is operating under a time charter to Petrobras. Petrobras is the largest energy company in Brazil with an integrated structure consistingGolar Winter. The Golar Winter is an FSRU that was retrofitted in 2008 from an LNG carrier built in 2004. The Golar Winter is currently operating under a time charter to Petrobras. In August 2013, we completed the modifications to the Golar Winter in return for an increase in the charter rate and an extension in the contract term by five years.The Golar Winter utilizes a regasification system able to operate in both open- and closed-loop modes. From the time that she commenced service as an FSRU, the Golar Winter was operated at an island jetty in Guanabara Bay outside Rio de Janeiro where she was moored at a jetty in sheltered waters behind a breakwater, delivering regasified LNG through a hard arm connection directly into a pipeline that services base load power generating assets. Following the completion of her modifications in August 2013, Petrobras moved the Golar Winter from Rio de Janeiro to Bahia. The Golar Winter is employed by Petrobras as an FSRU to service peak load power requirements.
Golar Freeze. The Golar Freeze is an FSRU that was retrofitted in 2010 from an LNG carrier built in 1977. The Golar Freeze is currently operating as an FSRU under a time charter with DUSUP. DUSUP is the exclusive purchaser of natural gas in Dubai.The Golar Freeze is permanently moored alongside a purpose built jetty within the existing Jebel Ali port. The Golar Freeze is capable of storing and delivering regasified LNG to DUSUP for further delivery into the Dubai gas network. Given that the Golar Freeze is principally operated in a stationary location and given the non-corrosive nature of LNG, we believe that her useful post-retrofit service life will be extended by ten years in excess of its initial 40-year useful life.
NR Satu. The NR Satu is an FSRU that was retrofitted in 2012 from an LNG carrier built in 1977. The NR Satu is currently operating under a time charter with PTNR. PTNR is a joint venture company that is 60% owned by Pertamina and 40% owned by PT Perusahaan Gas Negara, an unaffiliated Indonesian company engaged in the transport and distribution of natural gas in Indonesia. The NR Satu is permanently moored alongside a purpose built mooring facility. Given that the NR Satu is principally operated in a stationary location and given the non-corrosive nature of LNG, we believe that her useful post-retrofit service life will be 20 years.
Golar Igloo. The Golar Igloo is anFSRU that was built by the Korean shipyard, Samsung Heavy Industries Co. Ltd. and was delivered to Golar in February 2014. It is currently operating under a time charter to KNPC that expires in 2018. KNPC is the national oil refining company of Kuwait. We acquired the Golar Igloo in March 2014. Under the time charter, KNPC use the Golar Igloo as an FSRU for nine months each year and she is moored at a jetty at the Old South Pier at the Mina Al Ahmadi Refinery. The Golar Igloo has the ability to operate as a traditional LNG carrier and may be utilized as a traditional LNG carrier for the three months each year that she is not operating as an FSRU as provided under her charter.
Golar Eskimo. The Golar Eskimo is an FSRU that was built by the Korean shipyard, Samsung Heavy Industries Co. Ltd., and was delivered to Golar in December 2014. We acquired the Golar Eskimo in January 2015. In the second quarter of 2015, the Golar Eskimo commenced service under a ten year time charter with Jordan. The Golar Eskimo is moored at a purpose-built structure off the Red Sea port of Aqaba and connects to the Jordan Gas Transmission Pipeline that delivers natural gas to power plants in Jordan.
LNG Carriers
LNG carriers are designed to transport LNG between liquefaction facilities and import terminals for regasification after the natural gas is liquefied. Our LNG carriers utilizes the LNG that naturally boils off during transportation for their propulsion system.
According to industry analysts, based on the ramp up profile of LNG terminals that recently commenced operations, together with new facilities scheduled to commence operations in 2020, 30 million tons of new LNG, mainly from the United States, will be available in 2020. It was previously assumed that most of the US produced LNG would be destined for the Far East however a significant portion has recently shipped to Europe due to lower than expected Asian demand that contributed to low LNG prices, making transportation over extended distances uneconomic. The lower than anticipated ton-mile demand means that the current global fleet of LNG carriers and those LNG carriers expected to be delivered in 2020 will likely be sufficient to carry this expected new production. However the impact of recent COVID-19 outbreak on regional LNG demand and LNG prices is adding a high degree of volatility to current trade patterns. As a result, it is not possible to forecast the LNG vessel supply/demand balance for 2020 with any degree of precision.
As of April 16, 2020, our LNG carriers had an average age of 16 years. The following table provides additional information about the four LNG carriers in our current fleet. Unless otherwise indicated, we hold a 100% economic interest in the vessels.
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LNG Carrier | Capacity (cbm) | Year of Delivery | Containment System | Year Acquired | Charterer | Charter Expiration | Charter Extension Option Periods |
Golar Mazo(1) | 135,225 | 2000 | Moss | Upon formation | Not applicable | Not applicable | Not applicable |
Methane Princess(1) | 138,000 | 2003 | Membrane | Upon formation | Royal Dutch Shell | August 2024 | Five years plus five years |
Golar Grand | 145,700 | 2006 | Membrane | November 2012 | Major international Oil and Gas company | May 2021 | Terms extending up to six years(2) |
Golar Maria | 145,700 | 2006 | Membrane | February 2013 | Spot market(3) | Not applicable(3) | Not applicable(3) |
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LNG Carrier | | Capacity (cbm) | | Year of Delivery | | Charterer | | Current Charter Expiration | | Charter Extension Option Periods |
Golar Mazo(1) | | 135,000 |
| | 2000 | | Pertamina | | December 2017 | | Five years plus five years (2) |
Methane Princess | | 138,000 |
| | 2003 | | BG Group | | March 2024 | | Five years plus five years |
Golar Grand | | 145,700 |
| | 2006 | | Golar | | October 2017 | (3) | none |
Golar Maria | | 145,700 |
| | 2006 | | Eni S.p.A. | | December 2017 | | none |
Total Capacity | | 564,400 |
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(1) | We own a 60% interest in the Golar Mazo, and Chinese Petroleum Corporation holds the remaining 40% interest.
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(2) | In addition, Pertamina has the right to one additional short-term extension of 2 to 12 months following either the initial period of the charter or an extension period. |
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(3) | BG Group did not exercise its option to extend its charter on the Golar Grand beyond February 2015. Accordingly, in February 2015, we exercised our option requiring Golar to charter the vessel through to October 2017 at approximately 75% of the hire rate that would have been payable by BG Group.
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As of March 31, 2016,(1)Upon our LNG carriers had an average age of 12 years, comparedformation, Golar contributed to us a 100% interest in certain subsidiaries which owned a 60% interest in the world LNG carrier fleet average age of approximately 11 years. LNG carriers are generally expected to have a lifespan of approximately 40 years. The Methane Princess, Golar Mazo and which leased the Golar Grand Spirit and the Golar Maria have membrane-type cargo containment systems whilst the Golar Mazo has a Moss containment system. Our charterers are able to use our LNG carriers worldwide or to sublet the vessels to third parties.
Golar Mazo. The Golar Mazo is an LNG carrier built in 2000 that isMethane Princess. We currently operating under a time charter that expires in 2017 with Pertamina. Founded in 1960, Pertamina is the state-owned oil and gas company in Indonesia and one of the world’s largest producers and exporters of LNG. We own a 60% interest in this vesselthe Golar Mazo, and Chinese Petroleum Corporation ownsholds the remaining 40%. interest.As of April 16, 2020, the Golar Mazo was being prepared to be placed in lay-up, however our lay-up plans are subject to change at short notice due to measures in response to COVID-19.
Methane Princess. (2)The Methane Princess is an LNG carrier builtcharter initially had a term of two years. The charter was extended in 2003 that is currently operating underFebruary 2019 for a time charter that expiresyear and in 2024 with BG Group. BG Group engages in exploration and production of gas and oil reserves, export, shipping and import of LNG, pipeline transmission and distribution of gas, and various gas-powered electricity generation projects.
Golar GrandFebruary 2020 for another year . The charterer has options to extend the charter by two one year periods and two further periods of up to two years each.
(3)TheGolar Grand is an LNG carrier built in 2006 that currently operating under a medium-term charter with Golar. Prior to February 2015, the Golar Grand operated under a time charter with BG Group which was not extended beyond its initial term and expiredMaria will be available in the middle of February 2015. In February 2015, we exercised ourspot and short-term market between April 2020 through to late 2020 when the vessel will commence a two-year charter. This charter will include an option to require Golarextend up to charter inthree one year periods.
The below table summarizes the vessel until October 2017 at approximately 75%key details of the hire rate paid by BG Group representing an approximate 25% loss of daily revenuerates for the LNG carriers in our fleet on long-term charter:
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Vessel | Capital cost component | Operating cost component | | Changes to hire rate in the extension period (if applicable) |
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Methane Princess | Fixed. | Increases by a fixed percentage per annum. | | Reduces by approximately 37%. |
Golar Grand | The hire rate is an all-inclusive daily fixed rate. | | | The hire rate during the extension periods will be similar to the current level. |
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FLNG
Compared to us with respectonshore terminals, the FLNG industry is young. FLNG projects are a solution for stranded gas reserves (such as lean gas sourced from offshore fields) for which geographical, technical and economic limitations restrict the ability to convert these gas reserves to LNG. FLNGs offer a viable economic solution to the Golar Grand.
Golar Maria. The Golar Maria istraditional giant land-based projects as they are able to be re-deployed. Golar’s liquefaction solution places liquefaction technology on board an existing LNG carrier builtusing a rapid low-cost execution model resulting in 2006 thata vessel conversion and commissioning time of approximately four years. Golar is the only company to have entered into agreements for the long-term employment of FLNGs based on the conversion of an existing LNG carrier.
We currently operating under a time charter that expires in 2017 with LNG Shipping S.p.A. LNG Shipping S.p.A. is a wholly-owned subsidiaryown 50% of Eni S.p.A.the Common Units of Hilli LLC which owns Golar Hilli Corporation (“Hilli Corp”), an integrated energy company operating in the sectorsdisponent owner of oil and gas exploration & production, international gas transportation and marketing, power generation, refining and marketing, chemicals and oilfield services. Eni is partly owned by the Italian government.FLNG, the Hilli.
FLNG Hilli Episeyo on her way to Cameroon
Our Charters
The services of our vesselsFSRUs, LNG carriers and FLNG are provided to their charterers under time charter party agreements (or TCPs), or, in the case of the Golar Spirit and the Golar Winter, under separate TCPs and operation and services agreements (or OSAs). The TCPs and the OSAs for the Golar Winter and the Golar Spirit are interdependent and when combined have the same effect as the TCPs for our other vessels. We refer to the contracts under which we provide the services of our vessels to their charterers as our “time charters” or our “charters”. Time charters provide for the use of the vessel for a fixed period of time at a specified daily rate.hire or tolling rate pursuant to time charters or liquefaction tolling agreements. Under a time charter, the vessel owner provides crewing and other services related to the vessel’s operation which include repairs and maintenance, insurance, stores, lube oils and communication expenses as well as periodic drydocking costs. These costs related to the cost of which isvessel’s operation are included in the daily rate, and the customercharterer is responsible for substantially all of the vessel voyage costs, (includingwhich include fuel, port and canal fees, LNG boil-off, cargo loading and unloading expenses, canal tolls, agency fees and commissions. For FSRUs, the charterer is also responsible for providing, maintaining, repairing and operating certain facilities at the unloading port such as sufficient mooring infrastructure for LNG boil-off).vessels to be berthed alongside and a high pressure send-out pipeline.
The following discussion describes the material terms of our charters.
Initial Term; Extensions
Refer to the tables under “—Our Fleet and Customers” for details on the charter commencement, charter expiration and charter extension option periods for our vessels.
Hire Rate
“Hire rate” refers to the basic payment from the customer for use of the vessel.
Under our charters, hire is payable monthly, in advance, except for the Golar Igloo andthe Golar Eskimo, where hire is received monthly in arrears. Under all of our charters, hire is payable in U.S. Dollars, except for the operating cost component for the Golar Spirit and the Golar Winter, which is payable in Brazilian Reals.
Certain of our charters provide for the payment by the charterer of an all-inclusive daily fixed rate. UnderThe hire rate for our other charters, hire rateFSRU vessels and LNG Carriers is primarily made up of two components:
•Capital cost component - primarily relates to the cost of the vessel and is structured to meet that cost and provide a return on investor capital. The capital cost component is generally constant for the duration of the initial termentire charter except for the Golar Spirit and the Golar Winter.and Golar Eskimo.
•Operating cost component - intended to compensate us for vessel operating expenses including management fees. This component is generally established at the beginning of the charter and typically escalates annually on a fixed percentage or fluctuates annually based on changes in a specified consumer price index.index or foreign exchange rate.
The below table summarizesUnder time charters, hire is payable monthly. Under all of our charters, hire is payable in U.S. Dollars, except for the key detailsoperating cost component for the Golar Winter, which is payable in Brazilian Reais.
Our interest in the FLNG vessel provides floating liquefied natural gas tolling services based on a liquefaction tolling agreement. See “Item 5—Operating and Financial Review and Prospects—Results of the hire rates for each vessel in our fleet:Operations.”
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Vessel | Capital cost component | Operating cost component | Other | Changes to hire rate in the extension period (if applicable) |
Golar Spirit | Increases on a bi-annual basis based on a cost of living index. | Fluctuates annually based on changes to a specified cost of living index and U.S. dollar foreign exchange index. | Drydocking costs are included as part of the capital cost component. | The hire rate will be reduced by approximately 5%. |
Golar Winter | Increases on a bi-annual basis based on a cost of living index. | Fluctuates annually based on changes to a specified cost of living index and U.S. dollar foreign exchange index. | Drydocking costs are included as part of the capital cost component. | n/a |
Golar Freeze | Fixed. | Annual adjustment based on actual costs. | | The hire rate will be reduced by 64% from the initial hire rate. |
NR Satu | This also includes a mooring capital element. | Annual adjustment based on actual costs. | There is also a tax component.(1) | The capital element will decrease 12% in 2023, then by a further 7% in 2024 and 2025. |
Golar Igloo(2)
| The hire rate is an all-inclusive daily fixed rate. | n/a |
Golar Eskimo | Fixed for first five years of hire. Decreases by 6.4% after the first five years of hire. | Increases by a fixed percentage per annum. | n/a | n/a |
Golar Mazo | Fixed. | Annual adjustment based on actual costs. | Reimbursement of costs relating to:
i) Drydocking
ii) Additional cost component.(3)
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Methane Princess | Fixed. | Increases by a fixed percentage per annum. | | Reduces by approximately 37%. |
Golar Grand | The hire rate is an all-inclusive daily fixed rate. | n/a |
Golar Maria | The hire rate is an all-inclusive daily fixed rate. | n/a |
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(1) | The tax element shall be adjusted only when there is any change in Indonesian Tax Laws (including any changes in interpretation or implementation thereof) or any treaty to which Indonesia is party or the invalidity of any tax assumptions used in determining the tax element. |
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(2) | The Golar Igloo provides floating storage and regasification services to KNPC for a nine-month period each year (or the Regasification Season) until the termination of the charter. The Regasification Season commences, at KNPC’s election, between March 1 and March 31 of each year (or the Start Date) and ends nine months later (or the End Date). During the period between the End Date with respect to one Regasification Season and the Start Date of the next succeeding Regasification Season (or the Regasification Off-Season), we may charter the Golar Igloo to other customers under short-term charters.
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(3) | The additional cost component comprises of reimbursement for certain costs associated with certain modifications, improvements, alterations or replacements that are required pursuant to the charter, requested by Pertamina, or that are estimated to cost more than $2 million and related to any financing we obtain at the request of Pertamina. |
The hire rate payable for each of our vessels may be reduced if they do not perform to certain of their contractual specifications or if we are in breach of any of our representations and warranties in the charter.
Expenses
Under our charters, we are responsible for operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses as well as periodic drydocking costs. We are also directly responsible for providing all of these items and services. The charterer generally pays the voyage expenses, which include all expenses relating to particular voyages, including any bunker fuel expenses, LNG boil-off, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. For FSRUs, the charterer is responsible for providing, maintaining, repairing and operating certain facilities at the unloading port such as sufficient mooring infrastructure for LNG vessels to be berthed alongside and a high pressure send-out pipeline.
Off-hire
When a vessel is “off-hire” or not available for service, the charterer generally is not required to pay the hire or toll rate and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time charter.
A vessel generally will be deemed off-hire if there is a specified time it is not available for the charterer’s use due to, among other things:
operational deficiencies, drydocking for repairs, maintenance or inspection, equipment breakdowns, or delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or
our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.
UnderSee note 6 “Segment Information” in our consolidated financial statements for information regarding our significant customers.
Competition
We operate in markets that are highly competitive and based primarily on supply and demand. As the FSRU market continues to grow and mature there are new competitors entering the market. Existing competitors have also ordered additional FSRUs. Previous expectations of rapid growth in the FSRU market gave owners the confidence to place orders for FSRUs before securing charters. This has led to more competition for mid- and long-term FSRU charters. Competitive pressure in this market has since resulted in a significant reduction in new FSRU orders by both existing competitors and new entrants.
Competition for these charters foris based primarily on price, operational track record, LNG storage capacity, efficiency of the Golar Spirit, the Golar Winter regasification process, vessel availability, size, age and the NR Satu, an off-hire allowance is provided for a certain numbercondition of hours of scheduled off-hire per year. Under the Golar Freeze charter, we are allowed a certain number of days to carry out periodic drydocking during which time the vessel, relationships with LNG carrier users and reputation of the operator. In addition, some FSRUs may operate as LNG carriers during periods of increased FSRU competition.
The FLNG industry is in an early stage of development, and we do not currently face significant competition from other providers of FLNG services. As of April 16, 2020, there are currently only four operating FLNGs worldwide, including the Hilli. We anticipate that other companies, including marine transportation companies with strong reputations and extensive resources and experience, will not be off-hireenter the FLNG industry at some point in the future, resulting in greater competition.
Seasonality
Historically, LNG trade, and therefore we will continuecharter rates, increased in the winter months and eased in the summer months as demand for LNG for heating in the Northern Hemisphere rose in colder weather and fell in warmer weather. In general, the LNG vessel industry has become less dependent on the seasonal transport of LNG than a decade ago. The advent of FSRUs has opened up new markets and uses for LNG, spreading consumption somewhat more evenly over the year. There is a higher seasonal demand during the summer months due to receiveenergy requirements for air conditioning in some markets or reduced availability of hydro power in others and a pronounced higher seasonal demand during the hire rate during such period. Similarly,winter months for heating in other markets. The vessel market is somewhat weaker in the Golar Mazo willperiod between winter and summer.
Our vessels that operate under long-term charters are not be considered to be off-hire for scheduled drydockings for a certain number of days in each three-year period. The number of days during which the Golar Mazo will not be considered to be off-hire is intended to correspondsubject to the numbereffect of daysseasonal variations in demand, with the exception of the Golar Igloo, whose charter specifies a regasification season of ten months, extendable at the option of the charterer. For our vessels that are available for charter in the Golar Mazo is expectedspot market, our revenue may be subject to be off-hire for an ordinary, regularly scheduled drydocking.the effect of seasonal variations in demand.
Vessel Maintenance and Management
During their retrofitting, the FSRUs, except for the NR Satu, were prepared for five years in service between drydockings. ThisSafety is in line with the policy adopted by the industry for new LNG carriers. The NR Satu was prepared so it could remain in service for the duration of its charter with PTNR, including option periods, before its first drydocking as an FSRU. The FSRUs will benefit from the significantly reduced loads and wear and tear associated with remaining in sheltered waters for the majority of the terms of their charters.our top priority. Our vessels are drydocked at least once duringoperated in a five-year class cycle for inspectionmanner intended to protect the safety and health of our employees, the underwater partsgeneral public and for general repairs.the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten safety, such as groundings, fires and collisions. We are also committed to reducing emissions and waste generation. We have established key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets.
Vessel Management and Maintenance
Under our charters, we are responsible for the technical management of the vessels which Golar, through its subsidiaries, assists us, by managing our vessel operations, maintaining a technical department to monitor and audit our vessel manager operations and providing expertise in various functions critical to our operations. This affords an efficient and cost effective operation and, pursuant to administrative services agreements with certain subsidiaries of Golar, access to human resources, financial and other administrative functions.
These functions are supported by on board and onshore systems for maintenance, inventory, purchasing and budget management. In addition, Golar’s day-to-day focus on cost control will be applied to our operations. To some extent, the uniform design of some of our vessels and the adoption of common equipment standards should also result in operational efficiencies, including engagementwith respect to crew training and provisionvessel management, equipment operation and repair, and spare parts ordering.
See “Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions—Our Management Agreements.”
Risk of qualified crews, maintainingLoss, Insurance and Risk Management
The operation of any vessel, including LNG carriers, FSRUs and FLNGs, 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 and/or war risk situations, hostilities or pandemics. 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 arranging supplyis out of storesservice as a result of damage. The maximum coverage varies from 180 days to 360 days, depending on the vessel. The number of deductible days varies from 14 days to 60 days, depending on the vessel and equipment, periodic drydocking, cleaningtype of damage (e.g. whether the claim arises from either machinery or hull damage).
Protection and paintingindemnity insurance, which covers our third-party legal liabilities in connection with our shipping activities, is provided by mutual protection and ensuring compliance with applicable regulations, including licensingindemnity (“P&I”) associations, or P&I clubs. This includes third-party liability and certification requirements. Golar Management and Golar Management Norway provide these management servicesother 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.
The current protection and indemnity insurance coverage for pollution is $250 million per incident for the Hilli and $1 billion per vessel per incident for all other vessels. The thirteen P&I clubs that comprise the International Group of Protection and Indemnity Clubs insure approximately 90% 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 our fleet through fleet management agreements with our vessel owning subsidiaries.
this pooling agreement so that the maximum claim covered by the pool and its reinsurance would be approximately $8.2 billion per accident or occurrence. We are focuseda member of Gard and Skuld P&I Clubs. As a member of these P&I clubs, we are subject to a call for additional premiums based on operating and maintaining our vessels to the highest safety and industry standards and atclubs' claims record, as well as the same time maximizing revenue from each vessel. It is our policy to have our crews perform planned maintenance on our vessels while in operation, to reduce time required for repairs during drydocking. 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 drydock (except in the caseclaims record of all other members of the Golar Mazo, whose charter provides for an allowance for any regularly scheduled drydocking inP&I clubs comprising the International Group. However, our P&I clubs have reinsured the risk of additional premium calls to limit our additional exposure. This reinsurance is subject to a three-year period, provided that, subsequent to every two drydockings,cap, and there is the parties will meet to determine the allowance period for each of the two subsequent drydockings, and the Golar Freeze), we believerisk that the additional revenue earned from reduced off-hire periods outweighs the expensefull amount of the additional crew members or subcontractors.call would not be covered by this reinsurance.
Termination
Each charter terminates automatically uponThe insurers providing the hull and machinery, hull and cargo interests, protection and indemnity and loss of the vessel. Under certain circumstances, a charterer may terminate a charter (upon written notice). These circumstances include:
the occurrence of specified events of default;
requisition by any governmental authority;
force majeure after a continuous and specified period or in the eventhire insurances have confirmed that war or hostilities materially and adversely affect the operations of the applicable vessel; and
specified extended periods of off-hire.
In addition, we are generally entitled to suspend performance (but with the continuing accrual to our benefit of hire payments and default interest) and terminate the charter if the customer defaults in its payment obligations.
Under the Golar Spirit and the Golar Winter charters, Petrobras has the right to terminate the Golar Spirit and the Golar Winter charters, after the fifth and tenth anniversary, respectively, of the commencement of the applicable charter without fault upon payment of a termination fee specified in the relevant charter. Six months’ notice is required if Petrobras wishes to exercise its right to no fault termination under either of the charters.
Under the Golar Freeze charter, DUSUP has the right to terminate the charter without fault after the fifth anniversary of the commencement of the charter and by giving six months prior written notice and payment of a compensatory fee.
Under the Golar Igloo charter, we can offer a substitute FSRUthey will consider FSRUs as vessels for the remainderpurpose of providing insurance. For the Regasification Season at the same hire rate in the event the Golar Igloo cannot perform the service due toFSRUs we have also arranged an extended force majeure.
Under the Golar Eskimo charter, Jordan has the right to terminate the charter without fault (as long as it does not charter an alternative FSRU) on or after the fifth anniversaryadditional comprehensive general liability insurance. This type of the commencement of the charterinsurance is common for offshore operations and by giving 12 months prior written notice and payment of a specified early termination fee.
Under the Methane Princess charter, upon a default by us, the charterer is also entitled to require the charter to be substituted by a bareboat charter between us and the charterers on terms specified in the charter.
Under the Golar Mazo charter, upon a default by us, the charterer is also entitled to take possession of the vessel and operate, maintain and insure it at the charterer’s sole risk and expense.
Purchase Option
The NR Satu charter contains a provision that allows PTNR to purchase the vessel at any time, subject to agreeingadditional to the commercial terms.P&I insurance.
Our operations utilize Golar’s thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers' competence training program, seafarers' workshops and membership in emergency response organizations. We expect to benefit from Golar’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.
Classification, Inspection and Maintenance
Every large, commercial seagoing vessel must be “classed” by a classification society. TheA classification society certifies that thea vessel is “in class”,class,” signifying that the vessel has been built and maintained in accordance with the rules of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society and complies with applicable rules and regulationswill undertake them on application or by official order, acting on behalf of that particular class of vessel as laid down by that society and the applicable flag state.authorities concerned.
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. Vessels are drydocked at least once during a five-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. With the exception of the Golar Mazo, which is certified by Lloyds Register, all other vessels in our current fleet are each certified by Det Norske Veritas.Veritas GL ("DNV-GL"). All of our operating vessels have been awarded International Safety Management (“ISM”) certification and are currently “in class”., except for the Golar Spirit which is currently in lay-up and Golar Mazo which will be placed in lay-up shortly.
The vessel manager carriesWe carry out inspections of the vessels on a regular basis; both at sea and while the vessels are in port, while Golar carries out inspection and vessel audits to verify conformity with the manager’s reports.port. The results of these inspections, which are conducted both in port and while 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 and improvement for our vessels and their systems.
Safety, Management of Vessel Operations and Administration
Safety is our top operational priority. Our vessels are operated in a manner intended to protect the safety and health of our employees, the general public and the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten safety, such as groundings, fires and collisions. We are also committed to reducing emissions and waste generation. We have established key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets. Golar’s shore staff performs a full range of technical, commercial and business development services for us. This staff also provides administrative support to our operations in finance, accounting and human resources.
Through its subsidiaries, Golar assists us in managing our vessel operations and maintaining a technical department to monitor and audit our vessel manager operations. Our appointed vessel manager, Golar Management Norway, is working to the standard of International Standards Organization’s (or ISO) 9001 and ISO 14001, and have through Det Norske Veritas, the Norwegian classification society, and Lloyds, obtained approval of their safety management systems as being in compliance with the International Safety Management Code (or ISM Code), on behalf of the appropriate Flag State for the vessels in our current fleet, which are flagged in the Marshall Islands or Liberia. Golar Wilhelmsen (subsequently Golar Management Norway), established in 2010, received its ISO 9001 certification on April 7, 2011. Our vessels’ safety management certificates are being maintained through ongoing internal audits performed by the manager and intermediate audits performed by Det Norske Veritas or Lloyds. To supplement our operational experience, Golar and its subsidiaries provide expertise in various functions critical to our operations. This affords an efficient and cost effective operation and, pursuant to administrative services agreements with certain subsidiairies of Golar, access to human resources, financial and other administrative functions. Critical vessel management functions that will be provided by Golar Management through various of its offices around the world include:
technical management, maintenance, dockings;
crew management;
procurement, purchasing, forwarding logistics;
marine operations;
vetting, oil major and terminal approvals;
shipyard supervision;
insurance; and
financial services.
These functions are supported by on board and onshore systems for maintenance, inventory, purchasing and budget management. In addition, Golar’s day-to-day focus on cost control will be applied to our operations. To some extent, the uniform design of some of our vessels and the adoption of common equipment standards should also result in operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.
Competition
We operate in markets that are highly competitive and based primarily on supply and demand. We compete for charters based upon price, customer relationships, operating expertise, professional reputation, and size, age and condition of the vessels.
Competition for providing FSRUs and LNG carriers for chartering purposes comes from a number of experienced shipping companies. Some of our competitors have significantly greater financial resources than we do and can operate larger fleets and may be able to offer better charter rates. An increasing number of marine transportation companies have entered the FSRU and LNG carrier sector, including many with strong reputations and extensive resources and experience. This increased competition may cause greater price competition for time charters. While the majority of the existing world LNG carrier fleet is employed on long-term charters, there is competition for the employment of vessels whose charters are expiring and for the employment of vessels which are not dedicated to a long-term contract.
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, the quality of LNG carrier users and the experience and reputation of the carrier operator. In addition, vessels may operate in the emerging LNG carrier spot market that covers short-term charters of one year or less during periods of increased competition due to an oversupply of LNG carriers.
Seasonality
Our vessels primarily operate under long-term charters and are not subject to the effect of seasonal variations in demand, with the exception of the Golar Igloo, whose charter specifies a regasification season of 9 months, extendable at the option of the charterer.
Crewing and Staff
As of December 31, 2015, Golar employed approximately 575 seagoing staff who serve on our vessels. Golar and its subsidiaries may employ additional seagoing staff to assist us as we grow. Certain subsidiaries of Golar, including Golar Management and Golar Management Norway, provide commercial and technical management services, including all necessary crew-related services, to our subsidiaries pursuant to the fleet management agreements. Please read “Item 7—A. Major Unitholders and Related Party Transactions—B. Related Party Transactions—Fleet Management Agreements.” Golar regards attracting and retaining motivated seagoing personnel as a top priority. Golar offers seafarers competitive employment packages and opportunities for personal and career development, which relates to a philosophy of promoting internally. The officers operating our vessels are engaged on individual employment contracts, while the vessel managers have entered into Collective Bargaining Agreements that cover substantially all of the seamen that operate the vessels in our current fleet, which are flagged in the Marshall Islands, Indonesia or Liberia. Golar believes its relationships with these labor unions are good. Golar’s commitment to training is fundamental to the development of the highest caliber of seafarers for our marine operations. Golar’s cadet training approach is designed to balance academic learning with hands-on training at sea. Golar has relationships with training institutions in Croatia, India, Norway, Philippines, Indonesia and the United Kingdom. After receiving formal instruction at one of these institutions, cadets’ training continues on board one of our vessels. We believe that high-quality crewing and training policies will play an increasingly important role in distinguishing the preferred larger and LNG-experienced independent shipping companies from those that are newcomers to LNG and lacking in-house experienced staff and established expertise on which to base their customer service and safety operations.
Risk of Loss, Insurance and Risk Management
The operation of any vessel, including FSRUs and 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 war risk situations 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 218 days. The number of deductible days varies from 14 days for the new vessels to 30 days for the older vessels, and 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 or FSRU per incident. The thirteen P&I clubs that comprise the International Group of Protection and Indemnity Clubs insure approximately 90% 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 $5.45 billion per accident or occurrence. We are a member of Gard and Skuld P&I Clubs. As a member of these P&I clubs, we are subject to a call for additional premiums based on the clubs’ 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 clubs have 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.
The insurers providing the covers for Hull and Machinery, Hull and Cargo interests, Protection and Indemnity and Loss of Hire insurances have confirmed that they consider the FSRUs as vessels for the purpose of providing insurance. For the FSRUs, we have also arranged an additional Comprehensive General Liability (or CGL) insurance. This type of insurance is common for offshore operations and is additional to the P&I insurance. Our coverage under the CGL insurance is $150 million per unit for the Golar Spirit and the Golar Winter, $15 million for the Golar Freeze, $50 million for the NR Satu and$200 million for the Golar Igloo. Our additional coverage under Comprehensive Carriers Cover (or CCC) is $50 million for the Golar Eskimo.
We will use in our operations Golar’s thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers’ competence training program, seafarers’ workshops and membership in emergency response organizations. We expect to benefit from Golar’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations. Golar Wilhelmsen (subsequently Golar Management Norway), our vessel manager, received its ISO 9001 certification in April 2011, and is certified in accordance with the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis.
Environmental and Other Regulations
General
GovernmentalOur business and the operation of our vessels are subject to various international agencies extensively regulate the carriage, handling, storagetreaties and regasification of LNG. These regulations include international conventions and to the applicable local national state and subnational laws and regulations of the countries (U.S., Indonesia, Brazil, Kuwait, Jamaica and Jordan) in which our vessels operate or are registered. These local laws and regulations in the countries where our vessels now, or in the future, will 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. In addition, any serious marine incident that results in significant oil pollution or otherwise causes significant adverse environmental impact, including the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional legislation or regulation that could negatively affect our profitability. Various governmental and quasi-governmental agenciesmight require us to obtain governmental permits and authorizations before we may conduct certain activities. Failure to comply with these laws or to obtain the necessary business and technical licenses could result in sanctions including suspension and/or freezing of the business and certificatesresponsibility for all damages arising from any violation.
The local governments may also periodically revise their environmental laws and regulations or adopt new ones, and the operationeffects of new or revised laws and regulations on our vessels.
operations cannot be predicted. 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 vessels, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels. A varietyThere can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future laws and regulations, or that such laws and regulations will not have a material effect on our operations.
International environmental treaties and conventions, U.S. environmental laws and regulations that apply to the operation of governmental and private entities inspect our vessels on both a scheduledare described below. Other countries in which we operate or in which our vessels are registered have or may in the future have laws and unscheduled basis. These entities, each of which may have unique requirements and each of which conducts frequent inspections, include local port authorities, such asregulations that are similar in nature to the U.S. Coast Guard, harbor master or equivalent, classification societies, flag state, orlaws referenced below. GMN provides technical management services for our vessels, is certified in accordance with the administration of the country of registry, charterers, terminal operatorsInternational Maritime Organization's (“IMO”) standard for ISM and LNG producers.
Golar Management Norway (previously Golar Wilhelmsen) is operatingoperates in compliance with the International Standards Organization (or ISO)(“ISO”) Environmental Management Standard for the management of the significant environmental aspects associated with the ownership and operation of a fleetour fleet.
International Maritime Regulations of LNG Vessels
The IMO is the United Nations’ agency that provides international regulations governing safety, security and environmental aspects of shipping and international maritime trade. The requirements contained in the International SafetyFor a discussion of IMO’s environmental regulations, see “Air Emissions”, “Anti-Fouling Requirements,” “Ballast Water Management Code (ISM Code) promulgated by the IMO, govern our operations. Convention” and “Regulation of Greenhouse Gas Emissions”.
Among other requirements, the IMO's ISM Code requires the party with operational control of a vessel to develop an extensive safety management system that includes, among other things,and the adoption of a policy for 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 Norway, our vesselOur ship manager holds a Documentdocument of Compliancecompliance under the ISM Code for operation of Gas Carriers that meets the standards set by the IMO.Carriers.
Vessels that transport gas, including LNG carriers and FSRUs, are also subject to regulation under the International Gas Carrier Code (or the IGC Code) published by the IMO. The IGC Code(“IGC”) which provides a standard for the safe carriage of LNG and certain other liquid gases by prescribing the design and construction standards of vessels involved in such carriage. Compliance with the IGC Code must be evidenced by a Certificate of Fitness for the Carriage of Liquefied Gases in Bulk. Each of our vessels is in compliance with the IGC Code. Non-complianceCode and each of our new buildings/conversion contracts requires that the vessel receive certification that it is in compliance with the IGC Code 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.before it is delivered.
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. SOLAS(“SOLAS”) which provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation. Itoperation and addresses maritime security. SOLAS requires the provision of lifeboats and other life-saving appliances, requires the use of the Global Maritime Distress and Safety System which is an(an international radio equipment and watchkeeping standard,watch keeping standard) afloat and at shore stations, and relates to the TreatyInternational Convention on the Standards of Training and Certification of Watchkeeping Officers (or STCW)(“STCW”) also promulgated by the IMO. Flag states that have ratified SOLASThe STCW establishes minimum training, certification and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.
watch keeping standards for seafarers. The SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Non-compliance with these types of IMO regulations may subject usFlag states that have ratified the SOLAS and STCW generally employ the classification societies, which have incorporated the SOLAS and STCW requirements into their class rules, to increased liability or penalties, may leadundertake surveys to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports. For example, the U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code are prohibited from trading in U.S. and European Union ports.confirm compliance.
In the wake of increased worldwide security concerns, the IMO amended SOLAS and added the International Ship and Port Facility Security Code (or (“ISPS Code) as a new chapter to that convention. The objective of the ISPS,Code”), which came into effect on July 1, 2004, is to detect security threats and take preventive measures against security incidents affecting vessels or port facilities. Golar Management NorwayGMN has developed Security Plans,security plans and appointed and trained Shipship and Office Security Officers andoffice security officers. In addition, all of our vessels have been certified to meet the ISPS Code. See “—VesselCode and the security requirements of the SOLAS and the Maritime Transportation Security Regulations” for a more detailed discussion about these requirements.Act (“MTSA”).
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulation may have on our operations. Non-compliance with the IGC Code or other applicable IMO regulations may subject a shipowner or a bareboat charterer to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.
Air Emissions
The International Convention for the Prevention of Marine Pollution from Ships (or MARPOL)(“MARPOL”), is the principal international convention negotiated by the IMO governing marine pollution prevention and response. MARPOL imposes environmental standards on the shipping industry relating to marine pollution, including oil spills, management of garbage, the handling and disposal of noxious liquids, sewage and air emissions. Annex I to MARPOL applies to various vessels delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards. IMO regulations also require owners and operators of vessels to adopt Shipboard Oil Pollution Emergency Plans. Periodic training and drills for response personnel and for vessels and their crews are required.
MARPOL 73/78 Annex VI “Regulationsregulations for the prevention“Prevention of Air Pollution” (or Annex VI) entered into force on May 19, 2005, and appliesPollution from Ships” apply to all vessels, fixed and floating drilling rigs and other floating platforms. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from vessel exhausts, emissions of volatile compounds from cargo tanks, incineration of specific substances, and prohibits deliberate emissions of ozone depleting substances. Annex VI also includes a global cap on sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. The certification requirements for Annex VI depend on size of the vessel and time of periodicalthe periodic classification survey. Ships weighing more than 400 gross tons and engaged in international voyages involving countries that have ratified the conventions, or vessels flying the flag of those
countries, are required to have an International Air Pollution Certificate (or an (“IAPP Certificate)Certificate”). Annex VI came into force in the United States on January 8, 2009 and has been amended a number of times. As of the current date, all2009. All our vessels delivered or drydocked since May 19, 2005 have all been issued with IAPP Certificates.
In March 2006, the IMO amended Annex I to MARPOL, including a new regulation relating to oil fuel tank protection, which became effective August 1, 2007. The new regulation applies to various vessels delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards. IMO regulations also require owners and operators of vessels to adopt Ship Oil Pollution Emergency Plans. Periodic training and drills for response personnel and for vessels and their crews are required.
On July 1, 2010, amendments proposed by the United States, Norway and other IMO member states Amendments to Annex VI to the MARPOL Convention that took effect that requirein 2010 imposed progressively stricter limitations on sulfur emissions from vessels. Beginning onAs of January 1, 2012,2020, the ultimate limit of 0.5% the sulfur content for fuel used to power vessels may contain no more thanoperating in areas outside of designated emission control areas (“ECAs”) took effect. This represents a substantial reduction from the previous sulfur 3.5% cap. The 0.5% sulfur cap is generally referred to IMO 2020 and applies absent the installation of expensive sulfur scrubbers to meet reduced emission requirements for sulfur. This cap will decrease progressively. ForBecause the marine sector accounts for approximately half of the global fuel oil demand, the impact of the increased demand for compliant low sulfur fuels usedis expected to affect the availability and cost of such fuels and, in Emission Control Areas (or ECAs)turn, increase our costs of operation. Our vessels have achieved compliance with sulfur emission standards, where necessary, by being modified to burn gas only in their boilers when alongside a berth. Except for the Golar Mazo, we have modified the cap settled at 1% in January 2015. For fuels used inboilers on all seas, the cap will settle at 0.5%our vessels to also allow operation on January 1, 2020.low sulfur diesel oil, or LSDO. The amendments to Annex VI also establishestablished new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The European directive 2005/33/EU, which is effective from January 1, 2010,EC bans the use of fuel oils containing more than 0.10% sulfur by mass by any merchant vessel while at berth in any EU country. The See “European Commission continues to review directive 2005/33/EU after adopting a proposal to amend it to bring it into alignment with the latest IMO provisions on the sulfur content of marine fuels. Our vessels have achieved compliance, where necessary, by being modified to burn gas only in their boilers when alongside. Low sulfur marine diesel oil (or LSDO) has been purchased as the only fuelUnion Regulations” below for the Diesel Generators. In addition, except for the Golar Mazo, we have modified the boilers on all our vessels to also allow operation on LSDO.additional information.
Additionally,Even more stringent sulfur emission standards could apply in coastal areas designated as ECAs, such as the United States and Canadian coastal areas designated by the IMO’sIMO's Marine Environment Protection Committee ("MEPC"), as discussed in “—U.S.the “U.S. Clean Air Act” below. Effective August 1, 2012,These areas include certain coastal areas of North America were designated ECAs, and from January 1, 2014, the United States Caribbean Sea. From January 1, 2014, the maximum fuel sulfur limit for both marine gas oil and marine diesel oil is 0.1%. Annex VI Regulation 14, which came into effect on January 1, 2015, set the same 0.1%a 0.10% sulfur limit in areas of the Baltic Sea, North Sea, North America, and United States Caribbean Sea ECAs. Beginning in 2016, stringent engine standards for nitrogen oxide will become effective in both the North American ECA and the U.S. Caribbean ECA.
U.S. air emissions standards are now equivalent to these amended Annex VI requirements. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems. Because our vessels are largely powered by means other than fuel oil we do not anticipate that any emission limits that may be promulgated will require us to incur any material costs for the operation of our vessels, but that possibility cannot be eliminated.
Ballast Water Management Convention
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. For example, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments (or the BWM Convention) in February 2004. The BWM Convention’s implementing regulations call for a phased introduction of mandatory ballast water exchange requirements (beginning in 2009), to be replaced in time with mandatory concentration limits. The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping. The Convention has not yet entered into force because a sufficient number of states have failed to adopt it. As referenced below, the United States Coast Guard issued new ballast water management rules on March 23, 2012, and the U.S. Environmental Protection Agency (the “EPA”) issued a new Vessel General Permit in March 2013 that contains numeric technology-based ballast water effluent limitations that will apply to certain commercial vessels with ballast water tanks. Under the requirements of the BWM Convention for units with ballast water capacity more than 5000 cubic meters that were constructed in 2011 or before, ballast water management exchange or treatment will be accepted until 2016. From 2016 (or not later than the first intermediate or renewal survey after 2016), only ballast water treatment will be accepted by the BWM Convention. Installation of ballast water treatment systems will be needed on all our LNG carriers. As long as our FSRUs are operating as FSRUs and kept stationary, they will not need installation of ballast water treatment systems. However, under their TCP, Golar Spirit and Golar Winter may be required to trade as LNG carriers. If the respective vessel charterers should choose to trade the Golar Spirit or Golar Winter internationally as LNG carriers, the vessels will have to be equipped with ballast water treatment systems and the cost of the related modifications will be split between the charterer and owner. Ballast water treatment technologies are now becoming more mature, although the various technologies are still developing. The additional costs of complying with these rules are estimated to be in the range of between $2 million and $4 million.
