash and cash equivalents at
end of period 51,598 117,883 52,741
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid, net of
capitalized interest 34,592 36,551 25,603
Income taxes paid 356 66 321
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2004, 2003 and 2002
(in thousands of $, except number of shares)
Note Share Additional Accumulated Retained Total
Capital Paid in Other Earnings Stockholders'
Capital Comprehensive Equity
Income
(restated) (restated)
Balance at December 31, 2001 56,012 112,281 (1,472) 7,576 174,397
Net income - - - 27,137 27,137
Other comprehensive loss - - (5,398) - (5,398)
Balance at December 31, 2002 56,012 112,281 (6,870) 34,713 196,136
Issue of ordinary shares, net of 23 9,600 96,597 - - 106,197
issuance costs
Net income - - - 39,570 39,570
Other comprehensive loss - - (3,102) - (3,102)
Balance at December 31, 2003 (restated)
65,612 208,878 (9,972) 74,283 338,801
Net income - - - 55,833 55,833
Other comprehensive gain - - 6,235 - 6,235
Equity in gain on disposal of treasury
shares by investee 10 1,901 1,901
Balance at December 31, 2004 65,612 210,779 (3,737) 130,116 402,770
The accompanying notes are an integral part of these financial statements.
Notes to Consolidated Financial Statements (continued)
Golar LNG Limited
Notes to Consolidated Financial Statements
1. GENERAL
Golar LNG Limited (the "Company" or "Golar") was incorporated in Hamilton,
Bermuda on May 10, 2001 for the purpose of acquiring the liquefied natural gas
("LNG") shipping interests of Osprey Maritime Limited ("Osprey") and of
Seatankers Management Co. Ltd. ("Seatankers"). Osprey, through its parent World
Shipholding Ltd. ("World Shipholding"), and Seatankers, are both indirectly
controlled by Mr. John Fredriksen. Mr. Fredriksen is a Director, the Chairman
and President of Golar. Osprey acquired its LNG interests in 1997 through the
acquisition of Gotaas Larsen Shipping Corporation ("Gotaas Larsen"). World
Shipholding gained a controlling interest of more than 50 per cent of Osprey in
November 2000. In January 2001, World Shipholding's interest increased to over
90 per cent and the acquisition was completed in May 2001.
On May 21, 2001, Golar entered into purchase agreements with Osprey and
Seatankers to purchase its LNG shipping interests for a total purchase price of
$530.9 million. These LNG shipping interests comprised the ownership of LNG
carriers, a contract and options to build LNG vessels and a management
organization that provides management services for LNG carriers owned by the
Company. To finance the purchase of the LNG operations, the Company raised $280
million through the placement in Norway of 56 million shares at a price of $5.00
per share. Osprey subscribed for 28 million shares with the remaining 28 million
shares being subscribed by private investors. In addition a wholly owned
subsidiary of the Company raised $325 million through a credit facility secured
by the underlying vessels. As at the date of acquisition, Mr. John Fredriksen
indirectly controlled 50.01% of the Company through the initial 12,000 shares
issued at the Company's formation and the 28 million shares purchased by Osprey.
As required under generally accepted accounting principles in the United States,
the purchase by the Company of its LNG operations was treated as a transaction
between the entities under common control. The Company recorded the LNG assets
and liabilities acquired at the amounts previously reflected in the books of
Osprey and Seatankers on what is known as a "predecessor basis".
The original acquisition of Osprey by World Shipholding had been accounted for
as a purchase transaction and the fair value of the net assets acquired exceeded
the purchase price paid by World Shipholding. As such the negative goodwill
associated with the acquisition had been allocated to reduce the value of the
vessels.
The difference between the purchase price paid by the Company for its LNG
operations and the net assets recorded in the Company's books using the
predecessor basis of $107.5 million was reflected as reduction in equity.
On June 18, 2003 World Shipholding acquired Osprey's shareholding in Golar. As
of December 31, 2004, Mr. John Fredriksen indirectly controlled 42.7 per cent of
the Company.
As of December 31, 2004 the Company operated a fleet of nine (December 31, 2003:
seven) LNG carriers, seven of which are under long-term charter contracts.
Additionally, as of December 31, 2004, the Company was building four new LNG
carriers. Since December 31, 2004 the Company has taken delivery of one of the
new buildings. The Company currently leases seven (December 31, 2004: seven) of
its vessels under long-term lease agreements and has a 100 per cent ownership
interest in two vessels (December 31, 2004: one) and a 60 per cent ownership
interest in one (December 31, 2004: one) other vessel, the Golar Mazo. As of
June 30, 2005 the three remaining newbuildings are being built at a cost of $472
million excluding financing costs. These newbuildings are scheduled for delivery
between February 2006 and July 2007.
As of June 30, 2005 the Company believes it will have sufficient facilities to
meet its anticipated funding needs until May 2006. However, the Company does not
currently have sufficient facilities to meet payments, in respect of its two
unfinanced newbuildings, due in May 2006 and thereafter. Additional facilities
of $242 million will be required to meet commitments under the newbuilding
construction program for the two unfinanced newbuildings due in May 2006 and
thereafter. The construction contracts include penalty clauses for non-payment
of instalments, which could result in the yards retaining the vessels with no
compensation to Golar for advance payments previously made. The Company expects
that funds required to meet the commitments in May 2006 and thereafter will be
provided from a combination of cash reserves, debt financing, lease arrangements
and cash flow from operations. The Company has successfully financed four
newbuilding vessels without long-term charter coverage within the past 15
months. This success and experience, among other things, leads the Company to
believe that it will be able to obtain sufficient facilities to meet its
newbuilding commitments as they fall due. Accordingly, the financial statements
have been prepared on a going concern basis of accounting.
2. ACCOUNTING POLICIES
Basis of accounting
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States. Investments in companies in which the
Company directly or indirectly holds more than 50 per cent of the voting control
are consolidated in the financial statements, as well as certain variable
interest entities in which the Company is deemed to be subject to a majority of
the risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. All inter-company
balances and transactions have been eliminated.
Investments in companies in which the Company holds between 20 per cent and 50
per cent of an ownership interest, and over which the Company exercises
significant influence, are accounted for using the equity method. The Company
records its investments in equity-method investees on the consolidated balance
sheets as "Equity in net assets of non-consolidated investee" and its share of
the investees' earnings or losses in the consolidated statements of operations
as "Equity in net earnings of investee". The difference, if any, between the
purchase price and the book value of the Company's investments in equity method
investees is included in the accompanying consolidated balance sheets in "Equity
in net assets of non-consolidated investee".
The preparation of financial statements in accordance with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restatement
During the fourth quarter of 2003, through a series of step acquisitions, the
Company acquired a 9.94% interest in Korea Line Corporation ('KLC'), a shipping
company listed on the Korean Stock Exchange, and accounted for the investment as
an "available for sale" marketable security. By May 2004, after additional
purchases of common shares in KLC, the Company's interest increased to 21.09%.
Because the Company believes that the increase in its level of ownership has
given it the ability to exercise significant influence over the investee's
operating and financial policies, the Company has retroactively changed its
accounting for KLC to the equity method, in accordance with Accounting
Principles Board Opinion No.18 "The Equity Method of Accounting for Investments
in Common Stock".
The retroactive change to the equity method of accounting resulted in a decrease
in stockholders' equity of $1.6 million as of December 31, 2003, because of the
reversal of an unrealised gain on the "available for sale" marketable
securities, that was recorded in the consolidated statement of comprehensive
income when the investment was accounted for as an "available for sale"
marketable security. Stockholders' equity previously reported as of December 31,
2003 was $340.4 million, while stockholders' equity reported in these
consolidated financial statements as of December 31, 2003 is $338.8 million. The
restatement had no effect on net income for periods prior to and including the
year ended December 31, 2003 because the acquisitions occurred towards the end
of the fourth quarter of 2003 and the Company's amount of equity in the net
earnings of the investee for the fourth quarter of 2003 was not material. See
Note 10 for additional information.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues generated
from time charters, which are classified as operating leases by the Company, are
recorded over the term of the charter as service is provided. Reimbursement for
drydocking costs is recognized evenly over the period to the next drydocking,
which is generally between two to five years. Revenues include minimum lease
payments under time charters as well as the reimbursement of certain vessel
operating and drydocking costs.
Voyage charter revenues and associated expenses are recognized rateably over the
duration of the voyage. Under voyage charters, expenses such as fuel and port
charges are paid by the Company and have been recorded within operating
expenses, whereas under time charters, such voyage costs are paid by the
Company's customers. Estimated losses under a voyage charter are provided for in
full at the time such losses become evident. Voyage revenue is recognized on a
discharge-to-discharge basis. Under this basis, voyage revenue is recognized
evenly over the period from departure of a vessel from its last discharge port
to departure from the next discharge port.
Revenues generated from management fees are recorded rateably over the term of
the contract as service is provided.
Revenue includes amounts receivable from loss of hire insurance, which is
recognized on an accruals basis, to the value of $nil, $2,843,000 and $163,000
for the years ended December 31, 2004, 2003 and 2002, respectively.