Bunkers Convention/CLC State Certificate
The International Convention on Civil Liability for Bunker Oil Pollution 2001 (or the Bunker Convention) entered into force in State Parties to the Convention on November 21, 2008. The Bunker Convention provides a liability, compensation and compulsory insurance system for the victims of oil pollution damage caused by spills of bunker oil. The Bunker Convention makes the vessel owner liable to pay compensation for pollution damage (including the cost of preventive measures) caused in the territory, including the territorial sea of a State Party, as well as its economic zone or equivalent area. Registered owners of any sea going vessel and seaborne craft over 1,000 gross tonnage, of any type whatsoever, and registered in a State Party, or entering or leaving a port in the territory of a State Party, will be required to maintain insurance which meets the requirements of the Bunker Convention and to obtain a certificate issued by a State Party attesting that such insurance is in force. The State issued certificate must be carried on board at all times.
P&I Clubs in the International Group issue the required Bunkers Convention “Blue Cards” to enable signatory states to issue certificates. All of our vessels have received “Blue Cards” from their P&I Club and are in possession of a CLC State-issued certificate attesting that the required insurance coverage is in force.
Anti-Fouling Requirements
In 2001,Anti-fouling systems, such as paint or surface treatment, are used to coat the IMO adopted the International Convention on the Controlbottom of Harmful Anti-fouling Systems on Ships (the “Anti-fouling Convention”). The Anti-fouling Convention, which entered into force on September 17, 2008, prohibits the use of organotin compound coatingsvessels to prevent the attachment of mollusks and other sea life to the hulls of vessels. Our vessels after September 1, 2003.are subject to the IMO’s International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the Anti-fouling Convention, which prohibits the use of organotin compound coatings in anti-fouling systems. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-fouling System Certificates for all of our vessels, and we do not believe that maintaining such certificates will have an adverse financial impact on the operation of our vessels.
Compliance Enforcement
The flag state, as defined by the United Nations Convention on Law of the Sea, has overall responsibility for the implementation and enforcement of international maritime regulations for all vessels granted the right to fly its flag. The “Shipping Industry Guidelines on Flag State Performance” evaluates flag states based on factors such as sufficiency of infrastructure, ratification of international maritime treaties, implementation and enforcement of international maritime regulations, supervision of surveys, casualty investigations and participation at the IMO meetings.
As of January 2016, auditing of flag states that are parties to the SOLAS convention is mandatory and will be conducted under the IMO Instruments Implementation Code (III Code), which provides guidance on implementation and enforcement of IMO policies by flag states. These audits may lead the various flag states to be more aggressive in their enforcement, which may in turn lead us to incur additional costs.
In 2005, the European Union adopted a directive on ship-source pollution, imposing criminal sanctions for intentional, reckless or negligent pollution discharges by vessels. The directive could result in criminal liability for pollution from vessels in waters of European countries that adopt implementing legislation. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims.
United States Environmental Regulation of LNG Vessels
Our vessels operating in U.S. waters now or in the future will be subject to various federal, state and local laws and regulations relating to protection of the environment. In some cases, these laws and regulations require us to obtain governmental permits and authorizations before we may conduct certain activities. These environmental laws and regulations may impose substantial penalties for noncompliance and substantial liabilities for pollution. Failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties. As with the industry generally, our operations will entail risks in these areas, and compliance with these laws and regulations, which may be subject to frequent revisions and reinterpretation, increases our overall cost of business.
Oil Pollution Act and CERCLAThe Comprehensive Environmental Response Compensation and Liability Act
The U.S. Oil Pollution Act of 1990 (or (“OPA 90)90”) established an extensive regulatory and liability regime for environmental protection and clean-upclean up of oil spills. OPA 90 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 hundred200 nautical mile exclusive economic zone of the United States. CERCLAThe Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) applies to the discharge of hazardous substances whether on land or at sea. While OPA 90 and CERCLA would not apply to the discharge of LNG, theythese laws 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 90, 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 under OPA 90 aside from clean-up and containment costs are defined broadly to include:
•injury to, destruction or loss of, or loss of use of, natural resource damages and relatedthe costs of assessment costs;thereof;
•injury to, or economic losses resulting from, the destruction of real and personal property damages;property;
•net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;
•loss of subsistence use of natural resources that are injured, destroyed or lost;
•lost profits or earnings capacity;impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
•net cost of increased or additional public services necessitated by removal activities following a spill response,discharge of oil, such as protection from fire, safety or health hazards; and
loss of subsistence use of natural resources.hazards.
Effective July 31, 2009, the U.S. Coast Guard adjusted theThe limits of OPA 90 liability toare the greater of $2,000$2,200 per gross ton or $17.088$18.8 million for any double-hull tanker that isother than single-hull tank vessels, over 3,000 gross tons (subject to possible adjustment for inflation) (relevant to ours and Golar’s LNG carriers). 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’sparty's gross negligence or willful 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. OPA 90 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’ship owners’ responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels, contains a similar liability regime and provides for clean-up,recovery of clean up and removal costs and the imposition of natural resource damages for releases of “hazardous substances”. which as defined in CERCLA does not include oil. Liability under CERCLA is limited to the greater of $300 per gross ton or $0.5 million for each release from vessels not carrying hazardous substances as cargo or residue, and $300 per gross ton or $5 million for each release from vessels carrying hazardous substances as cargo or residue. As with OPA 90, 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’sparty's gross negligence or willful misconduct or if the responsible party fails or refuses to report the incident or to cooperate and assist in connection with the substance removal activities. OPA 90 and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. We believe that we are in substantial compliance with OPA 90, CERCLA and all applicable state regulations in the ports where our vessels call.
OPA 90 requires owners and operators of vessels to establish and maintain with the U.S. Coast GuardUSCG evidence of financial responsibility sufficient to meet the limit of their potential strict liability under OPA 90/CERCLA. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty. Under OPA 90 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 90/CERCLA. Each of our vesselship owning 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 Certificatescertificates of Financial Responsibility (or COFR),financial responsibility, or COFRs, 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 COFRs from the U.S.US Coast Guard for each of our vessels that is required to have one.
In response to the BP Deepwater Horizon oil spill, the U.S. Congress is currently considering a number of bills that could potentially increase or even eliminate the limits of liability under OPA 90. Compliance with any new requirements of OPA 90, or other laws or regulations, may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. AdditionalAny additional legislation or regulation applicable to the operation of our vessels that may be implemented in the future as a result of the 2010 BP Deepwater Horizon oil spill in the Gulf of Mexico could adversely affect our business and ability to make distributions to our unitholders.
We currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed or be excluded under our insurance coverage, it could have an adverse effect on our business and results of operation
Bunker Convention/CLC State Certificate
The International Convention on Civil Liability for Bunker Oil Pollution 2001, or the Bunker Convention entered into force on November 21, 2008. The Convention provides a liability, compensation and compulsory insurance system for the victims of oil pollution damage caused by spills of bunker oil. The Convention makes the ship owner liable to pay compensation for pollution damage (including the cost of preventive measures) caused in the territory, including the territorial sea of a State Party, as well as its economic zone or equivalent area. Registered owners of any sea going vessel and seaborne craft over 1,000 gross tonnage, of any type whatsoever, and registered in a State Party, or entering or leaving a port in the territory of a State Party, will be required to maintain insurance which meets the requirements of the Convention and to obtain a certificate issued by a State Party attesting that such insurance is in force. The State Party issued certificate must be carried on board at all times. P&I Clubs in the International Group issue the required Bunker Convention “Blue Cards” provide evidence
that there is insurance in place that meets the Bunker Convention requirements and thereby enable signatory states to issue certificates. All of our vessels have received “Blue Cards” from their P&I Club and are in possession of a Civil Liability Convention (CLC) State-issued certificate attesting that the required insurance cover is in force.
Ballast Water Management Convention, Clean Water Act and National Invasive Species Act
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. The Environmental Protection Agency (“EPA”) and USCG, have also enacted rules relating to ballast water discharge for all vessels entering or operating in United States waters. Compliance requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering United States waters.
a. Ballast Water Management Convention
In February 2004, the IMO adopted an International Convention for the Control and Management of Ships' Ballast Water and Sediments (“BWM Convention”). The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration limits. The Convention entered into force on September 8, 2017, however IMO later decided to postpone the compliance date for existing vessels by 2 years, i.e. until the first renewal survey following September 8, 2019. Furthermore, in October 2014 the MEPC met and adopted additional resolutions concerning the BWM Convention’s implementation. Upon entry into force of the BWM Convention, mid-ocean ballast water exchange became mandatory for our vessels.
b. Clean Water Act (or CWA)
The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in United StatesU.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA. In addition, many 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 EPA has enacted rules governingregulates the regulationdischarge of ballast and bilge water and other substances in United States waters under the CWA. The EPA regulations historically have required vessels 79 feet in length or longer (other than commercial fishing vessels and recreational vessels) to obtain and comply with a permit that regulates ballast water discharges and other discharges incidental to the normal operation of certain vessels within U.S.United States waters. In March 2013, the EPA released a final permit covering vessel discharges underissued the CWA that for the first time sets numeric effluent limits for ballast water discharges from large commercial vessels. The new Vessel General Permit (or VGP) replacedfor Discharges Incidental to the priorNormal Operation of Vessels, (“VGP”). The 2013 VGP asfocuses on authorizing discharges incidental to operations of December 2013. The new VGP covers vessel discharges in all U.S. statescommercial vessels and territories, including those jurisdictions that implement other aspects of the National Pollutant Discharge Elimination System (or NPDES) program. The permit covers owners and operators of non-recreational large vessels (79 feet and over) operating in a capacity as a means of transportation.
The most significant change in the new VGP is the inclusion of numeric effluentcontains ballast water discharge limits for ballast water expressed asmost vessels to reduce the maximum concentrationrisk of living organismsinvasive species in ballast water, as opposed to the prior non-numeric requirements. The permit also contains maximum discharge limitations for biocides and residuals. Those vessels that will be required to comply with the numeric limits will do so under a staggered implementation schedule. Certain existing vessels must achieve the numeric effluent limits for ballast water by the first drydocking after January 1, 2014 or January 1, 2016, depending on the vessel size. “New build” vessels are subject to the numeric limits upon the effective date of the new permit. Vessels that have deferred deadlines for meeting the numeric standards must meet BMPs, which are substantially similar to past requirements.
Vessels that are subject to the numeric effluent limits for ballast water can meet these limits in four ways: (1) treat ballast water prior to discharge; (2) transfer the vessel’s ballast water to a NPDES permitted third party treatment facility; (3) use treated municipal/potable water as ballast water; or (4) not discharge ballast water while within the territorialUS waters, of the United States. As with the prior permit, vessels that are enrolled in and meet themore stringent requirements for the Coast Guard’s Shipboard Technology Evaluation Program would be deemed in compliance with the numeric limitations. The VGP includes multiple mandatory practices for all vessels equipped with ballast water tanks, such as avoiding the discharge or uptake of ballast water in a manner that could impact sensitive areas (such as marine sanctuaries, preserves, parks, shellfish beds, or coral reefs), routine cleaning of ballast water tanks, using ballast water pumps in lieu of gravity draining, and minimizing ballast water discharges to the extent practicable. Additional changes to the new VGP include numeric limits for exhaust gas scrubber effluent,scrubbers and monitoring requirementsthe use of environmentally acceptable lubricants. In December 2018, the Vessel Incidental Discharge Act (VIDA) was signed into law and restructured the EPA and the USCG programs for some larger vesselsregulating incidental discharges from vessels. Rather than requiring CWA permits, the discharges will be regulated under a new CWA Section 312(p) establishing Uniform National Standards for graywater, exhaust gas scrubber effluent,Discharges Incidental to Normal Operation of Vessels. Under VIDA, VGP provisions and ballast water.
The newexisting USCG regulations will be phased out over a period of approximately four years and replaced with National Standards of Performance (NSPs) to be developed by EPA and implemented and enforced by the USCG. Under VIDA, the EPA is directed to develop the NSPs by December 2020 and the USCG is directed to develop its corresponding regulations two year after EPA develops the NSPs. Although the 2013 VGP includes a tiered requirement for obtaining coverage based onwas scheduled to expire in December 2018, under VIDA the sizeprovisions of the vessel and2013 VGP will remain in place until the amount of ballast water carried. Vessels thatnew regulations are 300 gross tons or larger and have the capacity to carry more than eight cubic meters of ballast water must submit notices of intent (NOIs) to receive permit coverage between six and nine months after the permit’s issuance date. Vessels that do not need to submit NOIs are automatically authorized under the permit.
In additionin place. Pursuant to the requirements in the new VGP, vessel owners and operators must meet twenty-five sets of state-specific requirements underas the CWA’s § 401 certification process. Because the CWA § 401 process allows tribes and states to impose their own requirements for vessels operating within their waters, vesselswaters. Vessels operating in multiple jurisdictions could face potentially conflicting conditions specific to each jurisdiction that they travel through.
c. National Invasive Species Act
The USCG regulations adopted under the U.S. National Invasive Species Act (or NISA) was enacted in 1996 in response(“NISA”) require the USCG's approval of any technology before it is placed on a vessel. As a result, the USCG has provided waivers to growing reportsvessels which could not install the then as-yet unapproved technology. In May 2016, the USCG published a review of harmful organisms being released into U.S. ports through ballast water taken on by vessels in foreign ports. NISA established a ballast water management program for vessels entering U.S. waters. Under NISA, mid-ocean ballast water exchange is voluntary, except for vessels heading to the Great Lakes, Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope crude oil. However, NISA’s exporting and record-keeping requirements are mandatory for vessels bound for any port in the United States. Although ballast water exchange is the primary means of compliance with the Act’s guidelines, compliance can also be achieved through the retention of ballast water on board the vessel, or the use of environmentally sound alternative ballast water management methods approved by the U.S. Coast Guard. If the mid-ocean ballast exchange is made mandatory throughout the United States, or if water treatment requirements or options are instituted, the costs of compliance could increase for ocean carriers.
As of June 21, 2012, the U.S. Coast Guard implemented revised regulations on ballast water management by establishing standards for the allowable concentration of living organisms in ballast water discharged in U.S. waters. The revised regulations adopt ballast water discharge standards for vessels calling on U.S. ports and intending to discharge ballast water equivalent to those set in IMO’s BWM Convention. The final rule requires that ballast water discharge have fewer than 10 living organisms per milliliter for organisms between 10 and 50 micrometers in size. For organisms larger than 50 micrometers, the discharge must have fewer than 10 living organisms per cubic meter of discharge. New vessels constructed on or after December 1, 2013 must comply with these standards and some existing vessels must comply with these standards by their first dry dock after January 1, 2014. The Coast Guard will review the practicability of implementing a more stringent ballast water discharge standard and publishstandard. The results concluded that technology to achieve a significant improvement in ballast water treatment efficacy cannot be practically implemented. In February, 2016, the results.USCG issued a new rule amending
Compliancethe Coast Guard’s ballast water management record-keeping requirements. Effective February 22, 2016, vessels with theseballast tanks operating exclusively on voyages between ports or places within a single Captain of the Port zone must submit an annual report of their ballast water management practices. Further, under the amended requirements, vessels may submit their reports after arrival at the port of destination instead of prior to arrival. As discussed above, under VIDA, existing USCG ballast water management regulations will entail additional costsbe phased out over a period of approximately four years and other measures that mayreplaced with NSPs to be significant.developed by EPA and implemented and enforced by the USCG.
Under our existing charter agreements, the costs associated with the installationInstallation of ballast water treatmenttreatments systems for(“BWTS”), will be needed on all our LNG Carriers. As long as our FSRUs are operating as FSRUs and kept stationary they will not need installation of a BWTS. The additional costs of complying with these rules, relating to all our vessels are estimated to be in the Golar Mazo wouldrange of $1.8 million and $2.1 million per vessel and will be allocated to our charterer if required exclusively by U.S. law. The costs associatedphased in over time in connection with the installationsrenewal surveys that are required. We have therefore decided to install BWTS on all our LNG Carriers on their first drydocking after 2017. The installation of the BWTS on the Methane Princess was completed in 2018.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for our other three LNG carriers, the Golar Winterillicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the Golar Spirit (if requireddischarges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to tradecriminal penalties. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. See “Regulation of Greenhouse Gas Emissions” below for European Union action relating to carbon dioxide emissions from maritime transport.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as LNG carriers underdetermined by type, age and flag as well as the number of times the ship has been detained. The European Union also adopted and extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their TCP), if needed, would be,main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC) introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at leastberth in part, our responsibility. Compliancethe Baltic, the North Sea and the English Channel (the so called “SOx-Emission Control Area”). As of January 2020, EU member states must also ensure that ships in all EU waters, except the SOx-Emission Control Area, use fuels with these regulations will entail additional costs, but current estimates suggest that additional costs are not likely to be material.a 0.5% maximum sulfur content.
Clean Air Act
The U.S. Clean Air Act of 1970 as amended (or the CAA)(“CAA”) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargoescargos when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas and emission standards for so-called “Category 3” marine diesel engines operating in U.S. waters. The marine diesel engine emission standards are currently limited to new engines beginning with the 2004 model year. On April 30, 2010, the EPA promulgated final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. The emission standards apply in two stages: near-term standards for newly-built engines apply from 2011, and long-term standards requiring an 80% reduction in nitrogen dioxides, (or NOx) willor NOx, apply from 2016. Aligned with the Annex VI Regulation 14 requirements, beginning in January 2015, the EPA emission standards also limit sulfur content in fuel used in Category 3 marine vessels operating in the North America ECA to 1,000 ppm (or 0.1% sulfur by mass). Compliance with these standards may cause us to incur costs to install control equipment on our vessels in the future.
International Labour Organization
The International Labour Organization (the “ILO”) is a specialized agency of the UN that has adopted the Maritime Labor Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships that are 500 gross tonnage or over and are either engaged in international voyages or flying the flag of a Member and operating from a port, or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
Regulation of Greenhouse Gas Emissions
In February 2005, the Kyoto Protocol entered into force. Pursuant to the Kyoto Protocol, adopting countries are required to implement national programs to reduce
Scientific studies have suggested that emissions of certain gases, generallycommonly referred to as greenhouse gases, which are suspected of“greenhouse gases” (“GHGs”), including carbon dioxide and methane, may be contributing to global warming. Currently,warming of the earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of GHG emissions, in particular emissions from fossil fuels, has and continues to attract political and social attention and is the subject of regulatory attention.
To date, emissions of greenhouse gases from international transport arehave not been subject to the international protocols and agreements addressing climate change, such as the 2005 Kyoto Protocol. TheProtocol and the 2015 Paris Agreement, which was announced by the Parties to the United Nations Framework Convention on Climate Change in December 2015, similarly does not cover international shipping, however, the IMO has subsequently reaffirmed its strong commitment to continue to workAgreement. However, absent a global approach to address greenhouse gasGHG emissions from vessels engaged in international trade. In June 2013,transport, the European Commission developedUnion has initiated action and is pursuing a strategy to integrate maritime emissions into the overall European Union strategy to reduce greenhouse gasGHG emissions. In accordance with2013, European Commission initiated a three step strategy aimed at this strategy, in April 2015 the European Parliamentreduction consisting of (i) monitoring, reporting and Council adopted regulations requiringverification of carbon dioxide emissions from large vessels using European Union ports, (ii) establishment of GHG reduction targets for sector; and (iii) implementation of further measures, including market-based measures such an emissions trading, in the medium to monitor, reportlong term. The first step was addressed with a European Union regulation that took effect in January 2018 that requires large vessels (over 5,000 gross tons) calling at European ports to collect and verify theirpublish data on carbon dioxide emissions. EU Directive 2018/410, which amended the EU Emissions Trading System Directive, emphasized the need to act on GHG emissions beginning in January 2018.from shipping and other sectors and calls for action by either IMO or the European Union to address emissions from the international transport sector from 2023.
On January 1, 2013,In addition, the IMO’s approvedIMO has taken some action, including mandatory measures to reduce emissions of greenhouse gasesGHGs from international shipping went into force.all vessels that took effect in January 2013. These includemeasures included amendments to MARPOL Annex VI Regulations for the prevention of air pollution from vessels adding a new Chapter 4 to Annex VI on Regulations on energy efficiency requiring the Energy Efficiency Design Index (EEDI),(“EEDI”) for new vessels, and the Ship Energy Efficiency Management Plan (SEEMP)(“SEEMP”) for all vessels. These measures entered into force on January 1, 2013. Other amendments to Annex VI add new definitions and requirements for survey and certification, including the format for the International Energy Efficiency Certificate. The regulations apply to all vessels of 400 gross tonnage and above. The IMO also adopted a mandatory requirement in October 2016, which entered into force in March 2018, that ships of 5,000 gross tonnage and above record and report their fuel oil consumption. These new rules will likelymeasures affect the operations of vessels that are registered in countries that are signatories to MARPOL Annex VI or vessels that call upon ports located within such countries. In May 2019, the MEPC approved for adoption at its April 2020 session further amendments to MARPOL Annex VI intended to significantly strengthen the EEDI “phase 3” requirements. These amendments would accelerate the entry into effect by date of phase 3 from 2025 to 2022 for several ship types, including gas carriers, general cargo ships and LNG carriers and require new ships built from that date to be significantly more energy efficient. The MEPC is also looking into the possible introduction of a phase 4 of EEDI requirements. The implementation of the EEDI and SEEMP standards could cause us to incur additional compliance costs. The IMO is also considering the implementation of a market-based mechanism for greenhouse gas emissions from vessels, but it is impossiblevessels. At the October 2016 MEPC session, the IMO adopted a roadmap for developing a comprehensive IMO strategy on reduction of GHG emissions. The IMO adopted its initial GHG reduction strategy in 2018 and established a program of follow-up actions up to predict the likelihood that such2023 as a standard might be adopted or its potential impact on our operations at this time.planning tool.
In the United States, the EPA has issued a final finding that greenhouse gases threaten public health and safety and has promulgated regulations that regulate the emission of greenhouse gases. In 2009 and 2010, EPA adopted greenhouse reporting requirements for various onshore facilities, and also adopted a rule in 2011 imposing control technology requirements ongases from certain stationary sources subject to the federal Clean Air Act.sources. The EPA may decideenforces both the CAA and the international standards found in Annex VI of MARPOL concerning marine diesel emissions, and the future to regulate greenhouse gas emissions from vessels and has already been petitioned by the California Attorney General to regulate greenhouse gas emissions from ocean-going vessels.sulfur content found in marine fuel. Other federal and state regulations relating to the control of greenhouse gas emissions may follow, including climate change initiatives that have been considered in the U.S. Congress. Any passage of climate control legislation or other regulatory initiatives by the IMO, the European Union, the United States, or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases from vessels could require us to make significant financial expenditures that we cannot predict with certainty at this time. In addition, even without such regulation, our business may be indirectly affected to the extent that climate change results in sea level changes or more intense weather events.
Dubai EnvironmentalOther Regulations
The Golar Freeze is now in Dubai waters and is subject to various regulations relating to protection of the environment. These laws and regulations require us to obtain governmental permits and authorizations before we may conduct certain activities. DUSUP, our charter party, has the contractual responsibility to obtain all permits necessary to operate the Golar Freeze in Dubai, and it already has done so. However, it is still our responsibility to meet the requirements of the environmental laws. To the extent that the local environmental laws and regulations of Dubai become more stringent over time, it is DUSUP’s obligation to fund the costs of improvements needed to meet any such requirements.
For instance, Dubai’s Federal Law No. 24 of 1999 for the Protection and Development of the Environment requires major projects to be licensed by the Ministry of Environment and Water. As part of the licensure application, the Agency requires an environmental impact assessment to determine the project’s effect on the environment. Vessels are prohibited from discharging harmful substances, including oil, into Dubai’s waters. Violators are subject to fines. At this time, Golar Freeze constitutes a major project under the applicable regulations and we supplied the necessary information to DUSUP. Using the information provided, DUSUP has acquired all of the necessary operating permits to comply with Dubai’s Federal Law No. 24.
In addition, Dubai’s Law No. 11 of 2010 on licensing Marine Transport Means includes licensing and registration requirements for vessels and crews. As a condition of licensing, registration, or license renewal, the vessel owner must present evidence of an insurance policy issued by an insurance company which is licensed to operate in Dubai and which covers the owner against liability from damages inflicted upon third parties. Vessels entering Dubai’s waters are required to be in compliance with the technical specifications of their flag state and the Dubai Maritime City Authority (or DMCA) is authorized to conduct technical inspections of vessels entering Dubai’s waters. The DMCA is authorized to create additional environmental regulations and in the future the DMCA may create regulations which effect greenhouse gas emissions. Violators of Law No. 11 of 2010 can be subject to fines, cancellation of licensure, and seizure of the vessel. We have obtained the requisite insurance and have met the applicable licensure and registration requirements for the Golar Freeze.
Also, the DMCA has issued two regulations which both took effect on August 1, 2011. The Dubai Anchorages Regulation applies to vessels entering Dubai’s waters and exclusive economic zone. The owner of a vessel must indemnify the DMCA for all claims and costs arising out of actual or potential pollution damage and costs of cleanup resulting from any act, omissions, neglect or default of the Master of the vessel, employees, contractors or sub-contractors or from the unseaworthiness of the vessel. The Ship to Ship Transfer Operations Regulation requires vessels to carry a Ship to Ship Transfer Operation Plan conforming to the requirements of MARPOL Annex I. The Operation Plan must be approved by the vessel’s flag administration or submitted electronically to the DMCA for review. After April 1, 2012, all Operation Plans must be approved by the vessel’s flag administration. Violators of these regulations are subject to criminal liability.
These environmental laws and regulations and others may impose costly and onerous obligations and violation or pollution events can lead to substantial civil and criminal fines and penalties. Because the cost of improvements needed to comply with any such new laws or regulations of Dubai is generally the responsibility of DUSUP, we do not foresee any increases in our overall cost of business due to any revisions or reinterpretations of existing Dubai law, or the promulgation of new Dubai or UAE environmental regulations.
Brazil Environmental Regulations
In Brazil, the environmental requirements are defined by the field operator, and in most cases, Petrobras, where it is involved. Brazilian environmental law includes international treaties and conventions to which Brazil is a party, as well as federal, state and local laws, regulations and permit requirements related to the protection of health and the environment. Brazilian oil and gas business is subject to extensive regulations by several governmental agencies, including the National Agency for Oil and Gas, the Brazilian Navy and the Brazilian Authority for Environmental Affairs and Renewable Resources.
The Golar Spirit and the Golar Winter which are operating in Brazil as FSRUs are subject to various local regulations such as the Conama Resolution 357 (the “Water Act” of March 2005) and the Conama Resolution 382 (the “Air Pollution Act” of December 2006). Failure to comply may subject us to administrative, criminal and civil liability, with strict liability in administrative and civil cases.
Indonesia Environmental Regulations
The NR Satu, which is operating in Indonesia as an FSRU, is also subject to various local environmental regulations. In Indonesia, the environmental requirements of downstream business activity for the gas industry are regulated and supervised by the Government of Indonesia and controlled through business and technical licenses issued by the Minister of Energy and Mineral Resources and BPH Migas, the regulatory agency for downstream oil and gas activity. Under Law 22, the Government of Indonesia has the exclusive rights to gas exploitation and activities carried out by private entities based on government-issued licenses. Companies engaging in downstream activities must comply with environmental management and occupational health and safety provisions related to operations. This includes obtaining environmental licenses and conducting environmental monitoring and reporting for activities that may have an impact on the environment.
On October 3, 2009, the Indonesian Government passed Law No. 32 of 2009 regarding Environmental Protection and Management, replacing Law No. 23 of 1997 on Environmental Management. Under this law every business activity having significant impact on the environment is required to carry out an environmental impact assessment (known as an AMDAL). Based on the assessment of the AMDAL by the Commission of AMDAL Assessment, the Minister, Governor, or Mayor/Regent (in accordance with their respective authority) must specify a decree of environmental feasibility. The decree of environmental feasibility is used as the basis for the issuance of an environmental license by the Minister, Governor, or Mayor/Regent (as applicable). The environmental license is a prerequisite to obtaining the relevant business license.
Failure to comply with these laws and obtain the necessary business and technical licenses could result in sanctions including suspension and/or freezing of the business and responsibility for all damages arising from any violation.
The Indonesian government may periodically revise its environmental laws and regulations or adopt new ones, and the effects of new or revised regulations on our operations cannot be predicted. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future regulations or that such regulations will not have a material effect on our operations.
Kuwait Environmental Regulations
Kuwait is a party to the Kuwait Regional Convention for Co-operation on the Protection of the Marine Environment from Pollution, which requires all parties to take appropriate measures to prevent, abate and combat pollution of the marine environment of the sea area. The Golar Igloo is operating in Kuwait and is subject to various regulations against disposals to sea.
The Kuwaiti government may periodically revise its environmental laws and regulations or adopt new ones, and the effects of new or revised regulations on our operations cannot be predicted. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future regulations or that such regulations will not have a material effect on our operations.
Jordan Environmental Regulations
The Golar Eskimo is currently operating in Aqaba, Jordan. The Gulf of Aqaba is considered a Special Area according to Annex One of the International Convention for the Prevention of Pollution from Ships 73/78 (MARPOL 73/78).
Jordan’s Regulation (No. 21) for the Protection of the Environment in the Aqaba Special Economic Zone for the year 2001 creates a number of regulatory requirements designed to prevent harm to the environment. These include limitations on air emissions, releases into the water, and rules for the disposal of garbage, noxious liquid substances, hazardous, radioactive and nucleic substances into the water. The Golar Eskimo may be subject to operational permit requirements if it disposes of waste into the water in this Zone. All disposals from the vessel will therefore be sent ashore.
Under these regulations, our operations may be suspended if any activity causes or threatens to cause environmental pollution in the Zone, or results in deterioration of the quality of water resources. We may also be required to perform environmental audits.
The Jordanian government may periodically revise its environmental laws and regulations or adopt new ones, and the effects of new or revised regulations on our operations cannot be predicted. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future regulations or that such regulations will not have a material effect on our operations.
Vessel Safety Regulations
The Maritime Safety Committee adopted a new paragraph 5 of SOLAS regulation III/1 to require lifeboat on-load release mechanisms not complying with new International Life-Saving Appliances (LSA) Code requirements to be replaced no later than the first scheduled dry-docking of the vessel after July 1, 2014 but, in any case, not later than July 1, 2019. The SOLAS amendment, which entered into force on January 1, 2013, is intended to establish new, stricter, safety standards for lifeboat release and retrieval systems, aimed at preventing accidents during lifeboat launching, and will require the assessment and possible replacement of a large number of lifeboat release hooks.
According to SOLAS Ch V/19.2.10, all vessels shall have an Electronic Chart Display and Information Systems (ECDIS) installed in the period 2012 to 2018. Our LNG vessels must have approved ECDIS fitted no later than the first survey on or after July 1, 2015. All our vessels now have an ECDIS installed and our officers have been sent to specific training courses.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the Maritime Transportation Act of 2002 (or MTSA) came into effect. To implement certain portions of the MTSA, in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new chapter became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, most of which are contained in the ISPS Code. The ISPS Code is designed to protect ports and international shipping against terrorism. After July 1, 2004, to trade internationally, a vessel must attain an International Ship Security Certificate (or ISSC) from a recognized security organization approved by the vessel’s flag state.
Among the various requirements are:
on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped vessels and shore stations, including information on a vessel’s identity, position, course, speed and navigational status;
on-board installation of vessel security alert systems, which do not sound on the vessel but only alerts the authorities on shore;
the development of vessel security plans;
ship identification number to be permanently marked on a vessel’s hull;
a continuous synopsis record kept on board showing a vessel’s history, including the name of the vessel and of the state whose flag the vessel is entitled to fly, the date on which the vessel was registered with that state, the vessel’s identification number, the port at which the vessel is registered and the name of the registered owner(s) and their registered address; and
compliance with flag state security certification requirements.
The U.S. Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from obtaining U.S. Coast Guard-approved MTSA vessel security plans provided such vessels have on board an ISSC that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code.
Our vessel managers have developed Security Plans, appointed and trained Ship and Office Security Officers and each of our vessels in our fleet complies with the requirements of the ISPS Code, SOLAS and the MTSA.
Other Regulation
Our LNG vessels may also become subject to the 2010International Convention on Liability and Compensation for Damage Connection with the Carriage of Hazardous and Noxious Substances by Sea, or HNS, adopted in 1996, the HNS Convention, ifand subsequently amended by the April 2010 Protocol. The HNS Convention introduces strict liability for the ship owner and covers pollution damage as well as the risks of fire and explosion, including loss of life or personal injury and damage to property. HNS includes, among other things, liquefied natural gas. At least 12 states must ratify or accede to the 2010 Protocol for it is enteredto enter into force. The Convention creates a regime of liability and compensationeffect. In July 2019, South Africa became the fifth state to ratify the protocol. At least 7 more states must ratify or accede to the treaty for damage from hazardous and noxious substances (or HNS), including liquefied gases. it to enter into effect.
The 2010 HNS ConventionProtocol sets up a two-tier system of compensation composed of compulsory insurance taken out by shipownersship owners and an HNS Fund whichfund that comes into play when the insurance is insufficient to satisfy a claim or does not cover the incident. Under the 2010 HNS Convention,Protocol, if damage is caused by bulk HNS, claims for compensation will first be sought from the shipownership
owner up to a maximum of 100 million Special Drawing Rights, (or SDR).or SDR. SDR is a potential claim on the freely usable currencies of the IMF members. If the damage is caused by packaged HNS or by both bulk and packaged HNS, the maximum liability is 115 million SDR. Once the limit is reached, compensation will be paid from the HNS Fund up to a maximum of 250 million SDR. The 2010 HNS Convention has not been ratified by a sufficient number of countries to enter into force, and weWe cannot estimate the costs that may be needed to comply with any such requirements that may be adopted with any certainty at this time.
Inspection by Classification Societies
Every large, commercial seagoing vessel must be “classed” by a classification society. A classification society certifies that a vessel is “in class”, signifying that the vessel has been built and maintained in accordance with the rules of the vessel’s country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
Our FSRUs, except for the NR Satu, are “classed” as LNG carriers with the additional class notation REGAS-2 signifying that the regasification installations are designed and approved for continuous operation. The reference to “vessels” in the following, also apply to our FSRUs. For maintenance of the class certificate, regular and special 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. Vessels are drydocked at least once during a five-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 “condition of class” 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.
The FSRU, the NR Satu has a dual class (Det Norske Veritas and the Indonesian BKI) with class notation +OI Floating Offshore LNG Regasification Terminal, REGAS, POSMOOR. The unit is without a propulsion system and is permanently moored without the ability to trade as LNG carrier.
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. The Golar Mazo is certified by Lloyds Register, and all our other vessels are each certified by Det Norske Veritas. Both being members of the International Association of Classification Societies. All of our vessels have been awarded ISM certification and are currently “in class”.
Taxation of the Partnership
United States Taxation
The following is a discussion of the material U.S. federal income tax considerations applicable to us. This discussion is based upon provisions of the Code as in effect on the date of this Annual Report, existing final and temporary regulations thereunder (Treasury(or Treasury Regulations), and current administrative rulings and court decisions, all of which are subject to change or differing interpretation, possibly with retroactive effect. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations applicable to us.
Election to be Treated as a Corporation. We have elected to be treated as a corporation for U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income to the extent it is from U.S. sources or is treated as effectively connected with the conduct of a trade or business in the UnitesUnited States unless such income is exempt from tax under Section 883.883 of the Code.
Taxation of Operating Income.Substantially all of our gross income ishas historically been attributable to the transportation, regasification and storage of LNG, and we expect that substantially all of our gross income will continue to be attributable to the transportation, regasification and storage of, as well as liquefaction of, LNG. Gross income generated from liquefaction, regasification and storage of LNG outside of the United States generally is not subject to U.S. federal income tax, and gross income generated from such activities in the United States generally is subject to U.S. federal income tax. Gross income that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States (or U.S. Source International Transportation Income) is considered to be 50.0% derived from sources within the United States and may be subject to U.S. federal income tax as described below. Gross income attributable to transportation that both begins and ends in the United States (or U.S. Source Domestic Transportation Income) is considered to be 100.0% derived from sources within the United States and generally is subject to U.S. federal income tax. Gross income attributable to transportation exclusively between non-U.S. destinations is considered to be 100.0% derived from sources outside the United States and generally is not subject to U.S. federal income tax.
We are not permitted by law to engage in transportation that gives rise to U.S. Source Domestic Transportation Income, and we do not anticipate providing any regasification or storage services within the territorial seas of the United States. However, certainCertain of our activities give rise to U.S. Source International Transportation Income, and future expansion of our operations could result in an increase in the amount of U.S. Source International Transportation Income, all of which could be subject to U.S. federal income taxation unless the exemption from U.S. taxation under Section 883 of the Code (or the Section 883 Exemption) applies.
The Section 883 Exemption.In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits taxes or the 4.0% gross basis tax described below on its U.S. Source International Transportation Income. The Section 883 Exemption applies only to U.S. Source International Transportation Income and does not apply to U.S. Source Domestic Transportation Income. As discussed below, we believe that based on our current ownership structure, the Section 883 Exemption applies and we are not subject to U.S. federal income tax on our U.S. Source International Transportation Income.
To qualify for the Section 883 Exemption, we must, among other things, meet the following three requirements:
•be organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States with respect to the types of U.S. Source International Transportation Income that we earn (or an Equivalent Exemption);
•satisfy the Publicly Traded Test (as described below) or the Qualified Shareholder Stock Ownership Test (as described below); and
•meet certain substantiation, reporting and other requirements.
In order for a non-U.S. corporation to meet the Publicly Traded Test, its equity interests must be “primarily traded” and “regularly traded” on an established securities market either in the United States or in a jurisdiction outside the United States that grants an Equivalent Exemption. The Section 883 Regulations provide, in pertinent part, that equity interests in a non-U.S. corporation will be considered to be “primarily traded” on an established securities market in a given country if, with respect to the class or classes of equity relied upon to meet the “regularly traded” requirement described below, the number of units of each such class that are traded during any taxable year on all established securities markets in that country exceeds the number of units in such class that are traded during that year on established securities markets in any other single country. Equity interests in a non-U.Snon-U.S. corporation will be considered to be “regularly traded” on an established securities market under the Section 883 Regulations if one or more classes of such equity interests that, in the aggregate, represent more than 50.0% of the combined vote and value of all outstanding equity interests in the non-U.S. corporation satisfy certain listing and trading volume requirements. These listing and trading volume requirements will be satisfied with respect to a class of equity interests if trades in such class are effected, other than in de minimis quantities, on an established securities market on at least 60 days during the taxable year and the aggregate number of units in such class that are traded on an established securities market during the taxable year is at least 10.0% of the average number of units outstanding in that class during the taxable year (with special rules for short taxable years). In addition, a class of equity interests will be considered to satisfy these listing and trading volume requirements if the equity interests in such class are traded during the taxable year on an established securities market in the United States and are “regularly quoted by dealers making a market” in such class (within the meaning of the Section 883 Regulations).
Even if a class of equity satisfies the foregoing requirements, and thus generally would be treated as “regularly traded” on an established securities market, an exception may apply to cause the class to fail the regularly traded test if, for more than half of the number of days during the taxable year, one or more 5.0% unitholders (i.e.(i.e. unitholders owning, actually or constructively, at least 5.0% of the vote and value of that class) own in the aggregate 50.0% or more of the vote and value of the class (or the Closely Held Block Exception). The Closely Held Block Exception does not apply, however, in the event the corporation can establish that a sufficient proportion of such 5.0% unitholders are Qualified Shareholders (as defined below) so as to preclude other persons who are 5.0% unitholders from owning 50.0% or more of the value of that class for more than half the days during the taxable year.
As set forth above, as an alternative to satisfying the Publicly Traded Test, a non-U.S. corporation may qualify for the Section 883 Exemption by satisfying the Qualified Shareholder Stock Ownership Test. A corporation generally will satisfy the Qualified Shareholder Stock Ownership Test if more than 50.0% of the value of its outstanding equity interests is owned, or treated as owned after applying certain attribution rules, for at least half of the number of days in the taxable year by:
•individual residents of jurisdictions that grant an Equivalent Exemption;
•non-U.S. corporations organized in jurisdictions that grant an Equivalent Exemption and that meet the Publicly Traded Test; or
•certain other qualified persons described in the Section 883 Regulations (which we refer to collectively as Qualified Shareholders).
We believe that we satisfy all of the requirements for the Section 883 Exemption, and we expect that we will continue to satisfy such requirements. We are organized under the laws of the Republic of the Marshall Islands. The U.S. Treasury Department has recognized the Republic of the Marshall Islands as a jurisdiction that grants an Equivalent Exemption with respect to the type of U.S. Source International Transportation Income we earn and expect to earn in the future. Consequently, our U.S. Source International Transportation Income (including for this purpose, our proportionate share of any such income earned by our subsidiaries) is and willshould be exempt from U.S. federal income taxation provided we meet either the Publicly Traded Test or the Qualified Shareholder Stock Ownership Test and we satisfy certain substantiation, reporting and other requirements.
Our common units and our Series A Preferred Units are traded only on Thethe Nasdaq Global Market, which is considered to be an established securities market. AlthoughThus the matter is not free from doubt, based on our current and expected cash flow and distributions on our outstanding equity interests, we believe thatnumber of our common units represent more than 50.0% ofand Series A Preferred Units that are traded on the total value of allNasdaq Global Market exceeds the number of our outstanding equity interests,common units and therefore,Series A Preferred Units that are traded on any other established securities market, and this is not expected to change. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Although the matter is not free from doubt, based on our analysis of our current and expected cash flow and distributions on our outstanding equity interests, we believe that (i) our common units and Series A Preferred Units represent more than 50.0% of the total value of all of our outstanding equity interests and (ii) our common units and our Series A Preferred Units represent more than 50.0% of the total combined voting power of our equity interests. In addition, we believe that our common units and our Series A Preferred Units each currently satisfy, and expect that our common units and our Series
A Preferred Units each will continue to satisfy, the listing and trading volume requirements described previously. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Further, our partnership agreement provides that any person or group that beneficially owns more than 4.9% of any class of our units then outstanding generally will be treated as owning only 4.9% of such units for purposes of voting for directors. Although there can be no assurance that this limitation will be effective to eliminate the possibility that we have or will have any 5.0% unitholders for purposes of the Closely Held Block Exception, based on the current ownership of our common units, we believe that our common units have not lost eligibility for the Section 883 Exemption as a result of the Closely Held Block Exception. Thus, although the matter is not free from doubt and is based upon our belief and expectations regarding our satisfaction of the factual requirements described above, we believe that we satisfysatisfied the Publicly Traded Test for the present taxable year2019 and will continue to satisfy the Publicly Traded Test for future taxable years.