Vessel operating costs include an allocation of administrative overheads that
relate to vessel operating activity which includes certain technical and
operational support staff for the vessels, information technology, legal,
accounting, and corporate costs. These costs are allocated based on internal
cost studies, which management believes are reasonable estimates. For the years
ended December 31, 2004, 2003 and 2002, $3,252,750, $2,375,000 and $2,250,000
have been allocated to vessel operating costs, respectively.
Revenues and voyage expenses of the vessels operating in pool arrangements are
pooled and the resulting net pool revenues are allocated to the pool
participants according to an agreed formula. The formula used to allocate net
pool revenues allocates revenues to pool participants on the basis of the number
of days a vessel operates in the pool. The same revenue and expenses principles
stated above are applied in determining the pool's net pool revenues. The pool
arrangements require the participants to pay and account for voyage expenses,
and distribute gross pool revenues to the participants such that the
participants' resulting net pool revenues are equal to net pool revenues
calculated according to the agreed formula. The Company accounts for net pool
revenues allocated by these pools as "Time charter revenues" in its statement of
operations.
Cash and cash equivalents
The Company considers all demand and time deposits and highly liquid investments
with original maturities of three months or less to be equivalent to cash.
Restricted cash and short-term investments
Restricted cash and short-term investments consist of bank deposits, which may
only be used to settle certain pre-arranged loan or lease payments. The Company
considers all short-term investments as held to maturity in accordance with
Statement of Financial Accounting Standards No.115 "Accounting for Certain
Investments in Debt and Equity Securities". These investments are carried at
amortized cost. The Company places its short-term investments primarily in fixed
term deposits with high credit quality financial institutions.
Insurance claim receivables
Insurance claim receivables are recognized when the facts and circumstances
support the legal recovery and management believes it is virtually certain that
the claims will be recovered.
Inventories
Inventories, which are comprised principally of fuel, lubricating oils and ship
spares, are stated at the lower of cost or market value. Cost is determined on a
first-in, first-out basis.
Newbuildings
The carrying value of newbuildings represents the accumulated costs to the
balance sheet date, which the Company has had to pay by way of purchase
instalments, and other capital expenditures together with capitalized loan
interest. No charge for depreciation is made until the vessel is delivered.
Vessels and equipment
Vessels and equipment are stated at cost less accumulated depreciation. The cost
of vessels and equipment less the estimated residual value is depreciated on a
straight-line basis over the assets' remaining useful economic lives.
Refurbishment costs incurred during the period are capitalized as part of
vessels and equipment. Also included in vessels and equipment is drydocking
expenditure which is capitalized when incurred and amortized over the period
until the next anticipated drydocking, which is generally between two and five
years. For vessels that are newly built or acquired the consideration paid is
allocated between drydocking and other vessels costs to reflect the different
useful lives of the component assets.
Useful lives applied in depreciation are as follows:
Vessels 40 years
Deferred drydocking expenditure two to five years
Office equipment and fittings three to six years
Vessels and equipment under capital lease
The Company leases certain vessels under agreements that are classified as
capital leases. Depreciation of vessels under capital lease is included within
depreciation and amortization expense in the statement of operations. Vessels
under capital lease are depreciated on a straight-line basis over the vessels'
remaining economic useful lives, based on a useful life of 40 years.
Refurbishment costs incurred during the period are capitalized as part of
vessels and equipment under capital lease. Also included in vessels and
equipment under capital lease, is drydocking expenditure which is capitalized
when incurred and amortized over the period until the next anticipated
drydocking, which is generally between two and five years. For vessels that are
newly built or acquired, the consideration paid is allocated between drydocking
and other vessel costs to reflect the different useful lives of the component
assets.
Deferred credit from capital leases
In accordance with Statement of Financial Accounting Standard ("SFAS") No.28
"Accounting for sales with leasebacks", income derived from the sale of
subsequently leased assets is deferred and amortized in proportion to the
amortization of the leased assets. Amortization of deferred income is offset
against depreciation and amortization expense in the statement of operations.
Impairment of long-lived assets
Long-lived assets that are held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less estimated costs to sell.
Deferred charges
Costs associated with long term financing, including debt arrangement fees, are
deferred and amortized over the term of the relevant loan. Amortization of
deferred loan costs is included in Other Financial Items.
Derivatives
The Company enters into interest rate swap transactions from time to time to
hedge a portion of its exposure to floating interest rates. These transactions
involve the conversion of floating rates into fixed rates over the life of the
transactions without an exchange of underlying principal. Hedge accounting is
used to account for these swaps provided certain hedging criteria are met. The
Company applies SFAS 133, "Accounting for Derivatives and Hedging Activities",
which requires an entity to recognize all derivatives as either assets or
liabilities on the balance sheet and measure these instruments at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. In order to qualify for hedge accounting under SFAS 133, certain
criteria and detailed documentation requirements must be met.
The Company does not enter into derivative contracts for speculative or trading
purposes.
Foreign currencies
The Company's functional currency is the U.S. dollar as all revenues are
received in U.S. dollars and a majority of the Company's expenditures are made
in U.S. dollars. The Company reports in U.S. dollars.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates of
exchange at the balance sheet date. Foreign currency non-monetary assets and
liabilities are translated using historical rates of exchange. Foreign currency
transaction and translation gains or losses are included in the consolidated
statements of operations.
Stock-based compensation
The Company will adopt FASB No. 123R, Share Based Payment beginning January 1,
2006. Under SFAS 123 "Accounting for Stock-Based Compensation", disclosures of
stock-based compensation arrangements with employees are required and companies
are encouraged, but not required, to record compensation costs associated with
employee stock option awards, based on estimated fair values at the grant dates.
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees". Had compensation costs been
calculated and accounted for in accordance with the fair value method
recommended in SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
(in thousands of $, except per share data) 2004 2003 2002
Net income
As reported 55,833 39,570 27,137
Add: Stock-based employee compensation
expense in reported net income under
APB 25, net of tax - - 57
Less: Total stock-based compensation
expense determined under SFAS 123
fair value method for all awards,
net of tax - - (390)
Pro-forma 55,833 39,570 26,804
Basic earnings per share
As reported $0.85 $0.68 $0.48
Pro-forma $0.85 $0.68 $0.48
Diluted earnings per share
As reported $0.84 $0.68 $0.48
Pro-forma $0.84 $0.68 $0.48
Earnings per share
Basic earnings per share ("EPS") is computed based on the income available to
common stockholders and the weighted average number of shares outstanding for
basic EPS. Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 8).
Pensions
Defined benefit pension costs, assets and liabilities are recognized in
accordance with SFAS 87 "Employer's Accounting for Pensions", which requires
adjustment of the significant actuarial assumptions annually to reflect current
market and economic conditions. Under SFAS 87, part of the deficit of plan
obligations over plan assets has been recognised in the balance sheet, with the
remainder of the unrecognised actuarial losses spread over the employees'
remaining service lifetimes. A minimum liability is recognized equal to the
amount by which the accumulated benefit obligation exceeds the fair value of the
plan assets. The pension benefit obligation is calculated by using a projected
unit credit method.
Defined contribution pension costs represents the contributions payable to the
scheme in respect of the accounting period.
Capital Leases
Leased vessels have been accounted for as capital leases in accordance with SFAS
13 "Accounting for Leases". Obligations under capital leases are carried at the
present value of future minimum lease payments, and the asset balance is
amortized on a straight-line basis over the remaining life economic useful lives
of the vessels. Interest expense is calculated at a constant rate over the term
of the lease.
Income Taxes
Income taxes are based on income before taxes. Deferred tax assets and
liabilities are recognized principally for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.
3. SUBSIDIARIES AND INVESTMENTS
The following table lists the Company's principal subsidiaries and their purpose
as at December 31, 2004. Unless otherwise indicated, we own 100 per cent of each
subsidiary.
Name Jurisdiction of Incorporation Purpose
Golar Gas Holding Company Inc. Republic of Liberia Holding Company and leases five
vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Republic of Liberia Holding Company
Oxbow Holdings Inc. British Virgin Islands Holding Company
Faraway Maritime Shipping Inc. (60% Republic of Liberia Owns Golar Mazo
ownership)
Golar LNG 2215 Corporation Republic of Liberia Leases Methane Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns Golar Viking
Golar LNG 2220 Corporation Republic of Liberia Leases Golar Winter
Golar LNG 2234 Corporation Republic of Liberia Owns newbuilding Hull 2234
Golar LNG 2244 Corporation Republic of Liberia Owns newbuilding Hull 2244
Golar Liberia Inc Republic of Liberia Owns newbuilding Hull 2226(1)
Golar International Ltd. Republic of Liberia Vessel management
Golar Maritime Services, S.A. Spain Vessel management
Gotaas-Larsen International Ltd. Republic of Liberia Vessel management
Golar Management Limited Bermuda Management
Golar Maritime Limited Bermuda Management
Golar Management (UK) Limited United Kingdom OperatesiGolarUFreezeited
Golar Khannur (UK) Limited United Kingdom Operates Khannur
Golar Gimi (UK) Limited United Kingdom Operates Gimi
Golar Hilli (UK) Limited United Kingdom Operates Hilli
Golar Spirit (UK) Limited United Kingdom Operates Golar Spirit
Golar Winter (UK) Limited United Kingdom Operates Golar Winter
--------------
1 As at December 31, 2004, Golar Liberia Inc owned newbuilding Hull 2226. In
April 2005 the Company signed a lease agreement in respect of its
newbuilding Hull 2226 and novated the shipbuilding contract to the
financial institution acting as lessor, therefore as from April 2004 Golar
Liberia Inc no longer owned Hull 2226.