The conclusions described above are based upon legal authorities that do not expressly contemplate an organizational structure such as ours. In particular, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under Marshall Islands law. Accordingly, while we believe that, assuming satisfaction of the factual requirements described above, our common units areand Series A Preferred Units should be considered “regularly traded” on an established securities market and that we should satisfy the requirements for the Section 883 Exemption, it is possible that the IRS would assert that our common units and Series A Preferred Units do not meet the “regularly traded” test. In addition, as described previously, our ability to satisfy the Publicly Traded Test depends upon factual matters that are subject to change. Should any of the factual requirements described above fail to be satisfied, we may not be able to satisfy the Publicly Traded Test. Furthermore, our board of directors could determine that it is in our best interests to take an action that would result in our not being able to satisfy the Publicly Traded Test in the future.
In Please see “—The Net Basis and Branch Profits Tax” and “—The 4.0% Gross Basis Tax” below for a discussion of the consequences in the event we aredo not able to satisfy the Publicly Traded Test for a taxable year, we may be able to satisfy the Qualified Shareholder Stock Ownership Test for that year provided Golar owns more than 50.0% of the value of our outstanding equity interests for more than half of the days in such year, Golar itself met the Publicly Traded Test for such year and Golar provided us with certain information that we need in order to claim the benefits of the Qualified Shareholder Stock Ownership Test. Golar has represented that it presently meets the Publicly Traded Test and has agreed to provide the information described above. However, there can be no assurance that Golar will continue to meet the Publicly Traded Test or be able to provide the information we need to claim the benefits of the Section 883 Exemption under the Qualified Shareholder Ownership Test. Further, the relative values of our equity interests are uncertain and subject to change, and as a result Golar may not own more than 50.0% of the value of our outstanding equity interests for any future year. Consequently, there can be no assurance that we would meet the Qualified Shareholder Stock Ownership Test based upon the ownership by Golar of an indirect ownership interest in us.
The Net Basis Tax and Branch Profits Tax.If we earn U.S. Source International Transportation Income and the Section 883 Exemption does not apply, the U.S. source portion of such income may be treated as effectively connected with the conduct of a trade or business in the United States (or Effectively Connected Income) if we have a fixed place of business in the United States involved in the earning of U.S. Source International Transportation Income and substantially all of our U.S. Source International Transportation Income is attributable to regularly scheduled transportation or, in the case of vessel leasing income, is attributable to a fixed place of business in the United States. In addition, if we earn income from liquefaction, regasification or storage of LNG within the territorial seas of the United States, such income may be treated as Effectively Connected Income. Based on our current operations, substantially all of our potential U.S. Source International Transportation Income is not attributable to regularly scheduled transportation or received from vessel leasing, and none of our liquefaction, regasification or storage activities occur within the territorial seas of the United States. As a result, we do not anticipate that any of our U.S. Source International Transportation Income or income earned from liquefaction, regasification or storage will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States, (oror earn income from liquefaction, regasification or storage activities within the territorial seas of the United States)States, in the future, which would result in such income being treated as Effectively Connected Income.
Any income we earn that is treated as Effectively Connected Income, net of applicable deductions, would be subject to U.S. federal corporate income tax (currently imposed at ratesa rate of up to 35.0%21.0%). In addition, a 30.0% branch profits tax could be imposed on any income we earn that is treated as Effectively Connected Income, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid by us in connection with the conduct of our U.S. trade or business.
On the sale of a vessel that has produced Effectively Connected Income, we could be subject to the net basis U.S. federal corporate income tax as well as branch profits tax with respect to the gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we would not be subject to U.S. federal income tax with respect to gaingains realized on the sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles. In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside the United States. It is expected that any sale of a vessel by us will be considered to occur outside of the United States.
The 4.0% Gross Basis Tax.If the Section 883 Exemption does not apply and the net basis tax does not apply, we would be subject to a 4.0% U.S. federal income tax on the U.S. source portion of our gross U.S. Source International Transportation Income, without benefit of deductions. Under the sourcing rules described above under “—United States Taxation—Taxation of
Operating Income,” 50.0% of our U.S. Source International Transportation Income would be treated as being derived from U.S. sources.
Marshall Islands Taxation
We believe that because we, our operating subsidiarysubsidiaries and our controlled affiliates do not, and do not expect to conduct business or operations in the Republic of the Marshall Islands, neither we nor our controlled affiliates will be subject to income, capital gains, profits or other taxation under current Marshall Islands law. As a result, distributions by our operating subsidiary and our controlled affiliates to us will not be subject to Marshall Islands taxation.
United Kingdom Taxation
The following is a discussion of the material United Kingdom tax consequences applicable to us relevant to the fiscal year ended December 31, 2015.2020. This discussion is based upon existing legislation and current H.M. Revenue & Customs practice as of the date of this Annual Report. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion is for general information purposes only and does not purport to be a comprehensive description of all of the United Kingdom tax considerations applicable to us.
Tax Residence and Taxation of a Permanent Establishment in the United Kingdom.A company treated as resident in the United Kingdom for purposes of the United Kingdom Corporation Tax Acts is subject to corporation tax in the same manner and to the same extent as a United Kingdom incorporated company. For this purpose, place of residence is determined by the place at which central management and control of the company is carried out.
In addition, a non-United Kingdom resident company will be subject to United Kingdom corporation tax on profits attributable to a permanent establishment in the United Kingdom to the extent it carries on a trade in the United Kingdom through such a permanent establishment. A company not resident in the United Kingdom will be treated as having a permanent establishment in the United Kingdom if it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on or if an agent acting on behalf of the company has and habitually exercises authority to enter into contracts on behalf of the company.
Unlike a company, a partnership resident in the United Kingdom or carrying on a trade in the United Kingdom is not itself subject to tax, although its partners generally will be liable for United Kingdom tax based upon their shares of the partnership’s income and gains. Please read “Item 10—Additional Information—E. Taxation”.
Taxation of Non-United Kingdom Incorporated Subsidiaries.We will undertake measures designed to ensure that our non-United Kingdom incorporated subsidiaries will be considered controlled and managed outside of the United Kingdom and not as having a permanent establishment or otherwise carrying on a trade in the United Kingdom. While certain of our subsidiaries that are incorporated outside of the United Kingdom will enter into agreements with Golar Management, a United Kingdom incorporated company, for the provision of administrative and/or technical management services, we believe that the terms of these agreements will not result in any of our non-United Kingdom incorporated subsidiaries being treated as having a permanent establishment or carrying on a trade in the United Kingdom. As a consequence, we expect that our non-United Kingdom incorporated subsidiaries will not be treated as resident in the United Kingdom and the profits these subsidiaries earn will not be subject to tax in the United Kingdom.
Taxation of United Kingdom Incorporated Subsidiaries.Each of our subsidiaries that is incorporated in the United Kingdom will be regarded for the purposes of the United Kingdom Corporation Tax Acts as being resident in the United Kingdom and will be liable to United Kingdom corporation tax on its worldwide income and chargeable gains, regardless of whether thisthe income or gains are remitted to the United Kingdom. The generally applicable rate of United Kingdom corporation tax is 20.0% from April 1, 2015.currently 19% . Our United Kingdom incorporated subsidiaries will be liable to tax at this rate on their net income, profits and gains after deducting expenses incurred wholly and exclusively for the purposes of the business being undertaken. There is currently no United Kingdom withholding taxestax levied on distributions made to us.
Brazilian Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Brazil and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Brazilian income tax considerations applicable to us.
One of our subsidiaries, Golar Serviços de Operação de Embarcações Ltda, (or Golar Brazil), has entered into operation and services agreements with Petrobras with respect to the Golar Spirit and the Golar Winter.
On commencement of trade by Golar Brazil in July 2008 (upon delivery of the Golar Spirit), we became subject to tax in Brazil (including net income taxes due from Golar Brazil, if any, and any Brazilian withholding taxes is required to be withheld by Golar Brazil from payments it makes to our other subsidiaries) in the approximate amount of 37.5% of the payments due to Golar Brazil under the operation and services agreement with respect to the Golar Spirit and the Golar Winter. A portion of this tax is withheld by Petrobras from payments it makes to Golar Brazil under the operation and services agreement, and the remainder is collected directly from Golar Brazil.
Petrobras generally will not be required to withhold tax from payments it makes under the charters for the Golar Spirit or the Golar Winter so long as the payments are not made to a “non-tax paying” jurisdiction as defined by the Brazilian authorities. Payments by Petrobras under the charters will be made to UK resident companies and will not therefore be subject to withholding tax.
Brazil may levy tax on the importation of goods and assets into Brazil. However, under the agreements with Petrobras, Petrobras is responsible for these taxes so long as we provide the proper documentation and take the necessary measures in order to clear the vessel and spare parts for importation and customs clearance. Consequently, we do not expect to be liable for any taxes on the importation of goods or assets into Brazil.
Indonesia Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Indonesia and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Indonesian income tax considerations applicable to us.
PTGI, which owns and operates the NR Satu, has entered into a time charter party agreement with PTNR.
On commencement of the charter by PTGRPTNR in Indonesia, which occurred in May 2012 upon delivery of the NR Satu, we became subject to tax in Indonesia payable by PTGI. This includes (and is not limited to) corporate income tax on profits at a rate of 25%, withholding taxes required to be withheld by PTGI from payments it makes to our other subsidiaries including dividends to PTGI’s immediate parent or interest payments on group loans as well as third party debt financing.
However, the tax exposure in Indonesia is intended to be mitigated by revenue due under the charter. This tax element of the time charter rate was established at the beginning of the time charter and shall be adjusted only if there is a change in Indonesian tax laws or certain stipulated tax assumptions are invalid.
PTNR withholds tax from payments it makes under the charter for the NR Satu.See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for details on our legal proceedings in Indonesia.
KuwaitOther Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Kuwait and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Kuwait income tax considerations applicable to us.
Golar Hull M2031 Corp (“Golar M2031”) which owns and operates the Golar Igloo has entered into LNG Storage and Regasification services contract with Kuwait National Petroleum Company (KNPC).
On commencement of the charter by KNPC, which occurred in March 2014 upon delivery of the Golar Igloo, we became subjectWe are liable to corporate income taxes in the jurisdictions in which we have subsidiaries or a taxable presence. We are therefore liable to tax currently in Kuwait payable by Golar M2031. The corporate income tax is predicated on a deemed profit margin of 30% on contracted revenue inthe United Kingdom, Brazil, Indonesia, Jordan, Jamaica, Kuwait and isBarbados according to the tax regulations of those countries. We are also subject to a 15% Corporate Income Tax Rate.tax inspections and tax audits in the jurisdictions we operate in.
KNPC withholds 5% of the monthly hire from payments it makes under the charter for the Golar Igloo which will be released upon Golar M2031 obtaining a certificate from the Kuwaiti Tax Authorities confirming all outstanding tax obligations have been settled.
Kuwait may levy tax on the importation of goods and assets into Kuwait. However, under the charter with KNPC for the Golar Igloo, we are exempt from customs related taxes, charges, administration fees and duties arising in connection with the charter.
Jordan Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Jordan and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Jordan income tax considerations applicable to us.
Golar Eskimo Corporation (“GEC”) entered into a charter with Jordan. On commencement of the charter with Jordan, which occurred in June 2015, shortly after the Golar Eskimo entered into Jordanian territorial waters, we became subject to corporate income tax in Jordan payable by the branch of GEC. As the branch is registered in the Aqaba Special Economic Zone Authority (“ASEZA”), it is subject to various exemptions and favorable tax rates including corporate income tax rate of 5%.
Jordan tax legislation indicated that the branch should be able to claim tax depreciation by reference to the delivered cost of the Golar Eskimo, the amount that would be reflected on the balance sheet of the branch for accounting purposes. However, the Jordanianlocal tax authorities may challengealso periodically revise their tax laws and regulations or adopt new laws and regulations, and the effects of new or revised tax regulations on our position on the value placed on the vessel, which impacts the value ofoperations cannot be predicted. There can be no assurances that additional significant costs and liabilities will not be incurred to comply with such current and future tax depreciation claimed. We believeregulation changes or that in the event we are challenged wesuch tax regulations will be successful in defending our position.
Employees
Other than our Secretary, we currently do not have any employees and relya material effect on the executive officers, directors and other key employees of Golar Management who perform services for us pursuant to the management and administrative services agreement. Golar Management also provides commercial and technical management services to our fleet and will provide administrative services to us pursuant to the management and administrative services agreement. Please read “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Executive Officers”.operations.
C.Organizational Structure
Golar GP LLC, a Marshall Islands limited liability company, is our general partner. Our general partner is a subsidiary of Golar, which is a Bermuda exempted company. Please readsee Exhibit 8.1 to this Annual ReportForm 20-F for a list of our significant subsidiaries.
D.Property, Plant and Equipment
Other than the vessels in our current fleet, we also own a purpose-built mooring structure with a net book value of $24.7$10.7 million and $28.5$14.2 million as of December 31, 20152019 and 2014,2018, respectively. The mooring structure is located off West Java, Indonesia where the NR Satu is permanently moored for the duration of its time charter with PTNR. Together with the NR Satu, the mooring structure is under a time charter with PTNR which terminates at the end of 2022. The mooring structure, together with the NR Satu, is also secured in favor of the $175$175.0 million NR Satu facility.
Item 4A.Unresolved Staff Comments
There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding our periodic reports which remain unresolved as of the date of the filing of this Form 20-F with the Commission.
Item 5.Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our historical financial statements and related notes included elsewhere in this Annual Report. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. Our consolidated financial statementsConsolidated Financial Statements have been prepared in accordance with U.S. GAAP and are presented in U.S. Dollars.
Background and OverviewOur Charters
The services of our FSRUs, LNG carriers and FLNG are provided to their charterers for a fixed period at a specified hire or tolling rate pursuant to time charters or liquefaction tolling agreements. Under a time charter, the vessel owner provides crewing and other services related to the vessel’s operation which include repairs and maintenance, insurance, stores, lube oils and communication expenses as well as periodic drydocking costs. These costs related to the vessel’s operation are included in the daily rate, and the charterer is responsible for substantially all of the vessel voyage costs, which include fuel, port and canal fees, LNG boil-off, cargo loading and unloading expenses, canal tolls, agency fees and commissions. For FSRUs, the charterer is also responsible for providing, maintaining, repairing and operating certain facilities at the unloading port such as sufficient mooring infrastructure for LNG vessels to be berthed alongside and a high pressure send-out pipeline.
Certain of our charters provide for the payment by the charterer of an all-inclusive daily fixed rate. The hire rate for our FSRU vessels and LNG Carriers is primarily made up of two components:
•Capital cost component - primarily relates to the cost of the vessel and is structured to meet that cost and provide a return on investor capital. The capital cost component is constant for the duration of the entire charter except for the Golar Winter and Golar Eskimo.
•Operating cost component - intended to compensate us for vessel operating expenses including management fees. This component is generally established at the beginning of the charter and typically escalates annually on a fixed percentage or fluctuates annually based on changes in a specified consumer price index or foreign exchange rate.
Under time charters, hire is payable monthly. Under all of our charters, hire is payable in U.S. Dollars, except for the operating cost component for the Golar Winter, which is payable in Brazilian Reais.
Our interest in the FLNG vessel provides floating liquefied natural gas tolling services based on a liquefaction tolling agreement. See “Item 5—Operating and Financial Review and Prospects—Results of Operations.”
The hire rate payable for each of our vessels may be reduced if they do not perform to certain of their contractual specifications or if we are in breach of any of our representations and warranties in the charter. When a vessel is “off-hire” or not available for service, the charterer generally is not required to pay the hire or toll rate and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time charter. A vessel generally will be deemed off-hire if there is a specified time it is not available for the charterer’s use due to, among other things: operational deficiencies, drydocking for repairs, maintenance or inspection, equipment breakdowns, or delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.
See note 6 “Segment Information” in our consolidated financial statements for information regarding our significant customers.
Competition
We were formedoperate in 2007markets that are highly competitive and based primarily on supply and demand. As the FSRU market continues to grow and mature there are new competitors entering the market. Existing competitors have also ordered additional FSRUs. Previous expectations of rapid growth in the FSRU market gave owners the confidence to place orders for FSRUs before securing charters. This has led to more competition for mid- and long-term FSRU charters. Competitive pressure in this market has since resulted in a significant reduction in new FSRU orders by both existing competitors and new entrants.
Competition for these charters is based primarily on price, operational track record, LNG storage capacity, efficiency of the regasification process, vessel availability, size, age and condition of the vessel, relationships with LNG carrier users and reputation of the operator. In addition, some FSRUs may operate as LNG carriers during periods of increased FSRU competition.
The FLNG industry is in an early stage of development, and we do not currently face significant competition from other providers of FLNG services. As of April 16, 2020, there are currently only four operating FLNGs worldwide, including the Hilli. We anticipate that other companies, including marine transportation companies with strong reputations and extensive resources and experience, will enter the FLNG industry at some point in the future, resulting in greater competition.
Seasonality
Historically, LNG trade, and therefore charter rates, increased in the winter months and eased in the summer months as demand for LNG for heating in the Northern Hemisphere rose in colder weather and fell in warmer weather. In general, the LNG vessel industry has become less dependent on the seasonal transport of LNG than a decade ago. The advent of FSRUs has opened up new markets and uses for LNG, spreading consumption somewhat more evenly over the year. There is a higher seasonal demand during the summer months due to energy requirements for air conditioning in some markets or reduced availability of hydro power in others and a pronounced higher seasonal demand during the winter months for heating in other markets. The vessel market is somewhat weaker in the period between winter and summer.
Our vessels that operate under long-term charters are not subject to the effect of seasonal variations in demand, with the exception of the Golar Igloo, whose charter specifies a leading independent ownerregasification season of ten months, extendable at the option of the charterer. For our vessels that are available for charter in the spot market, our revenue may be subject to the effect of seasonal variations in demand.
Vessel Maintenance and operatorManagement
Safety is our top priority. Our vessels are operated in a manner intended to protect the safety and health of our employees, the general public and the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten safety, such as groundings, fires and collisions. We are also committed to reducing emissions and waste generation. We have established key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets.
Under our charters, we are responsible for the technical management of the vessels which Golar, through its subsidiaries, assists us, by managing our vessel operations, maintaining a technical department to monitor and audit our vessel manager operations and providing expertise in various functions critical to our operations. This affords an efficient and cost effective operation and, pursuant to administrative services agreements with certain subsidiaries of Golar, access to human resources, financial and other administrative functions.
These functions are supported by on board and onshore systems for maintenance, inventory, purchasing and budget management. In addition, Golar’s day-to-day focus on cost control will be applied to our operations. To some extent, the uniform design of some of our vessels and the adoption of common equipment standards should also result in operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.
See “Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions—Our Management Agreements.”
Risk of Loss, Insurance and Risk Management
The operation of any vessel, including LNG carriers, FSRUs and FLNGs, 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 and/or war risk situations, hostilities or pandemics. 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. The maximum coverage varies from 180 days to 360 days, depending on the vessel. The number of deductible days varies from 14 days to 60 days, depending on the vessel and type of damage (e.g. whether the claim arises from either machinery or hull damage).
Protection and indemnity insurance, which covers our third-party legal liabilities in connection with our shipping activities, is provided by mutual protection and indemnity (“P&I”) associations, or P&I clubs. 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.
The current protection and indemnity insurance coverage for pollution is $250 million per incident for the Hilli and $1 billion per vessel per incident for all other vessels. The thirteen P&I clubs that comprise the International Group of Protection and Indemnity Clubs insure approximately 90% 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 $8.2 billion per accident or occurrence. We are a member of Gard and Skuld P&I Clubs. As a member of these P&I clubs, we are subject to a call for additional premiums based on the clubs' 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 clubs have 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.
The insurers providing the hull and machinery, hull and cargo interests, protection and indemnity and loss of hire insurances have confirmed that they will consider FSRUs as vessels for the purpose of providing insurance. For the FSRUs we have also arranged an additional comprehensive general liability insurance. This type of insurance is common for offshore operations and is additional to the P&I insurance.
Our operations utilize Golar’s thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers' competence training program, seafarers' workshops and membership in emergency response organizations. We expect to benefit from Golar’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.
Classification, Inspection and Maintenance
Every large, commercial seagoing vessel must be “classed” by a classification society. A classification society certifies that a vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
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. Vessels are drydocked at least once during a five-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. With the exception of the Golar Mazo, which is certified by Lloyds Register, all other vessels in our current fleet are each certified by Det Norske Veritas GL ("DNV-GL"). All of our operating vessels have been awarded International Safety Management (“ISM”) certification and are currently “in class”, except for the Golar Spirit which is currently in lay-up and Golar Mazo which will be placed in lay-up shortly.
We carry out inspections of the vessels on a regular basis; both at sea and while the vessels are in port. The results of these inspections, which are conducted both in port and while 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 and improvement for our vessels and their systems.
Environmental and Other Regulations
General
Our business and the operation of our vessels are subject to various international treaties and conventions and to the applicable local national and subnational laws and regulations of the countries (U.S., Indonesia, Brazil, Kuwait, Jamaica and Jordan) in which our vessels operate or are registered. These local laws and regulations might require us to obtain governmental permits and authorizations before we may conduct certain activities. Failure to comply with these laws or to obtain the necessary business and technical licenses could result in sanctions including suspension and/or freezing of the business and responsibility for all damages arising from any violation.
The local governments may also periodically revise their environmental laws and regulations or adopt new ones, and the effects of new or revised laws and regulations on our operations cannot be predicted. 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 vessels, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future laws and regulations, or that such laws and regulations will not have a material effect on our operations.
International environmental treaties and conventions, U.S. environmental laws and regulations that apply to the operation of our vessels are described below. Other countries in which we operate or in which our vessels are registered have or may in the future have laws and regulations that are similar in nature to the U.S. laws referenced below. GMN provides technical management services for our vessels, is certified in accordance with the International Maritime Organization's (“IMO”) standard for ISM and operates in compliance with the International Standards Organization (“ISO”) Environmental Management Standard for the management of significant environmental aspects associated with the ownership and operation of our fleet.
International Maritime Regulations of LNG Vessels
The IMO provides international regulations governing safety, security and environmental aspects of shipping and international maritime trade. For a discussion of IMO’s environmental regulations, see “Air Emissions”, “Anti-Fouling Requirements,” “Ballast Water Management Convention” and “Regulation of Greenhouse Gas Emissions”.
Among other requirements, the IMO's ISM Code requires the party with operational control of a vessel to develop an extensive safety management system and the adoption of a policy for safety and environmental protection setting forth instructions and procedures for operating its vessels safely and also describing procedures for responding to emergencies. Our ship manager holds a document of compliance under the ISM Code for operation of Gas Carriers.
Vessels that transport gas, including LNG carriers and FSRUs, are also subject to the International Gas Carrier Code (“IGC”) which provides a standard for the safe carriage of LNG and certain other liquid gases by prescribing the design and construction standards of vessels involved in such carriage. Each of our vessels is in compliance with the IGC Code and each of our new buildings/conversion contracts requires that the vessel receive certification that it is in compliance with applicable regulations before it is delivered.
The IMO also promulgates ongoing amendments to the International Convention for the Safety of Life at Sea (“SOLAS”) which provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation and addresses maritime security. SOLAS requires the provision of lifeboats and other life-saving appliances, requires the use of the Global Maritime Distress and Safety System (an international radio equipment and watch keeping standard) afloat and at shore stations, and relates to the International Convention on the Standards of Training and Certification of Watchkeeping Officers (“STCW”) also promulgated by the IMO. The STCW establishes minimum training, certification and watch keeping standards for seafarers. The SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Flag states that have ratified the SOLAS and STCW generally employ the classification societies, which have incorporated the SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.
In the wake of increased worldwide security concerns, the IMO amended SOLAS and added the International Ship and Port Facility Security Code (“ISPS Code”), which came into effect on July 1, 2004, to detect security threats and take preventive measures against security incidents affecting vessels or port facilities. GMN has developed security plans and appointed and trained ship and office security officers. In addition, all of our vessels have been certified to meet the ISPS Code and the security requirements of the SOLAS and the Maritime Transportation Security Act (“MTSA”).
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulation may have on our operations. Non-compliance with the IGC Code or other applicable IMO regulations may subject a shipowner or a bareboat charterer to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.
Air Emissions
The International Convention for the Prevention of Marine Pollution from Ships (“MARPOL”), imposes environmental standards on the shipping industry relating to marine pollution, including oil spills, management of garbage, the handling and disposal of noxious liquids, sewage and air emissions. Annex I to MARPOL applies to various vessels delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards. IMO regulations also require owners and operators of vessels to adopt Shipboard Oil Pollution Emergency Plans. Periodic training and drills for response personnel and for vessels and their crews are required.
MARPOL 73/78 Annex VI regulations for the “Prevention of Air Pollution from Ships” apply to all vessels, fixed and floating drilling rigs and other floating platforms. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from vessel exhausts, emissions of volatile compounds from cargo tanks, incineration of specific substances, and prohibits deliberate emissions of ozone depleting substances. Annex VI also includes a global cap on sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. The certification requirements for Annex VI depend on size of the vessel and time of the periodic classification survey. Ships weighing more than 400 gross tons and engaged in international voyages involving countries that have ratified the conventions, or vessels flying the flag of those
countries, are required to have an International Air Pollution Certificate (“IAPP Certificate”). Annex VI came into force in the United States on January 8, 2009. All our vessels delivered or drydocked since May 19, 2005 have been issued IAPP Certificates.
Amendments to Annex VI to the MARPOL Convention that took effect in 2010 imposed progressively stricter limitations on sulfur emissions from vessels. As of January 1, 2020, the ultimate limit of 0.5% the sulfur content for fuel used to power vessels operating in areas outside of designated emission control areas (“ECAs”) took effect. This represents a substantial reduction from the previous sulfur 3.5% cap. The 0.5% sulfur cap is generally referred to IMO 2020 and applies absent the installation of expensive sulfur scrubbers to meet reduced emission requirements for sulfur. Because the marine sector accounts for approximately half of the global fuel oil demand, the impact of the increased demand for compliant low sulfur fuels is expected to affect the availability and cost of such fuels and, in turn, increase our costs of operation. Our vessels have achieved compliance with sulfur emission standards, where necessary, by being modified to burn gas only in their boilers when alongside a berth. Except for the Golar Mazo, we have modified the boilers on all our vessels to also allow operation on low sulfur diesel oil, or LSDO. The amendments to Annex VI also established new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The European directive 2005/33/EC bans the use of fuel oils containing more than 0.10% sulfur by mass by any merchant vessel while at berth in any EU country. See “European Union Regulations” below for additional information.
Even more stringent sulfur emission standards apply in coastal areas designated as ECAs, such as the United States and Canadian coastal areas designated by the IMO's Marine Environment Protection Committee ("MEPC"), as discussed in the “U.S. Clean Air Act” below. These areas include certain coastal areas of North America and the United States Caribbean Sea. Annex VI Regulation 14, which came into effect on January 1, 2015, set a 0.10% sulfur limit in areas of the Baltic Sea, North Sea, North America, and United States Caribbean Sea ECAs.
U.S. air emissions standards are now equivalent to these amended Annex VI requirements. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems. Because our vessels are largely powered by means other than fuel oil we do not anticipate that any emission limits that may be promulgated will require us to incur any material costs for the operation of our vessels, but that possibility cannot be eliminated.
Anti-Fouling Requirements
Anti-fouling systems, such as paint or surface treatment, are used to coat the bottom of vessels to prevent the attachment of mollusks and other sea life to the hulls of vessels. Our vessels are subject to the IMO’s International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the Anti-fouling Convention, which prohibits the use of organotin compound coatings in anti-fouling systems. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-fouling System Certificates for all of our vessels, and we do not believe that maintaining such certificates will have an adverse financial impact on the operation of our vessels.
Oil Pollution Act and The Comprehensive Environmental Response Compensation and Liability Act
The U.S. Oil Pollution Act of 1990 (“OPA 90”) established an extensive regulatory and liability regime for environmental protection and clean up of oil spills. OPA 90 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 200 nautical mile exclusive economic zone of the United States. The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) applies to the discharge of hazardous substances whether on land or at sea. While OPA 90 and CERCLA would not apply to the discharge of LNG, these laws 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 90, 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 under OPA 90 aside from clean-up and containment costs are defined broadly to include:
•injury to, destruction or loss of, or loss of use of, natural resource and the costs of assessment thereof;
•injury to, or economic losses resulting from, the destruction of real and personal property;
•net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;
•loss of subsistence use of natural resources that are injured, destroyed or lost;
•lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
•net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards.
The limits of OPA 90 liability are the greater of $2,200 per gross ton or $18.8 million for any tanker other than single-hull tank vessels, over 3,000 gross tons (subject to possible adjustment for inflation) (relevant to ours and Golar’s LNG carriers). 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 willful 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. OPA 90 specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries, and operatesome 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 ship owners’ responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels, contains a similar liability regime and provides for recovery of clean up and removal costs and the imposition of natural resource damages for releases of “hazardous substances” which as defined in CERCLA does not include oil. Liability under CERCLA is limited to the greater of $300 per gross ton or $0.5 million for each release from vessels not carrying hazardous substances as cargo or residue, and $300 per gross ton or $5 million for each release from vessels carrying hazardous substances as cargo or residue. As with OPA 90, 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 willful 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 90 and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. We believe that we are in substantial compliance with OPA 90, CERCLA and all applicable state regulations in the ports where our vessels call.
OPA 90 requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the limit of their potential strict liability under OPA 90/CERCLA. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty. Under OPA 90 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 90/CERCLA. Each of our ship owning 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, or COFRs, 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 COFRs from the US Coast Guard for each of our vessels that is required to have one.
Compliance with any new requirements of OPA 90, or other laws or regulations, may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. Any additional legislation or regulation applicable to the operation of our vessels that may be implemented in the future could adversely affect our business and ability to make distributions to our unitholders.
We currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed or be excluded under our insurance coverage, it could have an adverse effect on our business and results of operation
Bunker Convention/CLC State Certificate
The International Convention on Civil Liability for Bunker Oil Pollution 2001, or the Bunker Convention entered into force on November 21, 2008. The Convention provides a liability, compensation and compulsory insurance system for the victims of oil pollution damage caused by spills of bunker oil. The Convention makes the ship owner liable to pay compensation for pollution damage (including the cost of preventive measures) caused in the territory, including the territorial sea of a State Party, as well as its economic zone or equivalent area. Registered owners of any sea going vessel and seaborne craft over 1,000 gross tonnage, of any type whatsoever, and registered in a State Party, or entering or leaving a port in the territory of a State Party, will be required to maintain insurance which meets the requirements of the Convention and to obtain a certificate issued by a State Party attesting that such insurance is in force. The State Party issued certificate must be carried on board at all times. P&I Clubs in the International Group issue the required Bunker Convention “Blue Cards” provide evidence
that there is insurance in place that meets the Bunker Convention requirements and thereby enable signatory states to issue certificates. All of our vessels have received “Blue Cards” from their P&I Club and are in possession of a Civil Liability Convention (CLC) State-issued certificate attesting that the required insurance cover is in force.
Ballast Water Management Convention, Clean Water Act and National Invasive Species Act
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. The Environmental Protection Agency (“EPA”) and USCG, have also enacted rules relating to ballast water discharge for all vessels entering or operating in United States waters. Compliance requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering United States waters.
a. Ballast Water Management Convention
In February 2004, the IMO adopted an International Convention for the Control and Management of Ships' Ballast Water and Sediments (“BWM Convention”). The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration limits. The Convention entered into force on September 8, 2017, however IMO later decided to postpone the compliance date for existing vessels by 2 years, i.e. until the first renewal survey following September 8, 2019. Furthermore, in October 2014 the MEPC met and adopted additional resolutions concerning the BWM Convention’s implementation. Upon entry into force of the BWM Convention, mid-ocean ballast water exchange became mandatory for our vessels.
b. Clean Water Act
The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA. In addition, many 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 EPA regulates the discharge of ballast and bilge water and other substances in United States waters under the CWA. The EPA regulations historically have required vessels 79 feet in length or longer (other than commercial fishing vessels and recreational vessels) to obtain and comply with a permit that regulates ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters. In March 2013, the EPA issued the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, (“VGP”). The 2013 VGP focuses on authorizing discharges incidental to operations of commercial vessels and contains ballast water discharge limits for most vessels to reduce the risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable lubricants. In December 2018, the Vessel Incidental Discharge Act (VIDA) was signed into law and restructured the EPA and the USCG programs for regulating incidental discharges from vessels. Rather than requiring CWA permits, the discharges will be regulated under a new CWA Section 312(p) establishing Uniform National Standards for Discharges Incidental to Normal Operation of Vessels. Under VIDA, VGP provisions and existing USCG regulations will be phased out over a period of approximately four years and replaced with National Standards of Performance (NSPs) to be developed by EPA and implemented and enforced by the USCG. Under VIDA, the EPA is directed to develop the NSPs by December 2020 and the USCG is directed to develop its corresponding regulations two year after EPA develops the NSPs. Although the 2013 VGP was scheduled to expire in December 2018, under VIDA the provisions of the 2013 VGP will remain in place until the new regulations are in place. Pursuant to the requirements in the VGP, vessel owners and operators must meet twenty-five sets of state-specific requirements as the CWA’s 401 certification process allows tribes and states to impose their own requirements for vessels operating within their waters. Vessels operating in multiple jurisdictions could face potentially conflicting conditions specific to each jurisdiction that they travel through.
c. National Invasive Species Act
The USCG regulations adopted under the U.S. National Invasive Species Act (“NISA”) require the USCG's approval of any technology before it is placed on a vessel. As a result, the USCG has provided waivers to vessels which could not install the then as-yet unapproved technology. In May 2016, the USCG published a review of the practicability of implementing a more stringent ballast water discharge standard. The results concluded that technology to achieve a significant improvement in ballast water treatment efficacy cannot be practically implemented. In February, 2016, the USCG issued a new rule amending
the Coast Guard’s ballast water management record-keeping requirements. Effective February 22, 2016, vessels with ballast tanks operating exclusively on voyages between ports or places within a single Captain of the Port zone must submit an annual report of their ballast water management practices. Further, under the amended requirements, vessels may submit their reports after arrival at the port of destination instead of prior to arrival. As discussed above, under VIDA, existing USCG ballast water management regulations will be phased out over a period of approximately four years and replaced with NSPs to be developed by EPA and implemented and enforced by the USCG.
Installation of ballast water treatments systems (“BWTS”), will be needed on all our LNG Carriers. As long as our FSRUs are operating as FSRUs and kept stationary they will not need installation of a BWTS. The additional costs of complying with these rules, relating to all our vessels are estimated to be in the range of $1.8 million and $2.1 million per vessel and will be phased in over time in connection with the renewal surveys that are required. We have therefore decided to install BWTS on all our LNG Carriers on their first drydocking after 2017. The installation of the BWTS on the Methane Princess was completed in 2018.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. See “Regulation of Greenhouse Gas Emissions” below for European Union action relating to carbon dioxide emissions from maritime transport.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age and flag as well as the number of times the ship has been detained. The European Union also adopted and extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC) introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at berth in the Baltic, the North Sea and the English Channel (the so called “SOx-Emission Control Area”). As of January 2020, EU member states must also ensure that ships in all EU waters, except the SOx-Emission Control Area, use fuels with a 0.5% maximum sulfur content.
Clean Air Act
The U.S. Clean Air Act of 1970 (“CAA”) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargos when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas and emission standards for so-called “Category 3” marine diesel engines operating in U.S. waters. The marine diesel engine emission standards are currently limited to new engines beginning with the 2004 model year. On April 30, 2010, the EPA promulgated final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. The emission standards apply in two stages: near-term standards for newly-built engines apply from 2011, and long-term standards requiring an 80% reduction in nitrogen dioxides, or NOx, apply from 2016. Compliance with these standards may cause us to incur costs to install control equipment on our vessels in the future.
International Labour Organization
The International Labour Organization (the “ILO”) is a specialized agency of the UN that has adopted the Maritime Labor Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships that are 500 gross tonnage or over and are either engaged in international voyages or flying the flag of a Member and operating from a port, or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
Regulation of Greenhouse Gas Emissions
Scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases” (“GHGs”), including carbon dioxide and methane, may be contributing to warming of the earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of GHG emissions, in particular emissions from fossil fuels, has and continues to attract political and social attention and is the subject of regulatory attention.
To date, emissions of greenhouse gases from international transport have not been subject to the international protocols and agreements addressing climate change, such as the 2005 Kyoto Protocol and the 2015 Paris Agreement. However, absent a global approach to address GHG emissions from international transport, the European Union has initiated action and is pursuing a strategy to integrate maritime emissions into the overall European Union strategy to reduce GHG emissions. In 2013, European Commission initiated a three step strategy aimed at this reduction consisting of (i) monitoring, reporting and verification of carbon dioxide emissions from large vessels using European Union ports, (ii) establishment of GHG reduction targets for sector; and (iii) implementation of further measures, including market-based measures such an emissions trading, in the medium to long term. The first step was addressed with a European Union regulation that took effect in January 2018 that requires large vessels (over 5,000 gross tons) calling at European ports to collect and publish data on carbon dioxide emissions. EU Directive 2018/410, which amended the EU Emissions Trading System Directive, emphasized the need to act on GHG emissions from shipping and other sectors and calls for action by either IMO or the European Union to address emissions from the international transport sector from 2023.
In addition, the IMO has taken some action, including mandatory measures to reduce emissions of GHGs from all vessels that took effect in January 2013. These measures included amendments to MARPOL Annex VI Regulations requiring the Energy Efficiency Design Index (“EEDI”) for new vessels, and the Ship Energy Efficiency Management Plan (“SEEMP”) for all vessels. The regulations apply to all vessels of 400 gross tonnage and above. The IMO also adopted a mandatory requirement in October 2016, which entered into force in March 2018, that ships of 5,000 gross tonnage and above record and report their fuel oil consumption. These measures affect the operations of vessels that are registered in countries that are signatories to MARPOL Annex VI or vessels that call upon ports located within such countries. In May 2019, the MEPC approved for adoption at its April 2020 session further amendments to MARPOL Annex VI intended to significantly strengthen the EEDI “phase 3” requirements. These amendments would accelerate the entry into effect by date of phase 3 from 2025 to 2022 for several ship types, including gas carriers, general cargo ships and LNG carriers under long-term chartersand require new ships built from that generate long-term stable cash flows. Our fleet currently consistsdate to be significantly more energy efficient. The MEPC is also looking into the possible introduction of six FSRUs (excludinga phase 4 of EEDI requirements. The implementation of the Golar Tundra)EEDI and four LNG carriers. We expectSEEMP standards could cause us to incur additional compliance costs. The IMO is also considering the implementation of a market-based mechanism for greenhouse gas emissions from vessels. At the October 2016 MEPC session, the IMO adopted a roadmap for developing a comprehensive IMO strategy on reduction of GHG emissions. The IMO adopted its initial GHG reduction strategy in 2018 and established a program of follow-up actions up to 2023 as a planning tool.
In the United States, the EPA has issued a final finding that greenhouse gases threaten public health and safety and has promulgated regulations that regulate the emission of greenhouse gases from certain sources. The EPA enforces both the CAA and the international standards found in Annex VI of MARPOL concerning marine diesel emissions, and the sulfur content found in marine fuel. Other federal and state regulations relating to the control of greenhouse gas emissions may follow, including climate change initiatives that have been considered in the U.S. Congress. Any passage of climate control legislation or other regulatory initiatives by the IMO, the European Union, the United States, or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases from vessels could require us to make additional accretive acquisitionssignificant financial expenditures that we cannot predict with certainty at this time. In addition, even without such regulation, our business may be indirectly affected to the extent that climate change results in sea level changes or more intense weather events.
Other Regulations
Our LNG vessels may also become subject to the International Convention on Liability and Compensation for Damage Connection with the Carriage of FSRUsHazardous and LNG carriersNoxious Substances by Sea, or HNS, adopted in 1996, the HNS Convention, and subsequently amended by the April 2010 Protocol. The HNS Convention introduces strict liability for the ship owner and covers pollution damage as well as the risks of fire and explosion, including loss of life or personal injury and damage to property. HNS includes, among other things, liquefied natural gas. At least 12 states must ratify or accede to the 2010 Protocol for it to enter into effect. In July 2019, South Africa became the fifth state to ratify the protocol. At least 7 more states must ratify or accede to the treaty for it to enter into effect.
The 2010 Protocol sets up a two-tier system of compensation composed of compulsory insurance taken out by ship owners and an HNS fund that comes into play when the insurance is insufficient to satisfy a claim or does not cover the incident. Under the 2010 Protocol, if damage is caused by bulk HNS, claims for compensation will first be sought from the ship
owner up to a maximum of 100 million Special Drawing Rights, or SDR. SDR is a potential claim on the freely usable currencies of the IMF members. If the damage is caused by packaged HNS or by both bulk and packaged HNS, the maximum liability is 115 million SDR. Once the limit is reached, compensation will be paid from the HNS Fund up to a maximum of 250 million SDR. We cannot estimate the costs that may be needed to comply with long-term chartersany such requirements that may be adopted with any certainty at this time.
Taxation of the Partnership
United States Taxation
The following is a discussion of the material U.S. federal income tax considerations applicable to us. This discussion is based upon provisions of the Code as in effect on the date of this Annual Report, existing final and temporary regulations thereunder (or Treasury Regulations), and current administrative rulings and court decisions, all of which are subject to change or differing interpretation, possibly with retroactive effect. Changes in these authorities may cause the tax consequences to vary substantially from Golarthe consequences described below. The following discussion is for general information purposes only and third partiesdoes not purport to be a comprehensive description of all of the U.S. federal income tax considerations applicable to us.
Election to be Treated as a Corporation. We have elected to be treated as a corporation for U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income to the extent it is from U.S. sources or is treated as effectively connected with the conduct of a trade or business in the United States unless such income is exempt from tax under Section 883 of the Code.
Taxation of Operating Income.Substantially all of our gross income has historically been attributable to the transportation, regasification and storage of LNG, and we expect that substantially all of our gross income will continue to be attributable to the transportation, regasification and storage of, as well as liquefaction of, LNG. Gross income generated from liquefaction, regasification and storage of LNG outside of the United States generally is not subject to U.S. federal income tax, and gross income generated from such activities in the United States generally is subject to U.S. federal income tax. Gross income that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States (or U.S. Source International Transportation Income) is considered to be 50.0% derived from sources within the United States and may be subject to U.S. federal income tax as described below. Gross income attributable to transportation that both begins and ends in the United States (or U.S. Source Domestic Transportation Income) is considered to be 100.0% derived from sources within the United States and generally is subject to U.S. federal income tax.
Certain of our activities give rise to U.S. Source International Transportation Income, and future expansion of our operations could result in an increase in the amount of U.S. Source International Transportation Income, all of which could be subject to U.S. federal income taxation unless the exemption from U.S. taxation under Section 883 of the Code (or the Section 883 Exemption) applies.
The Section 883 Exemption.In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits taxes or the 4.0% gross basis tax described below on its U.S. Source International Transportation Income. The Section 883 Exemption applies only to U.S. Source International Transportation Income and does not apply to U.S. Source Domestic Transportation Income. As discussed below, we believe that based on our current ownership structure, the Section 883 Exemption applies and we are not subject to U.S. federal income tax on our U.S. Source International Transportation Income.
To qualify for the Section 883 Exemption, we must, among other things, meet the following three requirements:
•be organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States with respect to the types of U.S. Source International Transportation Income that we earn (or an Equivalent Exemption);
•satisfy the Publicly Traded Test (as described below) or the Qualified Shareholder Stock Ownership Test (as described below); and
•meet certain substantiation, reporting and other requirements.
In order for a non-U.S. corporation to meet the Publicly Traded Test, its equity interests must be “primarily traded” and “regularly traded” on an established securities market either in the United States or in a jurisdiction outside the United States that grants an Equivalent Exemption. The Section 883 Regulations provide, in pertinent part, that equity interests in a non-U.S. corporation will be considered to be “primarily traded” on an established securities market in a given country if, with respect to the class or classes of equity relied upon to meet the “regularly traded” requirement described below, the number of units of each such class that are traded during any taxable year on all established securities markets in that country exceeds the number of units in such class that are traded during that year on established securities markets in any other single country. Equity interests in a non-U.S. corporation will be considered to be “regularly traded” on an established securities market under the Section 883 Regulations if one or more classes of such equity interests that, in the aggregate, represent more than 50.0% of the combined vote and value of all outstanding equity interests in the non-U.S. corporation satisfy certain listing and trading volume requirements. These listing and trading volume requirements will be satisfied with respect to a class of equity interests if trades in such class are effected, other than in de minimis quantities, on an established securities market on at least 60 days during the taxable year and the aggregate number of units in such class that are traded on an established securities market during the taxable year is at least 10.0% of the average number of units outstanding in that class during the taxable year (with special rules for short taxable years). In addition, a class of equity interests will be considered to satisfy these trading volume requirements if the equity interests in such class are traded during the taxable year on an established securities market in the United States and are “regularly quoted by dealers making a market” in such class (within the meaning of the Section 883 Regulations).
Even if a class of equity satisfies the foregoing requirements, and thus generally would be treated as “regularly traded” on an established securities market, conditions permit.an exception may apply to cause the class to fail the regularly traded test if, for more than half of the number of days during the taxable year, one or more 5.0% unitholders (i.e. unitholders owning, actually or constructively, at least 5.0% of the vote and value of that class) own in the aggregate 50.0% or more of the vote and value of the class (or the Closely Held Block Exception). The Closely Held Block Exception does not apply, however, in the event the corporation can establish that a sufficient proportion of such 5.0% unitholders are Qualified Shareholders (as defined below) so as to preclude other persons who are 5.0% unitholders from owning 50.0% or more of the value of that class for more than half the days during the taxable year.
As set forth above, as an alternative to satisfying the Publicly Traded Test, a non-U.S. corporation may qualify for the Section 883 Exemption by satisfying the Qualified Shareholder Stock Ownership Test. A corporation generally will satisfy the Qualified Shareholder Stock Ownership Test if more than 50.0% of the value of its outstanding equity interests is owned, or treated as owned after applying certain attribution rules, for at least half of the number of days in the taxable year by:
•individual residents of jurisdictions that grant an Equivalent Exemption;
•non-U.S. corporations organized in jurisdictions that grant an Equivalent Exemption and that meet the Publicly Traded Test; or
•certain other qualified persons described in the Section 883 Regulations (which we refer to collectively as Qualified Shareholders).
We completedbelieve that we satisfy all of the requirements for the Section 883 Exemption, and we expect that we will continue to satisfy such requirements. We are organized under the laws of the Republic of the Marshall Islands. The U.S. Treasury Department has recognized the Republic of the Marshall Islands as a jurisdiction that grants an Equivalent Exemption with respect to the type of U.S. Source International Transportation Income we earn and expect to earn in the future. Consequently, our IPO on April 13, 2011U.S. Source International Transportation Income (including for this purpose, our proportionate share of any such income earned by our subsidiaries) should be exempt from U.S. federal income taxation provided we meet the Publicly Traded Test and we satisfy certain substantiation, reporting and other requirements.
Our common units and our Series A Preferred Units are traded only on the Nasdaq Global Market, which is considered to be an established securities market. Thus the number of our common units and Series A Preferred Units that are traded on the NASDAQNasdaq Global Market exceeds the number of our common units and Series A Preferred Units that are traded on any other established securities market, and this is not expected to change. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Although the matter is not free from doubt, based on our analysis of our current and expected cash flow and distributions on our outstanding equity interests, we believe that (i) our common units and Series A Preferred Units represent more than 50.0% of the total value of all of our outstanding equity interests and (ii) our common units and our Series A Preferred Units represent more than 50.0% of the total combined voting power of our equity interests. In addition, we believe that our common units and our Series A Preferred Units each currently satisfy, and expect that our common units and our Series
A Preferred Units each will continue to satisfy, the listing and trading volume requirements described previously. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Further, our partnership agreement provides that any person or group that beneficially owns more than 4.9% of any class of our units then outstanding generally will be treated as owning only 4.9% of such units for purposes of voting for directors. Although there can be no assurance that this limitation will be effective to eliminate the possibility that we have or will have any 5.0% unitholders for purposes of the Closely Held Block Exception, based on the current ownership of our common units, we believe that our common units have not lost eligibility for the Section 883 Exemption as a result of the Closely Held Block Exception. Thus, although the matter is not free from doubt and is based upon our belief and expectations regarding our satisfaction of the factual requirements described above, we believe that we satisfied the Publicly Traded Test for 2019 and will continue to satisfy the Publicly Traded Test for future taxable years.
The conclusions described above are based upon legal authorities that do not expressly contemplate an organizational structure such as ours. In particular, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under Marshall Islands law. Accordingly, while we believe that, assuming satisfaction of the symbol “GMLP”.
Significant Developmentsfactual requirements described above, our common units and Series A Preferred Units should be considered “regularly traded” on an established securities market and that we should satisfy the requirements for the Section 883 Exemption, it is possible that the IRS would assert that our common units and Series A Preferred Units do not meet the “regularly traded” test. In addition, as described previously, our ability to satisfy the Publicly Traded Test depends upon factual matters that are subject to change. Should any of the factual requirements described above fail to be satisfied, we may not be able to satisfy the Publicly Traded Test. Furthermore, our board of directors could determine that it is in 2015 and Early 2016
Acquisition
Golar Eskimo Acquisition
In January 2015, we acquired from Golarour best interests to take an action that would result in our not being able to satisfy the Publicly Traded Test in the companies that ownfuture. Please see “—The Net Basis and operate the Golar EskimoBranch Profits Tax” and “—The 4.0% Gross Basis Tax” below for a total purchase pricediscussion of $388.8 million less assumed debt of $162.8 million. the consequences in the event we do not satisfy the Publicly Traded Test.
The Golar Eskimo was delivered in December 2014. The cashNet Basis Tax and Branch Profits Tax.If we earn U.S. Source International Transportation Income and the Section 883 Exemption does not apply, the U.S. source portion of such income may be treated as effectively connected with the purchase price for the Golar Eskimo acquisition was financed with cash on hand and the proceedsconduct of a $220.0 million unsecured non-amortizing loantrade or business in the United States (or Effectively Connected Income) if we have a fixed place of business in the United States involved in the earning of U.S. Source International Transportation Income and substantially all of our U.S. Source International Transportation Income is attributable to usregularly scheduled transportation or, in the case of vessel leasing income, is attributable to a fixed place of business in the United States. In addition, if we earn income from Golar (orliquefaction, regasification or storage of LNG within the “Eskimo Vendor Loan”). This loan,territorial seas of the United States, such income may be treated as Effectively Connected Income. Based on our current operations, substantially all of our potential U.S. Source International Transportation Income is not attributable to regularly scheduled transportation or received from vessel leasing, and none of our liquefaction, regasification or storage activities occur within the territorial seas of the United States. As a result, we do not anticipate that any of our U.S. Source International Transportation Income or income earned from liquefaction, regasification or storage will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States, or earn income from liquefaction, regasification or storage activities within the territorial seas of the United States, in the future, which containedwould result in such income being treated as Effectively Connected Income.
Any income we earn that is treated as Effectively Connected Income, net of applicable deductions, would be subject to U.S. federal corporate income tax (currently imposed at a prepayment incentive feerate of up to 1.0%21.0%). In addition, a 30.0% branch profits tax could be imposed on any income we earn that is treated as Effectively Connected Income, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid by us in connection with the conduct of our U.S. trade or business.
On the sale of a vessel that has produced Effectively Connected Income, we could be subject to the net basis U.S. federal corporate income tax as well as branch profits tax with respect to the gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we would not be subject to U.S. federal income tax with respect to gains realized on the sale of a vessel, provided the sale is considered to occur outside of the loan amount and bore interest atUnited States under U.S. federal income tax principles. In general, a blended rate equalsale of a vessel will be considered to three-month LIBOR plus a margin of 2.84%, was repaid in full in November 2015.
Pending acquisition
Golar Tundra Acquisition
In February 2016, we agreed to acquire from Golar its interests in Tundra Corp, the disponent owner and operatoroccur outside of the Golar Tundra,United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside the United States. It is expected that any sale of a purchase pricevessel by us will be considered to occur outside of $330.0 million less approximately $230.0 millionthe United States.
The 4.0% Gross Basis Tax.If the Section 883 Exemption does not apply and the net basis tax does not apply, we would be subject to a 4.0% U.S. federal income tax on the U.S. source portion of net lease obligationsour gross U.S. Source International Transportation Income, without benefit of deductions. Under the sourcing rules described above under “—Taxation of
Operating Income,” 50.0% of our U.S. Source International Transportation Income would be treated as being derived from U.S. sources.
Marshall Islands Taxation
We believe that because we, our operating subsidiaries and our controlled affiliates do not, and do not expect to conduct business or operations in the Tundra LeaseRepublic of the Marshall Islands, neither we nor our controlled affiliates will be subject to income, capital gains, profits or other taxation under current Marshall Islands law. As a result, distributions by our operating subsidiary and net working capital adjustments. our controlled affiliates to us will not be subject to Marshall Islands taxation.
United Kingdom Taxation
The Golar Tundrafollowing is a discussion of the material United Kingdom tax consequences applicable to us relevant to the fiscal year ended December 31, 2020. This discussion is based upon existing legislation and current H.M. Revenue & Customs practice as of the date of this Annual Report. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion is for general information purposes only and does not purport to be a comprehensive description of all of the United Kingdom tax considerations applicable to us.
Tax Residence and Taxation of a Permanent Establishment in the United Kingdom.A company treated as resident in the United Kingdom for purposes of the United Kingdom Corporation Tax Acts is subject to corporation tax in the “Golar Tundra Time Charter” with WAGL,same manner and to the same extent as a United Kingdom incorporated company. For this purpose, place of residence is determined by the place at which central management and control of the company is carried out.
In addition, a non-United Kingdom resident company will be subject to United Kingdom corporation tax on profits attributable to a permanent establishment in the United Kingdom to the extent it carries on a trade in the United Kingdom through such a permanent establishment. A company not resident in the United Kingdom will be treated as having a permanent establishment in the United Kingdom if it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on or if an agent acting on behalf of the company has and habitually exercises authority to enter into contracts on behalf of the company.
Unlike a company, jointly owned by the Nigerian National Petroleum Corporation and Sahara Energy Resource Ltd, for an initial term of five years, which may be extended for an additional five years at WAGL’s option. The Golar Tundra is expected to commence operations under the Golar Tundra Time Chartera partnership resident in the second quarterUnited Kingdom or carrying on a trade in the United Kingdom is not itself subject to tax, although its partners generally will be liable for United Kingdom tax based upon their shares of 2016. In connection with the Tundra Acquisition, wepartnership’s income and gains. Please read “Item 10—Additional Information—E. Taxation”.
Taxation of Non-United Kingdom Incorporated Subsidiaries.We will undertake measures designed to ensure that our non-United Kingdom incorporated subsidiaries will be considered controlled and managed outside of the United Kingdom and not as having a permanent establishment or otherwise carrying on a trade in the United Kingdom. While certain of our subsidiaries that are incorporated outside of the United Kingdom will enter into anagreements with Golar Management, a United Kingdom incorporated company, for the provision of administrative and/or technical management services, we believe that the terms of these agreements will not result in any of our non-United Kingdom incorporated subsidiaries being treated as having a permanent establishment or carrying on a trade in the United Kingdom. As a consequence, we expect that our non-United Kingdom incorporated subsidiaries will not be treated as resident in the United Kingdom and the profits these subsidiaries earn will not be subject to tax in the United Kingdom.
Taxation of United Kingdom Incorporated Subsidiaries.Each of our subsidiaries that is incorporated in the United Kingdom will be regarded for the purposes of the United Kingdom Corporation Tax Acts as being resident in the United Kingdom and will be liable to United Kingdom corporation tax on its worldwide income and chargeable gains, regardless of whether the income or gains are remitted to the United Kingdom. The generally applicable rate of United Kingdom corporation tax is currently 19% . Our United Kingdom incorporated subsidiaries will be liable to tax at this rate on their net income, profits and gains after deducting expenses incurred wholly and exclusively for the purposes of the business being undertaken. There is currently no United Kingdom withholding tax levied on distributions made to us.
Indonesia Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Indonesia and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Indonesian income tax considerations applicable to us.
PTGI, which owns and operates the NR Satu, has entered into a time charter party agreement with Golar pursuantPTNR. On commencement of the charter by PTNR in Indonesia, which occurred in May 2012 upon delivery of the NR Satu, we became subject to which Golar will paytax in Indonesia payable by PTGI. This includes (and is not limited to) corporate income tax on profits at a rate of 25%, withholding taxes required to usbe withheld by PTGI from payments it makes to our other subsidiaries including dividends to PTGI’s immediate parent or interest payments on group loans as well as third party debt financing.
However, the tax exposure in Indonesia is intended to be mitigated by revenue due under the charter. This tax element of the time charter rate was established at the beginning of the time charter and shall be adjusted only if there is a daily fee plus operating expenses, aggregating approximately $2.6 million per month,change in Indonesian tax laws or certain stipulated tax assumptions are invalid. PTNR withholds tax from payments it makes under the charter for the rightNR Satu. See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for details on our legal proceedings in Indonesia.
Other Taxation
We are liable to usecorporate income taxes in the jurisdictions in which we have subsidiaries or a taxable presence. We are therefore liable to tax currently in the United Kingdom, Brazil, Indonesia, Jordan, Jamaica, Kuwait and Barbados according to the tax regulations of those countries. We are also subject to tax inspections and tax audits in the jurisdictions we operate in.
The various local tax authorities may also periodically revise their tax laws and regulations or adopt new laws and regulations, and the effects of new or revised tax regulations on our operations cannot be predicted. There can be no assurances that additional significant costs and liabilities will not be incurred to comply with such current and future tax regulation changes or that such tax regulations will not have a material effect on our operations.
C.Organizational Structure
Golar Tundra fromGP LLC, a Marshall Islands limited liability company, is our general partner. Our general partner is a subsidiary of Golar, which is a Bermuda exempted company. Please see Exhibit 8.1 to this Form 20-F for a list of our significant subsidiaries.
D.Property, Plant and Equipment
Other than the vessels in our current fleet, we also own a purpose-built mooring structure with a net book value of $10.7 million and $14.2 million as of December 31, 2019 and 2018, respectively. The mooring structure is located off West Java, Indonesia where the NR Satu is permanently moored for the duration of its time charter with PTNR. Together with the NR Satu, the mooring structure is under a time charter with PTNR which terminates at the end of 2022. The mooring structure, together with the NR Satu, is also secured in favor of the $175.0 million NR Satu facility.
Item 4A.Unresolved Staff Comments
There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding our periodic reports which remain unresolved as of the date of the closingfiling of this Form 20-F with the Tundra Acquisition until the date that the Golar Tundra commences operations under the Golar Tundra Time Charter. In return we will remit to GolarCommission.
any hire income received with respect to the Golar Tundra during this period. If for any reason the Golar Tundra Time Charter has not commenced by the 12 month anniversary of the closing of the Tundra Acquisition, we shall have the right to require that Golar repurchase the shares of Tundra Corp at a price equal to the purchase price (the “Tundra Put Option”). In February 2016, we paid a $30.0 million deposit to Golar towards the total purchase price of the Tundra Acquisition. We intend to pay the remaining portion of the cash purchase price using borrowings under the $800.0 million credit facility that we entered into in April 2016. The Tundra Acquisition is expected to close in May 2016.
Financing
Refinancing of the Golar Maria and the Golar Freeze facilities
In June 2015, we entered into an agreement with certain lenders for a new $180 million credit facility (the “Maria and Freeze Facility”) to refinance the Golar Maria Facility (which would have matured in December 2015) and extend the commercial loan tranche and refinance the Exportfinans ASA tranche of the Golar Freeze facility (which would have matured in June 2015 and June 2018, respectively). The Maria and Freeze Facility consists of a $150 million term loan that is repayable in quarterly installments over a period of three years, with a final balloon payment of $114 million due in June 2018, and a revolving credit facility of up to $30 million that matures in June 2018. The Maria and Freeze Facility bears interest at a rate of LIBOR plus a margin of up to 1.95%. As a result of the refinancing, the Golar Maria credit facility and the Exportfinans ASA tranche of the Golar Freeze facility were terminated. The extended commercial loan tranche of the Golar Freeze facility became the $180 million Maria and Freeze facility. As of December 31, 2015, the $30 million revolving credit facility is fully drawn and the total outstanding amount of the Maria and Freeze facility is $174.0 million.
2015 Norwegian Bonds
On May 22, 2015, we completed the issuance
Item 5.Operating and saleFinancial Review and Prospects
The following discussion of $150.0 million aggregate principal amount of five year non-amortizing bonds in Norway (the “2015 Norwegian Bonds”) which were subsequently listed on the Oslo Bors in December 2015. The 2015 Norwegian Bonds mature on May 22, 2020 and bear interest at a rate of LIBOR plus 4.4%. In connection with the issuance of the 2015 Norwegian Bonds, we entered into economic hedge interest rate swaps to reduce the risk associated with fluctuations in interest rates by converting the floating rate of the interest obligation under the 2015 Norwegian Bonds to an all-in fixed rate of 6.275%.
Eskimo refinancing - CMBL Sale and Leaseback Transaction
In November 2015, Eskimo Corp sold the Golar Eskimo to Eskimo SPV and subsequently leased back the vessel on a bareboat charter for a term of ten years. From the third year anniversary of the commencement of the bareboat charter, we have an annual option to repurchase the Golar Eskimo at fixed pre-determined amounts, with an obligation to repurchase the vessel at the end of the ten year lease period. The purchase consideration for this sale reflected the market value of the Golar Eskimo as of the delivery date, which was valued at $290.0 million. Upon closing we received $256.5 million which was used to refinance the existing debt of $158.0 million and repay the remaining $100.0 million balance of the Eskimo Vendor Loan.
While we do not hold any equity investments in Eskimo SPV, based on our evaluation of the bareboat charter we have concluded that we are the primary beneficiary of Eskimo SPV, which is a VIE and accordingly, Eskimo SPV is consolidated into our financial results. For additional detail refer to note 5 “Variable Interest Entities”condition and results of operations should be read in conjunction with our consolidatedhistorical financial statements contained herein.
Refinancingand related notes included elsewhere in this Annual Report. Among other things, those financial statements include more detailed information regarding the basis of seven vessels’ facilities
In April 2016, we entered into a new $800 million senior secured credit facility, the “$800 million credit facility” which will refinance the bank debt secured by seven of our existing vessels as well as providing the remaining part of the cash purchase pricepresentation for the acquisition of the Golar Tundra. The vessels includedfollowing information. Our Consolidated Financial Statements have been prepared in this facilityaccordance with U.S. GAAP and are the Methane Princess, the Golar Spirit, the Golar Winter, the Golar Grand, the Golar Maria, the Golar Igloo and the Golar Freeze.presented in U.S. Dollars.
The new credit facility has a five year term and consists of a $650.0 million term loan facility and a $150.0 million revolving credit facility. It is repayable in quarterly installments with a total final balloon payment of $440.0 million in 2021. The facility is provided by a syndicate of banks and bears interest at LIBOR plus a margin broadly in line with the average margin of our existing bank facilities, as well as a commitment fee on undrawn amounts.
Equity offering
In January 2015, in an underwritten offering Golar sold 7,170,000 of our common units representing limited partner interests in the Partnership held by it at a price to the public of $29.90 per unit.
Recent Partnership matters
In February 2015, Mr. Hans Petter Aas and Mr. Bart Veldhuizen resigned from our board of directors. To fill the vacancies for their respective remaining terms, in February 2015, Mr. Andrew Whalley and Mr. Alf Thorkildsen, were appointed by the remaining directors elected by our common unitholders. In addition, Mr. Doug Arnell (the former CEO of Golar Management Limited), was appointed as a director by our general partner.
On September 23, 2015, at our 2015 annual meeting, the common unitholders elected Mr. Andrew Whalley and Mr. Paul Leand Jr. as Class III directors whose terms will expire at the 2018 annual meeting.
On September 23, 2015, Ms. Kate Blankenship resigned from our board of directors. As Ms. Blankenship was appointed to our board by our general partner pursuant to our partnership agreement, our general partner was entitled to appoint Ms. Blankenship’s replacement, and in February 2016, our general partner appointed Ms. Lori Wheeler Naess as a director. Our board of directors appointed Ms. Naess to its Audit Committee to serve as its Chairperson as a replacement for Ms. Blankenship.
Our Charters
The services of our FSRUs, LNG carriers and FLNG are provided to their charterers for a fixed period at a specified hire or tolling rate pursuant to time charters or liquefaction tolling agreements. Under a time charter, the vessel owner provides crewing and other services related to the vessel’s operation which include repairs and maintenance, insurance, stores, lube oils and communication expenses as well as periodic drydocking costs. These costs related to the vessel’s operation are included in the daily rate, and the charterer is responsible for substantially all of the vessel voyage costs, which include fuel, port and canal fees, LNG boil-off, cargo loading and unloading expenses, canal tolls, agency fees and commissions. For FSRUs, the charterer is also responsible for providing, maintaining, repairing and operating certain facilities at the unloading port such as sufficient mooring infrastructure for LNG vessels to be berthed alongside and a high pressure send-out pipeline.
Certain of our charters provide for the payment by the charterer of an all-inclusive daily fixed rate. The hire rate for our FSRU vessels and LNG Carriers is primarily made up of two components:
•Capital cost component - primarily relates to the cost of the vessel and is structured to meet that cost and provide a return on investor capital. The capital cost component is constant for the duration of the entire charter except for the Golar Winter and Golar Eskimo.
•Operating cost component - intended to compensate us for vessel operating expenses including management fees. This component is generally established at the beginning of the charter and typically escalates annually on a fixed percentage or fluctuates annually based on changes in a specified consumer price index or foreign exchange rate.
Under time charters, hire is payable monthly. Under all of our charters, hire is payable in U.S. Dollars, except for the operating cost component for the Golar Winter, which is payable in Brazilian Reais.
Our interest in the FLNG vessel provides floating liquefied natural gas tolling services based on a liquefaction tolling agreement. See “Item 5—Operating and Financial Review and Prospects—Results of Operations.”
The hire rate payable for each of our vessels may be reduced if they do not perform to certain of their contractual specifications or if we are in breach of any of our representations and warranties in the charter. When a vessel is “off-hire” or not available for service, the charterer generally is not required to pay the hire or toll rate and we are responsible for all costs. Prolonged off-hire may lead to vessel substitution or termination of the time charter. A vessel generally will be deemed off-hire if there is a specified time it is not available for the charterer’s use due to, among other things: operational deficiencies, drydocking for repairs, maintenance or inspection, equipment breakdowns, or delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.
See note 6 “Segment Information” in our consolidated financial statements for information regarding our significant customers.
Competition
We generateoperate in markets that are highly competitive and based primarily on supply and demand. As the FSRU market continues to grow and mature there are new competitors entering the market. Existing competitors have also ordered additional FSRUs. Previous expectations of rapid growth in the FSRU market gave owners the confidence to place orders for FSRUs before securing charters. This has led to more competition for mid- and long-term FSRU charters. Competitive pressure in this market has since resulted in a significant reduction in new FSRU orders by both existing competitors and new entrants.
Competition for these charters is based primarily on price, operational track record, LNG storage capacity, efficiency of the regasification process, vessel availability, size, age and condition of the vessel, relationships with LNG carrier users and reputation of the operator. In addition, some FSRUs may operate as LNG carriers during periods of increased FSRU competition.
The FLNG industry is in an early stage of development, and we do not currently face significant competition from other providers of FLNG services. As of April 16, 2020, there are currently only four operating FLNGs worldwide, including the Hilli. We anticipate that other companies, including marine transportation companies with strong reputations and extensive resources and experience, will enter the FLNG industry at some point in the future, resulting in greater competition.
Seasonality
Historically, LNG trade, and therefore charter rates, increased in the winter months and eased in the summer months as demand for LNG for heating in the Northern Hemisphere rose in colder weather and fell in warmer weather. In general, the LNG vessel industry has become less dependent on the seasonal transport of LNG than a decade ago. The advent of FSRUs has opened up new markets and uses for LNG, spreading consumption somewhat more evenly over the year. There is a higher seasonal demand during the summer months due to energy requirements for air conditioning in some markets or reduced availability of hydro power in others and a pronounced higher seasonal demand during the winter months for heating in other markets. The vessel market is somewhat weaker in the period between winter and summer.
Our vessels that operate under long-term charters are not subject to the effect of seasonal variations in demand, with the exception of the Golar Igloo, whose charter specifies a regasification season of ten months, extendable at the option of the charterer. For our vessels that are available for charter in the spot market, our revenue may be subject to the effect of seasonal variations in demand.
Vessel Maintenance and Management
Safety is our top priority. Our vessels are operated in a manner intended to protect the safety and health of our employees, the general public and the environment. We actively manage the risks inherent in our business and are committed to eliminating incidents that threaten safety, such as groundings, fires and collisions. We are also committed to reducing emissions and waste generation. We have established key performance indicators to facilitate regular monitoring of our operational performance. We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets.
Under our charters, we are responsible for the technical management of the vessels which Golar, through its subsidiaries, assists us, by managing our vessel operations, maintaining a technical department to monitor and audit our vessel manager operations and providing expertise in various functions critical to our operations. This affords an efficient and cost effective operation and, pursuant to administrative services agreements with certain subsidiaries of Golar, access to human resources, financial and other administrative functions.
These functions are supported by on board and onshore systems for maintenance, inventory, purchasing and budget management. In addition, Golar’s day-to-day focus on cost control will be applied to our operations. To some extent, the uniform design of some of our vessels and the adoption of common equipment standards should also result in operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.
See “Item 7. Major Unitholders and Related Party Transactions—B. Related Party Transactions—Our Management Agreements.”
Risk of Loss, Insurance and Risk Management
The operation of any vessel, including LNG carriers, FSRUs and FLNGs, 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 and/or war risk situations, hostilities or pandemics. 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. The maximum coverage varies from 180 days to 360 days, depending on the vessel. The number of deductible days varies from 14 days to 60 days, depending on the vessel and type of damage (e.g. whether the claim arises from either machinery or hull damage).
Protection and indemnity insurance, which covers our third-party legal liabilities in connection with our shipping activities, is provided by mutual protection and indemnity (“P&I”) associations, or P&I clubs. 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.
The current protection and indemnity insurance coverage for pollution is $250 million per incident for the Hilli and $1 billion per vessel per incident for all other vessels. The thirteen P&I clubs that comprise the International Group of Protection and Indemnity Clubs insure approximately 90% 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 $8.2 billion per accident or occurrence. We are a member of Gard and Skuld P&I Clubs. As a member of these P&I clubs, we are subject to a call for additional premiums based on the clubs' 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 clubs have 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.
The insurers providing the hull and machinery, hull and cargo interests, protection and indemnity and loss of hire insurances have confirmed that they will consider FSRUs as vessels for the purpose of providing insurance. For the FSRUs we have also arranged an additional comprehensive general liability insurance. This type of insurance is common for offshore operations and is additional to the P&I insurance.
Our operations utilize Golar’s thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers' competence training program, seafarers' workshops and membership in emergency response organizations. We expect to benefit from Golar’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.
Classification, Inspection and Maintenance
Every large, commercial seagoing vessel must be “classed” by a classification society. A classification society certifies that a vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
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. Vessels are drydocked at least once during a five-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. With the exception of the Golar Mazo, which is certified by Lloyds Register, all other vessels in our current fleet are each certified by Det Norske Veritas GL ("DNV-GL"). All of our operating vessels have been awarded International Safety Management (“ISM”) certification and are currently “in class”, except for the Golar Spirit which is currently in lay-up and Golar Mazo which will be placed in lay-up shortly.
We carry out inspections of the vessels on a regular basis; both at sea and while the vessels are in port. The results of these inspections, which are conducted both in port and while 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 and improvement for our vessels and their systems.
Environmental and Other Regulations
General
Our business and the operation of our vessels are subject to various international treaties and conventions and to the applicable local national and subnational laws and regulations of the countries (U.S., Indonesia, Brazil, Kuwait, Jamaica and Jordan) in which our vessels operate or are registered. These local laws and regulations might require us to obtain governmental permits and authorizations before we may conduct certain activities. Failure to comply with these laws or to obtain the necessary business and technical licenses could result in sanctions including suspension and/or freezing of the business and responsibility for all damages arising from any violation.
The local governments may also periodically revise their environmental laws and regulations or adopt new ones, and the effects of new or revised laws and regulations on our operations cannot be predicted. 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 vessels, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend the operation of one or more of our vessels. There can be no assurance that additional significant costs and liabilities will not be incurred to comply with such current and future laws and regulations, or that such laws and regulations will not have a material effect on our operations.
International environmental treaties and conventions, U.S. environmental laws and regulations that apply to the operation of our vessels are described below. Other countries in which we operate or in which our vessels are registered have or may in the future have laws and regulations that are similar in nature to the U.S. laws referenced below. GMN provides technical management services for our vessels, is certified in accordance with the International Maritime Organization's (“IMO”) standard for ISM and operates in compliance with the International Standards Organization (“ISO”) Environmental Management Standard for the management of significant environmental aspects associated with the ownership and operation of our fleet.
International Maritime Regulations of LNG Vessels
The IMO provides international regulations governing safety, security and environmental aspects of shipping and international maritime trade. For a discussion of IMO’s environmental regulations, see “Air Emissions”, “Anti-Fouling Requirements,” “Ballast Water Management Convention” and “Regulation of Greenhouse Gas Emissions”.
Among other requirements, the IMO's ISM Code requires the party with operational control of a vessel to develop an extensive safety management system and the adoption of a policy for safety and environmental protection setting forth instructions and procedures for operating its vessels safely and also describing procedures for responding to emergencies. Our ship manager holds a document of compliance under the ISM Code for operation of Gas Carriers.
Vessels that transport gas, including LNG carriers and FSRUs, are also subject to the International Gas Carrier Code (“IGC”) which provides a standard for the safe carriage of LNG and certain other liquid gases by prescribing the design and construction standards of vessels involved in such carriage. Each of our vessels is in compliance with the IGC Code and each of our new buildings/conversion contracts requires that the vessel receive certification that it is in compliance with applicable regulations before it is delivered.
The IMO also promulgates ongoing amendments to the International Convention for the Safety of Life at Sea (“SOLAS”) which provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation and addresses maritime security. SOLAS requires the provision of lifeboats and other life-saving appliances, requires the use of the Global Maritime Distress and Safety System (an international radio equipment and watch keeping standard) afloat and at shore stations, and relates to the International Convention on the Standards of Training and Certification of Watchkeeping Officers (“STCW”) also promulgated by the IMO. The STCW establishes minimum training, certification and watch keeping standards for seafarers. The SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations. Flag states that have ratified the SOLAS and STCW generally employ the classification societies, which have incorporated the SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.
In the wake of increased worldwide security concerns, the IMO amended SOLAS and added the International Ship and Port Facility Security Code (“ISPS Code”), which came into effect on July 1, 2004, to detect security threats and take preventive measures against security incidents affecting vessels or port facilities. GMN has developed security plans and appointed and trained ship and office security officers. In addition, all of our vessels have been certified to meet the ISPS Code and the security requirements of the SOLAS and the Maritime Transportation Security Act (“MTSA”).
The IMO continues to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulation may have on our operations. Non-compliance with the IGC Code or other applicable IMO regulations may subject a shipowner or a bareboat charterer to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.
Air Emissions
The International Convention for the Prevention of Marine Pollution from Ships (“MARPOL”), imposes environmental standards on the shipping industry relating to marine pollution, including oil spills, management of garbage, the handling and disposal of noxious liquids, sewage and air emissions. Annex I to MARPOL applies to various vessels delivered on or after August 1, 2010. It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards. IMO regulations also require owners and operators of vessels to adopt Shipboard Oil Pollution Emergency Plans. Periodic training and drills for response personnel and for vessels and their crews are required.
MARPOL 73/78 Annex VI regulations for the “Prevention of Air Pollution from Ships” apply to all vessels, fixed and floating drilling rigs and other floating platforms. Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from vessel exhausts, emissions of volatile compounds from cargo tanks, incineration of specific substances, and prohibits deliberate emissions of ozone depleting substances. Annex VI also includes a global cap on sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions. The certification requirements for Annex VI depend on size of the vessel and time of the periodic classification survey. Ships weighing more than 400 gross tons and engaged in international voyages involving countries that have ratified the conventions, or vessels flying the flag of those
countries, are required to have an International Air Pollution Certificate (“IAPP Certificate”). Annex VI came into force in the United States on January 8, 2009. All our vessels delivered or drydocked since May 19, 2005 have been issued IAPP Certificates.
Amendments to Annex VI to the MARPOL Convention that took effect in 2010 imposed progressively stricter limitations on sulfur emissions from vessels. As of January 1, 2020, the ultimate limit of 0.5% the sulfur content for fuel used to power vessels operating in areas outside of designated emission control areas (“ECAs”) took effect. This represents a substantial reduction from the previous sulfur 3.5% cap. The 0.5% sulfur cap is generally referred to IMO 2020 and applies absent the installation of expensive sulfur scrubbers to meet reduced emission requirements for sulfur. Because the marine sector accounts for approximately half of the global fuel oil demand, the impact of the increased demand for compliant low sulfur fuels is expected to affect the availability and cost of such fuels and, in turn, increase our costs of operation. Our vessels have achieved compliance with sulfur emission standards, where necessary, by being modified to burn gas only in their boilers when alongside a berth. Except for the Golar Mazo, we have modified the boilers on all our vessels to also allow operation on low sulfur diesel oil, or LSDO. The amendments to Annex VI also established new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The European directive 2005/33/EC bans the use of fuel oils containing more than 0.10% sulfur by mass by any merchant vessel while at berth in any EU country. See “European Union Regulations” below for additional information.
Even more stringent sulfur emission standards apply in coastal areas designated as ECAs, such as the United States and Canadian coastal areas designated by the IMO's Marine Environment Protection Committee ("MEPC"), as discussed in the “U.S. Clean Air Act” below. These areas include certain coastal areas of North America and the United States Caribbean Sea. Annex VI Regulation 14, which came into effect on January 1, 2015, set a 0.10% sulfur limit in areas of the Baltic Sea, North Sea, North America, and United States Caribbean Sea ECAs.
U.S. air emissions standards are now equivalent to these amended Annex VI requirements. Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems. Because our vessels are largely powered by means other than fuel oil we do not anticipate that any emission limits that may be promulgated will require us to incur any material costs for the operation of our vessels, but that possibility cannot be eliminated.
Anti-Fouling Requirements
Anti-fouling systems, such as paint or surface treatment, are used to coat the bottom of vessels to prevent the attachment of mollusks and other sea life to the hulls of vessels. Our vessels are subject to the IMO’s International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the Anti-fouling Convention, which prohibits the use of organotin compound coatings in anti-fouling systems. Vessels of over 400 gross tons engaged in international voyages must obtain an International Anti-fouling System Certificate and undergo a survey before the vessel is put into service or when the anti-fouling systems are altered or replaced. We have obtained Anti-fouling System Certificates for all of our vessels, and we do not believe that maintaining such certificates will have an adverse financial impact on the operation of our vessels.
Oil Pollution Act and The Comprehensive Environmental Response Compensation and Liability Act
The U.S. Oil Pollution Act of 1990 (“OPA 90”) established an extensive regulatory and liability regime for environmental protection and clean up of oil spills. OPA 90 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 200 nautical mile exclusive economic zone of the United States. The Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) applies to the discharge of hazardous substances whether on land or at sea. While OPA 90 and CERCLA would not apply to the discharge of LNG, these laws 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 90, 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 under OPA 90 aside from clean-up and containment costs are defined broadly to include:
•injury to, destruction or loss of, or loss of use of, natural resource and the costs of assessment thereof;
•injury to, or economic losses resulting from, the destruction of real and personal property;
•net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction or loss of real or personal property, or natural resources;
•loss of subsistence use of natural resources that are injured, destroyed or lost;
•lost profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources; and
•net cost of increased or additional public services necessitated by charteringremoval activities following a discharge of oil, such as protection from fire, safety or health hazards.
The limits of OPA 90 liability are the greater of $2,200 per gross ton or $18.8 million for any tanker other than single-hull tank vessels, over 3,000 gross tons (subject to possible adjustment for inflation) (relevant to ours and Golar’s LNG carriers). 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 willful 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. OPA 90 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 ship owners’ responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels, contains a similar liability regime and provides for recovery of clean up and removal costs and the imposition of natural resource damages for releases of “hazardous substances” which as defined in CERCLA does not include oil. Liability under CERCLA is limited to the greater of $300 per gross ton or $0.5 million for each release from vessels not carrying hazardous substances as cargo or residue, and $300 per gross ton or $5 million for each release from vessels carrying hazardous substances as cargo or residue. As with OPA 90, 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 willful 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 90 and CERCLA each preserve the right to recover damages under existing law, including maritime tort law. We believe that we are in substantial compliance with OPA 90, CERCLA and all applicable state regulations in the ports where our vessels call.
OPA 90 requires owners and operators of vessels to establish and maintain with the USCG evidence of financial responsibility sufficient to meet the limit of their potential strict liability under OPA 90/CERCLA. Under the regulations, evidence of financial responsibility may be demonstrated by insurance, surety bond, self-insurance or guaranty. Under OPA 90 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 90/CERCLA. Each of our ship owning 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, or COFRs, 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 COFRs from the US Coast Guard for each of our vessels that is required to have one.
Compliance with any new requirements of OPA 90, or other laws or regulations, may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. Any additional legislation or regulation applicable to the operation of our vessels that may be implemented in the future could adversely affect our business and ability to make distributions to our unitholders.
We currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed or be excluded under our insurance coverage, it could have an adverse effect on our business and results of operation
Bunker Convention/CLC State Certificate
The International Convention on Civil Liability for Bunker Oil Pollution 2001, or the Bunker Convention entered into force on November 21, 2008. The Convention provides a liability, compensation and compulsory insurance system for the victims of oil pollution damage caused by spills of bunker oil. The Convention makes the ship owner liable to pay compensation for pollution damage (including the cost of preventive measures) caused in the territory, including the territorial sea of a State Party, as well as its economic zone or equivalent area. Registered owners of any sea going vessel and seaborne craft over 1,000 gross tonnage, of any type whatsoever, and registered in a State Party, or entering or leaving a port in the territory of a State Party, will be required to maintain insurance which meets the requirements of the Convention and to obtain a certificate issued by a State Party attesting that such insurance is in force. The State Party issued certificate must be carried on board at all times. P&I Clubs in the International Group issue the required Bunker Convention “Blue Cards” provide evidence
that there is insurance in place that meets the Bunker Convention requirements and thereby enable signatory states to issue certificates. All of our vessels have received “Blue Cards” from their P&I Club and are in possession of a Civil Liability Convention (CLC) State-issued certificate attesting that the required insurance cover is in force.
Ballast Water Management Convention, Clean Water Act and National Invasive Species Act
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. The Environmental Protection Agency (“EPA”) and USCG, have also enacted rules relating to ballast water discharge for all vessels entering or operating in United States waters. Compliance requires the installation of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict our vessels from entering United States waters.
a. Ballast Water Management Convention
In February 2004, the IMO adopted an International Convention for the Control and Management of Ships' Ballast Water and Sediments (“BWM Convention”). The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange requirements to be replaced in time with mandatory concentration limits. The Convention entered into force on September 8, 2017, however IMO later decided to postpone the compliance date for existing vessels by 2 years, i.e. until the first renewal survey following September 8, 2019. Furthermore, in October 2014 the MEPC met and adopted additional resolutions concerning the BWM Convention’s implementation. Upon entry into force of the BWM Convention, mid-ocean ballast water exchange became mandatory for our vessels.
b. Clean Water Act
The U.S. Clean Water Act (“CWA”) prohibits the discharge of oil or hazardous substances in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available under OPA 90 and CERCLA. In addition, many 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 EPA regulates the discharge of ballast and bilge water and other substances in United States waters under the CWA. The EPA regulations historically have required vessels 79 feet in length or longer (other than commercial fishing vessels and recreational vessels) to obtain and comply with a permit that regulates ballast water discharges and other discharges incidental to the normal operation of certain vessels within United States waters. In March 2013, the EPA issued the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, (“VGP”). The 2013 VGP focuses on authorizing discharges incidental to operations of commercial vessels and contains ballast water discharge limits for most vessels to reduce the risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable lubricants. In December 2018, the Vessel Incidental Discharge Act (VIDA) was signed into law and restructured the EPA and the USCG programs for regulating incidental discharges from vessels. Rather than requiring CWA permits, the discharges will be regulated under a new CWA Section 312(p) establishing Uniform National Standards for Discharges Incidental to Normal Operation of Vessels. Under VIDA, VGP provisions and existing USCG regulations will be phased out over a period of approximately four years and replaced with National Standards of Performance (NSPs) to be developed by EPA and implemented and enforced by the USCG. Under VIDA, the EPA is directed to develop the NSPs by December 2020 and the USCG is directed to develop its corresponding regulations two year after EPA develops the NSPs. Although the 2013 VGP was scheduled to expire in December 2018, under VIDA the provisions of the 2013 VGP will remain in place until the new regulations are in place. Pursuant to the requirements in the VGP, vessel owners and operators must meet twenty-five sets of state-specific requirements as the CWA’s 401 certification process allows tribes and states to impose their own requirements for vessels operating within their waters. Vessels operating in multiple jurisdictions could face potentially conflicting conditions specific to each jurisdiction that they travel through.
c. National Invasive Species Act
The USCG regulations adopted under the U.S. National Invasive Species Act (“NISA”) require the USCG's approval of any technology before it is placed on a vessel. As a result, the USCG has provided waivers to vessels which could not install the then as-yet unapproved technology. In May 2016, the USCG published a review of the practicability of implementing a more stringent ballast water discharge standard. The results concluded that technology to achieve a significant improvement in ballast water treatment efficacy cannot be practically implemented. In February, 2016, the USCG issued a new rule amending
the Coast Guard’s ballast water management record-keeping requirements. Effective February 22, 2016, vessels with ballast tanks operating exclusively on voyages between ports or places within a single Captain of the Port zone must submit an annual report of their ballast water management practices. Further, under the amended requirements, vessels may submit their reports after arrival at the port of destination instead of prior to arrival. As discussed above, under VIDA, existing USCG ballast water management regulations will be phased out over a period of approximately four years and replaced with NSPs to be developed by EPA and implemented and enforced by the USCG.