4. ADOPTION OF NEW ACCOUNTING STANDARDS
FAS 151
In November 2004 the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 151, Inventory Costs--an amendment of ARB No.
43, Chapter 4 (revised) (FAS 151). FAS 151 amends the guidance in ARB No. 43,
Chapter 4, `Inventory Pricing,' to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material
(spoilage). FAS 151 requires that those items be recognized as current-period
charges. In addition, FAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. The Company will adopt FAS 151 on January 1, 2006. The
new standard is not expected to have material impact on the Company's results of
operations and financial position.
FAS 123R
In December 2004 the FASB issued Financial Accounting Standard No. 123R,
Share-Based Payment (FAS 123R). FAS 123R requires that companies expense the
value of employee stock options and other awards. FAS 123R allows companies to
choose an option pricing model that appropriately reflects their specific
circumstances and the economics of their transactions, and allows companies to
select from three transition methods for adoption of the provisions of the
standard. The Company will adopt FAS 123R effective January 1, 2006. The Company
has determined that this will not have an immediate impact upon Golar's
financial statements because as at December 31, 2004 all of Golar's stock
options are fully vested.
FAS 153
In December 2004 the FASB issued Financial Accounting Standard No. 153,
Exchanges of Nonmonetary Assets (FAS 153). FAS 153 amends APB Opinion No. 29,
Accounting for Nonmonetary Transactions, to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The Company will adopt FAS 153 for nonmonetary exchanges
occurring on or after January 1, 2006. The new standard is not expected to have
material impact on the Company's results of operations and financial position.
EITF 03-01
In June 2004, the Emerging Issues Task Force finalized Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments (EITF 03-01). The issue was intended to address the meaning of
"other-than-temporary" impairment and its application to certain investments in
debt and equity securities. A consensus was reached regarding disclosure
requirements concerning unrealized losses on available-for-sale debt and equity
securities accounted for under Financial Accounting Standard No. 115, Accounting
for Certain Investments in Debt and Equity Securities (FAS 115) and Financial
Accounting Standard No. 124, Accounting for Certain Investments Held by
Not-for-Profit Organizations (FAS 124). The guidance for evaluating whether an
investment is other-than-temporarily impaired should be applied in reporting
periods beginning after June 15, 2004. The disclosures are effective in annual
financial statements for fiscal years ending after December 31, 2003, for
investments accounted for under SFAS Nos. 115 and 124. For all other investments
within the scope of this EITF, the disclosures are effective for fiscal years
ending after June 15, 2004. Additional disclosures for cost method investments
are effective for fiscal years ending after June 15, 2004. The Company currently
does not have investments that fall within the scope of EITF 03-01, and has
therefore concluded that the guidance will not have an impact on its
consolidated results of operations or financial position.
FAS 154
In May 2005, the FASB issued Financial Accounting Standard No. 154, Accounting
Changes and Error Corrections (FAS 154). FAS 154 requires retrospective
application to prior periods' financial statements of changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. When it is impracticable to
determine the period-specific effects of an accounting change on one or more
individual prior periods presented, the Statement requires that the new
accounting principle be applied to the balances of assets and liabilities as of
the beginning of the earliest period for which retrospective application is
practicable and that a corresponding adjustment be made to the opening balance
of retained earnings (or other appropriate components of equity or net assets in
the statement of financial position) for that period rather than being reported
in an income statement. When it is impracticable to determine the cumulative
effect of applying a change in accounting principle to all prior periods, the
Statement requires that the new accounting principle be applied as if it were
adopted prospectively from the earliest date practicable. The Company will adopt
FAS 154 for accounting changes and corrections of errors made beginning January
1, 2006.
5. SEGMENTAL INFORMATION
The Company has not presented segmental information as it considers it operates
in one reportable segment, the LNG carrier market. During 2004, 2003 and 2002,
the vast majority of the Company's fleet operated under time charters and these
charters were with two charterers, Pertamina and BG Group plc. In time charters,
the charterer, not the Company, controls the choice of which routes the
Company's vessel will serve. These routes can be worldwide. Accordingly, the
Company's management, including the chief operating decision makers, does not
evaluate the Company's performance either according to customer or geographical
region.
Revenues in each of the years ended December 31, 2004, 2003 and 2002 from
Pertamina, the state-owned oil and gas company of Indonesia and BG Group plc,
headquartered in the United Kingdom, were $65.6 million and $82.2 million; $61.9
million and $64.8 million; and $61.0 million and $68.1 million respectively.
6. OTHER FINANCIAL ITEMS
(in thousands of $) 2004 2003 2002
Amortization of deferred financing costs 1,273 1,574 864
Financing arrangement fees and other costs 818 107 332
Market valuation adjustment for interest rate
derivatives (See note 24) (5,581) (6,401) 16,458
Market valuation adjustment for
foreign currency derivatives (See note 24) (6,656) - -
Foreign exchange loss (gain) on
capital lease obligations and related
restricted cash 5,160 (2,993) -
Foreign exchange loss on operations 182 496 233
(4,804) (7,217) 17,887
7. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. The Company has received written assurance
from the Minister of Finance in Bermuda that, in the event of any such taxes
being imposed, the Company will be exempted from taxation until the year 2016.
United States
Pursuant to the Internal Revenue Code of the United States (the "Code"), U.S.
source income from the international operations of ships is generally exempt
from U.S. tax if the Company operating the ships meets certain requirements.
Among other things, in order to qualify for this exemption, the company
operating the ships must be incorporated in a country which grants an equivalent
exemption from income taxes to U.S. citizens and U.S. corporations and must be
more than 50 per cent owned by individuals who are residents, as defined, in
such country or another foreign country that grants an equivalent exemption to
U.S. citizens and U.S. corporations. If the Company operating the ships is a UK
registered Company, which some of Golar's subsidiary companies are, an exemption
from US tax, where required, is afforded by the US-UK tax treaty agreement. The
management of the Company believes that by virtue of the above provisions, it
was not subject to tax on its U.S. source income.
A reconciliation between the income tax expense resulting from applying the U.S.
Federal statutory income tax rate and the reported income tax expense has not
been presented herein as it would not provide additional useful information to
users of the financial statements as the Company's net income is subject to
neither Bermuda nor U.S. tax.
Other Jurisdictions
Current taxation relates to taxation of the operations of the Company's United
Kingdom subsidiaries. Taxable revenues in the UK are generated by UK subsidiary
companies of Golar and comprise management fees received from third parties and
other Golar group companies as well as revenues from the operation of seven of
Golar's vessels. These vessels are sub-leased from other non-UK Golar companies,
which in turn are leased from financial institutions. The statutory tax rate in
the UK is 30%. The Company records deferred income taxes to reflect the net tax
effects of temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. The Company recorded deferred tax assets of $119,000 and $97,000 at
December 31, 2004 and 2003, respectively. These assets relate to differences for
depreciation and pension liabilities.
Deferred income tax assets are summarized as follows:
(in thousands of $) 2004 2003
Equipment 119 97
Pension plans and similar obligations 542 840
------- ------
661 937
Valuation allowances (542) (840)
Deferred tax assets, net 119 97
The valuation allowances on deferred tax assets decreased by $298,000. In future
periods, depending upon the financial results, managements' estimate of the
amount of the deferred tax assets considered realizable may change, and hence
the valuation allowances may increase or decrease.
Deferred income tax assets shown within the caption "Other long term assets" in
the Consolidated balance sheets are as follows:
(in thousands of $) 2004 2003
Deferred tax assets net (non-current) 119 97
8. EARNINGS PER SHARE
Basic earnings per share for the year ended December 31, 2004 has been
calculated with reference to the weighted average number of common shares in
issue during the year. The computation of diluted EPS for the years ended
December 31, 2004 and 2003, assumes the conversion of potentially dilutive
instruments.
The components of the numerator for the calculation of basic and diluted EPS are
as follows:
(in thousands of $) 2004 2003 2002
Net income available to stockholders
- basic 55,833 39,570 27,137
Dilutive effect of investee's convertibl
bonds and bonds with stock warrants (394) - -
-------- ------- --------
55,439 39,570 27,137
The components of the denominator for the calculation of basic EPS and diluted
EPS are as follows:
(in thousands) 2004 2003 2002
Basic earnings per share:
Weighted average number of common
shares outstanding 65,612 58,533 56,012
Diluted earnings per share:
Weighted average number of common
shares outstanding 65,612 58,533 56,012
Effect of dilutive share options 185 90 10
65,797 58,623 56,022
9. LEASES
Rental income
The minimum future revenues to be received on time charters as of December 31,
2004 were as follows:
Year ending December 31, Total
(in thousands of $)
2005 147,654
2006 137,886
2007 118,250
2008 106,514
2009 94,515
2010 and later 680,744
Total 1,285,564
The long-term contracts for two of the Company's vessels are time charters but
the economic terms are analogous to bareboat contracts, under which the vessels
are paid a fixed rate of hire and the vessel operating costs are borne by the
charterer on a costs pass through basis. The pass through of operating costs is
not reflected in the minimum lease revenues set out above.