Installation of ballast water treatments systems (“BWTS”), will be needed on all our LNG Carriers. As long as our FSRUs are operating as FSRUs and kept stationary they will not need installation of a BWTS. The additional costs of complying with these rules, relating to all our vessels are estimated to be in the range of $1.8 million and $2.1 million per vessel and will be phased in over time in connection with the renewal surveys that are required. We have therefore decided to install BWTS on all our LNG Carriers on their first drydocking after 2017. The installation of the BWTS on the Methane Princess was completed in 2018.
European Union Regulations
In October 2009, the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. See “Regulation of Greenhouse Gas Emissions” below for European Union action relating to carbon dioxide emissions from maritime transport.
The European Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age and flag as well as the number of times the ship has been detained. The European Union also adopted and extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation also provided the European Union with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply. Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their main and auxiliary engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC) introduced requirements parallel to those in Annex VI relating to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at berth in the Baltic, the North Sea and the English Channel (the so called “SOx-Emission Control Area”). As of January 2020, EU member states must also ensure that ships in all EU waters, except the SOx-Emission Control Area, use fuels with a 0.5% maximum sulfur content.
Clean Air Act
The U.S. Clean Air Act of 1970 (“CAA”) requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and recovery requirements for certain cargos when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas and emission standards for so-called “Category 3” marine diesel engines operating in U.S. waters. The marine diesel engine emission standards are currently limited to new engines beginning with the 2004 model year. On April 30, 2010, the EPA promulgated final emission standards for Category 3 marine diesel engines equivalent to those adopted in the amendments to Annex VI to MARPOL. The emission standards apply in two stages: near-term standards for newly-built engines apply from 2011, and long-term standards requiring an 80% reduction in nitrogen dioxides, or NOx, apply from 2016. Compliance with these standards may cause us to incur costs to install control equipment on our vessels in the future.
International Labour Organization
The International Labour Organization (the “ILO”) is a specialized agency of the UN that has adopted the Maritime Labor Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required to ensure compliance with the MLC 2006 for all ships that are 500 gross tonnage or over and are either engaged in international voyages or flying the flag of a Member and operating from a port, or between ports, in another country. We believe that all our vessels are in substantial compliance with and are certified to meet MLC 2006.
Regulation of Greenhouse Gas Emissions
Scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases” (“GHGs”), including carbon dioxide and methane, may be contributing to warming of the earth’s atmosphere and other climatic changes. In response to such studies, the issue of climate change and the effect of GHG emissions, in particular emissions from fossil fuels, has and continues to attract political and social attention and is the subject of regulatory attention.
To date, emissions of greenhouse gases from international transport have not been subject to the international protocols and agreements addressing climate change, such as the 2005 Kyoto Protocol and the 2015 Paris Agreement. However, absent a global approach to address GHG emissions from international transport, the European Union has initiated action and is pursuing a strategy to integrate maritime emissions into the overall European Union strategy to reduce GHG emissions. In 2013, European Commission initiated a three step strategy aimed at this reduction consisting of (i) monitoring, reporting and verification of carbon dioxide emissions from large vessels using European Union ports, (ii) establishment of GHG reduction targets for sector; and (iii) implementation of further measures, including market-based measures such an emissions trading, in the medium to long term. The first step was addressed with a European Union regulation that took effect in January 2018 that requires large vessels (over 5,000 gross tons) calling at European ports to collect and publish data on carbon dioxide emissions. EU Directive 2018/410, which amended the EU Emissions Trading System Directive, emphasized the need to act on GHG emissions from shipping and other sectors and calls for action by either IMO or the European Union to address emissions from the international transport sector from 2023.
In addition, the IMO has taken some action, including mandatory measures to reduce emissions of GHGs from all vessels that took effect in January 2013. These measures included amendments to MARPOL Annex VI Regulations requiring the Energy Efficiency Design Index (“EEDI”) for new vessels, and the Ship Energy Efficiency Management Plan (“SEEMP”) for all vessels. The regulations apply to all vessels of 400 gross tonnage and above. The IMO also adopted a mandatory requirement in October 2016, which entered into force in March 2018, that ships of 5,000 gross tonnage and above record and report their fuel oil consumption. These measures affect the operations of vessels that are registered in countries that are signatories to MARPOL Annex VI or vessels that call upon ports located within such countries. In May 2019, the MEPC approved for adoption at its April 2020 session further amendments to MARPOL Annex VI intended to significantly strengthen the EEDI “phase 3” requirements. These amendments would accelerate the entry into effect by date of phase 3 from 2025 to 2022 for several ship types, including gas carriers, general cargo ships and LNG carriers and require new ships built from that date to be significantly more energy efficient. The MEPC is also looking into the possible introduction of a phase 4 of EEDI requirements. The implementation of the EEDI and SEEMP standards could cause us to incur additional compliance costs. The IMO is also considering the implementation of a market-based mechanism for greenhouse gas emissions from vessels. At the October 2016 MEPC session, the IMO adopted a roadmap for developing a comprehensive IMO strategy on reduction of GHG emissions. The IMO adopted its initial GHG reduction strategy in 2018 and established a program of follow-up actions up to 2023 as a planning tool.
In the United States, the EPA has issued a final finding that greenhouse gases threaten public health and safety and has promulgated regulations that regulate the emission of greenhouse gases from certain sources. The EPA enforces both the CAA and the international standards found in Annex VI of MARPOL concerning marine diesel emissions, and the sulfur content found in marine fuel. Other federal and state regulations relating to the control of greenhouse gas emissions may follow, including climate change initiatives that have been considered in the U.S. Congress. Any passage of climate control legislation or other regulatory initiatives by the IMO, the European Union, the United States, or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases from vessels could require us to make significant financial expenditures that we cannot predict with certainty at this time. In addition, even without such regulation, our business may be indirectly affected to the extent that climate change results in sea level changes or more intense weather events.
Other Regulations
Our LNG vessels may also become subject to the International Convention on Liability and Compensation for Damage Connection with the Carriage of Hazardous and Noxious Substances by Sea, or HNS, adopted in 1996, the HNS Convention, and subsequently amended by the April 2010 Protocol. The HNS Convention introduces strict liability for the ship owner and covers pollution damage as well as the risks of fire and explosion, including loss of life or personal injury and damage to property. HNS includes, among other things, liquefied natural gas. At least 12 states must ratify or accede to the 2010 Protocol for it to enter into effect. In July 2019, South Africa became the fifth state to ratify the protocol. At least 7 more states must ratify or accede to the treaty for it to enter into effect.
The 2010 Protocol sets up a two-tier system of compensation composed of compulsory insurance taken out by ship owners and an HNS fund that comes into play when the insurance is insufficient to satisfy a claim or does not cover the incident. Under the 2010 Protocol, if damage is caused by bulk HNS, claims for compensation will first be sought from the ship
owner up to a maximum of 100 million Special Drawing Rights, or SDR. SDR is a potential claim on the freely usable currencies of the IMF members. If the damage is caused by packaged HNS or by both bulk and packaged HNS, the maximum liability is 115 million SDR. Once the limit is reached, compensation will be paid from the HNS Fund up to a maximum of 250 million SDR. We cannot estimate the costs that may be needed to comply with any such requirements that may be adopted with any certainty at this time.
Taxation of the Partnership
United States Taxation
The following is a discussion of the material U.S. federal income tax considerations applicable to us. This discussion is based upon provisions of the Code as in effect on the date of this Annual Report, existing final and temporary regulations thereunder (or Treasury Regulations), and current administrative rulings and court decisions, all of which are subject to change or differing interpretation, possibly with retroactive effect. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion is for general information purposes only and does not purport to be a comprehensive description of all of the U.S. federal income tax considerations applicable to us.
Election to be Treated as a Corporation. We have elected to be treated as a corporation for U.S. federal income tax purposes. As such, we are subject to U.S. federal income tax on our income to the extent it is from U.S. sources or is treated as effectively connected with the conduct of a trade or business in the United States unless such income is exempt from tax under Section 883 of the Code.
Taxation of Operating Income.Substantially all of our gross income has historically been attributable to the transportation, regasification and storage of LNG, and we expect that substantially all of our gross income will continue to be attributable to the transportation, regasification and storage of, as well as liquefaction of, LNG. Gross income generated from liquefaction, regasification and storage of LNG outside of the United States generally is not subject to U.S. federal income tax, and gross income generated from such activities in the United States generally is subject to U.S. federal income tax. Gross income that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States (or U.S. Source International Transportation Income) is considered to be 50.0% derived from sources within the United States and may be subject to U.S. federal income tax as described below. Gross income attributable to transportation that both begins and ends in the United States (or U.S. Source Domestic Transportation Income) is considered to be 100.0% derived from sources within the United States and generally is subject to U.S. federal income tax.
Certain of our activities give rise to U.S. Source International Transportation Income, and future expansion of our operations could result in an increase in the amount of U.S. Source International Transportation Income, all of which could be subject to U.S. federal income taxation unless the exemption from U.S. taxation under Section 883 of the Code (or the Section 883 Exemption) applies.
The Section 883 Exemption.In general, the Section 883 Exemption provides that if a non-U.S. corporation satisfies the requirements of Section 883 of the Code and the Treasury Regulations thereunder (or the Section 883 Regulations), it will not be subject to the net basis and branch profits taxes or the 4.0% gross basis tax described below on its U.S. Source International Transportation Income. The Section 883 Exemption applies only to U.S. Source International Transportation Income and does not apply to U.S. Source Domestic Transportation Income. As discussed below, we believe that based on our current ownership structure, the Section 883 Exemption applies and we are not subject to U.S. federal income tax on our U.S. Source International Transportation Income.
To qualify for the Section 883 Exemption, we must, among other things, meet the following three requirements:
•be organized in a jurisdiction outside the United States that grants an equivalent exemption from tax to corporations organized in the United States with respect to the types of U.S. Source International Transportation Income that we earn (or an Equivalent Exemption);
•satisfy the Publicly Traded Test (as described below) or the Qualified Shareholder Stock Ownership Test (as described below); and
•meet certain substantiation, reporting and other requirements.
In order for a non-U.S. corporation to meet the Publicly Traded Test, its equity interests must be “primarily traded” and “regularly traded” on an established securities market either in the United States or in a jurisdiction outside the United States that grants an Equivalent Exemption. The Section 883 Regulations provide, in pertinent part, that equity interests in a non-U.S. corporation will be considered to be “primarily traded” on an established securities market in a given country if, with respect to the class or classes of equity relied upon to meet the “regularly traded” requirement described below, the number of units of each such class that are traded during any taxable year on all established securities markets in that country exceeds the number of units in such class that are traded during that year on established securities markets in any other single country. Equity interests in a non-U.S. corporation will be considered to be “regularly traded” on an established securities market under the Section 883 Regulations if one or more classes of such equity interests that, in the aggregate, represent more than 50.0% of the combined vote and value of all outstanding equity interests in the non-U.S. corporation satisfy certain listing and trading volume requirements. These listing and trading volume requirements will be satisfied with respect to a class of equity interests if trades in such class are effected, other than in de minimis quantities, on an established securities market on at least 60 days during the taxable year and the aggregate number of units in such class that are traded on an established securities market during the taxable year is at least 10.0% of the average number of units outstanding in that class during the taxable year (with special rules for short taxable years). In addition, a class of equity interests will be considered to satisfy these trading volume requirements if the equity interests in such class are traded during the taxable year on an established securities market in the United States and are “regularly quoted by dealers making a market” in such class (within the meaning of the Section 883 Regulations).
Even if a class of equity satisfies the foregoing requirements, and thus generally would be treated as “regularly traded” on an established securities market, an exception may apply to cause the class to fail the regularly traded test if, for more than half of the number of days during the taxable year, one or more 5.0% unitholders (i.e. unitholders owning, actually or constructively, at least 5.0% of the vote and value of that class) own in the aggregate 50.0% or more of the vote and value of the class (or the Closely Held Block Exception). The Closely Held Block Exception does not apply, however, in the event the corporation can establish that a sufficient proportion of such 5.0% unitholders are Qualified Shareholders (as defined below) so as to preclude other persons who are 5.0% unitholders from owning 50.0% or more of the value of that class for more than half the days during the taxable year.
As set forth above, as an alternative to satisfying the Publicly Traded Test, a non-U.S. corporation may qualify for the Section 883 Exemption by satisfying the Qualified Shareholder Stock Ownership Test. A corporation generally will satisfy the Qualified Shareholder Stock Ownership Test if more than 50.0% of the value of its outstanding equity interests is owned, or treated as owned after applying certain attribution rules, for at least half of the number of days in the taxable year by:
•individual residents of jurisdictions that grant an Equivalent Exemption;
•non-U.S. corporations organized in jurisdictions that grant an Equivalent Exemption and that meet the Publicly Traded Test; or
•certain other qualified persons described in the Section 883 Regulations (which we refer to collectively as Qualified Shareholders).
We believe that we satisfy all of the requirements for the Section 883 Exemption, and we expect that we will continue to satisfy such requirements. We are organized under the laws of the Republic of the Marshall Islands. The U.S. Treasury Department has recognized the Republic of the Marshall Islands as a jurisdiction that grants an Equivalent Exemption with respect to the type of U.S. Source International Transportation Income we earn and expect to earn in the future. Consequently, our U.S. Source International Transportation Income (including for this purpose, our proportionate share of any such income earned by our subsidiaries) should be exempt from U.S. federal income taxation provided we meet the Publicly Traded Test and we satisfy certain substantiation, reporting and other requirements.
Our common units and our Series A Preferred Units are traded only on the Nasdaq Global Market, which is considered to be an established securities market. Thus the number of our common units and Series A Preferred Units that are traded on the Nasdaq Global Market exceeds the number of our common units and Series A Preferred Units that are traded on any other established securities market, and this is not expected to change. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Although the matter is not free from doubt, based on our analysis of our current and expected cash flow and distributions on our outstanding equity interests, we believe that (i) our common units and Series A Preferred Units represent more than 50.0% of the total value of all of our outstanding equity interests and (ii) our common units and our Series A Preferred Units represent more than 50.0% of the total combined voting power of our equity interests. In addition, we believe that our common units and our Series A Preferred Units each currently satisfy, and expect that our common units and our Series
A Preferred Units each will continue to satisfy, the listing and trading volume requirements described previously. Therefore, we believe that our equity interests are “primarily traded” on an established securities market for purposes of the Publicly Traded Test.
Further, our partnership agreement provides that any person or group that beneficially owns more than 4.9% of any class of our units then outstanding generally will be treated as owning only 4.9% of such units for purposes of voting for directors. Although there can be no assurance that this limitation will be effective to eliminate the possibility that we have or will have any 5.0% unitholders for purposes of the Closely Held Block Exception, based on the current ownership of our common units, we believe that our common units have not lost eligibility for the Section 883 Exemption as a result of the Closely Held Block Exception. Thus, although the matter is not free from doubt and is based upon our belief and expectations regarding our satisfaction of the factual requirements described above, we believe that we satisfied the Publicly Traded Test for 2019 and will continue to satisfy the Publicly Traded Test for future taxable years.
The conclusions described above are based upon legal authorities that do not expressly contemplate an organizational structure such as ours. In particular, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under Marshall Islands law. Accordingly, while we believe that, assuming satisfaction of the factual requirements described above, our common units and Series A Preferred Units should be considered “regularly traded” on an established securities market and that we should satisfy the requirements for the Section 883 Exemption, it is possible that the IRS would assert that our common units and Series A Preferred Units do not meet the “regularly traded” test. In addition, as described previously, our ability to satisfy the Publicly Traded Test depends upon factual matters that are subject to change. Should any of the factual requirements described above fail to be satisfied, we may not be able to satisfy the Publicly Traded Test. Furthermore, our board of directors could determine that it is in our best interests to take an action that would result in our not being able to satisfy the Publicly Traded Test in the future. Please see “—The Net Basis and Branch Profits Tax” and “—The 4.0% Gross Basis Tax” below for a discussion of the consequences in the event we do not satisfy the Publicly Traded Test.
The Net Basis Tax and Branch Profits Tax.If we earn U.S. Source International Transportation Income and the Section 883 Exemption does not apply, the U.S. source portion of such income may be treated as effectively connected with the conduct of a trade or business in the United States (or Effectively Connected Income) if we have a fixed place of business in the United States involved in the earning of U.S. Source International Transportation Income and substantially all of our U.S. Source International Transportation Income is attributable to regularly scheduled transportation or, in the case of vessel leasing income, is attributable to a fixed place of business in the United States. In addition, if we earn income from liquefaction, regasification or storage of LNG within the territorial seas of the United States, such income may be treated as Effectively Connected Income. Based on our current operations, substantially all of our potential U.S. Source International Transportation Income is not attributable to regularly scheduled transportation or received from vessel leasing, and none of our liquefaction, regasification or storage activities occur within the territorial seas of the United States. As a result, we do not anticipate that any of our U.S. Source International Transportation Income or income earned from liquefaction, regasification or storage will be treated as Effectively Connected Income. However, there is no assurance that we will not earn income pursuant to regularly scheduled transportation or bareboat charters attributable to a fixed place of business in the United States, or earn income from liquefaction, regasification or storage activities within the territorial seas of the United States, in the future, which would result in such income being treated as Effectively Connected Income.
Any income we earn that is treated as Effectively Connected Income, net of applicable deductions, would be subject to U.S. federal corporate income tax (currently imposed at a rate of up to 21.0%). In addition, a 30.0% branch profits tax could be imposed on any income we earn that is treated as Effectively Connected Income, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid by us in connection with the conduct of our U.S. trade or business.
On the sale of a vessel that has produced Effectively Connected Income, we could be subject to the net basis U.S. federal corporate income tax as well as branch profits tax with respect to the gain recognized up to the amount of certain prior deductions for depreciation that reduced Effectively Connected Income. Otherwise, we would not be subject to U.S. federal income tax with respect to gains realized on the sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles. In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside the United States. It is expected that any sale of a vessel by us will be considered to occur outside of the United States.
The 4.0% Gross Basis Tax.If the Section 883 Exemption does not apply and the net basis tax does not apply, we would be subject to a 4.0% U.S. federal income tax on the U.S. source portion of our gross U.S. Source International Transportation Income, without benefit of deductions. Under the sourcing rules described above under “—Taxation of
Operating Income,” 50.0% of our U.S. Source International Transportation Income would be treated as being derived from U.S. sources.
Marshall Islands Taxation
We believe that because we, our operating subsidiaries and our controlled affiliates do not, and do not expect to conduct business or operations in the Republic of the Marshall Islands, neither we nor our controlled affiliates will be subject to income, capital gains, profits or other taxation under current Marshall Islands law. As a result, distributions by our operating subsidiary and our controlled affiliates to us will not be subject to Marshall Islands taxation.
United Kingdom Taxation
The following is a discussion of the material United Kingdom tax consequences applicable to us relevant to the fiscal year ended December 31, 2020. This discussion is based upon existing legislation and current H.M. Revenue & Customs practice as of the date of this Annual Report. Changes in these authorities may cause the tax consequences to vary substantially from the consequences described below. The following discussion is for general information purposes only and does not purport to be a comprehensive description of all of the United Kingdom tax considerations applicable to us.
Tax Residence and Taxation of a Permanent Establishment in the United Kingdom.A company treated as resident in the United Kingdom for purposes of the United Kingdom Corporation Tax Acts is subject to corporation tax in the same manner and to the same extent as a United Kingdom incorporated company. For this purpose, place of residence is determined by the place at which central management and control of the company is carried out.
In addition, a non-United Kingdom resident company will be subject to United Kingdom corporation tax on profits attributable to a permanent establishment in the United Kingdom to the extent it carries on a trade in the United Kingdom through such a permanent establishment. A company not resident in the United Kingdom will be treated as having a permanent establishment in the United Kingdom if it has a fixed place of business in the United Kingdom through which the business of the company is wholly or partly carried on or if an agent acting on behalf of the company has and habitually exercises authority to enter into contracts on behalf of the company.
Unlike a company, a partnership resident in the United Kingdom or carrying on a trade in the United Kingdom is not itself subject to tax, although its partners generally will be liable for United Kingdom tax based upon their shares of the partnership’s income and gains. Please read “Item 10—Additional Information—E. Taxation”.
Taxation of Non-United Kingdom Incorporated Subsidiaries.We will undertake measures designed to ensure that our non-United Kingdom incorporated subsidiaries will be considered controlled and managed outside of the United Kingdom and not as having a permanent establishment or otherwise carrying on a trade in the United Kingdom. While certain of our subsidiaries that are incorporated outside of the United Kingdom will enter into agreements with Golar Management, a United Kingdom incorporated company, for the provision of administrative and/or technical management services, we believe that the terms of these agreements will not result in any of our non-United Kingdom incorporated subsidiaries being treated as having a permanent establishment or carrying on a trade in the United Kingdom. As a consequence, we expect that our non-United Kingdom incorporated subsidiaries will not be treated as resident in the United Kingdom and the profits these subsidiaries earn will not be subject to tax in the United Kingdom.
Taxation of United Kingdom Incorporated Subsidiaries.Each of our subsidiaries that is incorporated in the United Kingdom will be regarded for the purposes of the United Kingdom Corporation Tax Acts as being resident in the United Kingdom and will be liable to United Kingdom corporation tax on its worldwide income and chargeable gains, regardless of whether the income or gains are remitted to the United Kingdom. The generally applicable rate of United Kingdom corporation tax is currently 19% . Our United Kingdom incorporated subsidiaries will be liable to tax at this rate on their net income, profits and gains after deducting expenses incurred wholly and exclusively for the purposes of the business being undertaken. There is currently no United Kingdom withholding tax levied on distributions made to us.
Indonesia Taxation
The following discussion is based upon our knowledge and understanding of the tax laws of Indonesia and regulations, rulings and judicial decisions thereunder, all as in effect of the date of this Annual Report and subject to possible change on a retroactive basis. The following discussion is for general information purposes and does not purport to be a comprehensive description of all the Indonesian income tax considerations applicable to us.
PTGI, which owns and operates the NR Satu, has entered into a time charter party agreement with PTNR. On commencement of the charter by PTNR in Indonesia, which occurred in May 2012 upon delivery of the NR Satu, we became subject to tax in Indonesia payable by PTGI. This includes (and is not limited to) corporate income tax on profits at a rate of 25%, withholding taxes required to be withheld by PTGI from payments it makes to our other subsidiaries including dividends to PTGI’s immediate parent or interest payments on group loans as well as third party debt financing.
However, the tax exposure in Indonesia is intended to be mitigated by revenue due under the charter. This tax element of the time charter rate was established at the beginning of the time charter and shall be adjusted only if there is a change in Indonesian tax laws or certain stipulated tax assumptions are invalid. PTNR withholds tax from payments it makes under the charter for the NR Satu. See “Item 8—Financial Information—A. Consolidated Statements and Other Financial Information—Legal Proceedings” for details on our legal proceedings in Indonesia.
Other Taxation
We are liable to corporate income taxes in the jurisdictions in which we have subsidiaries or a taxable presence. We are therefore liable to tax currently in the United Kingdom, Brazil, Indonesia, Jordan, Jamaica, Kuwait and Barbados according to the tax regulations of those countries. We are also subject to tax inspections and tax audits in the jurisdictions we operate in.
The various local tax authorities may also periodically revise their tax laws and regulations or adopt new laws and regulations, and the effects of new or revised tax regulations on our operations cannot be predicted. There can be no assurances that additional significant costs and liabilities will not be incurred to comply with such current and future tax regulation changes or that such tax regulations will not have a material effect on our operations.
C.Organizational Structure
Golar GP LLC, a Marshall Islands limited liability company, is our general partner. Our general partner is a subsidiary of Golar, which is a Bermuda exempted company. Please see Exhibit 8.1 to this Form 20-F for a list of our significant subsidiaries.
D.Property, Plant and Equipment
Other than the vessels in our current fleet, we also own a purpose-built mooring structure with a net book value of $10.7 million and $14.2 million as of December 31, 2019 and 2018, respectively. The mooring structure is located off West Java, Indonesia where the NR Satu is permanently moored for the duration of its time charter with PTNR. Together with the NR Satu, the mooring structure is under a time charter with PTNR which terminates at the end of 2022. The mooring structure, together with the NR Satu, is also secured in favor of the $175.0 million NR Satu facility.
Item 4A.Unresolved Staff Comments
There are no written comments which have been provided by the staff of the Securities and Exchange Commission regarding our periodic reports which remain unresolved as of the date of the filing of this Form 20-F with the Commission.
Item 5.Operating and Financial Review and Prospects
The following discussion of our financial condition and results of operations should be read in conjunction with our historical financial statements and related notes included elsewhere in this Annual Report. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. Our Consolidated Financial Statements have been prepared in accordance with U.S. GAAP and are presented in U.S. Dollars.
Background and Overview
We were formed in 2007 by Golar to own and operate FSRUs and LNG carriers under long-term charters that generate long-term stable cash flows. Our fleet currently consists of six FSRUs, four LNG carriers and an interest in the FLNG Hilli, through our ownership of 50% of the Hilli Common Units. We expect to customersmake additional accretive acquisitions of FSRUs, LNG carriers and FLNGs from Golar and third parties in the future as market conditions permit.
We completed our IPO on April 13, 2011 and our common units are traded on the NASDAQ Global Market under the symbol “GMLP”.
Significant Developments in 2019 and Early 2020
Golar Freeze Charter
On April 1, 2019, the Golar Freeze tendered notice of readiness for the FSRU testing for her 15-year time charter offshore Jamaica ("Golar Freeze Charter") and started earning her contracted full daily hire rate. On May 15, 2019, we executed a fixedmodification to the Golar Freeze Charter which triggered a change in accounting for the charter from an operating lease to a sales-type lease ("Golar Freeze Finance Lease"). As a result, the underlying vessel carrying value of the Golar Freeze was de-recognized from "vessels and equipment, net", and we have subsequently recognized an "investment in leased vessel, net" in our consolidated balance sheets with a corresponding $4.2 million gain included within "Other non-operating income" of our consolidated statement of operations.
Charter Awards
In October 2019, the Partnership received notice from Kuwait National Petroleum Co. ("KNPC") of a two-year contract award for the FSRU Golar Igloo. The charter award was subsequently executed in February 2020, which provides that the Partnership will provide two years of LNG storage and regasification services at the Mina Al-Ahmadi Refinery in Kuwait for KNPC’s regasification seasons beginning in February 2020. The contract may be further extended by KNPC through to December 2022.
In October 2019, we entered into a two-year charter for the Golar Maria which will commence late 2020. The charter includes options for the charterer to extend the contract for up to 3 years. Between April 2020 and the start of her charter, the vessel will trade in the spot market.
In February 2020, the Golar Grand charter, originally expiring in May 2020, was extended for one year at a rate similar to the current level with an option to extend for terms up to six years.
Global COVID-19 Outbreak
We have mentioned specific impacts to our operating activities due to COVID-19 (see “—Factors Affecting Our Results of Operations and Future Results”), however, the extent to which COVID-19 will impact our results of operation and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including among others, new information which may emerge concerning the severity of COVID-19 and the actions to contain or treat its impact. An estimate of the impact cannot therefore be made at this time.
Cash Distributions
In February 2020, we paid a cash distribution of $0.4042 per common unit in respect of the three months ended December 31, 2019 to unitholders of record as of February 7, 2020. We also paid a cash distribution of $0.546875 per Series A Preferred Unit for the period from November 15, 2019 through to February 14, 2020 to our Series A Preferred unitholders of time at rates that are generally fixed but may containrecord as of February 7, 2020.
In April 2020, the Partnership announced an update regarding its financial strategy and ongoing initiatives in response to the recent COVID-19 induced deterioration in the macro-economic environment, including approval of a variable component, such as tax and inflation adjustment.
As of95% reduction in the quarterly distribution on our common units to $0.0202 per unit for the quarter ended March 31, 2016,2020 (from $0.4042 per unit in the average remaining termprevious quarter) inconnection with our 2015 and 2017 Norwegian Bond refinancing described below. The Partnership believes this reduction is in the best interest of its unitholders during this time of market volatility. With the resulting cash retention, we will focus our existing time charters (excludingcapital allocation on debt reduction, thus strengthening our balance sheet.
2015 and 2017 Norwegian Bond Refinancing
On April 1, 2020, we announced the WAGL charter relatinginitiation of a process to the Golar Tundra) was approximately six yearsseek bondholder approval for our FSRU vessels,an extension of the maturity date by 18 months, subject to certain terminationterms and purchase rights, and approximately three yearsconditions, for our LNG carriers.2015 Norwegian Bonds and our 2017 Norwegian Bonds.We intend to use the 18 month extension period to arrange a long-term refinancing of the 2015 Norwegian Bonds and the 2017 Norwegian Bonds, which has not been possible in light of the current turmoil in the Nordic and international capital markets due in part to the adverse conditions caused by COVID-19.
For more informationWe have scheduled a bondholder meeting on our charters, please read “Item 4—InformationMay 5, 2020 to approve the proposed amendments to the 2015 Norwegian Bonds and the 2017 Norwegian Bonds (the "Norwegian Bond Amendments").In turn for the 18 month extension we will pay an amendment fee of 0.5% of the par value of all of the 2015 Norwegian Bonds and 2017 Norwegian Bonds.The proposed amendments include the following:
2015 Norwegian Bonds:The interest rate on the Partnership— Charters.”2015 Norwegian Bonds will increase by 185 basis points, from LIBOR plus 4.4% per annum to LIBOR plus 6.25% per annum. In addition, the repayment profile of the 2015 Norwegian Bonds will change from a bullet repayment on the original maturity date to amortization as follows:
•Equal instalments of $5 million (at 100% of par value), the first time on September 30, 2020 and thereafter on each interest payment date in the period up to and including the interest payment date in May 2021;
Market Overview•Equal instalments of $3.75 million (at 100% of the par value) from, but excluding the interest payment date in May 2021 and Trendson each interest payment date thereafter; and
•Repayment of the remaining amount at a price of 105% of the par value on the amended maturity date of November 22, 2021.
Historically, spot
2017 Norwegian Bonds: The interest rate on the 2017 Norwegian Bonds will increase by 185 basis points, from LIBOR plus 6.25% per annum to LIBOR plus 8.1% per annum. In addition, the repayment profile of the 2017 Norwegian Bonds will change from a bullet repayment upon the original maturity date to amortization as follows:
•Equal instalments of $5 million (at 100% of par value), the first time on September 30, 2020 and short-term charter hire rates for LNG carriersthereafter on each interest payment date in the period up to and including the interest payment date in May 2021;
•Equal instalments of $6.25 million (at 100% of the par value) from, but excluding the interest payment date in November 2021 and on each interest payment date thereafter;
•Equal instalments of $10 million (at 100% of the par value) from and including the interest payment date in February 2022 after the 2015 Norwegian Bonds have been uncertain, which reflectsredeemed in full; and
•Repayment of the variabilityremaining amount at a price of 105% of the par value on the amended maturity date of November 22, 2022.
Under the Norwegian Bond Amendments, we may incur no additional financial indebtedness without applying the proceeds received therefrom to redeem the 2015 Norwegian Bonds and the 2017 Norwegian Bonds on a pro rata basis, other than certain permitted financial indebtedness incurred: (i) to repay existing financial indebtedness, (ii) by way of secured debt from financial institutions incurred in the supply and demandordinary course of business in connection with acquisitions of assets or (iii) an amount up to $25 million in aggregate, provided that the proceeds in the case of each of (i) to (iii) above are not applied for LNG carriers. The industry has not, however, experienced a structural surplusredemption of LNG carriers since the 1980s with fluctuations in rates and utilization over the intervening decades reflecting short-term timing disconnects between the delivery of new vessels and deliveryany or all of the new LNG they were ordered2017 Norwegian Bonds prior to transport. During the last cycleredemption of the 2015 Norwegian Bonds in full. In addition, the Norwegian Bond Amendments will contain a provision prohibiting us from paying distributions to our common
unit holders in an excessamount greater than (i) $0.0808 per common unit per annum or (ii) the aggregate amount of LNG carriers first became evident in 2004, before reaching a peak incash equity raised. Additionally, under the second quarterNorwegian Bond Amendments, we will not be permitted to repurchase any of 2010, when spot and short term charter hire rates together with utilization reached near historic lows. Dueour common or preferred units
As of April 30, 2020, we had received support from bondholders for the required two-thirds majority to a lackapprove the proposed amendments at the meeting on May 5, 2020 for each of newbuild orders placed between 2008 and 2010, this trend then reversed from the third quarter of 2010 such that the demand for LNG shipping was not being met by available supply in 20112015 Norwegian and the first half2017 Norwegian Bonds.
Financing
In February 2019, we borrowed the remaining $25.0 million available under the revolving credit facility under our $800 million credit facility. As of 2012. Spot and short-medium term charter hire rates togetherDecember 31, 2019, the revolving credit facility was fully drawn.
In November 2019, we borrowed $15.0 million from Golar, with fleet utilization reached historic highsinterest at a rate of LIBOR plus 5.0%. We repaid the loan in 2012. Since 2012, hire rates and utilization slowly declinedfull, including interest of $0.1 million, on December 30, 2019.
In February 2020, we borrowed $25.0 million from these all-time highs reachingGolar, with interest at a rate of LIBOR plus 5.0%. We repaid the loan in full, including interest.
Common Unit Repurchase Program
In August 2019, we repurchased a total of 153,728 units under the common unit repurchase program for an equilibrium around the third quarteraggregate cost of 2013 when the supply and demand of vessels was broadly in alignment. After late 2013, the pace of newbuild LNG carrier deliveries outstripped the supply of new LNG liquefaction,$1.6 million. In accordance with the supplyprovisions of LNG carriers exceeding shipping requirements throughout 2014the partnership agreement, all common units repurchased were deemed canceled and 2015. Historically low charter ratesnot outstanding, with immediate effect.
Organizational Changes
On October 1, 2019, Mr. Brian Tienzo stepped down as our Chief Executive Officer ("CEO") and levelsChief Financial Officer ("CFO") to focus full time as senior advisor for Golar group financings. Mr. Graham Robjohns was appointed as our CEO to serve until April 30, 2020, when he will step down as our CEO and leave Golar. We expect to announce his replacement imminently.
Partnership Matters
At our Annual Meeting of utilization in 2015 and the first quarter of 2016 resulted from the oversupply of LNG carriers, and we expect these rates and utilization levels to persist for at least the first six months of 2016. Thereafter, we believe the anticipated arrival of substantial new LNG volumes should start to absorb the built-up surplus of LNG carriers. It is anticipated that the market will reach an equilibrium position during the second half of 2017 and then be short of LNG carriers in early 2018 unless further new vessels are ordered. Beginning in the second half of 2016, we anticipate there will be increasing utilization levels followed by rising charter rates for LNG carriers, provided there are no significant unplanned outages at existing liquefaction facilitiesLimited Partners on September 27, 2019, Mr. Alf Thorkildsen was elected as a result of geopolitical or other unexpected events.
In 2015, global crude oil prices were volatile and declined significantly. The decline in oil prices since late 2014 has depressed natural gas prices and led to a narrowingClass I Director of the gap in pricing in different geographic regions, which has adversely affectedPartnership. His term will expire at the length2022 Annual Meeting of voyages inLimited Partners.
On October 1, 2019, the spot LNG shipping market and the spot rates and medium term charter rates for charters which commence in the near future. A continued decline in oil prices could adversely affect both the competitiveness of natural gasPartnership's general partner appointed Ms. Georgina Sousa as a fuelreplacement for power generationMr. Michael Ashford as one of the general partner's three appointed Directors. Mr. Michael Ashford also retired as Company Secretary and was replaced by Ms. Georgina Sousa.
Series A Preferred Units ATM Program
On January 28, 2020, the marketPartnership entered into a sales agreement with a sales agent (the "Agent"), relating to the Partnership’s Series A Preferred Units. In accordance with the terms of the sales agreement, we may, through the Agent, offer and sell from time to time, Series A Preferred Units having an aggregate offering price of natural gas. Some production companies have announced delays or cancellationsup to $120.0 million.
volumes, chartering activity and charter rates could also adversely affect the market value of our vessels, on which certain of the ratios and financial covenants we are required to comply with in our credit facilities are based. See “Risk Factors-Our future performance and growth depend on continued growth in LNG production and demand for LNG, FLNGs, FSRUs and LNG carriers.”
Factors Affecting the ComparabilityOur Results of Operations and Future Results
Our historical results of operations and cash flows may not be indicative of future results of operations and cash flows toour results may be expected in the future, principally affected for the following reasons:
We intend to increase the size of our fleet by making other acquisitions. Our growth strategy focuses on expanding our fleet through the acquisition of FSRUs and LNG carriers and in the future possibly FLNG vessels under long-term time charters from Golar or third parties. We may need to issue additional equity or incur additional indebtedness to fund additional vessels that we purchase.
Vessel operating and other costs may face industry-wide cost pressures. Factors such as pressure on raw material prices, increased cost of qualified and experienced seafaring crew and changes in regulatory requirements could also increase operating expenditures. Although we continue to take measures to improve operational efficiencies and mitigate the impact of inflation and price escalations, future increases to operational costs are likely to occur.
We may enter into different financing arrangements. Our financing arrangements currently in place may not be representative of the arrangements we will enter into in the future. For example, we may amend our existing credit facilities or enter into new financing arrangements. For descriptions of our current financing arrangements, please read “—B. Liquidity and Capital Resources—Borrowing Activities.”
Our results are affected by fluctuations in the fair value of our derivative instruments. The change in fair value of some of our derivative instruments is included in our net income as some of our derivative instruments are not designated as hedges for accounting purposes. These changes may fluctuate significantly as interest rates fluctuate. Please read note 25 in the notes to our consolidated financial statements.
Our results•Vessels may be affected by tax exposure and changes in deferred tax. In 2015 and 2014, we recognized deferred tax assets relating to the recognition of certain historical tax positions relating to foreign tax operating losses in Indonesia. Furthermore, in 2015, we recognized a deferred tax liability relating to excess of the tax basis depreciation over the accounting basis depreciation in connection with the Golar Eskimo. Please see note 9 in the notes to our consolidated financial statements. This may not have an impact in our future results as we may not recognize deferred tax in the future. Tax accounting and reporting judgments that we make may not be entirely free from doubt. It is possible that applicable tax authorities will disagree with our positions, possibly resulting in additional taxes being owed. For instance, the Indonesian tax authorities have notified one of our subsidiaries, PTGI, that it is canceling a previously granted waiver of VAT importation in the approximate amount of $24.0 million for the NR Satu. In the event of an unfavorable outcome of our challenge of this ruling in Indonesian tax court, it is possible that PTGI will be liable for the VAT plus penalties and interest. See “Item 3. Risk Factors—We will be subject to taxes, which will reduce our cash available for distribution”.
The amount and timing of drydocking and the number of drydocking days of our vessels can significantly affect our revenues between periods. Our vessels are off-hire at various points of time due to scheduled and unscheduled maintenance. During the years ended December 31, 2015, 2014 and 2013, we had 84, nil, and 28 off-hire days, respectively, relating to drydocking of our vessels. Material differences in the number of off-hire days from period to period could cause financial results to differ materially. The material impact of off-hire time on our business and results of operations is discussed below.
The Golar Igloo generated revenues during the first month of her three month Regasification Off-Season. Under the Golar Igloo’s charter with KNPC, Golar Igloo is to provide FSRU services for nine months of each year (the regasification season). During the charter term, there will be a three-month window each year from December until March, during which the Golar Igloo will not provide FSRU services to KNPC, permitting us to pursue spot carrier and other short-term business opportunities. KNPC extended the Golar Igloo’s charter after the end of the regasification season until December 31 in both 2015 and 2014. We cannot guarantee that the Golar Igloo will be employed each year during her Regasification Off-Season.
Reductions of hire rates for extension periods may significantly affect our revenues. The Golar Grand is currently operating under a replacement time charter with Golar at a hire rate that is 75% of the rate paid by the previous charterer. Certain of our other time charters provide for significant reductions in hire rates payable during extension periods if the charterer extends the applicable charter beyond its initial term. These reductions range from 5% for the Golar Spirit to 64% for the Golar Freeze. Our results of operations will be negatively impacted in periods during which any of our vessels are operating under a reduced hire rate.
Vessels maybe re-contracted at lower rates. We currently derive all of our revenue from a limited number of customers on medium to long-term charters. The charters on three of our LNG carriers are due to expire in 2017. Hire rates for FSRUs and LNG carriers fluctuate over time as a result of changes in the supply-demand balance relating to current and future FSRU and LNG carrier capacity. Hire rates at a time when we may be seeking a new charter may be lower than the hire rates at which our vessels are currently chartered. In addition, certain of our time charters provide for significant reductions in hire rates payable during extension periods if the charterer extends the applicable charter beyond its initial term. If rates are lower, when we are seeking a new charter, or if we elect not to re-charter a vessel, our earnings and ability to make distributions to our unitholders may decline. See “Risk Factors-Hire rates
•Outbreaks of epidemic and pandemic diseases and governmental responses thereto could adversely affect our business. Our operations are subject to risks related to public health threats, including the recent COVID-19 pandemic, a virus causing potentially deadly respiratory tract infections originating in China, which has negatively affected global economic conditions and the demand for FSRUsLNG and LNG carriersshipping regionally as well as our operations and the operations of our charterers and suppliers. Governments in affected countries have imposed travel bans, quarantines and other emergency public health measures. Uncertainties regarding the economic impact of the COVID-19 outbreak are likely to result in sustained market turmoil, which could also negatively impact our business, financial condition and cash flows. Governments are approving large stimulus packages to mitigate the effects of the sudden decline in economic activity caused by the pandemic; however, we cannot predict the extent to which these measures will be sufficient to restore or sustain the business and financial condition of companies in the shipping industry. Governmental measures, though temporary in nature, may fluctuate substantially. If rates are lower whencontinue and increase depending on developments in outbreak of COVID-19. We have experienced the following disruption to our operations to-date:
•crew changes have been cancelled and/or delayed due to port authorities denying disembarkation, a high potential of infection in countries where crew changes may otherwise have taken place and the inability to repatriate crew members due to lack of international air transport or denial of re-entry by crew members’ home countries, which may have closed their borders;
•the inability to complete scheduled engine overhauls, routine maintenance work and management of equipment malfunctions;
•shortages or a lack of access to required spare parts for our vessels, and delays in repairs to, or scheduled or unscheduled maintenance or modifications or dry docking of, our vessels, as a result of a lack of berths available by shipyards from a shortage in labor or due to other business disruptions;
•delays in vessel inspections and related certifications by class societies, customers or government agencies; and
•disruptions to business from, or additional costs related to, new regulations, directives or practices implemented in response to the pandemic, such as travel restrictions, increased inspection regimes, hygiene measures (such as quarantining and physical distancing) or increased implementation of remote working arrangements.