The cost and accumulated depreciation of vessels leased to third parties at
December 31, 2004 were approximately $1,033.2 million and $122.2 million
respectively and at December 31, 2003 were approximately $851.0 million and
$87.2 million respectively.
Rental expense
The Company is committed to make rental payments under operating leases for
office premises. The future minimum rental payments under the Company's
non-cancellable operating leases are as follows:
Year ending December 31, Total
(in thousands of $)
2005 270
2006 270
2007 270
2008 270
2009 135
Total minimum lease payments 1,215
During 2004, the Company also had lease commitments relating to former office
space that the Company no longer occupied, which was subject to a sublease
arrangement. The lease and sublease ended in November 2004. At the time the
Company entered into the sublease arrangement, a provision was recognized for
the difference between the Company's future obligation under the lease agreement
and its anticipated sublease income over the remaining term of the lease. This
provision was recognized as a reduction to rental expense over the life of the
lease agreement and eliminated the Company's ongoing rental expense for these
facilities. The provision is recorded in other current liabilities and other
long-term liabilities. The provision balance at December 31, 2004 and 2003 was
$nil and $710,000, respectively, of which $nil and $710,000 is shown in other
current liabilities at December 31, 2004 and 2003, respectively.
Total rental expense for operating leases was $1,849,000, $2,554,000 and
$2,709,000 for the years ended December 31, 2004, 2003 and 2002, respectively
and total sublease income was approximately $1,103,000, $1,161,000 and
$1,497,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
The amortization of the provision described above was $746,000, $529,000 and
$954,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
10. EQUITY IN NET ASSETS OF NON-CONSOLIDATED INVESTEE
Equity in net assets of non-consolidated investee relates to the Company's
investment in Korea Line Corporation ("KLC") as at December 31, 2004. KLC is a
shipping company listed on the Korea stock exchange.
(in thousands of $) 2004 2003
(restated)
Cost 34,124 12,176
Equity in net earnings of investee 13,015 -
Share of other reserves movement in investee 1,901 -
Less dividends received (171) -
Equity in net assets of non-consolidated investee 48,869 12,176
As at December 31, 2003, the Company's investment in KLC amounted to 9.94% of
the investee's issued share capital, which had been acquired at a cost of
$12,176,000 following a series of step acquisitions during the fourth quarter of
2003. At March 31, 2004 following additional purchases of common shares in KLC,
at a cost of $11,351,000, the Company's interest increased by 5.77% to 15.71%.
By May 2004, after further purchases of common shares in KLC, at a cost of
$10,597,000, the Company's interest had increased by 5.38% to 21.09%.
Because the Company believes that the increase in its level of ownership has
given it the ability to exercise significant influence over the investee's
operating and financial policies, the Company has retroactively changed is
accounting for KLC to the equity method, in accordance with Accounting
Principles Board Opinion No.18 "The Equity Method of Accounting for Investments
in Common Stock".
The retroactive change to the equity method of accounting resulted in a decrease
in stockholders' equity of $1.6 million as of December 31, 2003, because of the
reversal of an unrealised gain on the "available for sale" marketable
securities, that was recorded in the consolidated statement of comprehensive
income when the investment was accounted for as an "available for sale"
marketable security. Stockholders' equity previously reported as of December 31,
2003 was $340.4 million, while stockholders' equity reported in these
consolidated financial statements as of December 31, 2003 is $338.8 million. The
restatement had no effect on net income for periods prior to and including the
year ended December 31, 2003 because the acquisitions occurred towards the end
of the fourth quarter of 2003 and the Company's amount of equity in the net
earnings of the investee for the fourth quarter of 2003 was not material.
The excess of the fair value of the Company's share of net assets acquired over
consideration paid, amounting to $11,276,000 has been allocated as a pro rata
reduction to the fair value of the investees long lived assets.
As at December 31, 2004 , the market value of this investment calculated by
reference to the quoted market price was $72.8 million..
Included in the Company's additional paid in capital is the Company's share of
KLC's gain on disposal of a portion of its treasury shares to third parties.
11. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful accounts
amounting to $nil as of December 31, 2004 and December 31, 2003.
12. OTHER RECEIVABLES, PREPAID EXPENSES AND ACCRUED INCOME
(in thousands of $) 2004 2003
Other receivables 1,868 8,025
Mark to market foreign currency swaps valuation 6,656 -
Prepaid expenses 2,345 2,554
Accrued interest income 7,361 5,328
------- -------
18,230 15,907
Other receivables at December 31, 2004 includes the net amount receivable of
$219,000 (2003: $2,469,000) under the Company's loss of hire insurance policy
relating to a period of off-hire in respect of one vessel due to required
repairs. Other receivables as at December 31, 2004 also includes the net amount
receivable of $1,001,000 (2003: $3,701,000) under the Company's hull and
machinery insurance policy relating to repair costs incurred by the Company for
four vessels.
13. DUE FROM RELATED COMPANIES
Amounts due from related companies as at December 31, 2004 and 2003 of $294,000
and $180,000, respectively, represent the recharge of expenses and rebates and
seconded staff costs.
14. NEWBUILDINGS
(in thousands of $) 2004 2003
Purchase price instalments 133,200 184,764
Interest and other costs capitalized 12,033 23,033
------- -------
145,233 207,797
The amount of interest capitalized in relation to newbuildings was $7,268,000
and $17,270,000 for the years ended December 31, 2004 and 2003, respectively.
The Company took delivery of two newbuildings during 2004. The Golar Winter was
delivered to the Company on 14 April, 2004 and, the Golar Frost was delivered on
June 16, 2004. The cost of Golar Winter of $169,030,000 was transferred to
vessels under capital leases (see note 16). The cost of Golar Frost of
$169,049,000 has been transferred to vessels and equipment (see note 15).
As at December 31, 2004, the Company had contracts to build four new LNG
carriers at a total contract cost of $638.2 million, excluding financing costs.
As at December 31, 2004, the instalments for these vessels, were due to be paid
as follows:
(in millions of $)
Paid in 12 months to 31 December 2001 16.3
Paid in 12 months to 31 December 2002 16.9
Paid in 12 months to 31 December 2003 39.0
Paid in 12 months to 31 December 2004 61.6
Payable in 12 months to 31 December 2005 135.9
Payable in 12 months to 31 December 2006 252.7
Payable in 12 months to 31 December 2007 115.8
-------------
638.2
In January 2005, the Company took delivery of its newbuilding hull number 1460
(Golar Viking). The instalments in respect of the Company's three newbuildings
yet to be delivered, as at June 30, 2005, are due to be paid as follows:
(in millions of $)
Payable in 6 months to 31 December 2005 -
Payable in 12 months to 31 December 2006 252.7
Payable in 12 months to 31 December 2007 115.8
------------
368.5
As at December 31, 2004, the Company did not have facilities in place to finance
its entire newbuilding program. The Company will require additional financing of
approximately $242 million to fund its newbuilding construction commitments
outstanding as at June 30, 2005.
Additional facilities are required to meet the final delivery instalments for
two of the Company's newbuildings payable on May 30, 2006 and during the
remainder of 2006 and 2007.
15. VESSELS AND EQUIPMENT, NET
(in thousands of $) 2004 2003
Cost 398,052 229,515
Accumulated depreciation (26,185) (18,417)
Net book value 371,867 211,098
As at December 31, 2004 Golar owned two vessels (2003: one).
Drydocking costs of $3,140,000 and $1,425,000 are included in the cost amounts
above as of December 31, 2004 and 2003 respectively. Accumulated amortization of
those costs as of December 31, 2004 and 2003 were $1,691,000 and $794,000
respectively.
Included in the above amounts, as at December 31, 2004 and 2003 is equipment
with a net book value of $585,000 and $657,000, respectively.
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was
$8,526,000, $12,658,000 and $31,300,000 respectively.
As at December 31, 2004 and 2003 vessels with a net book value of $371,282,000
and $210,411,000 respectively were pledged as security for certain debt
facilities (see note 21).
16. VESSELS UNDER CAPITAL LEASES, NET
(in thousands of $) 2004 2003
Cost 806,260 624,020
Accumulated depreciation and amortization (99,744) (70,635)
Net book value 706,516 553,385
As at December 31, 2004 Golar operated seven (2003: six) vessels under capital
leases. These leases are in respect of two refinancing transactions undertaken
during 2003 and a lease financing transaction during 2004.
Drydocking costs of $32,168,000 and $24,524,000 are included in the cost amounts
above as of December 31, 2004 and 2003 respectively. Accumulated amortization of
those costs at December 31, 2004 and 2003 were $12,988,000 and $10,831,000
respectively.
Amortization expense for vessels under capital leases for the years ended
December 31, 2004, 2003 and 2002 was $35,942,000, $21,143,000 and $nil
respectively.
The first leasing transaction, which took place in April 2003, was the sale of
five 100 per cent owned subsidiaries to a financial institution in the United
Kingdom (UK). The subsidiaries were established in Bermuda specifically to own
and operate one LNG vessel as their sole asset. Simultaneous to the sale of the
five entities, Golar leased each of the five vessels under five separate lease
agreements ("Five Ship Leases").
The second leasing transaction, which occurred in August 2003, was in relation
to the Company's first newbuilding, the Methane Princess. The Company novated
the Methane Princess newbuilding contract prior to completion of construction
and leased the vessel from the same financial institution in the UK ("The
Methane Princess Lease").
The third leasing transaction, which occurred in April 2004, was in relation to
the Company's second newbuilding, the Golar Winter. The Company novated the
Golar Winter newbuilding contract prior to completion of construction and leased
the vessel from financial institution in the UK ("The Golar Winter Lease").
Golar's obligations to the lessors under the Five Ship Leases and Methane
Princess lease are primarily secured by letters of credit ("LC") provided by
other banks. Golar's obligations to the lessor of the Golar Winter lease are
partly secured by a LC. Golar has used debt finance and cash to provide security
deposits for the banks providing the LC's.
(in thousands of $) 2004 2003
Total long-term obligations under capital leases 845,515 616,210
Less: current portion of obligations under
capital leases (2,662) -
Long term obligations under capital leases 842,853 616,210
As at 31 December 2004, the Company is committed to make quarterly minimum
rental payments under capital leases, as follows:
Year ending December 31, Five ship Methane Golar Total
(in thousands of $) leases Princess Winter
lease lease
2005 22,778 6,575 12,299 41,652
2006 24,150 6,920 12,299 43,369
2007 25,599 7,281 12,299 45,179
2008 27,075 7,609 12,299 46,983
2009 28,619 7,938 12,299 48,856
2010 and later 805,760 376,033 276,741 1,458,534
----------- ---------- ---------- ----------
Total minimum lease payments 933,981 412,356 338,236 1,684,573
Less: Imputed interest (431,023) (240,192) (167,843) (839,058)
----------- ---------- ---------- ----------
Present value of minimum
lease payments 502,958 172,164 170,393 845,515
The profiles of the Five Ship Leases are such that the lease liability continues
to increase until 2008 and thereafter decreases over the period to 2023 being
the primary term of the leases. The interest element of the lease rentals is
accrued at a rate based upon floating British Pound (GBP) LIBOR.
The profile of the Methane Princess Lease is such that the lease liability
continues to increase until 2014 and thereafter decreases over the period to
2034 being the primary term of the lease. The interest element of the lease
rentals is accrued at a rate based upon floating British Pound (GBP) LIBOR.
The Golar Winter Lease is for a primary period of 28 years, expiring in April
2032. The lease liability is reduced by lease rentals from inception. The
interest element of the lease rentals is accrued at a rate based upon floating
rate British Pound (GBP) LIBOR.
In common with the Five Ship Leases and the Methane Princess lease the Golar
Winter lease is denominated in British Pounds. However, unlike these other
leases the cash deposits securing the lease obligations are significantly less
than the lease obligation itself. In order to hedge the currency risk arising
from re-translation of the GBP lease rental obligation into US dollars, the
Company entered into a 28 year currency swap to hedge all lease rental payments
under the Golar Winter lease into US dollars at a fixed GBP/USD exchange rate.
In addition at December 31, 2004 the Company had entered into interest rate
swaps of $85 million to fix the interest rate in respect of its Golar Winter
lease obligations for a period ranging from three to ten years. In January 2005,
the Company entered into a further $30 million of interest swaps in connection
with its Golar Winter lease obligations.
The Company determined that the entities that owned the vessels were variable
interest entities in which Golar had a variable interest and was the primary
beneficiary. Upon transferring the vessels to the financial institutions, Golar
measured the subsequently leased vessels at the same amounts as if the transfer
had not occurred, which was cost less accumulated depreciation at the time of
transfer.
As at December 31, 2004, the value of deposits used to obtain letters of credit
to secure the obligations for the lease arrangements described above was $743.9
million (2003: $642.6 million). These security deposits are referred to in these
financial statements as restricted cash and earn interest based upon GBP LIBOR
for the Five Ship Leases and the Methane Prince Lease and based upon USD LIBOR
for the Golar Winter Lease. The Company's restricted cash balances are as
follows:
(in thousands of $) 2004 2003
Five Ship Leases security deposits 523,518 479,316
Methane Princess Lease security deposits 178,847 163,298
Golar Winter Lease security deposits 41,524 -
Total security deposits for lease obligations 743,889 642,614
Included in short-term restricted cash and
short-term investments (29,087) (19,435)
Long-term restricted cash 714,802 623,179
(in thousands of $) 2004 2003
Short term lease security deposits 29,087 19,435
Restricted cash relating to the Mazo Facility
(see note 22) 12,866 12,660
Short-term restricted cash and short-term
investments 41,953 32,095
17. DEFERRED CHARGES
Deferred charges represent financing costs, principally bank fees that are
capitalized and amortized to other financial items over the life of the debt
instrument. The deferred charges are comprised of the following amounts:
(in thousands of $) 2004 2003
Debt arrangement fees and other deferred
financing charges 9,956 7,443
Accumulated amortization (3,236) (1,963)
------- -------
6,720 5,480
18. ACCRUED EXPENSES
(in thousands of $) 2004 2003
Vessel operating and drydocking expenses 4,420 5,565
Administrative expenses 1,581 1,286
Interest expense 9,742 12,070
Provision for financing arrangement fees and
other costs 1,011 904
Provision for tax 300 210
------- -------
17,054 20,035
19. OTHER CURRENT LIABILITIES
(in thousands of $) 2004 2003
Deferred drydocking and operating cost revenue 4,398 6,744
Marked to market interest rate swaps valuation 15,314 20,895
Provision for Baja project costs 1,247 1,403
Other provisions 577 710
Deferred credits from capital lease
transactions (note 22) 3,964 3,957
Other creditors 907 1,340
------- -------
26,407 35,049
During 2002, Golar signed a joint development agreement with Marathon Baja
Limited ("Marathon"), a subsidiary of Marathon Oil and GGS Holdings Limited
("GGS"), to participate in a project to build a LNG import and re-gasification
facility and power generation complex near Tijuana in the Mexican State of Baja
California. Under the agreement with Marathon and GGS, costs incurred in
relation to the development of the project are to be shared as follows: Marathon
80%, GGS 10%, Golar 10% prior to the establishment of a lead project company and
execution of a shareholders' agreement.
As at December 31, 2003, the provision made by the Company for its 10 per cent
share of the total project costs amounted to $1,403,000. As at December 31, 2004
the project was effectively terminated and the Company was in discussions with
Marathon concerning settlement of its liability. These discussions were
concluded in May 2005 with Marathon agreeing to a settlement of $1,247,000.
Accordingly, a total net amount of $156,000 has been credited to administrative
expenses in relation to the Baja project for the year ended December 31, 2004
(2003: charge of $1,744,000) with a provision of $1,403,000 carried forward at
December 31, 2004.
20. PENSIONS
Defined contribution scheme
The Company operates a defined contribution scheme. The pension cost for the
period represents contributions payable by the Company to the scheme. The charge
to net income for the year ending December 31, 2004 and 2003 was $156,000 and
$158,000 respectively.
Defined benefit schemes
The Company has two defined benefit pension plans both of which are closed to
new entrants but which still cover certain employees of the Company. Benefits
are based on the employee's years of service and compensation. Net periodic
pension plan costs are determined using the Projected Unit Credit Cost method.
The Company's plans are funded by the Company in conformity with the funding
requirements of the applicable government regulations. Plan assets consist of
both fixed income and equity funds managed by professional fund managers.
The Company uses a measurement date of December 31 for the majority of its
pension and other postretirement benefit plans.
The components of net periodic benefit costs are as follows:
2004 2003 2002
Service cost 1,186 1,162 1,325
Interest cost 3,102 3,440 3,519
Expected return on plan assets (1,706) (2,005) (2,249)
Recognized actuarial loss 827 751 504
------- ------- --------
Net periodic benefit cost 3,409 3,348 3,099
The change in benefit obligation and plan assets and reconciliation of funded
status as of December 31 are as follows:
(in thousands of $) 2004 2003
Reconciliation of benefit obligation:
Benefit obligation at January 1 54,243 51,881
Service cost 1,186 1,162
Interest cost 3,102 3,440
Actuarial (gain) / loss (6,379) 3,222
Foreign currency exchange rate changes 736 885
Benefit payments (4,984) (6,347)
------- -------
Benefit obligation at December 31 47,904 54,243
The accumulated benefit obligation at the end of 2004 and 2003 was $46.6 million
and $51.8 million, respectively.