Given the recent fluidity of developments and the extensive response to the outbreak, we are seekingcontinually receiving updated information and we are constantly reassessing the impact of COVID-19 on our operations. Measures that we are taking in response to COVID-19 include:
•All crew changes have been cancelled until further notice and this will be continually reviewed as the situation develops;
•Arrangements to accept delivery of additional spare parts and critical supplies are made where possible in supply chains;
•Planned engine overhaul and routine maintenance services have been cancelled where possible, and arrangements for remote servicing of equipment are being made wherever possible;
•Non-critical boardings are being cancelled, current visits are limited to vettings inspectors, pilots and port officials, where allowed, and procedures have been implemented on board to limit the risk of human-to-human transmission from visiting personnel;
•Global offices were closed in advance of government-mandated lockdown dates to minimize the opportunity for human-to-human transmission, IT systems and network capacity have proven to be robust, and no interruption to business support functions and no implications to financial reporting systems or internal controls over financial reporting have been identified; and
•Flexible working arrangements have been made for those with children, non-critical projects have been postponed and various governmental support schemes and grants are being explored.
In addition prolonged periods of low utilization and hire rates arising as a result of the COVID-19 outbreak could also result in the recognition of impairment charges on our vessels if future cash flow estimates, based upon information available at the time, indicate that the carrying value of these vessels may not be recoverable. Such impairment charges may cause lenders to accelerate loan payments under our financing agreements.
•Our results may be affected by tax exposure. Tax accounting and reporting judgments that we make may not be entirely free from doubt. It is possible that applicable tax authorities will disagree with our positions, possibly resulting in additional taxes being owed in future years. We are also subject to changes in regulatory requirements. For instance, tax authorities issuing tax assessments for property tax on the basis of new charter, our earnings and abilitylegislation introduced that specifically list FSRUs as being treated as objects liable to make distributions to our unitholdersland & buildings tax, when it previously did not. More information on certain tax exposures that may decline”.
Factors Affecting Our Results of Operations
We believe the principal factors that will affect our future results is included within note 26 “Other Commitments and Contingencies” in our consolidated financial statements.
•The amount and timing of operations include:
drydocking and the number of vessels in our fleet, and our ability to acquire additional vessels from Golar or from third parties;
our ability to maintain good relationships with our nine existing customers and our future customers and to increase the numberdrydocking days of our customer relationships;
demand for LNG shipping services, including floating storagevessels can significantly affect our revenues between periods. Our vessels are off-hire at various points of time due to scheduled and regasification services;
our abilityunscheduled maintenance. During the years ended December 31, 2019, 2018 and 2017, we had 45, 134 and 123 off-hire days, respectively, relating to successfully employ our vessels at economically attractive rates, as our charters expire or are otherwise terminated;
the effective and efficient technical managementdrydocking of our vessels;
Golar’s ability to obtain and maintain major international energy company approvals and to satisfy their technical, health, safety and compliance standards; and
economic, regulatory, political and governmental conditions that affect the shipping and the LNG industry. This includes changesvessels. Material differences in the number of newoff-hire days from period to period could cause financial results to differ materially.
•We intend to increase the size of our fleet by making other acquisitions. Our growth strategy focuses on expanding our fleet through the acquisition of FSRUs, LNG importing countriescarriers and regionsFLNGs under long-term time charters from Golar or third parties. We may need to issue additional equity or incur additional indebtedness to fund additional vessels that we purchase.
•Our vessels' net book value may be impaired. 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 long-lived assets' carrying amounts, we make assumptions regarding estimated future cash flows, such as the vessels' economic useful life and availabilityestimates in respect of surplus LNG from projects aroundresidual or scrap value. If the world, as well as structural LNG market changes allowing greater flexibility and enhanced competition with other energy sources.
In additionvalue of our ships declines, we may be required to the factors discussed above, we believe certain specific factors have impacted, and will continue to impact,record an impairment charge in our financial statements, which could adversely affect our results of operations.
•We may enter into different financing arrangements. Our financing arrangements currently in place may not be representative of the arrangements we will enter into in the future. For example, we may amend our existing credit facilities or enter into new financing arrangements. For descriptions of our current financing arrangements, please read “—B. Liquidity and Capital Resources—Borrowing Activities.”
•Our results are affected by fluctuations in the fair value of our derivative instruments. The change in fair value of our derivative instruments is included in our net income as we have no existing derivative instruments held for hedging. These factors include:changes may fluctuate significantly as interest rates fluctuate. Please read note 24 “Financial Instruments” in our Consolidated Financial Statements.
the hire rate earned•Our results may be affected by our vessels, unscheduled off-hire days and the level offluctuations in our vessel operating expenses;
mark-to-market chargescosts. Factors such as shortage of qualified and experienced seafaring crew and pressure on raw material prices could increase our operating expenditures. Although we continue to take measures to improve operational efficiencies and mitigate the impact of inflation and price escalations, future increases to operational cost may occur. In addition, the Golar Spirit has been in interest rate swaps and foreign currency derivatives;
foreign currency exchange gains and losses;
our access to capital required to acquire additional vessels and/or to implement our business strategy;
increased crewing costs;
our level of debtlay-up since August 2017 and the related interest expenseGolar Mazo will be placed into lay-up shortly. We receive no revenues for vessels while they are in lay-up or being converted, but we benefit from lower vessel operating costs, principally from reduced crew on board, and amortizationminimal maintenance requirements and voyage costs.
•Our investment in Hilli LLC may not result in anticipated profitability or generate cash flow sufficient to justify our investment. The Hilli is the world’s first converted FLNG vessel. FLNG vessels are complex and their operations are technically challenging and subject to mechanical risks. Accordingly, the operations of the Hilli are subject to risks that could negatively impact affect our earnings and financial condition. In addition, we provided the Partnership Guarantee and the LOC Guarantee in connection with the Hilli Acquisition. We could be liable under these guarantees if Hilli Corp fails to service its debt or comply with its debt covenants under the Hilli Facility or fails to perform under the LTA. This could also impact our ability to obtain future credit.
the level of any distribution on our common units.
Please read “Item 3—Key Information—D. Risk Factors” for a discussion of certain risks inherent in our business.
Important Financial and Operational Terms and Concepts
We use a variety of financial and operational terms and concepts when analyzing our performance. These include the following:
Total Operating Revenues. Revenues. Total operating revenues refersmainly pertains to lease payments under time charter revenues.charters where we act as lessor in operating lease arrangements, fees for repositioning vessels as well as the reimbursement of certain vessel operating costs such as drydocking costs and taxes in relation to these leasing arrangements. We recognizerecord fixed revenues generated from time charters, which we classify as operating leases, on a straight line basis over the term of the charter as the applicable vessel operates underservice is provided. Any variable payments relating to the charter.lease arrangements are recognized as incurred in the relevant period. We do not recognize revenue during days when the vessel is off-hire unless the charter agreement makes a specific exception.
Off-hire (Including Commercial Waiting Time). Our vessels may be idle, that is, off-hire, for several reasons: scheduled drydocking or special survey or vessel upgrade or maintenance or inspection, which we refer to as scheduled off-hire; days spent waiting for a charter, which we refer to as commercial waiting time; and unscheduled repairs, maintenance, operational deficiencies, equipment breakdown, accidents, crewing strikes, certain vessel detentions or similar problems, or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew, which we refer to as unscheduled off-hire.
Drydocking. We must periodically drydock each of our vessels for inspection, repairs and maintenance and any modifications required to comply with industry certification or governmental requirements. Except for the NR Satu and Golar Freeze, which will go into drydock after itstheir charter with PTNR,their respective charterer, we generally drydock each of our vessels every two and a half to five years, depending upon the type of vessel and its age.years. In addition, a shipping society classification intermediate survey is performed on our LNG carriers between the second and third year of a five-year drydocking period. We capitalize a substantial portion of the costs incurred during drydocking and for the survey and amortize those costs on a straight-line basis from the completion of a drydocking or intermediate survey over the estimated useful life of the drydock. We expense as incurred costs for routine repairs and maintenance performed during drydocking or intermediate survey that do not improve or extend the useful lives of the assets. The number of drydockings undertaken in a given period and the nature of the work performed determine the level of drydocking expenditures.
Voyage and Commission Expenses. Voyage expenses, which are primarily comprise of fuel costs but which also include other costs such as port charges, are paid by our customers under our time charters. However, we may incur voyage related expenses during off-hire periods when positioning or repositioning vessels before or after the period of a time charter or before or after drydocking, which expenses will be payable by us. We also incur some voyage expenses, principally fuel costs, when our vessels are in periods of commercial waiting time.
Time Charter Equivalent Earnings. 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 TCE. For our time charters, this is calculated by dividing time charter revenuesthe sum of (a) total operating revenue and (b) amount invoiced under sales-type lease, less voyage and commission expenses, by the number of calendar days minus days for scheduled off-hire. Where we are paid a fee to position or reposition a vessel before or after a time charter, this additional revenue, less voyage expenses, is included in the calculation of TCE. For shipping companies utilizing voyage charters (where the vessel owner pays voyage costs instead of the charterer), TCE is calculated by dividing voyage revenues, net of vessel voyage costs, by the number of calendar days minus days for scheduled off-hire. TCE is a non-GAAP financial measure. Please readSee “Item 3—3. Key Financial Information—A. Selected Historical Financial and Operating Data—Non-GAAP Financial Measures”Measure” for a reconciliation of TCE to total operating revenues (TCE’s most directly comparable financial measure in accordance with GAAP).
Vessel Operating Expenses. Vessel operating expenses include direct vessel operating costs associated with operating a vessel, such as crew wages, which are the most significant component, vessel supplies, routine repairs, maintenance, lubricating oils, insurance and management fees for the provision of commercial and technical management services.
Adjusted EBITDA.Modification of the FSRU Golar Freeze charter agreement on May 15, 2019, led to a reassessment of the contract under lease accounting rules. This modification resulted in the contract changing from an operating lease to a sales-type lease ("Golar Freeze Finance Lease"). This accounting change resulted in the recognition of the capital hire revenue as “Interest Income” based on a rate implicit in the contract while service revenue is recognized straight line over the life of the contract. In order to compare the performance of the Golar Freeze with our wider business, management has determined that it will measure the performance of the Golar Freeze Charter based on Adjusted EBITDA (EBITDA as adjusted for the amount invoiced under sales-type lease in the period).
Adjusted EBITDA is calculated by totaling the sum of each segment's operating revenues and amounts invoiced under sales-type lease, less: vessel operating expenses, voyage and commission expenses and administrative expenses. The FLNG segment reflects our effective share of revenue and expenses attributable to our 50% ownership of the Hilli Common Units that was acquired in July 2018. Adjusted EBITDA is a financial measure used by management and investors to assess the Partnership’s total financial and operating performance. Management believes that Adjusted EBITDA assists management and investors by increasing comparability of its total performance from period to period and against the performance of other companies.
Depreciation and Amortization. Depreciation and amortization expense, or the periodic cost charged to our income for the reduction in usefulness and long-term value of our vessels, is related to the number of vessels we own or operate under long-term capital leases.for contractual future leasing. We depreciate the cost of our owned vessels, less their estimated residual value, and amortize the amount of our capitalfinance lease assets over their estimated economic useful lives, on a straight-line basis.
We amortize our deferred drydocking costs generally over two to five years based on each vessel’s next anticipated drydocking. Income derived from sale and subsequently leased assets is deferred and amortized in proportion to the amortization of the leased assets. Also, we amortize our intangible assets, which pertain to customer related and contract basedcontract-based assets representing primarily long-term time charter party agreements acquired in connection with the acquisition of certain subsidiaries from Golar, over the term of the time charter party agreement.
Administrative Expenses. We are party to a management and services agreement with Golar Management, under which Golar Management provides certain management and administrative services to us and is reimbursed for costs and expenses incurred in connection with these services at a cost plus 5% basis. The balance of administrative expenses relate to corporate expenses such as legal, accounting and regulatory compliance costs.
Interest Expense and Interest Income. Interest expense depends on our overall level of borrowing and may significantly increase when we acquire or lease vessels. In addition, by virtue of sale and leaseback transactions we have or may enter into with lessor VIEs, where we are deemed to be the primary beneficiary, webeneficiary. We are required to consolidate the VIEs into our results. Although consolidated into our results, we have no control over the funding arrangements negotiated by these lessor VIE entities which includes the interest rates to be applied. For additional detail, refer to note 5 “Variable"Variable Interest Entities”Entities" to our consolidated financial statements. Furthermore, our estimation process is dependent upon the timeliness of receipt and accuracy of financial information provided by financial institutions. While an LNG carrier is undergoing retrofitting into a FSRU, interest expense incurred is capitalized on the cost of the vessel.Consolidated Financial Statements. Interest expense may also change with prevailing interest rates, although interest rate swaps or other derivative instruments may reduce the effect of these changes. Interest income will depend on prevailing interest rates and the level of our cash deposits and restricted cash deposits. Interest income also includes interest income in relation to our sales-type lease for which we are the lessor.
Impairment of Long-Lived Assets. 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, the vessels’ estimated useful life and estimates in respect of residual or scrap value. We estimate those future cash flows based(Losses)/gains on the existing service potential of our vessels. 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. As of December 31, 2015, we performed an impairment testDerivative Instruments. (Losses)/gains on certain vessels, as we have assessed that there were indications for impairment. With reference to undiscounted future cash flows based on the existing service potential of the vessels and the associated long term charters, no impairment was identified. Since our inception, our vessels have not been impaired. For additional detail, refer to note 2 to our consolidated financial statements.
Other Financial Items. Other financial itemsderivative instruments include financing fee arrangement costs such as commitment fees on credit facilities, amortization of deferred financing costs, market valuation adjustments for interest rate swap derivatives, foreign exchange gains/lossesrealized interest income/(expense) on interest rate swaps and foreign currency derivatives.market valuation adjustments on Earn-Out Units. The market valuation adjustment for our interest rate and foreign currency derivatives may have a significant impact on our results of operations and financial position although it does not materially impact our short-term liquidity unless we terminate these swaps before their maturity.
Other Financial Items. Other financial items include financing fee arrangement costs such as commitment fees on credit facilities, foreign exchange gains/losses and other realized gains/(losses) on our financial instruments. Foreign exchange gains or losses arise due to the retranslation of our capitalfinance lease obligations and the cash deposits securing those obligations. Any gain or loss represents an unrealized gain or loss 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 capitalfinance lease obligations.
Non-Controlling Interest. Non-controlling interest refers to the 40% interest in the Golar Mazo. In addition, since our entry into a sale and leaseback arrangement with a wholly-owned subsidiary (or “Eskimo SPV”) of China Merchants Bank Leasing (“CMBL”) in November 2015 relating to the Golar Eskimo, we have consolidated the Eskimo SPV into our results. Thus, the equity attributable to CMBL is included in our non-controlling interest. For additional details, see note 5 “Variable Interest Entities” to our Consolidated Financial Statements included herein.
In
Equity in net earnings of affiliate. Our affiliate represents our 50% interest in the years ended December 31, 2015, 2014 and 2013, revenues from eachHilli Common Units which is accounted for by the equity method of accounting. The excess of the following customers accounted forpurchase price over 10%book value of our investments in equity method affiliates, or basis difference, is included in the consolidated revenues:balance sheets as "Investment in affiliate". We allocate the basis difference across the assets and liabilities of the affiliate, with the residual assigned to goodwill. The basis difference will then be amortized through the consolidated statements of operations as part of the equity method of accounting. Under the equity method of accounting, we recognize gains and losses in the income statement as equity in net earnings or losses of affiliate based on the economic results allocated based on a contractual agreement, net of interest, tax and basis difference amortization.
|
| | | | | | | | | | | | | | | | | | | | | | |
(in thousands of $) | | 2015 | | 2014 | | 2013 |
Petrobras | | $ | 100,052 |
| | 23 | % | | $ | 99,976 |
| | 25 | % | | $ | 85,899 |
| | 26 | % |
PTNR | | 67,325 |
| | 15 | % | | 66,345 |
| | 17 | % | | 65,478 |
| | 20 | % |
KNPC | | 47,402 |
| | 11 | % | | 43,220 |
| | 11 | % | | — |
| | — | % |
DUSUP | | 41,970 |
| | 10 | % | | 48,392 |
| | 12 | % | | 48,029 |
| | 15 | % |
Pertamina | | 38,061 |
| | 9 | % | | 40,004 |
| | 10 | % | | 37,302 |
| | 11 | % |
BG Group plc | | 31,370 |
| | 7 | % | | 68,884 |
| | 17 | % | | 66,341 |
| | 20 | % |
| | | |
|
| | | — |
| | | | | |
Inflation and Cost Increases
Although inflation has had a moderate impact on operating expenses, interest costs, drydocking expenses and overhead, we do 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. Insurance costs have historically seen periods of high cost inflation.inflation, although not within the last 12 months. It is anticipated that insurance costs may continue to rise in the future. LNG transportation is a business that requires specialist skills that take some time to acquire and the number of vessels is increasing. Similarly, historically, there have been periods of increased demand for qualified crew, which has and we anticipatemay in future will continue to put inflationary pressure on crew costs. Only vessels on full cost pass-through charters would be fully protected from crew cost increases. The impact of these increases will be mitigated to some extent by the following provisions in our existing charters:
•The Golar Mazo’s charter provides for operating cost and insurance cost pass-throughs, and so we will be protected from the impact of the vast majority of such increases.
The Methane Princess’’s and the Golar Eskimo’s charters provide that the operating cost component of the charter hire rate, established at the beginning of the charter, will increase by a fixed percentage per annum (except for insurance in the case of the Methane Princess, which is covered at cost).
•Under the OSAsOSA for both the Golar Spirit and the Golar Winter, the charter hire rates are payable in Brazilian Reals.Reais. The charter hire rates payable under the OSAsOSA covers all vessel operating expenses, other than drydocking and insurance. The charter hire ratesrate payable under the OSAs wereOSA was established between the parties at the time the charter was entered into and will be increased based on a specified mix of consumer price and U.S. Dollar foreign exchange rate indices on an annual basis.
•The Golar Freeze and the NR Satu time charterscharter provides for an annual adjustmentsadjustment to the operating expense component of the charter hire rate as necessary to take into account cost increases.
movements.
A.Operating Results
Year Ended December 31, 20152019 Compared with the Year Ended December 31, 20142018
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2015 | | 2014 | | Change | | % Change |
| (dollars in thousands, except TCE and average daily vessel operating costs) |
Total operating revenues | $ | 434,687 |
| | $ | 396,026 |
| | $ | 38,661 |
| | 10 | % |
Vessel operating expenses | 65,244 |
| | 59,191 |
| | 6,053 |
| | 10 | % |
Voyage and commission expenses | 7,724 |
| | 6,048 |
| | 1,676 |
| | 28 | % |
Administrative expenses | 6,643 |
| | 5,757 |
| | 886 |
| | 15 | % |
Depreciation and amortization | 99,256 |
| | 80,574 |
| | 18,682 |
| | 23 | % |
Interest income | 1,315 |
| | 1,131 |
| | 184 |
| | 16 | % |
Interest expense | (55,324 | ) | | (43,781 | ) | | (11,543 | ) | | 26 | % |
Other financial items | (23,459 | ) | | (22,118 | ) | | (1,341 | ) | | 6 | % |
Taxes | (5,669 | ) | | 5,047 |
| | (10,716 | ) | | (212 | )% |
Net income | 172,683 |
| | 184,735 |
| | (12,052 | ) | | (7 | )% |
Non-controlling interest | (10,547 | ) | | (10,581 | ) | | 34 |
| | — | % |
TCE (to the closest $100) | $ | 120,373 |
| | 121,900 |
| | (1,527 | ) | | (1 | )% |
Average daily vessel operating costs | 17,969 |
| | 18,502 |
| | (533 | ) | | (3 | )% |
Operating days: DuringThe following details the yearAdjusted EBITDA information for our reportable segments; FSRUs, LNG carriers and FLNG for the years ended December 31, 2015,2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | December 31, 2018 | | | | | | |
(dollars in thousands) | FSRU | LNG Carrier | FLNG | Elimination(1) | Consolidated Reporting | FSRU | LNG Carrier | FLNG | | | Elimination(1) | Consolidated Reporting |
| | | | | | | | | | | | |
Total operating revenues | $ | 240,695 | | $ | 58,957 | | $ | 104,073 | | $ | (104,073) | | $ | 299,652 | | $ | 294,889 | | $ | 51,761 | | 49,754 | | | | (49,754) | | $ | 346,650 | |
Vessel operating expenses | (40,978) | | (19,980) | | (23,042) | | 23,042 | | (60,958) | | (42,736) | | (22,511) | | (9,834) | | | | 9,834 | | (65,247) | |
Voyage and commission expenses | (4,467) | | (3,181) | | (230) | | 230 | | (7,648) | | (7,138) | | (4,084) | | (434) | | | | 434 | | (11,222) | |
Administrative expenses(2) | (8,090) | | (5,322) | | (1,093) | | 1,093 | | (13,412) | | (9,384) | | (5,425) | | (1,306) | | | | 1,306 | | (14,809) | |
Amount invoiced under sales-type lease | 11,500 | | — | | — | | (11,500) | | — | | — | | — | | — | | | | — | | — | |
Adjusted EBITDA | 198,660 | | 30,474 | | 79,708 | | (91,208) | | 217,634 | | 235,631 | | 19,741 | | 38,180 | | | | (38,180) | | 255,372 | |
(1) Eliminations reverse the effective share of revenues, expenses, and Adjusted EBITDA attributable to our total operating days increased to 3,518 days, compared to 3,196 days in 2014, mainly as a result50% ownership of the acquisitionHilli Common Units, as well as the amount invoiced under sales-type lease on the Golar Freeze.
(2) Indirect administrative expenses are allocated to the FSRU and LNG carrier segments based on the number of vessels while administrative expenses for the FLNG segment relates to our effective share of expenses attributable to our 50% ownership of the Golar Eskimo in January 2015, partially offset byHilli Common Units. See the net effectdiscussion under “—Other Operating Results” below.
FSRU Segment
The following table sets forth the operating results of our FSRU segment for the scheduled drydockingyears ended December 31, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2019 | | 2018 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands, except TCE) | | | | | | |
Total operating revenues | $ | 240,695 | | | $ | 294,889 | | | $ | (54,194) | | | (18) | % |
Vessel operating expenses | (40,978) | | | (42,736) | | | 1,758 | | | (4) | % |
Voyage and commission expenses | (4,467) | | | (7,138) | | | 2,671 | | | (37) | % |
Administrative expenses | (8,090) | | | (9,384) | | | 1,294 | | | (14) | % |
Amount invoiced under sales-type lease | 11,500 | | | — | | | 11,500 | | | 100 | % |
FSRU Adjusted EBITDA | $ | 198,660 | | | $ | 235,631 | | | $ | (36,971) | | | (16) | % |
| | | | | | | |
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Other Financial Data: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Average daily TCE(1) | $ | 139,173 | | | $ | 171,689 | | | $ | (32,516) | | | (19) | % |
| | | | | | | |
(1) Refer to “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Measure.” for a definition of the FSRU, the Golar Freeze in 2015average daily TCE and the LNG carrier, the Golar Mazo in 2014.reconciliation to its most directly comparable GAAP financial measure.
OperatingTotal operating revenues: Total operating revenues increaseddecreased by $38.7$54.2 million to $434.7$240.7 million for the year ended December 31, 20152019 compared to $396.0$294.9 million in 2014.2018. This iswas primarily due to:
$50.6 million revenue contribution from the Golar Eskimo following her acquisition in January 2015; and
$4.2 million of additional revenue in 2015 from the Golar Igloo due to recognition of ten months of revenue as compared to approximately nine months in 2014, following her acquisition in March 2014.
This was partially offset by:
•a $6.4$46.5 million reduction in revenue from the Golar Freeze due mainly as a result of (i) recognition of all remaining revenue on her previous charter which had an original expiration date of April 2019, during the year ended December 31, 2018, as the vessel was no longer available under the previous charter; (ii) reduced daily hire rate from the current charter for the year ended December 31, 2019 compared to her scheduled drydocking in 2015;
the previous charter hire rate for the year ended December 31, 2018; and (iii) the impact of the Golar Freeze Charter being modified to a sales-type lease on May 15, 2019. Subsequently, all income from the Golar Freeze Finance Lease is recognized as interest income rather than revenue; and
•a $9.1$7.7 million reduction in revenue from the Golar Grand, followingIgloo due to (i) a reduced daily hire rate during the year ended December 31, 2019 compared to 2018 and (ii) the vessel being offhire during December 2019, as her redelivery from BG Groupcharter ended in mid-February 2015 and her subsequent charter back to Golar at a lower daily time charter rate; andNovember 2019.
The decrease was slightly offset by a $1.9$1.3 million reductionincrease in revenue from theGolar MazoWinter as a result of increased daily hire rate for the year ended December 31, 2019 compared to 2018.
Vessel operating expenses: The decrease of $1.8 million in vessel operating expenses to $41.0 million for the year ended December 31, 2019 as compared to $42.7 million in 2018 was primarily due to a $2.4 million decrease in repair and maintenance costs incurred by the Golar Eskimo,Golar Igloo and NR Satu during the year ended December 31, 2019. The decrease was partially offset by a $0.8 million increase in vessel operating expenses for the Golar Freeze during the year ended December 31, 2019, due to higher repair and maintenance cost and increased operational costs incurred pursuant to her charter in Jamaica, compared to her previous charter in Dubai.
Voyage and commission expenses: Voyage and commission expenses decreased by $2.7 million to $4.5 million for the year ended December 31, 2019 compared to $7.1 million in 2018, mainly due to Golar Freeze incurring lower bunker costs in the year ended December 31, 2019 compared to 2018 when she incurred bunker cost sailing to the yard for her scheduled drydock.
Amount invoiced under sales-type lease:This represents the actual invoiced amounts on the Golar Freeze Finance Lease. As the income generated from the Golar Freeze Finance Lease is not reflected in our total operating revenues, we have included the amounts invoiced under the lease in arriving at our FSRU Adjusted EBITDA for the year ended December 31, 2019 to enable comparability with the rest of our FSRU segment's charters.
FSRU Adjusted EBITDA: The FSRU Adjusted EBITDA decreased by $37.0 million to $198.7 million for the year ended December 31, 2019 compared to $235.6 million in 2018. This was primarily due to the effect ofreduced revenues from the Golar Freeze and the accelerated release of drydocking revenue Golar Igloo charters for the year ended December 31, 2019, which were partially offset by the decrease in 2014, as she drydocked earlier than expected.
vessel operating expenses and voyage and commission expenses.
Time charter equivalent earningsAverage daily TCE(1):
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2015 | | 2014 | | Change | | % Change |
Calendar days less scheduled off-hire days | 3,547 |
| | 3,199 |
| | 348 |
| | 11 | % |
Average daily TCE (to the closest $100) | $ | 120,373 |
| | $ | 121,900 |
| | $ | (1,527 | ) | | (1 | )% |
The decrease of $1,527 in the average daily time charter equivalent rate, or TCE for the year ended December 31, 20152019 decreased by $32,516 to $120,373$139,173 compared to $121,900$171,689 in 2014, is2018, mainly due to a reduction in total operating revenue from the Golar Freeze and the Golar Igloo charters. This was combined with the impact of decreased number of scheduled off-hire days as the Golar Freeze was onhire for a longer period of time in the year ended December 31, 2019 compared to 2018 as a result of her scheduled drydocking in 2018.
LNG Carrier Segment
The following table sets forth the operating results of our LNG carrier segment for the years ended December 31, 2019 and 2018.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2019 | | 2018 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands, except TCE) | | | | | | |
Total operating revenues | $ | 58,957 | | | $ | 51,761 | | | $ | 7,196 | | | 14 | % |
Vessel operating expenses | (19,980) | | | (22,511) | | | 2,531 | | | (11) | % |
Voyage and commission expenses | (3,181) | | | (4,084) | | | 903 | | | (22) | % |
Administrative expenses | (5,322) | | | (5,425) | | | 103 | | | (2) | % |
LNG carrier Adjusted EBITDA | $ | 30,474 | | | $ | 19,741 | | | $ | 10,733 | | | 54 | % |
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Other Financial Data: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Average daily TCE(1) | $ | 38,360 | | | $ | 33,575 | | | $ | 4,785 | | | 14 | % |
| | | | | | | |
(1)Refer to “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Measure.” for a definition of average daily TCE and reconciliation to its most directly comparable GAAP financial measure.
Operating revenues: Total operating revenues increased by $7.2 million to $59.0 million for the year ended December 31, 2019 compared to $51.8 million in 2018. This was primarily due to (i)an increase in hire rates for the Golar Grand operating under a replacement charter at a lower and Golar Maria for the year ended December 31, 2019, compared to the previous hire rate thanrates for 2018. In addition, the Golar Maria and Methane Princess were on-hire for longer periods in the year ended December 31, 2019 compared to 2018 as Golar
Maria had shorter charters in the year ended December 31, 2018, and Methane Princess underwent her previous charter; (ii)scheduled drydocking in the Golar Igloo being off-hire for two months during her re-gasification off-season. There was no comparable off-hire in 2014 as her charter commenced in March 2014; and (iii) the drydocking of the Golar Freeze in 2015. This decrease was partially offset by the higher than average hire rate from the Golar Eskimo following her acquisition in January 2015.year ended December 31, 2018.
Vessel operating expenses: The increasedecrease of $6.0$2.5 million in vessel operating expenses to $65.2$20.0 million for the year ended December 31, 2015,2019, as compared to $59.2$22.5 million in 2014,2018, was principallyprimarily due to a decrease in operating cost for the Methane Princess as she incurred higher repair and maintenance costs during her scheduled drydocking in the year ended December 31, 2018.
Voyage and commission expenses: Voyage and commission expenses decreased by $0.9 million to $3.2 million for the year ended December 31, 2019 compared to $4.1 million in 2018, primarily due to:
$5.9•a $1.3 million decrease in voyage expenses for the Golar Maria due toincremental operating costs relating topositioning and bunker cost incurredfor the Golar Eskimoyear ended December 31, 2018, which were subsequently recouped from the charterer following her acquisition in January 2015; and
$1.8 million in additional costs for Golar Igloo, due to recognition of a full year’s operating expenses compared to approximately nine months in 2014, following her acquisition in March 2014.
While the vessel operating expenses increased compared to 2014, the average daily operatingentry into spot charters. There were no comparable costs for the year ended December 31, 2015 decreased compared to 20142019; and
•a $0.5 million decrease in voyage expenses for the Methane Princess due to higher than average daily operating costs forbunker cost incurred when she sailed from the vesselsshipyard where she carried out her scheduled drydocking in 2014 primarily due to unexpected repairs and maintenance of the Golar Grand, Methane Princess and the NR Satu.year ended December 31, 2018. There werewas no comparable costs in 2015. Accordingly, average daily vessel operating costs for the year ended December 31, 2015 were $17,969, compared2019.
This was partially offset by a $0.8 million increase in voyage expenses for the Golar Mazo during the year ended December 31, 2019, due to $18,502 in 2014.
Voyageincremental positioning and commission expenses: Voyage and commission expenses primarily relate to fuelbunker costs associated with commercial waiting time, vessel positioning costs, charter hire expenses and brokers’ commissions. When a vessel is on-hire, fuel costs are typically paid by the charterer, whereas during periods of commercial waiting time, fuel costs are paid by us.
Voyage and commission expenses increased by $1.7 million to $7.7 millionincurred for the year ended December 31, 2015 compared to $6.0 million in 2014 primarily due to (i) an increase in fuel costs payable by us; and (ii) positioning costs to and2019, which was subsequently recouped from the shipyard at our cost in relation to the scheduled drydocking of the Golar Freeze in 2015.charterer.
Administrative expenses: Administrative expensesLNG carrier Adjusted EBITDA: The LNG carrier Adjusted EBITDA increased by $0.9 million, to $6.6 million for the year ended December 31, 2015, compared to $5.8 million in 2014.
We are party to a management and services agreement with Golar Management, under which Golar Management provides certain management and administrative services to us and is reimbursed for costs and expenses incurred in connection with these services at a cost plus 5% basis. Under this arrangement, for the each of the years ended December 31, 2015 and 2014, we incurred charges of $2.9 million. The balance of administrative expenses amounting to $3.7 million and $2.9 million for the years ended December 31, 2015 and 2014, respectively, relate to corporate expenses such as legal, accounting and regulatory compliance costs.
Depreciation and amortization: Depreciation and amortization increased by $18.7 million to $99.3 million for the year ended December 31, 2015, compared to $80.6 million in 2014 primarily due to:
$16.6 million of vessel depreciation and intangibles amortization from the Golar Eskimo following her acquisition in January 2015; and
$3.2 million of incremental vessel depreciation and intangibles amortization in 2015 from the Golar Igloo, which represents a full year’s depreciation in 2015 compared to only approximately nine months of depreciation, following her acquisition in March 2014.
This increase was partially offset by a $2.2 million decrease in depreciation and amortization in respect of the Golar Mazo, following the accelerated amortization of her drydocking costs in 2014, as she drydocked earlier than expected in 2014.
Interest income: Interest income for the year ended December 31, 2015 of $1.3 million was comparable with 2014.
Interest expense: Interest expense increased by $11.5$10.7 million to $55.3$30.5 million for the year ended December 31, 2015,2019 compared to $43.8$19.7 million in 2014.2018. This was principallyprimarily due to the $8.9 millionincreased revenue for the Methane Princess, Golar Grand and Golar Maria, combined with a decrease in vessel operating cost for the Methane Princess for the year ended December 31, 2019.
Average daily TCE(1): The average daily TCE for the year ended December 31, 2019 increased by $4,785 to $38,360 compared to $33,575 in 2018. This was primarily due to theincreased revenue for the Methane Princess, Golar Grand and Golar Maria, combined with a decrease in voyage and commission expenses for the Golar Maria and Methane Princess for the year ended December 31, 2019.
FLNG Segment
We carry out our FLNG business through our ownership of additional interest expense relating to the debt associated with the acquisition50% of the Golar Eskimo Hilli Common Units effective from July 2018. Although we account for our investment as an equity method investment, which is presented in January 2015. This included“Equity in net earnings of affiliate” within our statements of operations, we report our segment on a gross basis showing our proportionate share of the Golar Eskimo debt of $162.8 million which we assumed on her acquisition andunderlying business activities.
The following table sets forth the $220.0 million Eskimo Vendor Loan used to finance the acquisition; and $4.4 million increase in bond interest expense following the issuanceoperating results of our 2015 Norwegian Bonds in May 2015. The proceeds from the issuance of the 2015 Norwegian bonds were used partly to repay the remaining $120 million outstanding under the $220 million Eskimo Vendor Loan. This was partially offset by lower interest expense arising on designated swaps due to the maturity of certain designated swaps relating to the Golar Freeze Facility.
Other financial items: Other financial items reflect a loss of $23.5 million and $22.1 millionFLNG Segment for the years ended December 31, 20152019 and 2014, respectively, as set forth2018.
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| Year Ended December 31, | | | | | | |
| 2019 | | 2018 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands) | | | | | | |
Total operating revenues | $ | 104,073 | | | $ | 49,754 | | | $ | 54,319 | | | 109 | % |
Vessel operating expenses | (23,042) | | | (9,834) | | | (13,208) | | | 134 | % |
Voyage and commission expenses | (230) | | | (434) | | | 204 | | | (47) | % |
Administrative expenses | (1,093) | | | (1,306) | | | 213 | | | (16) | % |
FLNG Adjusted EBITDA | $ | 79,708 | | | $ | 38,180 | | | $ | 41,528 | | | 109 | % |
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FLNG Adjusted EBITDA: Our effective share of the FLNG Adjusted EBITDA for the year ended December 31, 2019 increased by $41.5 million to $79.7 million compared to $38.2 million in 2018, due to the Hilli being in operation for the entire year ended December 31, 2019 compared to 172 days in the table below:year ended December 31, 2018.
Other operating results
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2015 | | 2014 | | Change | | % Change |
| (dollars in thousands) |
Mark-to-market gains (losses) for interest rate swaps | $ | 655 |
| | $ | (5,953 | ) | | $ | 6,608 |
| | (111 | )% |
Interest expense on un-designated interest rate swaps | (14,385 | ) | | (12,163 | ) | | (2,222 | ) | | 18 | % |
Unrealized and realized losses on interest rate swaps | (13,730 | ) | | (18,116 | ) | | 4,386 |
| | (24 | )% |
Amortization of deferred financing costs | (6,308 | ) | | (3,657 | ) | | (2,651 | ) | | 72 | % |
Financing arrangement fees and other costs | (1,694 | ) | | (12 | ) | | (1,682 | ) | | 14,017 | % |
Other | (1,727 | ) | | (333 | ) | | (1,394 | ) | | 419 | % |
Other financial items, net | $ | (23,459 | ) | | $ | (22,118 | ) | | $ | (1,341 | ) | | 6 | % |
The following details our unallocated consolidated results for the years ended December 31, 2019 and 2018:
Net realized and unrealized gains (losses) on interest rate swaps. Net realized and unrealized (losses)/gains on interest rate swaps resulted in a net loss of $13.7 | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2019 | | 2018 | | Change | | % Change |
| (dollars in thousands) | | | | | | |
Other non-operating income | $ | 4,795 | | | $ | 449 | | | $ | 4,346 | | | 968 | % |
Depreciation and amortization | (83,239) | | | (98,812) | | | 15,573 | | | (16) | % |
Administrative expenses | (13,412) | | | (14,809) | | | 1,397 | | | (9) | % |
Interest income | 13,278 | | | 8,950 | | | 4,328 | | | 48 | % |
Interest expense | (79,791) | | | (80,650) | | | 859 | | | (1) | % |
(Losses)/gains on derivative instruments | (38,796) | | | 8,106 | | | (46,902) | | | (579) | % |
Other financial items, net | 675 | | | (592) | | | 1,267 | | | (214) | % |
Taxes | (17,962) | | | (17,465) | | | (497) | | | 3 | % |
Non-controlling interest | (3,329) | | | (3,358) | | | 29 | | | (1) | % |
Other non-operating income: Other non-operating income increased by $4.3 million to $4.8 million for the year ended December 31, 2015,2019 compared to a net loss of $18.1$0.5 million in 2014. A key factor contributing2018. This was primarily due to the gain recognized upon the Golar Freeze charter modification from an operating lease to a sales-type lease. This classification change resulted in the de-recognition of the vessel asset carrying value, the recognition of net unrealizedinvestment in leased vessel, and realized lossa gain on disposal of $13.7$4.2 million.
Depreciation and amortization: Depreciation and amortization decreased by $15.6 million to $83.2 million for the year ended December 31, 20152019 compared to $98.8 million in 2018. This was primarily due to:
•an $11.6 million reduction in the depreciation and amortization of the Golar Freeze following extension of her useful economic life to reflect the vessel being utilized for the new 15-year charter, combined with depreciation and amortization ceasing following the derecognition of the vessel from balance sheet line item "Vessels and equipment, net" on May 15, 2019;
•a $2.9 million decrease in long-term swap interest ratesthe amortization of the intangible asset acquired in 2015.connection with the acquisition of the Golar Igloo to align the intangible asset's useful economic life with the amended lease term following exercise of the extension option; and
As•a $0.7 million decrease in the drydock amortization of December 31, 2015, our interest rate swaps portfolio had a notional value Golar Spirit as her drydock cost was fully amortized within the first quarter of $863.2 million (excluding the cross-currency interest rate swap), 16.5% of which have been designated as accounting hedges. Accordingly, a further $0.2 million unrealized loss2018. No such comparable cost was accounted for as a change in other comprehensive income, which would have otherwise been recognized in earnings forincurred during the year ended December 31, 2015.2019.
We are also party to a cross currency interest rate swap with a notional value of $227.2 million, entered into as a hedge against our NOK denominated bonds (the High-Yield Bonds), which was designated as a cash flow hedge. A $4.9 million loss was accounted for as a change in other comprehensive income which would have otherwise been recognized in earnings for the year ended December 31, 2015. The cross currency interest rate swap has a credit support arrangement that requires us to provide cash collateral in the event that the market value of the swap drops below a certain level.
Amortization of deferred financing costs. Amortization of deferred financing costs increasedAdministrative expenses: Administrative expenses decreased by $2.7$1.4 million to $6.3$13.4 million for the year ended December 31, 20152019 compared to $3.7$14.8 million in 2014. This was principally due to (i) the write-off of the deferred financing costs relating to the previous Golar Freeze and Golar Maria debt facilities following their refinancing in June 2015; and (ii) additional amortization expense in relation to financing costs arising from our issuance of the 2015 Norwegian bonds in May 2015.
Financing arrangement fees and other costs. Financing arrangement fees and other costs increased by $1.7 million compared to 2014, primarily due to commitment fees incurred on our undrawn revolving facilities.
Other items. Other items represent, among other things, bank charges, foreign currency differences arising on retranslation of foreign currency balances, and gains or losses on short-term foreign currency forward contracts.
Income taxes: Income taxes relate primarily to the taxation of our operations in the United Kingdom, Brazil, Jordan, Indonesia and Kuwait. Taxes during 2015 increased by $10.7 million to a $5.7 million tax charge compared to a $5.0 million tax credit in 2014. The increase was mainly attributable to taxes in respect of our Indonesian operations. The tax credit in 2014 was attributable to several factors: First, net operating losses were recognized relating to certain historical tax positions that had previously been uncertain as to realization, of which $9.5 million was first recognized in 2014, with an additional amount of $4.9 million recognized in 2015. Of these brought-forward losses, $4.1 million were utilized against taxable profits during 2015. In addition ,certain historical tax provisions were released following the conclusion of the tax audit in Indonesia in 2014 (there were no comparable tax provision releases in 2015) and the deferred tax was recognized in respect of Jordanian operations following commencement of Golar Eskimo’s charter in June 2015.
Please see note 9 to our audited consolidated financial statements included elsewhere in this Annual Report.
Net income: As a result of the foregoing, we earned net income of $172.7 million and $184.7 million for the years ended December 31, 2015 and 2014, respectively.
Non-controlling interest: Non-controlling interest refers to the 40% interest in the Golar Mazo.
A.Operating Results
Year Ended December 31, 2014 Compared with the Year Ended December 31, 2013
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2014 | | 2013 | | Change | | % Change |
| (dollars in thousands, except TCE and average daily vessel operating costs) |
Total operating revenues | $ | 396,026 |
| | $ | 329,190 |
| | $ | 66,836 |
| | 20 | % |
Vessel operating expenses | 59,191 |
| | 52,390 |
| | 6,801 |
| | 13 | % |
Voyage and commission expenses | 6,048 |
| | 5,239 |
| | 809 |
| | 15 | % |
Administrative expenses | 5,757 |
| | 5,194 |
| | 563 |
| | 11 | % |
Depreciation and amortization | 80,574 |
| | 66,336 |
| | 14,238 |
| | 21 | % |
Interest income | 1,131 |
| | 1,097 |
| | 34 |
| | 3 | % |
Interest expense | (43,781 | ) | | (43,195 | ) | | (586 | ) | | 1 | % |
Other financial items | (22,118 | ) | | (1,661 | ) | | (20,457 | ) | | 1,232 | % |
Taxes | 5,047 |
| | (5,453 | ) | | 10,500 |
| | (193 | )% |
Net income | 184,735 |
| | 150,819 |
| | 33,916 |
| | 22 | % |
Non-controlling interest | (10,581 | ) | | (9,523 | ) | | (1,058 | ) | | 11 | % |
TCE (to the closest $100) | 121,900 |
| | 117,800 |
| | 4,100 |
| | 3 | % |
Average daily vessel operating costs | 18,502 |
| | 18,172 |
| | 330 |
| | 2 | % |
Operating days: During the year ended December 31, 2014, our total operating days increased to 3,196 days, compared to 2,751 days in 2013, as a result of the acquisition of the Golar Igloo in March 2014 and the absence of scheduled drydockings in 2014 compared to 128 days in 2013.