(in thousands of $) 2004 2003
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 24,735 25,414
Actual return on plan assets 2,094 3,614
Employer contributions 1,687 1,476
Foreign currency exchange rate changes 526 578
Benefit payments (4,984) (6,347)
Fair value of plan assets at December 31 24,058 24,735
Deficit of plan assets
over projected benefit obligation (1) (23,846) (29,508)
Unrecognized actuarial loss 5,073 12,413
-------- --------
Net amount recognized (18,773) (17,095)
Employer contributions and benefits paid under the pension plans include
$1,687,000 and $1,476,000 paid from employer assets in 2004 and 2003
respectively.
(1) The Company's plans are composed of two plans that are both under funded at
December 31, 2004 and December 31, 2003.
The details of these plans are as follows:
December 31, 2004 December 31, 2003
UK Scheme Marine scheme UK scheme Marine scheme
(in thousands of $)
Accumulated benefit
obligation (8,796) (37,772) (8,806) (42,996)
Projected benefit obligation (9,291) (38,613) (9,201) (45,042)
Fair value of plan assets 6,990 17,068 6,013 18,722
Funded status (2,301) (21,545) (3,188) (26,320)
The amounts recognized in the Company's balance sheet as of December 31 were as
follows:
(in thousands of $) 2004 2003
Accrued benefit liability (22,510) (27,067)
Minimum pension liability 3,737 9,972
Net amount recognized (18,773) (17,095)
The asset allocation for the Company's Marine scheme at the end of 2004 and
2003, and the target allocation for 2005, by asset category follows:
Marine scheme Target allocation
2005 (%) 2004 (%) 2003 (%)
Equity 30-65 59 33
Bonds 10-50 38 31
Other 20-40 3 30
Cash 0-22.5 - 6
----- -----
Total 100 100
The asset allocation for the Company's UK scheme at the end of 2004 and 2003,
and the target allocation for 2005, by asset category follows:
UK scheme Target allocation
2005 (%) 2004 (%) 2003 (%)
Equity 80 80 82
Bonds 20 20 15
Other - - -
Cash - - 3
----- -----
Total 100 100
The Company's investment strategy is to balance risk and reward through the
selection of professional investment managers and investing in pooled funds.
The Company is expected to make the following contributions to the scheme in
2005, as follows:
(in thousands of $) UK scheme Marine scheme
Employer contributions 367 1,320
The Company is expected to make the following pension disbursements as follows:
(in thousands of $) UK scheme Marine scheme
2005 238 3,007
2006 212 2,916
2007 192 3,000
2008 264 3,120
2009 381 3,144
2010-2014 2,497 16,777
The weighted average assumptions used to determine the benefit obligation for
the Company's plans at December 31 are as follows:
2004 2003
Discount rate 5.7% 5.9%
Rate of compensation increase 2.8% 2.8%
The weighted average assumptions used to determine the net periodic benefit cost
for the Company's plans for the year ended December 31 are as follows:
2004 2003
Discount rate 5.9% 6.6%
Expected return on plan assets 7.6% 8.0%
Rate of compensation increase 2.8% 2.7%
21. DEBT
(in thousands of $) 2004 2003
Total long-term debt due to third parties 702,954 655,235
Less: current portion of long-term debt due
to third parties (66,457) (61,331)
636,497 593,904
The outstanding debt as of December 31, 2004 is repayable as follows:
Year ending December 31,
(in thousands of $)
2005 66,457
2006 74,564
2007 280,387
2008 22,794
2009 24,648
2010 and later 234,104
---------
Total 702,954
The weighted average interest rate for debt, which is denominated in US dollars,
as of December 31, 2004 and 2003 was 4.68 per cent and 4.61 per cent,
respectively. As at December 31, 2004, interest on US$135 million of debt in
respect of the Methane Princess facility was fixed, of which US$105 million was
fixed by 2003. The fixings are due to mature in 2015 at a weighted average rate
of 6.77 per cent, and at an average rate of 5.89 per cent from February 2004
when the vessel entered into its long-term charter.
At December 31, 2004, the debt of the Company comprised the following, details
of which are set out below:
(in thousands of $) Maturity date
Mazo facility 168,207 2013
Methane Princess facility (previously referred to
as `Hull 2215 facility') 171,947 2015
New Golar LNG facility 213,750 2007
New Golar LNG Subordinated facility 40,000 2007
Golar Frost facility 109,050 2007
---------
702,954
Mazo facility
The facility was assumed by Golar from Osprey in May 2001, and was originally a
secured loan facility for an amount of $214.5 million. The loan is secured on
the vessel Golar Mazo. The facility bears floating interest rate of LIBOR plus a
margin and the repayment terms are six monthly and commenced on June 28, 2001.
The debt agreement requires that certain cash balances, representing interest
and principal repayments for defined future periods, be held by a Trust Company
during the period of the loan. These balances are referred to in these financial
statements as restricted cash.
New Golar LNG facility
In May 2001 the Golar group entered into a secured loan facility (the "Golar LNG
facility") with a banking consortium for an amount of $325.0 million. This loan
was first refinanced in April 2003, ("New Golar LNG facility") with an amount of
$265 million with the same syndicate of banks. The amount outstanding on the old
facility at the time of the first refinancing was $282.5 million and accordingly
a net $17.5 million was repaid. The loan accrued floating interest at a rate per
annum equal to the aggregate of LIBOR plus a margin. The loan had a term of four
years and two months and was repayable in 16 quarterly instalments and a final
balloon payment of $138.8 million payable on May 31, 2007. The loan was secured
by the assignment to the lending banks of a mortgage given to Golar by the
lessor of the five vessels that are part of the Five Ship Leases (see note 16).
As discussed in Note 27, the New Golar LNG facility was refinanced in March
2005.
New Golar LNG Subordinated facility
In October 2002, Golar entered into a secured subordinated loan facility (the
"Golar LNG subordinated facility") with a banking consortium for an amount of
$60.0 million. This loan was also refinanced in April 2003. This new second
priority loan ("New Golar LNG subordinated facility") was also for an amount of
$60 million with the same syndicate of banks. It accrues floating interest at a
rate per annum equal to the aggregate of LIBOR, plus a margin, increasing by
0.25 per cent per annum on 30 November 2004 and 30 November 2005. The loan has a
term of four years and two months and is repayable in 15 quarterly instalments
commencing in November 2003. The loan is secured by the assignment to the
lending banks of a second priority mortgage given to Golar by the lessor of the
five vessels that are part of the Five Ship Leases (see note 16). As discussed
in Note 28, the New Golar LNG facility was refinanced in March 2005.
Methane Princess facility
In December 2001 the Company signed a loan agreement with Lloyds TSB bank Plc
for the purpose of financing newbuilding hull number 2215 (Methane Princess)
(the "Hull 2215 facility") for an amount up to $180 million.
In August 2003, prior to the delivery of the Methane Princess the Company
refinanced this facility (Methane Princess facility). The new facility is also
for $180 million, with the same bank and has a similar repayment profile. It
accrues a floating rate of interest of LIBOR plus a margin up to the date the
vessel is delivered to the Charterer under the BG Charter and thereafter at
LIBOR plus a reduced margin determined by reference to Standard and Poors
("S&P") rating of the Charterer from time to time. The margin can increase if
the rating for the Charterer at any time falls below an S&P rating of "B". As at
December 31, 2004, interest on $135 million of debt in respect of the Methane
Princess facility was fixed, of which $55 million was fixed in 2002, $50 million
in 2003 and $30 million in 2004. All fixings are due to mature in 2015 and bear
a weighted average rate of 5.68 per cent (including margin). The loan is secured
by the assignment to the lending bank of a mortgage given to Golar by the lessor
of the Methane Princess Lease (see note 16).
Golar Frost facility
In June 2004 the Company signed a loan agreement with a banking consortium for
an amount of $110.0 million for the purpose of financing newbuilding hull number
1444, the Golar Frost, and is secured by a mortgage on this vessel. The facility
bears floating interest rate of LIBOR plus a margin and the repayment terms are
5 six monthly instalments and a final balloon payment of $102.6 million payable
on June 15, 2007. Repayments on the loan commenced on December 15, 2004.
The margins Golar pays under its current loan agreements over and above LIBOR at
a fixed or floating rate range from 0.865 per cent to 2.0 per cent.
Certain of the Company's debt is collateralized by ship mortgages and, in the
case of some debt, pledges of shares by each guarantor subsidiary. The existing
financing agreements impose operation and financing restrictions which may
significantly limit or prohibit, among other things, the Company's ability to
incur additional indebtedness, create liens, sell capital shares of
subsidiaries, make certain investments, engage in mergers and acquisitions,
purchase and sell vessels, enter into time or consecutive voyage charters or pay
dividends without the consent of the Lenders. In addition, Lenders may
accelerate the maturity of indebtedness under financing agreements and foreclose
upon the collateral securing the indebtedness upon the occurrence of certain
events of default, including a failure to comply with any of the covenants
contained in the financing agreements. Various debt agreements of the Company
contain certain covenants, which require compliance with certain financial
ratios. Such ratios include equity ratio covenants and minimum free cash
restrictions. As of December 31, 2004 and 2003 the Company complied with the
debt covenants of its various debt agreements.