Operating revenues: Total operating revenues increased by $66.8 million to $396.0 million for the year ended December 31, 2014 compared to $329.2 million in 2013. This is primarily due to:
$43.2 million of revenue contribution from the Golar Igloo following her acquisition in March 2014;
$16.5 million higher revenues from the Golar Sprit, the Golar Winter and the Methane Princess in 2014 compared to 2013, due to their scheduled drydockings during the first half of 2013. Also, the Golar Winter contributed full year of increased hire rates compared to approximately five months in 2013, following the completion of her modification works in July 2013;
$3.1 million of additional revenues from the Golar Maria, representing a full year of revenues in 2014 compared to approximately eleven months in 2013, following her acquisition in February 2013; and
$2.7 million of revenue contribution from the Golar Mazo due to the accelerated release of drydocking revenue, as she drydocked earlier than expected.
Time charter equivalent earnings:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2014 | | 2013 | | Change | | % Change |
Calendar days less scheduled off-hire days | 3,199 |
| | 2,751 |
| | 448 |
| | 16 | % |
Average daily TCE (to the closest $100) | $ | 121,900 |
| | $ | 117,800 |
| | $ | 4,100 |
| | 3 | % |
The increase of $4,100 in the average daily time charter equivalent rate, or TCE, for the year ended December 31, 2014 to $121,900 compared to $117,800 in 2013, is primarily due to the higher than average hire rate from the Golar Igloo, following her acquisition in March 2014.
Vessel operating expenses: The increase of $6.8 million in vessel operating expenses to $59.2 million for the year ended December 31, 2014, as compared to $52.4 million in 2013, was principally due to:
incremental operating costs relating to the Golar Igloo of $5.9 million since her acquisition in March 2014; and
$0.5 million of expenses relating to a pre-acquisition claim for the NR Satu.
Accordingly, average daily vessel costs for the year ended December 31, 2014 was $18,502, compared to $18,172 in 2013.
Voyage and commission expenses: Voyage and commission expenses primarily relate to fuel costs associated with commercial waiting time, vessel positioning costs, charter hire expenses and brokers’ commissions. When a vessel is on-hire, fuel costs are typically paid by the charterer, whereas during periods of commercial waiting time, fuel costs are paid by us. Voyage and commission expenses increased by $0.8 million to $6.0 million for the year ended December 31, 2014 compared to $5.2 million in 2013 primarily due to $1.1 million of brokers’ commission relating to the Golar Igloo, following her acquisition in March 2014. This was partially offset by lower repositioning costs to and from the shipyard, at our costs, due to only one vessel going into drydock for the year ended December 31, 2014, compared to four in 2013.
Administrative expenses: Administrative expenses increased by $0.6 million, to $5.8 million for the year ended December 31, 2014, compared to $5.2 million in 2013.
2018. We are party to a management and services agreement with Golar Management, under which Golar Management provides certain management and administrative services to us and is reimbursed for costs and expenses incurred in connection with these services at a cost plus 5% basis. Under this arrangement, for the years ended December 31, 20142019 and 2013,2018, we incurred charges of $2.9$9.6 million and $2.6$9.8 million, respectively. The remaining balance of administrative expenses amounting to $2.9$3.8 million and $2.6$5.0 million for the years ended December 31, 20142019 and 2013,2018, respectively, relate to corporate expenses such as legal, accounting and regulatory compliance costs.
Depreciation and amortizationInterest income: Depreciation and amortizationInterest income increased by $14.2$4.3 million to $80.6$13.3 million for the year ended December 31, 2014,2019, compared to $66.3$9.0 million in 20132018. This was primarily due to:
$5.6to $9.5 million of depreciation ofinterest income recognized in relation to the Golar Igloo following her acquisition in March 2014;
$3.1 million of amortization of intangible assets representing Golar Igloo’s charter;
a full year of amortization of the capitalized drydocking costs of the Golar Spirit, the Golar Winter, the Golar Mazo and the Methane Princess in 2014 after completion of their drydockings in 2013 resulting in higher depreciation and amortization by $2.9 million;
$0.8 million of accelerated amortization of the Golar Mazo’s capitalized drydock costs in 2013, as she drydocked earlier than expected in September 2014; and
a full year of depreciationFreeze Finance Lease for the year ended December 31, 2014 higher by $0.7 million compared to approximately eleven months of depreciation in 2013 for the Golar Maria, following her acquisition in February 2013.
Interest income: Interest2019. There was no such interest income for the year ended December 31, 20142018. This increase was offset by $4.8 million interest income earned during the year ended December 31, 2018 on the $107.2 million Deferred Purchase Price relating to the Tundra Put Sale and the $70 million deposit paid upon execution of $1.1 millionthe purchase agreement for the Hilli Acquisition. No such interest income was broadlyrecorded in line with 2013.the year ended December 31, 2019.
Interest expense: Interest expense increaseddecreased by $0.6$0.9 million to $43.8$79.8 million for the year ended December 31, 2014,2019, compared to $43.2$80.7 million in 2013. This was principally2018. In addition to reduced interest costs due to:
additional interest of $3.7 million, associated withto lower LIBOR rates, the Golar Igloo debt, which we assumed upon her acquisition in March 2014; and
a full year of interest of the Golar Partners Operating facility secured against the Golar Grand and the Golar Winter, entered into in June 2013, compared to approximately six months in 2013. The new facility is larger and accrues interest at a higher rate than the two leases it replaced.
The increase was partially offset by:
decrease in interest on designated hedges of $3.7 million following the maturity of certain designated swaps since November 2013; andexpense was primarily due to:
lower interest payments on remaining facilities following repayments made on principal balances.
Other financial items:
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
| 2014 | | 2013 | | Change | | % Change |
| (dollars in thousands) |
Mark-to-market (losses)/gains for interest rate swaps | $ | (5,953 | ) | | $ | 12,845 |
| | $ | (18,798 | ) | | (146 | )% |
Interest expense on un-designated interest rate swaps | (12,163 | ) | | (8,188 | ) | | (3,975 | ) | | 49 | % |
Unrealized and realized (losses)/gains on interest rate swaps | (18,116 | ) | | 4,657 |
| | (22,773 | ) | | (489 | )% |
Net foreign currency adjustments for retranslation of lease related balances and mark-to-market adjustments for the Golar Winter Lease related currency swap derivative | 677 |
| | 2,245 |
| | (1,568 | ) | | (70 | )% |
Amortization of deferred financing costs | (3,554 | ) | | (5,828 | ) | | 2,274 |
| | (39 | )% |
Other | (1,125 | ) | | (2,735 | ) | | 1,610 |
| | (59 | )% |
Other financial items, net | $ | (22,118 | ) | | $ | (1,661 | ) | | $ | (20,457 | ) | | 1,232 | % |
•a $1.5 million decrease in interest expense and amortization of deferred financing costs as a result of our refinancing of the NR Satu debt facility in early 2018;
•a $1.7 million decrease in amortization of deferred financing costs for the Golar Eskimo, which was fully amortized in 2018; and
•a $0.4 million decrease in interest expense arising on the loan facility of our consolidated EskimoVIE.
This was offset by:
•a $1.8 million of incremental interest on our $800 million credit facility as a result of the additional balance drawn under the revolving credit facility; and
•a $1.2 million of incremental interest on our Norwegian Bonds during the year ended December 31, 2019.
(Losses)/gains on derivative instruments: (Losses)/gains on derivative instruments, reflects a loss of $38.8 million and a gain of $8.1 million for the years ended December 31, 2019 and 2018, respectively, as set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | |
| 2019 | | 2018 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | |
Mark-to-market losses for interest rate swaps | $ | (43,746) | | | $ | (1,455) | | | $ | (42,291) | | | 2,907 | % |
Net interest income on un-designated interest rate swaps | 4,950 | | | 2,161 | | | 2,789 | | | 129 | % |
Net unrealized and realized (losses)/gains on interest rate swaps | (38,796) | | | 706 | | | (39,502) | | | (5,595) | % |
Mark-to-market gains on Earn-Out Units | — | | | 7,400 | | | (7,400) | | | (100) | % |
Total | $ | (38,796) | | | $ | 8,106 | | | $ | (46,902) | | | (579) | % |
Net unrealized and realized and unrealized (losses)/gains on interest rate swaps.swaps:Net realizedunrealized and unrealizedrealized (losses)/gains on interest rate swaps resulted in a net loss of $18.1$38.8 million for the year ended December 31, 2014,2019, compared to a net gain of $4.7$0.7 million in 2013. A key factor contributing2018 due to decrease in long-term swap interest rates in 2019 which has resulted in a loss on the net unrealized and realized lossmark-to-market valuation of $18.1our interest rate swaps.
Mark-to-market gains on Earn-Out Units: We recognized a mark-to-market gain of $7.4 million for the year ended December 31, 20142018. On October 24, 2018, we declared a reduced quarterly distribution of $0.4042 per common unit. Consequently, the second tranche of Earn-Out Units were not issued. There is no comparable movement for the year ended December 31, 2019.
Other financial items, net: Other financial items reflect a gain of $0.7 million and a loss of $0.6 million for the years ended December 31, 2019 and 2018, respectively, as set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | |
| 2019 | | 2018 | | Change | | % Change |
| (dollars in thousands) | | | | | | |
Foreign exchange (losses)/gains on finance lease obligations and related restricted cash | $ | (941) | | | $ | 1,105 | | | $ | (2,046) | | | (185) | % |
Amortization of Partnership guarantee | 2,065 | | | 503 | | | 1,562 | | | 311 | % |
Financing arrangement fees and other costs | (531) | | | (1,363) | | | 832 | | | (61) | % |
Foreign exchange gains/(losses) on operations | 82 | | | (837) | | | 919 | | | (110) | % |
| $ | 675 | | | $ | (592) | | | $ | 1,267 | | | (214) | % |
Foreign exchange (losses)/gains on finance lease obligations and related restricted cash: Represents foreign currency differences arising on retranslation of foreign currency balances including foreign currency movements on the Methane Princess lease which is denominated in Pound Sterling.
Amortization of Partnership Guarantee:Represents the amortization for the year ended December 31, 2019 of the fair value of the Partnership Guarantee provided in connection with the Hilli Acquisition. See Note 25 “Related Party Transactions” to our Consolidated Financial Statements included herein.
Year Ended December 31, 2018 Compared with the Year Ended December 31, 2017
The following details the Adjusted EBITDA information for our reportable segments; FSRUs, LNG carriers and FLNG for the years ended December 31, 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | | | | | | December 31, 2017 | | | | | | |
(dollars in thousands) | FSRU | LNG Carrier | FLNG | | | Elimination(1) | Consolidated Reporting | FSRU | LNG Carrier | FLNG | | | Elimination(1) | Consolidated Reporting |
| | | | | | | | | | | | | | |
Total operating revenues | $ | 294,889 | | $ | 51,761 | | $ | 49,754 | | | | $ | (49,754) | | $ | 346,650 | | $ | 316,599 | | $ | 116,503 | | — | | | | — | | $ | 433,102 | |
Vessel operating expenses | (42,736) | | (22,511) | | (9,834) | | | | 9,834 | | (65,247) | | (47,960) | | (20,318) | | — | | | | — | | (68,278) | |
Voyage and commission expenses | (7,138) | | (4,084) | | (434) | | | | 434 | | (11,222) | | (8,375) | | (1,319) | | — | | | | — | | (9,694) | |
Administrative expenses(2) | (9,384) | | (5,425) | | (1,306) | | | | 1,306 | | (14,809) | | (10,029) | | (5,181) | | — | | | | — | | (15,210) | |
Adjusted EBITDA | $ | 235,631 | | $ | 19,741 | | $ | 38,180 | | | | $ | (38,180) | | $ | 255,372 | | $ | 250,235 | | $ | 89,685 | | — | | | | — | | $ | 339,920 | |
(1) Eliminations reverse the effective share of revenues, expenses, and Adjusted EBITDA attributable to our 50% ownership of the Hilli Common Units.
(2) Indirect administrative expenses are allocated to the FSRU and LNG carrier segments based on the number of vessels while administrative expenses for the FLNG segment relates to our effective share of expenses attributable to our 50% ownership of the Hilli Common Units. See the discussion under “—Other Operating Results” below.
FSRU Segment
The following table sets forth the operating results of our FSRU segment for the years ended December 31, 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2018 | | 2017 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands, except TCE) | | | | | | |
Total operating revenues | $ | 294,889 | | | $ | 316,599 | | | $ | (21,710) | | | (7) | % |
Vessel operating expenses | (42,736) | | | (47,960) | | | 5,224 | | | (11) | % |
Voyage and commission expenses | (7,138) | | | (8,375) | | | 1,237 | | | (15) | % |
Administrative expenses | (9,384) | | | (10,029) | | | 645 | | | (6) | % |
FSRU Adjusted EBITDA | 235,631 | | | 250,235 | | | (14,604) | | | (6) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other Financial Data: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Average daily TCE(1) | $ | 171,689 | | | $ | 159,950 | | | $ | 11,739 | | | 7 | % |
| | | | | | | |
(1)Refer to “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Measure.” for a definition of average daily TCE and reconciliation to its most directly comparable GAAP financial measure.
Total operating revenues: Total operating revenues decreased by $21.7 million to $294.9 million for the year ended December 31, 2018 compared to $316.6 million in 2017. This was primarily due to a $43.3 million reduction in revenue from the Golar Spirit following the early termination of her time charter in 2017 and a $4.0 million reduction in revenue from the NR Satu due to a reduction of the daily time charter rate in 2018.
This was partially offset by:
• a $12.1 million increase due to recognition of all of Golar Freeze's revenue until the end of her previous charter in the year ended December 31, 2018. In July 2018, Golar Freeze was nominated to service the Golar Freeze Charter and subsequently underwent drydocking to satisfy certain technical specifications of the charter.
Accordingly, we recognized all of the revenue due to be paid under the previous Golar Freeze charter which had an original expiration date of April 2019 as the vessel was no longer available; and
•a $13.0 million increase in revenue from the Golar Winter in the year ended December 31, 2018 following her scheduled drydocking in 2017.
Vessel operating expenses: The decrease of $5.2 million in vessel operating expenses to $42.7 million for the year ended December 31, 2018 as compared to $48.0 million in 2017 was principally due to:
•a $4.1 million decrease in repairs and maintenance costs for the NR Satu during the year ended December 31, 2018 following her scheduled maintenance in 2017; and
•a $3.8 million reduction in the operating costs associated with the Golar Spirit due to the vessel being placed in lay-up in August 2017 following the termination of her charter.
This was partially offset by a $2.7 million increase in the Golar Freeze repairs and maintenance cost during her scheduled drydocking in July 2018.
Voyage and commission expenses: Voyage and commission expenses decreased by $1.2 million to $7.1 million for the year ended December 31, 2018 compared to $8.4 million in 2017, mainly due to higher bunker costs incurred in connection with the Golar Spirit being placed in lay-up in August 2017 and the Golar Winter's scheduled drydocking in September 2017. This was partially offset by bunker and positioning costs incurred by the Golar Freeze in preparation for her new charter in 2019.
FSRU Adjusted EBITDA: The FSRU Adjusted EBITDA decreased by $14.6 million to $235.6 million for the year ended December 31, 2018 compared to $250.2 million in 2017. This was primarily due to the Golar Spirit being in lay-up following the early termination of her time charter in 2017, resulting in lower total operating revenue, vessel operating expenses and voyage and commission expenses for the year ended December 31, 2018.
Average daily TCE(1): The average daily TCE for the year ended December 31, 2018 increased by $11,739 to $171,689 compared to $159,950 for 2017 mainly due to a reduction in calendar days less scheduled off-hire days in the year ended December 31, 2018 as the Golar Spirit has been in lay-up since August 2017. The decrease in revenues from the Golar Spirit does not affect the average daily TCE in 2018 as the days when vessels are in lay-up are also considered scheduled off-hire days.
LNG Carrier Segment
The following table sets forth the operating results of our LNG carrier Segment for the years ended December 31, 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2018 | | 2017 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands, except TCE) | | | | | | |
Total operating revenues | $ | 51,761 | | | $ | 116,503 | | | $ | (64,742) | | | (56) | % |
Vessel operating expenses | (22,511) | | | (20,318) | | | (2,193) | | | 11 | % |
Voyage and commission expenses | (4,084) | | | (1,319) | | | (2,765) | | | 210 | % |
Administrative expenses | (5,425) | | | (5,181) | | | (244) | | | 5 | % |
LNG carrier Adjusted EBITDA | $ | 19,741 | | | $ | 89,685 | | | $ | (69,944) | | | (78) | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other Financial Data: | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Average daily TCE(1) | $ | 33,575 | | | $ | 80,268 | | | $ | (46,693) | | | (58) | % |
| | | | | | | |
(1)Refer to “Item 3. Key Information—A. Selected Financial Data—Non-GAAP Financial Measure.” for a definition of average daily TCE and reconciliation to its most directly comparable GAAP financial measure.
Operating revenues: Total operating revenues decreased by $64.7 million to $51.8 million for the year ended December 31, 2018 compared to $116.5 million in 2017. This was primarily due to:
•a $31.5 million reduction in revenue from the Golar Mazo as a result of the expiration of her charter in December 2017;
•a $29.2 million reduction in revenue from the Golar Grand and the Golar Maria following the expiration of the charter back to Golar and her charter, respectively, in November 2017. The hire rates under the Golar Grand's and the Golar Maria's time charters with the new charterers are lower than the previous hire rates; and
•a $4.0 million reduction in revenue from the Methane Princess resulting from her scheduled drydocking in 2018.
Vessel operating expenses: The increase of $2.2 million in vessel operating expenses to $22.5 million for the year ended December 31, 2018, as compared to $20.3 million in 2017, was principally due to a $4.7 million increase in repair and maintenance costs in respect of the Golar Maria and Methane Princess in 2018.
This was partially offset by a reduction of:
•$1.3 million in operating costs for the Golar Mazo in 2018 following the expiration of her charter in December 2017; and
•$1.2 million in operating costs for the Golar Grand in 2018 as she was taken out of lay-up and completed her drydock in 2017.
Voyage and commission expenses: Voyage and commission expenses increased by $2.8 million to $4.1 million for the year ended December 31, 2018 compared to $1.3 million in 2017, primarily due to incremental positioning and bunker costs incurred by the Golar Mazo and Golar Maria for the year ended December 31, 2018 following the expiration of their long term charters in December 2017 and November 2017, respectively.
LNG carrier Adjusted EBITDA: The LNG carrier Adjusted EBITDA decreased by $69.9 million to $19.7 million for the year ended December 31, 2018 compared to $89.7 million in 2017. This was primarily due to thereduction in revenue and higher positioning and bunker costs from the Golar Mazo and Golar Maria for the year ended December 31, 2018 following the expiration of their charters in 2017.
Average daily TCE(1): The average daily TCE for the year ended December 31, 2018 decreased by $46,693 to $33,575 compared to $80,268 for the year ended December 31, 2017. This was due to (i) the Golar Mazo and Golar Maria being offhire following the expiration of their charters in December 2017 and November 2017, respectively; and (ii) lower hire rates for the Golar Grand following the expiration of the charter back arrangement with Golar in November 2017.
FLNG Segment
The following table sets forth the operating results of our FLNG Segment for the years ended December 31, 2018 and 2017.
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2018 | | 2017 | | Change | | % Change |
Statement of Operations Data: | (dollars in thousands) | | | | | | |
Total operating revenues | $ | 49,754 | | | $ | — | | | 49,754 | | | 100 | % |
Vessel operating expenses | (9,834) | | | — | | | (9,834) | | | 100 | % |
Voyage and commission expenses | (434) | | | — | | | (434) | | | 100 | % |
Administrative expenses | (1,306) | | | — | | | (1,306) | | | 100 | % |
FLNG Adjusted EBITDA | 38,180 | | | — | | | 38,180 | | | 100 | % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
FLNG Adjusted EBITDA: This refers to our effective share of the FLNG Adjusted EBITDA subsequent to the close of the Hilli Acquisition. There was no comparable amount in the year ended December 31, 2017.
Other operating results
The following details our unallocated consolidated results for the years ended December 31, 2018 and 2017:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2018 | | 2017 | | Change | | % Change |
| (dollars in thousands) | | | | | | |
Other non-operating income | $ | 449 | | | $ | 922 | | | $ | (473) | | | (51) | % |
Depreciation and amortization | (98,812) | | | (103,810) | | | 4,998 | | | (5) | % |
Administrative expenses | (14,809) | | | (15,210) | | | 401 | | | (3) | % |
Interest income | 8,950 | | | 7,804 | | | 1,146 | | | 15 | % |
Interest expense | (80,650) | | | (75,425) | | | (5,225) | | | 7 | % |
Gains on derivative instruments | 8,106 | | | 7,796 | | | 310 | | | 4 | % |
Other financial items, net | (592) | | | (15,363) | | | 14,771 | | | (96) | % |
Taxes | (17,465) | | | (16,996) | | | (469) | | | 3 | % |
Non-controlling interest | (3,358) | | | (15,568) | | | 12,210 | | | (78) | % |
Depreciation and amortization: Depreciation and amortization decreased by $5.0 million to $98.8 million for the year ended December 31, 2018, compared to $103.8 million in 2017. This was primarily due to a lower drydock amortization on both the Golar Spirit as her drydock cost was fully amortized within the first quarter of 2018, and on the Golar Winter following the completion of her scheduled drydocking in the fourth quarter of 2017.
Administrative expenses: Administrative expenses decreased by $0.4 million to $14.8 million for the year ended December 31, 2018 compared to $15.2 million in 2017. Under the Management and Administrative Services Agreement with Golar Management, for the years ended December 31, 2018 and 2017, we incurred charges of $9.8 million and $7.8 million, respectively. The remaining balance of administrative expenses amounting to $5.0 million and $7.4 million for the years ended December 31, 2018 and 2017, respectively, relate to corporate expenses such as legal, accounting and regulatory compliance costs.
Interest income: Interest income increased by $1.1 million to $9.0 million for the year ended December 31, 2018, compared to $7.8 million in 2017. This was principally due to the $2.4 million interest income earned on the $107.2 million Deferred Purchase Price relating to the Tundra Put Sale and the $70.0 million deposit paid upon execution of the Hilli Purchase Agreement, for which we earn interest at 5% per annum, from August and October 2017, respectively. Both amounts were applied to the purchase price for the Hilli Acquisition in July 2018. This was partially offset by lower interest income earned on our free cash balance in 2018.
Interest expense: Interest expense increased by $5.2 million to $80.7 million for the year ended December 31, 2018, compared to $75.4 million in 2017. This was principally due to:
•$2.0 million in additional interest due to a full year of interest expense arising on our $250 million of senior unsecured non-amortizing 2017 Norwegian Bonds, issued in February 2017;
•$2.1 million incremental interest on the $800 million facility, due to higher LIBOR and additional interest as a result of the balance drawn under the revolving facility during 2018; and
•$0.7 million incremental interest and amortization of deferred financing costs as a result of refinancing of the NR Satu facility in early 2018.
Gains on derivative instruments: Gains on derivative instruments reflects a gain of $8.1 million and $7.8 million for the years ended December 31, 2018 and 2017, respectively, as set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | | | | | |
| 2018 | | 2017 | | $ Change | | % Change |
| (dollars in thousands) | | | | | | |
Mark-to-market adjustment for interest rate swaps | $ | (1,455) | | | $ | 12,073 | | | $ | (13,528) | | | (112) | % |
Net interest income/(expense) on un-designated interest rate swaps | 2,161 | | | (7,554) | | | 9,715 | | | (129) | % |
Net unrealized and realized gains on interest rate swaps | 706 | | | 4,519 | | | (3,813) | | | (84) | % |
Mark-to-market gains/(losses) on Earn-Out Units | 7,400 | | | (441) | | | 7,841 | | | (1,778) | % |
Gains on repurchase of cross-currency interest rate swap | — | | | 3,718 | | | (3,718) | | | (100) | % |
Total | $ | 8,106 | | | $ | 7,796 | | | $ | 310 | | | 4 | % |
Net unrealized and realized gains on interest rate swaps:Net unrealized and realized gains on interest rate swaps resulted in a net gain of $0.7 million for the year ended December 31, 2018, compared to a net gain of $4.5 million in 2017 due to decrease in long-term swap interest rates in 2014. In contrast,2018 which has resulted in losses on the outlook in 2013 was that long-term interest rates would increase.
Asmark-to-market valuation of December 31, 2014, our interest rate swaps portfolio hadswaps.
Mark-to-market gains/(losses) on Earn-Out Units: On October 24, 2018, we declared a notional valuereduced quarterly distribution of $919.1$0.4042 per common unit. Consequently, the second tranche of Earn-Out Units were not issued. Accordingly, the associated derivative liability was reduced to $nil, resulting in a mark-to-market gain of $7.4 million (excluding the cross-currency interest rate swap), 23% of which qualified for hedge accounting. Accordingly, a further $0.8 million unrealized loss was accounted for as a change in other comprehensive income, which would have otherwise been recognized in earnings for the year ended December 31, 2014.
We are also party2018 compared to a cross currency interest rate swap with a notional valueloss of $227.2$0.4 million which was designated as a cash flow hedge. A $0.2 million loss was accounted for as a change in other comprehensive income which would have otherwise been recognized in earnings for the year ended December 31, 2014.2017.
Net foreign exchange gains and losses Gains on retranslationrepurchase of lease related balances including the Golar Winter lease currency swapcross-currency interest rate swap: This pertains to mark-to-market gains and losses. Foreign exchange gains and losses arise principally asof $3.9 million on our cross-currency interest rates swap that was repurchased during 2017, offset by a result of the retranslation of our capital lease obligations, the cash deposits securing these obligations and the movement in the fair value of the currency swap used to hedge the Golar Winter lease. We incurred a net foreign exchange gain of $0.7 million and $2.2 million for the years ended December 31, 2014 and 2013, respectively. This is mainly due to the appreciation of the US dollar against Pound Sterling. The Golar Winter lease and the related foreign currency swap were terminated in June 2013, accordingly, there wasloss of $0.2 million. There is no comparable gain for the year ended December 31, 2014.2018.
AmortizationOther financial items, net: Other financial items reflect a loss of deferred financing costs. Amortization$0.6 million and $15.4 million for the years ended December 31, 2018 and 2017, respectively, as set forth in the table below:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | | | |
| 2018 | | 2017 | | Change | | % Change |
| (dollars in thousands) | | | | | | |
Losses on repurchase of 2012 High-Yield Bonds | $ | — | | | $ | (7,876) | | | $ | 7,876 | | | 100 | % |
Foreign exchange losses on 2012 High-Yield Bonds | — | | | (3,103) | | | 3,103 | | | 100 | % |
Premium paid on repurchase of 2012 High-Yield Bonds | — | | | (2,820) | | | 2,820 | | | 100 | % |
Other items | (592) | | | (1,564) | | | 972 | | | (62) | % |
Other financial items, net | $ | (592) | | | $ | (15,363) | | | $ | 14,771 | | | (96) | % |
Losses on repurchase of deferred financing costs decreased by $2.32012 High-Yield Bonds: In the year ended December 31, 2017, as a consequence of the cessation of hedge accounting for the related cross currency interest rate swap (entered into as a hedge against our NOK denominated 2012 High-Yield Bonds), we reclassified $5.0 million of accumulated mark-to-market losses previously recorded within accumulated other comprehensive income to $3.6the statement of operations. We also recognized foreign exchange losses of $2.9 million arising from the repurchase of our 2012 High-Yield Bonds. There is no comparable cost for the year ended December 31, 2014 compared to $5.8 million in 2013.2018.
Foreign exchange losses on 2012 High-Yield Bonds: This was largely duepertains to the write offunrealized foreign exchange loss of $3.1 million for the remaining 2012 High-Yield Bonds for the year ended December 31, 2017. There is no comparable cost for the year ended December 31, 2018.
Premium paid on repurchase of 2012 High-Yield Bonds: This pertains to the premium paid upon the repurchase of the deferred financing costs relating to2012 High-Yield Bonds for the Golar Winter and the Golar Grand leases following the termination of these lease agreements in June 2013.year ended December 31, 2017. There areis no comparable costs in 2014.cost for the year ended December 31, 2018.
Other items.items: Other items represent, among other things, bank charges, foreign currency differences arising on retranslation of foreign currency and gains or losses on short termbalances including foreign currency forward contracts.
Income taxes: Income taxes relate primarily tomovements on the taxation of our UK based vessel operating companies, our Brazilian subsidiary established in connection with our charters with Petrobras, our Marshall Island operating company which is deemedMethane Princess lease. Foreign currency gains increased by $1.8 million as a tax resident in Kuwait in connection with our charter with KNPC, and PTGI, our Indonesian subsidiary related to the ownership and managementresult of the NR Satu, with respect to its charter with PTNR. However, the tax exposure in Indonesia is mitigated by the revenues due under the charter. This tax elementweakening of the time charter rateUS dollar against the Pound Sterling in 2018. This was established at the beginningoffset by an increase in financing arrangement fees of the time charter, and shall be adjusted only if there is a change in Indonesian tax laws or certain stipulated tax assumptions are invalid. Taxes$0.8 million.
Non-controlling interest: Non-controlling interest decreased by $12.2 million to $3.4 million for the year ended December 31, 2014 decreased by $10.5 million resulting to a tax credit of $5.1 million,2018, compared to a tax charge of $5.5$15.6 million in 2013. This was primarily2017, mainly due to the recognition of certain historical tax positions related to foreign tax net operating losses that were not recognized until 2014, due to uncertainty of realization. As of December 31, 2014, $5.3 million of foreign tax operating losses were not recognized due to uncertainty of realization.
Net income: As a result of the foregoing, we earnedreduction in net income from the Golar Mazo followingthe expiration of $184.7 million and $150.8 million for the years endedher charter in December 31, 2014 and 2013, respectively.2017.
Non-controlling interest: Non-controlling interest refers to the 40% interest in the Golar Mazo.
B.Liquidity and Capital Resources
Liquidity and Cash Needs
We operate in a capital-intensive industry and we expect to finance the purchase of additional vessels and other capital expenditures through a combination of borrowings from, and leasing arrangements with, commercial banks, cash generated from operations and debt and equity financings. In addition to paying distributions, our other short-term liquidity requirements relate to servicing interest on our debt, scheduled debt repayments, of long-term debt, funding working capital requirements, including drydocking, and maintaining cash reserves against fluctuations in operating cash flows.
Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. Cash and cash equivalents are held primarily in U.S. Dollars with some balances held in other currencies. We have not useduse derivative instruments other than for interest rate and currency risk management purposes.purposes only.
Short-term Liquidity and Cash Requirements
Sources of short-term liquidity include cash balances, current restricted cash balances,and short-term investments, available amounts under revolving credit facilities anddeposits, receipts from our charters.charters and short-term loans from Golar. Revenues from the majority of our time charters are received monthly in advance. In addition we benefit from low inventory requirements (consisting primarily of fuel, lubricating oil and spare parts) due to the fact that fuel costs which represent the majority of these costs beingare generally paid for by the charterer under time charters.
As of December 31, 2015,2019, our cash and cash equivalents, including restricted cash, and short-term investments, was $234.0 million and we had access to undrawn borrowing facilities of $53.5were $229.9 million. Our total restricted cash balances (excluding $19.7 million in performance and bid bonds relating to certain of our charters) contribute to our short andand medium term liquidity as they are used to fund payment of certain financial obligations (including loans, capitalfinance leases and derivatives) which would otherwise be paid out of our unrestricted cash balances. Since December 31, 2015,2019, significant transactions impacting our cash flows include:
In April 2016, we entered into a new $800 million credit facility which will refinance the bank debt secured by seven of our existing vessels as well as providing the remaining part of the cash purchase price for the acquisition of the Golar Tundra. The vessels included in this facility are the Methane Princess, the Golar Spirit, the Golar Winter, the Golar Grand, the Golar Maria, the Golar Igloo and the Golar Freeze. The new credit facility has a 5 year term and consists of a $650 million term loan facility and a $150 million revolving credit facility. It is repayable in quarterly installments with a total final balloon •payment of $440.0 million in 2021. The facility is provided by a syndicate of banks, and bears interest at LIBOR plus a margin broadly in line with the average margin of our existing bank credit facilities as well as a commitment fee on undrawn amounts;
In February 2016, we agreed to acquire the ownership interests in the disponent owner and operator of the FSRU the Golar Tundra from Golar for an aggregate purchase price of approximately $330.0 million. In February 2016 we paid a $30 million deposit to Golar related to the acquisition. We will finance the remaining balance of the purchase price with cash proceeds from the $800 million credit facility, and the assumption of outstanding lease obligations in respect of the Golar Tundra. We expect the acquisition to close in May 2016;
As of April 29, 2016, we had made $23.8 million of scheduled debt repayments and paid interest on our bonds of $9.3 million since December 31, 2015;
In February 2016, we paid a cash distribution of $0.5775$0.4042 per unit ($38.228.6 million in the aggregate) to all common and general partner unitholders with respect to the quarter ended December 31, 2015;2019 in February 2020;
In April 2016, we declared•payment of a quarterly cash distribution with respectof $0.546875 per Series A Preferred Unit ($3.0 million in the aggregate) for the period from November 15, 2019 through February 14, 2020, in February 2020;
•payment of $31.7 million of scheduled debt principal and interest repayments;
•payment of additional $11.8 million in collateral related to our interest rate swaps; and
•receipt of $25.0 million loan from Golar in February 2020.We repaid the loan in full, including interest.
Other cash requirements
On April 1, 2020, we announced the initiation of a process to seek bondholder approval for an extension of the maturity date by 18 months, subject to certain terms and conditions, for our 2015 Norwegian Bonds and our 2017 Norwegian Bonds . We intend to use the 18 month extension period to arrange a long-term refinancing of the 2015 Norwegian Bonds and the 2017 Norwegian Bonds, which has not been possible in light of the current turmoil in the Nordic and international capital markets due in part to the quarter ended March 31, 2016 of $0.5775 per unit which will be paidadverse conditions caused by COVID-19.
We have scheduled a bondholder meeting on May 13, 20165, 2020 to all unitholders of record as of May 6, 2016.
The consolidated financial statements have been prepared assuming thatapprove the proposed amendments to the 2015 Norwegian Bonds and the 2017 Norwegian Bonds (the “Norwegian Bond Amendments”). In return for the 18 month extension, we will continue as a going concern. Aspay an amendment fee of December 31, 2015, we recorded net current liabilities of $134.2 million. Items included within current liabilities are: (i) mark-to-market valuations of our swap derivatives of $104.6 million (including $89.0 million mark-to-market valuations for our cross-currency interest rate swap) maturing between 2018 and 2022 which we have no intention of terminating before maturity and hence realizing these liabilities prior to their maturity (see note 25 “Financial Instruments”0.5% of the Consolidatedpar value of all of the 2015 Norwegian Bonds and 2017 Norwegian Bonds. For more information, see “Item 5—Operating and Financial Statements, contained herein for further details);Review and (ii) deferred revenue of $11.0 million, which relates to charter-hire receivedProspects—Significant Developments in advance2019 and Early 2020”
Together with proceeds from our charterers, thus, nofinancing activities, as may be permitted under our current financing arrangements and the Norwegian Bond Amendments, and cash outflows are expected in respect of the charter hire received in advance in the next twelve months. In addition, the cash expected to be generated from our operations (assuming the current rates earned from existing charters continue)continue until charter termination or expiration, where applicable) will be sufficient to cover our operational cash outflows and our ongoing obligations under our financing commitments to service our debtpay loan interest, make scheduled loan repayments and paymake cash distributions. Accordingly, as of April 29, 2016, we believe our current resources including our undrawn revolving credit facilities of $53.5 million, are sufficient to meet our working capital requirements for our current business for at least the next twelve months.
Medium to Long-term Liquidity and Cash Requirements
Our medium to long-term liquidity requirements include funding the acquisition of new vessels, maintenance capital expenditures, the repayment of long-term debt including our $800 million credit facility, which is due to mature in April 2021, and the payment of distributions to our unitholders, to the extent we have sufficient cash from operations after the establishment of cash reserves and payment of fees.Management is currently exploring various options to obtain the necessary funds to refinance the maturing credit facility. We have a track record of successfully refinancing our debt requirements and given the strong fundamentals of the underlying assets (contracted cash flows and existing leverage ratios), we believe that it is probable that we will obtain the necessary funding to meet our payment obligations under the maturing $800 million credit facility in April 2021.
Generally, our long-term sources of funds will be cash from operations, long-term bank borrowings and other debt and equity financings. Because we will distribute the majority of our available cash, we expect that we will rely upon external financing sources, including bank borrowings and the issuance of debt and equity securities, to fund acquisitions and other expansion capital expenditures. Occasionally we may enter into vendor financing arrangements with Golar to provide intermediate financing for capital expenditures until longer-term financing is obtained, at which time we will use all or a portion of the proceeds from the longer-term financings to repay outstanding amounts due under these arrangements.
Our pursuit of further acquisitions is dependent upon our ability to successfully raise capital at a cost that makes such acquisitions accretive and economically viable.
Estimated Maintenance and Replacement Capital Expenditures
Our operating agreements require us to distribute our available cash each quarter. In determining the amount of cash available for distribution, our board of directors determines the amount of cash reserves to set aside, including reserves for future maintenance capital expenditures, working capital and other matters. The capital expenditures we are required to make to maintain our fleet are substantial. As of December 31, 2015,2019, our annual estimated maintenance and replacement capital expenditures are $71.74$62.9 million, which is comprised of $18.0$16.4 million for drydock maintenance and society classification surveys and $53.74$46.5 million, including financing costs, for replacing our existing vessels at the end of their useful lives.lives and estimated capital expenditure relating to our share of our equity accounted affiliate.
The estimate for future vessel replacement is based on assumptions regarding the remaining useful life of our vessels, a net investment rate applied on reserves, replacement values of our vessels based on current market conditions and the residual value of our vessels. The actual cost of replacing the vessels in our fleet will depend on a number of factors, including prevailing market conditions, contract operating daytime charter daily rates and the availability and cost of financing at the time of replacement. Our operating agreement requires our board of directors to deduct from operating surplus each quarter estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, in order to reduce disparities in operating surplus caused by fluctuating maintenance and replacement capital expenditures, such as drydocking and vessel replacement. Our board of directors, with the approval of the conflicts committee, may determine that one or more of the assumptions should be revised, which could cause the board of directors to increase the amount of estimated maintenance and replacement capital expenditures. We may elect to finance some or all of our maintenance and replacement capital expenditures through the issuance of additional common units which could be dilutive to existing unitholders.
Cash Flows
The following table summarizes our net cash flows from operating, investing and financing activities for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | | |
(in thousands) | 2019 | | 2018 | | 2017 |
Net cash provided by operating activities | $ | 152,707 | | | $ | 137,166 | | | $ | 270,430 | |
Net cash used in investing activities | (6,312) | | | (19,632) | | | (70,426) | |
Net cash used in financing activities | (189,288) | | | (272,211) | | | (8,729) | |
Net (decrease)/increase in cash, cash equivalents and restricted cash | (39,170) | | | (160,795) | | | 201,762 | |
Cash, cash equivalents and restricted cash at beginning of year | 269,092 | | | 429,887 | | | 228,125 | |
Cash, cash equivalents and restricted cash at end of year | 229,922 | | | 269,092 | | | 429,887 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2015 | | 2014 | | 2013 |
| (in thousands) |
Net cash provided by operating activities | $ | 212,230 |
| | $ | 276,980 |
| | $ | 148,679 |
|
Net cash used in investing activities | 734 |
| | (167,755 | ) | | (84,052 | ) |
Net cash used in financing activities | (271,276 | ) | | (113,327 | ) | | (27,854 | ) |
Net (decrease) increase in cash and cash equivalents | (58,312 | ) | | (4,102 | ) | | 36,773 |
|
Cash and cash equivalents at beginning of year | 98,998 |
| | 103,100 |
| | 66,327 |
|
Cash and cash equivalents at end of year | 40,686 |
| | 98,998 |
| | 103,100 |
|
In addition to our cash and cash equivalents noted above, as of December 31, 2015, we had restricted cash of $193.3 million. This comprised principally of (i) $144.8 million that represents balances retained on restricted accounts in accordance with certain lease and loan requirements (these balances act as security for, and other time are used to, repay lease and loan obligations) and (ii) $36.8 million in relation to cash collateral in respect of our cross-currency interest rate swap entered into in connection with the NOK denominated High-Yield Bonds, the collateral requirements of which are dependent upon the mark to market valuation of the swap. For additional detail refer to note 18 “Restricted cash” of the Consolidated Financial Statements contained herein.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $212.2 million, $277.0 million and $148.7 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Cash providedincreased by operating activities decreased by $57.1$15.5 million to $212.2$152.7 million for the year ended December 31, 2015,2019, compared to $277.0$137.2 million in 2014.2018. This was primarily due to:
an increase•a decrease in drydocking expenditure of $12.6$15.1 million by virtue of thedue to lower cost from scheduled drydocking of the FSRU,Golar Eskimo and Golar Igloo in the Golar Freeze in 2015,year ended December 31, 2019 compared to the drydocking expenditure of the LNG carrier, the Golar Mazo in 2014 as well as the loss of revenue contribution from the Golar Freeze, while and Methane Princess in drydock2018; and
•a $1.1 million increase in 2015;
a $9.1 million reductiondividends received from Hilli LLC in the revenue attributableyear ended December 31, 2019 compared to the Golar Grand, following her redelivery from BG Group2018, in mid February 2015 and her subsequent charter back to Golar at a lower daily time charter rate;
respect of our Hilli Common Units.
an increase of $7.6 million of restricted cash for Golar Eskimo and Golar Igloo;
This was partially offset by a general increase in working capital specifically,for the increase in trade receivables and amounts due from/year ended December 31, 2019, compared to Golar of $11.7 million and $18.7 million, respectively.2018.
CashNet cash provided by operating activities increaseddecreased by $128.3$133.3 million to $277.0$137.2 million for the year ended December 31, 2014,2018, compared to $148.7$270.4 million in 2013.2017. This was primarily due to:
•a significant decrease in revenue from charterers following the improvementexpiration of a number of long-term charters and lower charter hire rates in overall trading through the contributions from the Golar Igloo, following her acquisition in March 2014;
2018;
a decrease•an increase in drydocking expenditure of $48.5$4.9 million due to higher cost for the scheduled drydocking of the Golar Freeze and Methane Princess in 2018, compared with the drydocking of the Golar Grand, Golar Mazo and Golar Winter in 2017; and
•a general increase in working capital for the year ended December 31, 2014 compared 2013, due to four scheduled drydockings in the first half of 2013,2018, compared to only one drydocking in 2014;2017.
higher revenues from the Golar Winter, the Golar Spirit and the Methane Princess, following their scheduled drydockings in the first half of 2013, coupled with the increased hire rate for the Golar Winter, pursuant to the completion of her modification works in July 2013; and
the Golar Maria earning a full year of revenues for the year ended December 31, 2014, compared to approximately eleven months in 2013, following her acquisition in February 2013.