22. OTHER LONG-TERM LIABILITIES
(in thousands of $) 2004 2003
Pension obligations (note 20) 22,510 27,067
Deferred credits from capital lease transactions 63,523 67,159
------- -------
86,033 94,226
Deferred credits from capital lease transactions
(in thousands of $) 2004 2003
Deferred credits from capital lease transactions 74,121 73,771
Less: Accumulated amortization (6,634) (2,655)
-------- --------
67,487 71,116
Short-term (note 19) 3,964 3,957
Long-term 63,523 67,159
-------- -------
67,487 71,116
In connection with the leasing transactions undertaken in the year ended
December 31, 2003 (see Note 16), the Company recorded an initial amount of $73.8
million, representing the difference between the net cash proceeds received upon
sale of the vessels and the present value of the minimum lease payments. The
amortization charge for the year is offset against depreciation and amortization
expense in the statement of operations.
The deferred credits represent the upfront benefits derived from undertaking
financing in the form of UK leases. The deferred credits are amortized over the
remaining economic lives of the vessels to which the leases relate on a
straight-line basis. The benefits under lease financings are derived primarily
from tax depreciation assumed to be available to lessors as a result of their
investment in the vessels. If that tax depreciation ultimately proves not to be
available to the lessors, or is clawed back from the lessor (e.g. on a change of
tax law), the lessor will be entitled to adjust the rentals under the relevant
lease so as to maintain its after tax position, except in limited circumstances.
Any increase in rentals is likely to affect the ability to reduce the deferred
credits through amortization. The adjustment to rentals could result in the
Company being required to return more than the cash inflow (approximately $51
million) that was received in connection with the lease financing transactions
undertaken in the year ended December 31, 2003.
23. SHARE CAPITAL AND SHARE OPTIONS
The Company was incorporated on May 10, 2001 and 12,000 common shares of $1.00
par value each were issued to the initial shareholder. In May 2001, the Company
issued 56,000,000 common shares at a price of $5.00 per share in a placement in
Norway subscribed to by approximately 130 financial investors. These shares were
issued to finance the acquisition of the LNG interest of Osprey as described in
Note 1.
In July 2003, the Company completed a direct equity offering of 5,600,000 common
shares in a placement in Norway, towards international institutional investors
at a price of $10.20 per share. In December 2003, the Company further issued
4,000,000 common shares at a price of $13.11 per share.
At December 31, 2004 and December 31, 2003, authorized and issued share capital
is as follows:
Authorized share capital:
(in thousands of $, except share numbers) 2004 2003
100,000,000 common shares of $1.00 each 100,000 100,000
Issued share capital:
(in thousands of $, except share numbers)
Issued 65,612,000 common shares of $1.00 each 65,612 65,612
In July 2001, the Board of the Company approved the grant of options to eligible
employees to acquire an aggregate amount of up to 2,000,000 shares in the
company.
In July 2001, the Board of Golar granted options to certain directors and
officers of the Company to acquire 400,000 shares at a subscription price of
$5.75. These options vested on July 18, 2002 and are exercisable for a maximum
period of nine years following the first anniversary date of the grant. The
following summarizes the share options transactions relating to this plan:
Shares Weighted average
(in thousands of $, except per share data) 2004 2003 exercise price
Options outstanding at January 1 300 400 $5.75
Cancelled during the year - (100) $5.75
----- ----- -----
Options outstanding at December 31 300 300 $5.75
Options exercisable at:
December 31, 2003 300 $5.75
December 31, 2004 300 $5.75
There were no options granted in the year ended December 31, 2004 and 2003. The
weighted average fair value of 400,000 options granted in 2001 was $1.785, which
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
2001
Risk free interest rate 4.39%
Expected life 5 years
Expected volatility 20%
Expected dividend yield 0%
Compensation cost of $nil, $nil and $56,700 has been recognized in the year
ended December 31, 2004, 2003 and 2002 respectively, in connection with the
grant of the 400,000 options in July 2001. This amount represents the difference
between the subscription price of $5.75 and the market price of $6.01 (the
equivalent to NOK56 at the exchange rate of NOK9.3153 to $1.00) on the date of
grant, recognized over the vesting period of the options.
In February 2002, the Board of Golar approved an employee share option scheme.
Under the terms of the scheme, options may be granted to any director or
eligible employee of the Company or its subsidiaries. Options are exercisable
for a maximum period of nine years following the first anniversary date of the
grant. The exercise price for the options may not be less than the average of
the fair market value of the underlying shares for the three trading days before
the date of grant. The Company authorized 2,000,000 shares to be issued under
the scheme, and the number of shares granted under the scheme may not in any ten
year period exceed seven per cent of the issued share capital of the Company. No
consideration is payable for the grant of an option. As at December 31, 2004 and
2003 no options had been granted under the employee share option scheme.
24. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The Company has
entered into swaps that convert floating rate interest obligations to fixed
rates, which from an economic perspective hedge the interest rate exposure. The
Company does not hold or issue instruments for speculative or trading purposes.
The counterparties to such contracts are major banking and financial
institutions. Credit risk exists to the extent that the counterparties are
unable to perform under the contracts.
The Company manages its debt portfolio with interest rate swap agreements in
U.S. dollars to achieve an overall desired position of fixed and floating
interest rates. The Company has entered into the following interest rate swap
transactions involving the payment of fixed rates in exchange for LIBOR:
Notional Amount
Instrument December 31, December 31, Maturity Fixed Interest
2004 2003 Dates Rates
(in thousands of $)
Interest rate swaps:
Receiving floating,
pay fixed 293,707 171,763 2007 - 2014 3.50% to 6.43%
At December 31, 2004, the notional principal amount of the debt outstanding
subject to such swap agreements was $293.7 million (2003: $171.8 million).
Foreign currency risk
The majority of the vessels' gross earnings are receivable in U.S. dollars. The
majority of the Company's transactions, assets and liabilities are denominated
in U.S. dollars, the functional currency of the Company. However, the Company
incurs expenditure in other currencies. The Company's capital lease obligations
and related restricted cash deposits are denominated in British Pounds. There is
a risk that currency fluctuations will have a negative effect on the value of
the Company's cash flows.
A net foreign exchange gain of $1.5 million arose in the year ended December 31,
2004 (2003: $3.0 million) as a result of the retranslation of our capital lease
obligations and the cash deposits securing those obligations net of the gain on
the currency swap referred to below. The net gain arose due to the appreciation
of the British Pound against the US Dollar during the year. This net gain
represents an unrealized gain and does not therefore materially impact the
Company's liquidity. Further foreign exchange gains or losses will arise over
time in relation to Golar's capital lease obligations as a result of exchange
rate movements. Gains or losses will only be realized to the extent that monies
are, or are required to be withdrawn or paid into the deposits securing our
capital lease obligations or if the leases are terminated.
In April 2004, the Company entered into a lease arrangement in respect of the
Golar Winter, the obligation in respect of which is denominated in GBP. In this
transaction the restricted cash deposit, which secures the letter of credit
given to the lessor to secure part of Golar's obligations to the lessor, is much
less than the obligation and therefore, unlike the Company's other two leases,
does not provide a natural hedge. In order therefore to hedge this exposure the
Company entered into a currency swap with Lloyds TSB Bank Plc, who is also the
lessor, to exchange GBP payment obligations into U.S. dollar payment obligations
as set out in the table below. The swap hedges the full amount of the GBP lease
obligation and the restricted cash deposit is denominated in U.S. dollars. The
Company could be exposed to currency risk if the lease was terminated.
Notional Amount
Instrument December 31, December 31, Maturity Fixed GBP/USD
2004 2003 Dates Currency Rate
(in thousands)
Currency rate swaps:
Receiving in GBP GBP 88,011 - 2032 1.838
Pay in U.S.dollar GBP 161,764 - 2032 -
Fair values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2004 and 2003 are as follows:
2004 2004 2003 2003
Carrying Fair Carrying Fair
(in thousands of $) Value Value Value Value
Non-Derivatives:
Cash and cash equivalents 51,598 51,598 117,883 117,883
Restricted cash and
short-term investments 41,953 41,953 32,095 32,095
Long-term restricted cash 714,802 714,802 623,179 623,179
Short-term debt - floating 66,457 66,457 61,331 61,331
Long term debt - floating 501,497 501,497 488,904 488,904
Long-term debt - fixed 135,000 133,345 105,000 106,303
Long-term obligations under
capital leases 842,853 842,853 616,210 616,210
Derivatives:
Interest rate swap liability (15,314) (15,314) (20,898) (20,898)
Foreign currency swap asset 6,656 6,656 - -
The carrying value of cash and cash equivalents, which are highly liquid, is a
reasonable estimate of fair value.
The estimated fair value for restricted cash and short-term investments are
considered to be equal to the carrying value since they are placed for periods
of less than six months. The estimated fair value for long-term restricted cash
is considered to be equal to the carrying value since it bears variable interest
rates, which are reset on a quarterly basis.
The estimated fair value for floating long-term debt is considered to be equal
to the carrying value since it bears variable interest rates, which are reset on
a quarterly or six monthly basis. The estimated fair value for long-term debt
with fixed rates of interest of more than one year is estimated by obtaining
quotes for breaking the fixed rate at the year end, from the related banking
institution.
The estimated fair values of long-term lease obligations under capital leases
are considered to be equal to the carrying value since they bear interest at
rates, which are reset on a quarterly basis.
The fair value of interest rate swaps is estimated by obtaining quotes from the
related banking institution.
The fair value of currency swaps is estimated by obtaining quotes from the
related banking institution.
The mark-to-market gain or loss on Golar's interest rate and currency swaps for
the period is reported in the income statement caption "other financial
items"(see note 6).
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents, restricted cash and short-term investments to the extent that
substantially all of the amounts are carried with Nordea Bank of Finland PLC,
Mizuho Corporate Bank, Lloyds TSB Bank plc, The Bank of New York, Bank of
Scotland, Canadian Imperial Bank Corporation and Bayerische Landesbank. However,
the Company believes this risk is remote as these banks are high credit quality
financial institutions.
During the year ended December 31, 2004, two customers accounted for a
substantial amount of the total revenues of the company. The Company's revenues
and associated accounts receivable are derived from its five time charters with
BG Group plc and two time charters with Pertamina. Pertamina is a state
enterprise of the Republic of Indonesia. Credit risk is mitigated by the
long-term contracts with Pertamina being on a ship-or-pay basis. Also, under the
various contracts the Company's vessel hire charges are paid by the Trustee and
Paying Agent from the immediate sale proceeds of the delivered gas. The Trustee
must pay the ship owner before Pertamina and the gas sales contracts are with
the Chinese Petroleum Corporation and KOGAS. The Company considers the credit
risk of BG Group plc and NGSCO to be low.
During the years ended December 31, 2004, 2003 and 2002, BG Group plc and
Pertamina each accounted for more than 10% of gross revenue.
During 2002, Pertamina and BG Group plc accounted for revenues of $61.0 million
and $68.1 million respectively.
During 2003, Pertamina and BG Group plc accounted for revenues of $61.9 million
and $64.8 million respectively.
During 2004, Pertamina and BG Group plc accounted for revenues of $65.6 million
and $82.2 million respectively.
25. RELATED PARTY TRANSACTIONS
Greenwich Holdings Limited is indirectly controlled by the Company's chairman,
John Fredriksen. During 2001, Golar obtained loans amounting to $85.3 million
from Greenwich Holdings Limited, in order to finance instalments due on its
newbuildings. The floating interest rate payable on these loans was between
LIBOR plus 2.5 per cent and LIBOR plus 3.0 per cent. Golar repaid loans of $52.6
million in March 2002 and repaid the remaining loans of $32.7 million during
2003.
During 2002, Golar obtained $16.3 million in loan finance from Greenwich
Holdings Limited, in order to finance an instalment due on a newbuilding. The
floating interest rate payable on the loan was LIBOR plus 2.625 per cent. The
loan was repaid in November 2002.
During the years ended December 31, 2003 and 2002 the rate of interest that
Greenwich paid to the banks providing the above facilities was LIBOR plus 1.5
per cent until June 11, 2002, thereafter the rate was 1.625 per cent until
February 2003 and 2.0 per cent until the loans were fully repaid in August 2003.
In the years ended December 31, 2004, 2003 and 2002, the Company paid interest
of $nil, $779,000 and $2,275,000, respectively to Greenwich in respect of loan
facilities. As at December 31, 2004, 2003 and 2002, $nil, $nil and $169,612
respectively, of the interest due to Greenwich was outstanding.
For each of the loans from Greenwich noted above the Company paid loan
arrangement fees directly to the lending banks. These fees during the years
ended December 31, 2004, 2003 and 2002 amounted to $nil, $81,756 and $323,250
respectively.
In the years ended December 31, 2004, 2003 and 2002 Frontline Management
(Bermuda) Limited and Frontline Management AS both subsidiaries of Frontline
Ltd. ("Frontline") have provided services to the Company. These services include
management support, corporate services and administrative services. In the years
ended December 31, 2004, 2003 and 2002, management fees payable to Frontline of
$235,200, $273,547 and $379,550 respectively, have been incurred by Golar. As at
December 31, 2004 and 2003 of $nil and $122,079 respectively, were due to
Frontline in respect of these fees and costs incurred. In addition, certain
amounts have been recharged at cost between both the companies. As at December
31, 2004 an amount of $177,000 (2003: $12,501) was due from Frontline in respect
of these recharges. Frontline is a publicly listed company. Its principal
shareholder is Hemen Holding Limited, a company indirectly controlled by John
Fredriksen.
Seatankers Management Company Limited ("Seatankers") is indirectly controlled by
the Company's chairman, John Fredriksen. In the year ended December 31, 2004,
2003 and 2002, Seatankers has provided insurance administration services to the
Company. In the years ended December 31, 2004, 2003 and 2002, management fees
payable to Seatankers of $35,000, $25,000 and $24,556, respectively, have been
incurred by Golar. As at December 31, 2004 and 2003 no amounts were due to
Seatankers in respect of these services. In addition, certain amounts have been
recharged at cost between both companies. As at December 31, 2004 the Company
owed $258,000 to Seatankers (2003: $45,000 due from Seatankers) in respect of
these recharges.
During the years ended December 31, 2004, 2003 and 2002, Faraway Maritime
Shipping Inc., which is 60% owned by Golar and 40% owned by China Petroleum
Corporation ("CPC"), paid dividends totalling $nil, $4.2 million and $25.0
million respectively, of which 60 per cent was paid to Golar and 40 per cent was
paid to CPC.
Golar Management held a promissory note executed by Mr. McDonald, an officer of
the Company, on April 21, 1998, under which Mr. McDonald promised to pay to
Golar Management the principal sum of (pound)20,900 in monthly instalments of
(pound)318. The note carried an interest rate of three per cent. Payments under
the note commenced in May 1998 and the principal balance as of December 31, 2003
and 2002 was(pound)1,158 and (pound)4,974 or approximately $2,000 and $9,000,
respectively. The promissory note was repaid in full during early 2004.
Management believes transactions with related parties are under terms similar to
those that would be arranged with other parties.
26. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) December 31, December 31,
2004 2003
Long-term loans secured on vessels, vessels
under capital leases and newbuildings 702,954 655,235
Other Contractual Commitments and contingencies
The Company insures the legal liability risks for its shipping activities with
the United Kingdom Mutual Steamship Assurance Association (Bermuda), a mutual
protection and indemnity association. As a member of a mutual association, the
Company is subject to calls payable to the association based on the Company's
claims record in addition to the claims records of all other members of the
association. A contingent liability exists to the extent that the claims records
of the members of the association in the aggregate show significant
deterioration, which results in additional calls on the members.
27. SUBSEQUENT EVENTS
In January 2005, the Company signed a loan agreement with Bank of Scotland for
the purpose of financing its newbuilding hull number 1460 (Golar Viking) ("the
Golar Viking facility") for an amount of $120.0 million. The facility bears
floating rate of interest of LIBOR plus a margin, has an initial term of five
years and is repayable in 20 quarterly installments commencing in April 2005 and
a final balloon payment of $100 million. In January 2005, the Company also took
delivery of the Golar Viking and the final delivery installment of $91.7 million
was settled by drawing down on the Golar Viking facility.
In January 2005, the Company announced that it was to reorganize its technical
fleet operations. The Company has entered into management contracts with two
established third party ship managers in Singapore and Oslo to assist with the
day-to-day operations of the Company's eleven LNG carriers. The restructuring
has resulted in approximately 25 Golar employees being made redundant at a cost
of approximately $1,054,000, the cost of which has been expensed in the first
quarter of 2005.
In February 2005, the Company, through market purchases, acquired 50,000 Golar
shares at NOK 85.22 per share. The shares were cancelled and resulted in a
reduction of total outstanding shares of the Company to 65,562,000.
In February 2005, the Company invested $3.0 million in TORP Technology AS,
giving it ownership of 16.1 per cent of the share capital of the company. TORP
Technology is an unlisted company, which holds the rights to the HiLoad LNG
Re-gasification Technology developed by Remora Technology.
In March 2005, a subsidiary of the Company, Golar Gas Holding Company Inc.,
entered into a refinancing transaction in respect of the New Golar LNG Facility
and the New Golar LNG subordinated facility. The new first priority loan ("Golar
Gas Holding Facility") is for an amount of $300 million. The total amount
outstanding at the time of refinancing was $242.3 million. The loan accrues
floating interest at a rate per annum equal to the aggregate of LIBOR plus a
margin. The loan has a term of 6 years and is repayable in 24 quarterly
installments and a final balloon payment of $79.4 million payable on April 14,
2011.
In April 2005, the Company signed a lease agreement in respect of its
newbuilding, hull number 2226. The anticipated date of delivery is January 2006.
Under the agreement Golar will receive a total amount of $150 million, before
fees and expenses, of which $47 million was received in April 2005 with the
remainder due on delivery of the vessel. Golar's obligations to the lessor under
the lease are secured by (inter alia) a letter of credit provided by another UK
bank (`the LC bank') as security for the letter of credit. In April 2005, Golar
deposited $45 million with the LC bank as security for the letter of credit. The
effective amount of net financing is therefore $105 million, before fees and
expenses.