Net Cash Used in Investing Activities
Net cash used in investing activities of $0.7$6.3 million in 2015for the year ended December 31, 2019 was primarily due to the payment of $6.0to:
•$10.3 million of cash consideration (netpaid in respect of cash acquired)the remaining net purchase price less working capital adjustments in connection with the acquisitionHilli Acquisition; and
•$10.2 million of capital expenditures for the Golar Eskimo in January 2015 Igloo and $3.7 million cash utilized for vessels additions. Golar Freeze.
This was partially offset by the release$14.2 million of the restricted cashdividends received from Hilli LLC in respect of $10.4 million.our Hilli Common Units.
Net cash used in investing activities of $167.8$19.6 million in 2014for the year ended December 31, 2018 was primarily due toto:
•$10.7 million of payments for vessel modifications for the $155.3Golar Freeze and Golar Igloo, and BWTS installation for the Methane Princess; and
•$9.7 million of cash consideration paid (net of cash acquired) in connection with the acquisitionHilli Acquisition, which closed in July 2018.
Net cash used in investing activities of $84.1$70.4 million in 2013for the year ended December 31, 2017 was primarily due to the $119.9payment of a $70.0 million of cash consideration paid (net of cash acquired)deposit in connection with the acquisition of the Golar MariaHilli Acquisition in February 2013 and additions to vessels and equipment relating to the Golar Winter modification. This was partially offset by the release of the restricted cash relating to the Golar Grand lease following the termination of the lease in June 2013 and the release of restricted cash deposits relating to the Mazo facility which matured in June 2013.August 2017.
Net Cash Used in Financing Activities
Net cash used in financing activities is principally generated from funds from equity and debt offerings, and new debt and lease financings, and contributions from owners, offset by cash distributions, unit repurchase payments, and debt and lease repayments.
Net cash used in financing activities during the year ended December 31, 20152019 of $271.3$189.3 million was primarily due to the following:
•payment of $126.6 million in cash distributions during the yeardistributions;
•$101.7 million of $164.3 million (of which $11.4 million refers to distributions to our non-controlling interests);
scheduled repayment of our debt, (including debt due to related party)including the short term loan from Golar; and lease obligations of $713.8 million. Of this amount, $220
•$1.6 million relates to repayment of the Eskimo Vendor Loan from Golar and $133.4 million relates to the settlement of the outstanding debt balances on the Golar Maria and the Golar Freeze debt facilitiespayment in connection with their refinancing in June 2015;our common unit repurchase program.
net cash deposits of $31.2 million to restricted cash balances, which is mainly attributable to additional cash collateral requirements associated with our cross currency interest rate swap arrangement resulting from the depreciation of the marked-to-market valuation of the swap.
This was partially offset with the receipt of aggregate proceeds of $644.1by a $25.0 million borrowing under our revolving credit facility and $15.0 million from our new debt or debt refinancings, comprising (i) $150.0 million from drawdown of our long-term revolving credit facilities; (ii) $150.0 million from the issuance of our 2015 Norwegian bonds; and (iii) $344.1 million proceeds from short-term debt (including $254.1 million loan proceeds drawn due to the consolidation of Eskimo SPV relating to the Eskimo refinancing in November 2015, see note 5 “Variable Interest Entities” of our Consolidated Financial Statements contained herein).Golar.
Net cash used in financing activities during the year ended December 31, 20142018 of $113.3$272.2 million was primarily due to the following:
•repayment of debt and lease obligations of $157.2 million;
•payment of cash distributions during the year of $153.9$165.3 million;
•payment of $14.0 million (of which $13.7in connection with our common unit repurchase program; and
•payment of $1.7 million refersof financing costs related to distributions to our non-controlling interests);the refinancing of the NR Satu Facility.
repayment of long term debt and lease obligations of $93.6 million.
This was partially offset by thetotal proceeds of $135.0$65.3 million drawn down from our common unit at-the-market offering program (the “Common Unit ATM Program”) and debt financings, comprising mainly of (i) $50.0 million drawdown of our long-term revolving credit facilities (of which $20and (ii) net proceeds of $13.9 million refers toraised from our revolving credit facility with Golar).Common Unit ATM Program.
Net cash used in financing activities during the year ended December 31, 20132017 of $27.9$8.7 million was mainlyprimarily due to the following:
net proceeds from the public offerings of common units in February 2013 and December 2013, which together raised $280.6 million;
proceeds of $230 million drawn from the new Golar Partners $275 million credit facility in connection with the refinancing of the Golar Winter and the Golar Grand in June 2013 to acquire the legal title of these vessels. The proceeds were put towards settling the termination sums payable of $251 million on the Golar Winter and Golar Grand Leases (including the related Golar Winter currency swap);
draw down and the subsequent •repayment of the $20 million sponsor credit facility;
repayment of long-term debt and lease obligations of $152.2 million;$463.8 million. Of this amount, $234.2 million related to the redemption of our High-Yield Bonds and termination of the related cross currency interest rate swap;
•payment of cash distributions during the year of $130.5$168.1 million (of which $10.6$7.0 million refers towas distributions to our non-controlling interests).; and
•financing and debt settlement costs of $5.4 million mainly in connection with issuance of the 2017 Norwegian Bonds.
This was partially offset by the receipt of aggregate proceeds of $630.0 million from our equity offerings and debt financings, comprising (i) net proceeds of $122.0 million from our public offering of common units in February 2017 and our Common Unit ATM Program; (ii) net proceeds of $133.0 million raised from our public offering of Series A Preferred Units; (iii) $250.0 million from the issuance of our 2017 Norwegian Bonds; and (iv) $125.0 million drawdown of our long-term revolving credit facilities.
Borrowing Activities
Long-Term Debt. As of December 31, 2015 and 2014, our long-term debt consisted of the following:
|
| | | | | | | |
| December 31, |
| 2015 | | 2014 |
| (in thousands) |
Maria and Freeze Facility | $ | 174,000 |
| | $ | — |
|
2012 High-Yield Bonds | 147,007 |
| | 174,450 |
|
2015 Norwegian Bonds | 150,000 |
| | — |
|
Golar LNG Partners Credit Facility | 181,500 |
| | 203,500 |
|
Golar Partners Operating Credit Facility | 185,000 |
| | 235,000 |
|
NR Satu Facility | 112,100 |
| | 126,400 |
|
Golar Igloo Debt | 141,111 |
| | 154,550 |
|
Eskimo SPV | 254,070 |
| | — |
|
Golar LNG Revolving Credit Facility | — |
| | 20,000 |
|
Golar Maria Facility | — |
| | 79,525 |
|
Golar Freeze Facility | — |
| | 59,107 |
|
Total | $ | 1,344,788 |
| | $ | 1,052,532 |
|
Our outstanding debt of $1,344.8 million as of December 31, 2015, is repayable as follows:
|
| | | |
Year Ending December 31, | (in thousands) |
| |
2016 | $ | 121,739 |
|
2017 | 223,747 |
|
2018 | 431,256 |
|
2019 | 44,122 |
|
2020 | 195,939 |
|
2021 and thereafter | 327,985 |
|
Total | $ | 1,344,788 |
|
Loan agreements
Maria and Freeze Facility
On June 16, 2015, we entered into an agreement for a $180.0 million credit facility (the "Maria and Freeze Facility"), with certain lenders, to refinance the Golar Maria Facility (which would have matured in December 2015) and extend the commercial loan tranche and refinance the Exportfinans ASA tranche of the Golar Freeze Facility (which would have matured in June 2015 and June 2018, respectively). The Maria and Freeze Facility consists of a $150.0 million term loan that is repayable in quarterly installments over a period of three years, with a final balloon payment of $114.0 million due on June 18, 2018, and a revolving credit facility of up to $30.0 million that matures on June 18, 2018. Maria and Freeze Facility bears interest at a rate of LIBOR plus a margin of up to 1.95%. As a result of the refinancing, the Golar Maria Facility and the Exportfinans ASA tranche of the Golar Freeze Facility were terminated. The commercial loan tranche of the Golar Freeze Facility was amended and extended and became the Golar Maria and Freeze Facility. As of December 31, 2015, the balance outstanding under the Golar Maria and Freeze Facility is $174.0 million, which includes a drawdown on the revolving credit facility of $30.0 million.
In addition to the restrictive covenants generally described under “-Debt and Lease Restrictions-Loan Agreements” below, the Golar Maria and Freeze Facility require us to maintain as of the end of each quarterly period during and as of the end of each fiscal year:
free liquid assets of at least $30.0 million until the maturity date;
a minimum EBITDA to debt service ratio of 1.15:1;
a maximum net debt to EBITDA ratio of 6.5:1; and
a consolidated net worth of $250.0 million.
In addition, under the Golar Maria and Freeze Facility, the aggregate fair market of value the Golar Maria and the Golar Freeze must at all times be at least 110% of the outstanding facility amount.
Golar LNG Partners Credit Facility
In September 2008, we refinanced existing loan facilities in respect of two of our vessels, the Methane Princess and the Golar Spirit, and entered into a new $285 million revolving credit facility with a banking consortium. The loan is secured against the Golar Spirit and the assignment to the lending banks of a mortgage given to us by the lessors of the Methane Princess, with a second priority charge over the Golar Mazo.
The revolving credit facility accrues floating interest at a rate per annum equal to LIBOR plus a margin of 1.15% until November 2014. The margin on LIBOR was changed to 1.34% in November 2014 due to a change in covenant requirements. The initial draw down amounted to $250 million in November 2008. The total amount outstanding at the time of refinancing, in respect of the two vessels’ facilities was $202.3 million. The revolving credit facility is a reducing facility which decreases by $2.5 million per quarter from June 30, 2009 through December 31, 2012 and by $5.5 million per quarter from March 31, 2013 through December 31, 2017. As of December 31, 2015, we have no ability to draw additional amounts under this facility. The loan has a term of ten years and is repayable in quarterly installments commencing in May 2009 with a final balloon payment of $137.5 million due in March 2018, its maturity date. As of December 31, 2015, $181.5 million was outstanding on the revolving credit facility.
In addition to the restrictive covenants generally described under “-Debt and Lease Restrictions-Loan Agreements” below, the Golar LNG Partners credit facility contains certain financial covenants, which require us to maintain, as of the end of each quarter, and as of the end of each fiscal year:
free liquid assets of at least $30 million;
a minimum EBITDA to debt service ratio of 1.15:1;
a maximum net debt to EBITDA ratio of 6.5:1; and
a consolidated net worth of $123.95 million.
Golar Partners Operating Credit Facility
In June 2013, we entered into a five year, $275 million loan facility with a banking consortium in connection with the refinancing of our lease financing arrangements in respect of two vessels: the Golar Winter and the Golar Grand. The loan facility is split into two tranches, a $225 million term loan facility and a $50 million revolving credit facility. As of December 31, 2015, the Partnership had an undrawn balance of $33.5 million under the revolving credit facility. The loan facility is secured against the Golar Winter and the Golar Grand and is repayable in quarterly installments with a final balloon payment of $130 million payable in July 2018. The loan facility and the revolving credit facility bear interest at LIBOR plus a margin of 3% together with a commitment fee of 1.2% on any undrawn portion of the facility. As of December 31, 2015, the Partnership had $185.0 million of borrowings outstanding under the Golar Partners Operating credit facility.
In addition to the restrictive covenants generally described under “-Debt and Lease Restrictions-Loan Agreements” below, the Golar Partners Operating credit facility contains certain financial covenants, which require us to maintain, as of the end of each quarter, and as of the end of each fiscal year:
free liquid assets of at least $30 million from July 1,2014 until the maturity date;
a minimum EBITDA to debt service ratio of 1.15:1;
a maximum net debt to EBITDA ratio of 6.5:1; and
a consolidated net worth of $123.95 million.
NR Satu Facility
In December 2012, PTGI, the company that owns and operates the NR Satu, entered into a 7 year, $175.0 million secured loan facility (or the NR Satu facility). The NR Satu facility is split into two tranches, a $155 million term loan facility and a $20 million revolving facility. The facility is with a syndicate of banks and bears interest at LIBOR plus a margin of 3.5%. We drew down $155 million on the term loan facility in December 2012. The loan is payable on a quarterly basis with a final balloon payment of $52.5 million payable in March 2020. As of December 31, 2015,2019, we had an undrawn balancetotal outstanding borrowings, gross of $20 million availabledeferred financing costs, of $1,222.9 million. Please refer to us“Item 5—Operating and Financial Review and Prospects—F. Tabular Disclosure of Contractual Obligations”, note 21 “Debt” and note 22 “Obligation under the revolving facility. The NR Satu facility requires certain cash balancesFinancial Lease” to be held on deposit during the period of the loan.��These balances are referred to in these consolidated financial statements as restricted cash. As of December 31, 2015, the value of the deposit secured against the loan was $10.3 million.
In addition to the restrictive covenants generally described under “-Debt and Lease Restrictions-Loan Agreements” below, the NR Satu facility contains certain financial covenants, which require us to maintain, as of the end of each quarter, and as of the end of each fiscal year:
free liquid assets of at least $30 million;
a minimum EBITDA to debt service ratio of 1.10:1; and
a maximum net debt to EBITDA ratio of 6.5:1.
Golar Igloo Debt
The Golar Igloo debt originally formed part of Golar’s $1.125 billion facility to fund eight of its newbuildings. The portion of the debt secured against the Golar Igloo was assumed by us upon our acquisition of the vessel from Golar in March 2014. The amount drawn down under the original facility and the balance outstanding at the date of acquisition was $161.3 million. The Golar Igloo debt bears interest at LIBOR plus a margin. The debt is divided into three tranches, with the following general terms, in line with the original facility:
|
| | | | |
Tranche | Proportion of debt | Term of loan | Repayment terms | Margin on LIBOR |
K-Sure | 40% | 12 years | Semi-annual installments | 2.10% |
KEXIM | 40% | 12 years | Semi-annual installments | 2.75% |
Commercial | 20% | 5 years | Semi-annual installments, unpaid balance to be refinanced after 5 years | 2.75% |
The K-Sure Tranche, is funded by a consortium of lenders, of which 95% is guaranteed by a Korean Trade Insurance Corporation (or K-Sure) policy; the KEXIM tranche is funded by the Export Import Bank of Korea (or KEXIM). The commercial tranche is funded by a syndicate of banks and is for a term of five years from the date of drawdown with a final balloon payment of $20.2 million due in February 2019. In the event the commercial tranche is not refinanced prior to the end of the five years, KEXIM has an option to demand repayment of the balance outstanding under the KEXIM tranche. As of December 31, 2015, we had $141.1 million of borrowing outstanding under the facility.
In addition to the restrictive covenants generally described under “-Debt and Lease Restrictions-Credit Agreements” below, the Golar Igloo Facility contains certain financial covenants, which require us to maintain, as of the end of each quarter, and as of the end of each fiscal year:
free liquid assets of at least $30.0 million until the maturity date;
a minimum EBITDA to debt service ratio of 1.15:1;
a maximum net debt to EBITDA ratio of 6.50:1; and
a consolidated net worth of $123,950,000 million.
Golar Eskimo Vendor Loan
We financed a portion of the cash purchase price of the Golar Eskimo with the proceeds of the Golar Eskimo Vendor Loan, a $220.0 million unsecured non-amortizing loan to us from Golar that required repayment within two years (with a prepayment incentive fee of up to 1.0% of the loan amount) and bore interest at a blended rate equal to three-month LIBOR plus a margin of 2.84%. The loan was repaid in full in November 2015.
Eskimo SPV Debt
In November 2015 we entered into a sale and leaseback transaction pursuant to which we sold the Golar Eskimo to Eskimo SPV, a subsidiary of CMBL for approximately $285.0 million, and leased back the vessel under a bareboat charter at a monthly hire rate of approximately $1.07 million plus interest of LIBOR plus a margin.
In November 2015, Eskimo SPV, which is the legal owner of the Golar Eskimo, entered into a long-term loan facility (the “Eskimo SPV Debt”). Eskimo SPV was determined to be a VIE of which we are deemed to be the primary beneficiary, and as a result, we are required to consolidate the results of Eskimo SPV. Although consolidated into our results, we have no control over the funding arrangements negotiated by Eskimo SPV, such as interest rates, maturity, and repayment profiles. In consolidating Eskimo SPV, we must make certain assumptions regarding the debt amortization profile and the interest rate to be applied against Eskimo SPV’s debt principal. The Eskimo SPV Debt is non-amortizing, with a final balloon payment of $254.1 million due in 2025. The facility bears interest at LIBOR plus a margin.
Refer to note 5 “Variable Interest Entities” of our Consolidated Financial Statements contained herein.
In addition to the restrictive covenants described under “-Debtincluded herein for further detailed information on our borrowings and Lease Restrictions- Loan Agreements”, the bareboat charter and the related agreements governing our sale and leaseback of the Golar Eskimo require us to maintain:
free liquid assets of at least $30 million throughout the charter period;
a maximum net debt to EBITDA ratio of 6.5:1; and
a consolidated tangible net worth of $123.95 million.
In addition, from the third year anniversary of the commencement of the bareboat charter, we have an annual option to repurchase the vessel at fixed pre-determined amounts, with an obligation to repurchase the vessel at the end of the ten yearfinance lease period. In addition, the fair market of value the Golar Eskimo must at all times be at least 110% of the outstanding capital balance (as reduced from time to time).
$800 million credit facility
In April 2016, we entered into a new $800.0 million senior secured credit facility which will refinance the outstanding bank debt secured by seven of our existing vessels as well as providing the remaining part of the cash purchase price for the acquisition of the Golar Tundra. The vessels included in this facility are the Methane Princess, the Golar Spirit, the Golar Winter, the Golar Grand, the Golar Maria, the Golar Igloo and the Golar Freeze.
The new credit facility has a 5 year term and consists of a $650 million term loan facility and a $150 million revolving credit facility. It is repayable in quarterly installments with a total final balloon payment of $440.0 million in 2021. The facility is provided by a syndicate of banks and bears interest at LIBOR plus margin well as a commitment fee on undrawn amounts.
The $800.0 million senior secured credit facility requires us to maintain as of the end of each quarterly period during and as of the end of each fiscal year:
•free liquid assets of at least $30.0 million until the maturity date;
•a minimum EBITDA to debt service ratio of 1.15:1;
•a maximum net debt to EBITDA ratio of 6.5:1; and
•a consolidated net worth of $250.0 million.
In addition, the aggregate fair market of value the seven vessels must at all times be at least 110% of the outstanding facility amount.
Norwegian Bonds
High-Yield Bonds
In October 2012, we completed the issuance of NOK 1,300 million senior unsecured bonds that mature in October 2017. The bonds were in denominations of NOK 1 million each. The aggregate principal amount of the bonds at the time of issuance is equivalent to approximately $227 million. The bonds bear interest at three months NIBOR plus a margin of 5.20% payable quarterly. All interest and principal payments on the bonds were swapped into U.S. dollars including fixing interest payments at 6.485%. The net proceeds from the bonds were used primarily to repay the $222.3 million 6.75% loan due in October 2014 from Golar that was utilized to purchase the Golar Freeze (Golar LNG Vendor Financing Loan - Golar Freeze). The bonds were listed on the Oslo Bors ASA in December 2012. As of December 31, 2015, the U.S. dollar equivalent of the principal amount is $147.0 million.
2015 Norwegian Bonds
In May 2015, we completed the issuance and sale of $150.0 million aggregate principal amount of five year non-amortizing bonds in Norway. They were subsequently listed on the Oslo Bors in December 2015. The 2015 Norwegian Bonds mature on May 22, 2020 and bear interest at a rate of LIBOR plus 4.4%. In connection with the issuance of the 2015 Norwegian Bonds, we entered into economic hedge interest rate swaps to reduce the risk associated with fluctuations in interest rates by converting the floating rate of the interest obligation under the 2015 Norwegian Bonds to an all-in fixed rate of 6.275%.
Under the bond agreements governing our 2012 and 2015 bonds, we are obligated to comply with certain restrictive covenants that will require the prior written consent of the lenders or otherwise restrict our ability to, among other things:
merge or consolidate with any other person;
de-merge or carry out a corporate reorganization splitting the Partnership into two or more separate entities;
change or cease to carry on the general nature or scope of our business;
sell or dispose of all or a substantial part of our assets or operations;
enter into any transaction with related parties other than on an arms’ length basis; and
change our type of organization or jurisdiction of organization.
The financial covenants under the bond agreements require us to maintain as of the end of each quarterly period during and as of the end of each fiscal year:
free liquid assets of at least $30 million;
a minimum EBITDA to debt service ratio of 1.15:1; and
a maximum net debt to EBITDA ratio of 6.5:1.
In addition, we are required to provide the documents and information necessary to maintain the listing and quotation of the bonds on the Oslo Bors.
Capital Lease Obligation. As of December 31, 2015, we are committed to make minimum rental payments under our remaining capital lease, as follows:
|
| | | | |
Year ending December 31, (in thousands) | | Methane Princess Lease |
2016 | | $ | 7,442 |
|
2017 | | 7,723 |
|
2018 | | 8,030 |
|
2019 | | 8,338 |
|
2020 | | 8,650 |
|
2021 and thereafter | | 192,476 |
|
Total minimum lease payments | | 232,659 |
|
Less: Imputed interest | | (89,547 | ) |
Present value of minimum lease payments | | $ | 143,112 |
|
Methane Princess Lease
In August 2003, Golar entered into a lease arrangement (or the Methane Princess lease) with a United Kingdom (UK) bank (or the Methane Princess lessor). Our obligation to the Methane Princess lessor is primarily secured by a letter of credit, which is itself secured by a cash deposit which since June 2008 has been placed with the Methane Princess Lessor. Lease rentals are payable quarterly. At the end of each quarter the required value of the letter of credit to secure the present value of rentals due under the Methane Princess lease is recalculated taking into account the rental payment due at the end of the quarter. The surplus funds in the cash deposits securing the letter of credit, released as a result of the reduction in the required letter of credit amount are available to pay the lease rentals due at the end of the same quarter. Deficits, if any, are financed by working capital.
The lease liability under the Methane Princess lease continues to increase until 2018 and thereafter decreases over the period to 2034, being the primary term of the lease. The value of the deposit used to obtain a letter of credit to secure the Methane Princess leaserespectively as of December 31, 2015 was $134.5 million.2019.
For theMethane Princess lease, lease rentals include an interest element that is accrued at a rate based upon Pound Sterling LIBOR. We receive interest income on our restricted cash deposits at a rate based upon Pound Sterling LIBOR. This lease is therefore denominated in Pound Sterling. The majority of this Pound Sterling capital lease obligation is hedged by Pound Sterling cash deposits securing the lease obligation. The movement in the currency exchange rate between the U.S. Dollar and Pound Sterling will affect our results.
In the event of any adverse tax changes to legislation affecting the tax treatment of the lease for the UK vessel lessor or a successful challenge by the UK Revenue authorities to the tax assumptions on which the transactions were based, or in the event that we terminate our UK tax lease before its expiration, we would be required to return all or a portion of, or in certain circumstances significantly more than, the upfront cash benefits that we have received or that have accrued over time, together with the fees that were financed in connection with our lease financing transaction, post additional security or make additional payments to our lessor which would increase the obligations noted above. The Lessor of the Methane Princess has a second priority security interest in the Methane Princess and the Golar Spirit and subsequent to the $800 million credit facility refinancing the Golar Grand to secure these potential obligations and similar obligations related to other Golar vessels. Golar has agreed to indemnify us against any of these increased costs and obligations (see note 27 “Other Commitments and Contingencies” of our Consolidated Financial Statements).
Debt and Lease Restrictions
Loan Agreements
Our loandebt agreements contain operating and financial restrictions and other covenants that may restrict our business and financing activities as well as our ability to make cash distributions to our unitholders, including restrictive covenants that generally require the prior written consent of the lenders or otherwise restrict our ability to, among other things:
merge or consolidate with any other person;
make certain capital expenditures;
pay distributions to our unitholders;
terminate or materially amend certain of our charters;
enter into any other line of business;
make any acquisitions;
incur additional indebtedness or grant any liens to secure any of our existing or future indebtedness;
enter into sale transactions in respect of the vessel securing such credit facility;
enter into sale-leaseback transactions in respect of certain of our vessels; and
enter into transactions with our affiliates.
Our loan agreementagreements generally prohibit us from paying distributions to our unitholders if we are not in compliance with certain financial covenants or upon the occurrence of an event of default. ThePlease refer to note 21 “Debt” and note 25 “Related Party Transactions—Indemnifications and guarantees” to our Consolidated Financial Statements included herein for further detailed information on the financial covenants and ratios imposed under the agreements governing our credit facilities, are described above under “-Borrowing Activities-Long-Term Debt-Loan Agreements.”leases and guarantees.
Furthermore, we are required under our credit facilities to, among other things, comply with the ISM Code and the ISPS Code and with all international and local environmental laws and to maintain certain levels of insurance on the vessels securing our facilities and to maintain the vessels’ class certifications with no material overdue recommendations.
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 contain covenants that require compliance with certain financial ratios. Such ratios include equity ratios, working capital ratios and earnings to net debt ratio covenants, debt service coverage ratios, minimum net worth covenants, minimum value clauses and minimum cash and cash equivalent restrictions in respect of our subsidiaries and us. In addition, there are cross default provisions in most of our and Golar’s loan and lease agreements.
As of December 31, 2015,2019, we were in compliance with all covenants under our existing debt and lease agreements.agreements and guarantees.
In July 2013, Golar entered into a $1.125 billion credit agreement to finance the construction of eight newbuildings (the “Golar Parent Facility”). In connection with our acquisition of the Golar Igloo in March 2014, we assumed the portion the Golar Parent Facility secured by the Golar Igloo (the “Igloo Debt”). In 2013, Golar drew $256.4 million under the Golar Parent Facility to fund the final installment payments of the Golar Seal and the Golar Celsius, which were delivered in October 2013. Under the Golar Parent Facility if on the second anniversary of a drawdown under the facility, Golar falls below a prescribed EBITDA to debt service ratio, additional cash deposits are required to be made or maintained. As of December 31, 2015, Golar was not in compliance with this covenant under the Golar Parent Facility. In April 2016, Golar received a waiver relating to its requirement to comply with this financial covenant in respect of the financing of the Golar Seal and the Golar Celsius and made the required payment. Had Golar been unable to obtain this waiver, this could have resulted in the acceleration of our indebtedness under the Igloo Debt.
Derivatives
We use financial instruments to reduce the risk associated with fluctuations in interest rates and foreign currency exchange rates. We have a portfolio of interest rate swaps that exchange or swap floating rate interest to fixed rates, which from a financial perspective, hedges our obligations to make payments based on floating interest rates. As of December 31, 2015,2019, we had interest rate swaps with a notional outstanding value of approximately $1,090.4$1,557.8 million (including swaps with a notional value of $227.2 million in connection with our High-Yield Bonds) representing approximately 81% 88% of total debt and capitalfinance lease obligations, netincluding our proportionate share of related restricted cash. the obligation under the Hilli Facility. Our swap agreements have expiration dates between 20172020 and 20222026 and have fixed rates of between 1.07%1.12% and 6.49%2.90%.
All interest and principal payments on the High-Yield Bonds were swapped into U.S. dollars.
We enter into foreign currency forward contracts in order to manage our exposure to the risk of movements in foreign currency exchange rate fluctuations. We also receive some of the revenue in respect of the Golar Spirit and Golar Winter charters in Brazilian Reals. We are affected by foreign currency fluctuations primarily through our FSRU projects, expenditures in respect of our vessels’ drydocking, some operating expenses including the effect of paying the majority of our seafaring officers in Euros, and some of our administrative costs. The currencies which impact us the most include, but are not limited to, the Euro, Norwegian Kroner, Singapore Dollars, Brazilian Reais, Indonesian Rupiah and, to a lesser extent, Pound Sterling.
Please refer to See "Item 11—Quantitative and Qualitative Disclosures about Market Risk" and note 2524 “Financial Instruments” to our audited consolidated financial statementsConsolidated Financial Statements included herein this Annual Report.
herein.
Capital Commitments
Possible Acquisitions of Other Vessels
In February 2016, we agreed to acquire from Golar, the Golar Tundra, for a purchase price of $330.0 million less approximately $230.0 million of net lease obligations and net working capital adjustments. In February 2016, we paid a $30.0 million deposit to Golar towards the total purchase price of the Tundra Acquisition. We intend to pay the remaining portion of the cash purchase price using borrowings under the $800 million credit facility. The Tundra Acquisition is expected to close in May 2016. See “Item 5—Operating and Financial Review and Prospects—Significant Developments in 2015 and Early 2016—Golar Tundra Acquisition”.
Although we do not currently have in place any agreements relating to acquisitions of vessels, we assess potential acquisition opportunities on a regular basis. Pursuant to our omnibus agreementagreements with Golar and Golar Power, we will have the opportunity to purchase additional FSRUs and LNG carriers and FSRUs in the future from Golar and Golar Power when those vessels are fixed under charters of five or more years upon their expiration of their current charters. Subject to the terms of our loan agreements, we could elect to fund any future acquisitions with equity or debt or cash on hand or a combination of these forms of consideration. Any debt incurred for this purpose could make us more leveraged and subject us to additional operational or financial covenants.
Drydocking and Ballast Water Treatment System
From now through to December 31, 2019, six2024, eight of the vessels in our current fleet will undergo their scheduled drydockings. We estimate that we will spend in total approximately $47.7$65.1 million for drydocking of these vessels, which includes $19.1 million in respect of the Golar Spirit and the Golar Mazo in order to put them back in service from lay-up, with approximately $16.6 million in 2020, $10.0 million in 2021, $5.0 million in 2022, $23.5 million in 2023 and $10.0 million expected to be incurred in 2018.2024. We are required to install BWTS on all our LNG carriers on their first drydocking after 2017. The additional costs of complying with these rules, relating to all our vessels are estimated to be in the range of $1.8 million and $2.1 million per vessel and will be phased in over time in connection with the renewal surveys that are required. See "Item 4 — Information on the Partnership — B. Business Overview—Ballast Water Management Convention, Clean Water Act and National Invasive Species Act".
We reserve a portion of cash generated from our operations to meet the costs of future drydockings.drydockings and BWTS installation. As our fleet matures and expands, our drydocking expenses will likely increase. Ongoing costs for compliance with environmental regulations are primarily included as part of our drydocking and society classification survey costs or are a component of our operating expenses. We are not aware of any regulatory changes or environmental liabilities that we anticipate will have a material impact on our current or future operations.
Critical Accounting Policies
The preparation of our consolidated and combined financial statementsConsolidated Financial Statements in accordance with U.S. GAAP 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 us that are considered to involve a higher degree of judgment in their application. Please read note 2 Significant“Significant Accounting Policies ofPolicies” to our consolidated and combined financial statements included elsewhere in this Annual Report.Consolidated Financial Statements for additional information.
Revenue Recognition
Our revenues include minimum lease payments under time charters, fees for repositioning vessels as well as the reimbursement of certain vessel operating costs such as drydocking costs and taxes. We record revenues generated from time charters, which we classify as operating leases, over the term of the charter as service is provided.
We recognize the reimbursement for drydocking costs evenly over the period to the next drydocking, which is generally between two to five years. We recognize repositioning fees (which are included in time charter revenue) received in respect of time charters at the end of the charter when the fee becomes fixed and determinable. However, where there is a fixed amount specified in the charter, which is not dependent upon redelivery location, we will recognize the fee evenly over the term of the charter. Where a vessel undertakes multiple single voyage time charters, revenue is recognized, including the repositioning fee if fixed and determinable, on a discharge-to-discharge basis. Under this basis, revenue is recognized evenly over the period from departure of the vessel from its last discharge port to departure from the next discharge port.
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 FSRU and LNG shipping industries. 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.
Depreciation and Amortization - Useful lives
Depreciation and amortization expense, or the periodic cost charged to our income for the reduction in usefulness and long-term value of our vessels, is 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 economic useful lives, on a straight-line basis, which we estimate at December 31, 2015 to be approximately an average of 17 years for all ten vessels in our fleet (including the Golar Eskimo, which was acquired in January 2015). The economic life for LNG carriers operated worldwide has generally been estimated to be 40 years. However, the Golar Spirit, the Golar Freeze, and the NR Satu have been converted into FSRUs and have been moored in sheltered waters where fatigue loads on their hulls are significantly reduced compared to loads borne in connection with operation in a worldwide trade pattern. We believe that these factors support our estimate that the Golar Spirit, the Golar Freeze and the NR Satu will remain operational until they are 55 years old and will therefore have remaining useful economic lives of approximately 20 years each at the time their conversion into FSRUs were completed. We amortize our deferred drydocking costs over two to five years based on each vessel’s next anticipated drydocking.
Vessels and Impairment
OurDescription: We review vessels are reviewedand equipment 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, the vessels estimated useful life and estimates in respect of residual or scrap value.
In the event an impairment trigger exists, we estimate the vessel’s future undiscounted cash flows based on the service potential of our vessels under their existing contract terms and the estimated daily time charter equivalent for vessels operating in the spot market over the vessel’s remaining economic life after the expiration of the existing charter. If the carrying value of athe vessel were to exceedmay not be fully recoverable. Management performs an annual impairment assessment and when such events or circumstances are present, we assess recoverability by comparing the vessel's projected undiscounted futurenet cash flows we would write the vessel down to its carrying value. If the total projected undiscounted net cash flows is lower than the vessel’s carrying value, an impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value, which is calculated by using a risk-adjusted rate of interest.
value. As of December 31, 2015,2019, the carrying values of seven of our vessels were higher than their estimated market
values (based on third party ship broker valuations). As a result, we performedconcluded that an impairment testtrigger existed and so performed a recoverability assessment for each of these vessels. However, no impairment loss was recognized for these vessels, as the projected undiscounted net cash flows were significantly higher than each vessel's carrying value. Refer to note 13 “Vessels and Equipment, Net” and note 14 "Vessel Under Finance Lease" in our Consolidated Financial Statements.
Judgments and estimates: The cash flows on the Golar Mazo, the Golar Winter, the Golar Maria, and the NR Satu, as indications for impairment were identified (i.e. the carrying amount of the vessels were below the market values as appraised by independent valuation firms). Based onwhich our assessment of recoverability are based is highly dependent upon our forecasts, which are highly subjective and, although we believe the vessels’underlying assumptions supporting this assessment are reasonable and appropriate at the time they were made, it is therefore reasonably possible that a further decline in the economic environment could adversely impact our business prospects in the next year. This could represent a triggering event for a further impairment assessment.
Accordingly, the principal assumptions we have used in our recoverability assessment (i.e. projected undiscounted futurenet cash flows nobasis) included, among others, charter rates, ship operating expenses, drydocking requirements and residual value. These assumptions are based on historical trends and adjusted for future expectations. Specifically, forecasted charter rates are based on information regarding current spot market charter rates (based on a third party information), option renewal rate with the existing counterparty or existing long-term charter rates, in addition to industry analyst and broker reports. Estimated outflows for operating expenses and drydockings are based on historical costs.
Effect if actual results differ from assumptions: Although we believe the underlying assumptions supporting the impairment was identified.assessment are reasonable, if charter rate trends and the length of the current market downturn vary significantly from our forecasts, management may be required to perform step two of the impairment analysis that could expose us to material impairment charges in the future. Our estimates of vessel market values may not be indicative of the current or future market value of our vessels or prices that we could achieve if we were to sell them and a material loss might be recognized upon the sale of our vessels.
Vessel market values
Description: Under "Vessels and impairment", we discuss our policy for assessing impairment of the carrying values of our vessels. During the past few years, the market values of certain vessels in the worldwide fleet have experienced particular volatility, with substantial declines in many vessel classes. There is a future risk that the salemarket value of certain of our vessels could decline below those vessels’vessels' carrying value, even though we would not impairrecognize an impairment for those vessels’ carrying value under our impairment accounting policy,vessels' due to our belief that futureprojected undiscounted net cash flows expected to be earned by such vessels over their operating lives would exceed such vessels’vessels' carrying amounts.
With respect to ascertaining the fair market value of our owned vessels, we believe that the LNG carrierJudgments and FSRU markets are illiquid, difficult to observe and therefore judgmental. Our valuation approach is to make an estimate of future net cash flows, with particular respect to cash flows derived from pre-existing contracts with counterparties and obtain market valuation from independent reputable valuation firms.
The principal assumptions we have used are:
Cash flows are assumed to be in line with pre-existing contracts and are utilized based on historical performance levels;
For our LNG carriers, once the initial contract period expires, we have estimated cash flows at the lower of our estimated current long-term charter rate or option renewal rate with the existing counterparty;
For our FSRUs, once the initial contract period expires, we have estimated cash flows at the existing contract option renewal rate, given the lack of pricing transparency in the market as a whole; and
We have made certain assumptions in relation to the scrap values of our vessels at the end of their useful lives of 40-55 years.
While we intend to hold and operate our vessels, were we to hold them for sale, we do not believe that the fair market value of any of our owned vessels would be lower than their respective historical book values presented as of December 31, 2015.estimates: Our estimates of fair market values assume that we would sell each of our owned vessels in the current environment, on industry standard terms, in cash transactions, and to a willing buyer where we are not under any compulsion to sell, and where the buyer is not under any compulsion to buy. For purposes of this calculation, we have assumed that each owned vessel would be sold at a price that reflects our estimate of its current fair market value. However, we are not holding any of our vessels for sale. Our estimates of fair market valuesvalue assume that our vessels are all in good and seaworthy condition without need for repair and, if inspected, would be certified in class without notations of any kind. As we obtain informationOur estimates for our LNG carriers and FSRUs are based on approximate vessel market values that have been received from various sources of objective datathird party ship brokers, which are commonly used and internal assumptions,accepted by our estimates of fair market value are inherently uncertain. In addition, vessellenders for determining compliance with the relevant covenants in our credit facilities. Vessel values arecan be highly volatile; asvolatile, such that our estimates may not be indicative of the current or future fair market value of our vessels or prices that we could achieve if we were to sell them.sell. In addition, the determination of estimated market values may involve considerable judgment given the illiquidity of the secondhand market for these types of vessels.
ValuationEffect if actual results differ from assumptions: As of DerivativeDecember 31, 2019, while we intend to hold and operate our vessels, were we to hold them for sale, we have determined the fair market value of our vessels, with the exception of seven vessels, were greater than their carrying value. With respect to these seven vessels, the carrying value of these vessels exceeded their aggregate market value. However, as discussed above, for each of these vessels, the carrying value was less than its projected undiscounted net cash flows, consequently, no impairment loss was recognized. See note 13 “Vessels and equipment, net” to our Consolidated Financial InstrumentsStatements for additional information.
Our risk
Acquisition of Hilli LLC Common Units
Description: On July 12, 2018, we completed the acquisition of 50% of the Hilli Common Units. As we are deemed to have significant influence, we equity accounted for our investment. Hilli LLC is an entity where the economic results are allocated based on a contractual agreement rather than relative ownership percentages. This is due to the different classes of equity within Hilli LLC (Common Units, Series A Special Units and Series B Special Units).
Judgments and estimates: As the Hilli LLC Agreement is a substantive contractual arrangement that specifies the allocation of cash proceeds, management policies permithas performed the use of derivative financial instruments to manage foreign currency fluctuation and interest rate. Changes innotional fair value exercise to allocate the cost of derivative financial instrumentsour investment to the acquired assets and liabilities based on the Hilli LLC Agreement. This exercise determined that are not designated as cash flow hedges for accounting purposes are recognized in earnings in the consolidated statement of income (loss). Changes in fair value of derivative financial instruments that are designated as cash flow hedges for accounting purposes are recorded in other comprehensive income (loss) and are reclassified to earnings in the consolidated statement of income (loss) when the hedged transaction is reflected in earnings. Ineffective portions of the hedges are recognized in earnings as they occur. During the life of the hedge, we formally assess whether each derivative designated as a hedging instrument continues to be highly effective in offsetting changes in the fair value or cash flowsadjustment primarily related to the vessel and the LTA. Our share of hedged items. If itthe fair value adjustment relating to the Hilli LLC Common Units is determined that a hedge has ceasedrequired to be highly effective, we will discontinue hedge accounting prospectively.
The fair valueamortized through the statement of our derivative financial instruments is the estimated amount that we would receive or pay to terminate the agreements in an arm’s length transaction under normal business conditions at the reporting date, taking into account current interest rates and foreign exchange rates, and estimatesoperations as part of the current credit worthinessequity accounting. In addition we have calculated our “Equity in net earnings of both us andaffiliates” based on the swap counterparty. Inputs usedsame assumptions.
Certain assumptions were made on the allocation of non-cash components, specifically, the unrealized mark-to-market movement in the oil derivative asset associated to determine the fair value of our derivative instrumentsthe Brent Crude price is allocated to the Series A Special unitholders only, as they are observable either directly or indirectly in active markets.the only unitholders who benefit from the oil linked tolling fee billings. The processaccounting of determining credit worthiness is highly subjectivethe cost of the Hilli follows the allocation of cash tolling fee revenues associated with the capacity of the Hilli to the Hilli common unitholders and requires significant judgment at many points during the analysis.Series B Special unitholders.
Effect if actual results differ from assumptions: If our estimatesallocation of fair value are inaccurate,the non-cash items were incorrect this could result in a material adjustment to the carrying amount allocated to the “Investment in affiliate” on the disposal date. In addition, on a prospective basis, the allocation of derivative asset or liability and consequently“Net income” to the change“Equity in fair value for the applicable period that would have been recognized innet earnings or comprehensive income. Please seeof affiliate” could be materially different.
Recently Issued Accounting Standards
See note 253 “Recently Issued Accounting Standards” to our audited consolidated financial statements.Consolidated Financial Statements.
A variable interest entity (VIE) is defined by the accounting standard as a legal entity where either (a) equity interest holders, as a group, lack the characteristics of a controlling financial interest, including decision making ability and an interest in the entity’s residual risks and rewards, or (b) the equity holders have not provided sufficient equity investment to permit the entity to finance its activities without additional subordinated financial support, or (c) the voting rights of some investors are
not proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both and substantially all of the entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights. A party that is a variable interest holder is required to consolidate a VIE if the holder has both (a) the power to direct the activities that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
In consolidating VIEs, on a quarterly basis, we must make assumptions regarding the debt amortization profile and the interest rate to be applied against the VIEs’ debt principal. Our estimates are therefore dependent upon the timeliness of receipt and accuracy of financial information provided by these lessor VIE entities. Upon receipt of the audited annual financial statements of VIEs, we will make a true-up adjustment for any material differences.
Business combinations
Business combinations are accounted for under the acquisition method. On acquisition, the identifiable assets, liabilities and contingent liabilities are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. bargain purchase) is credited to the statement of operations in the period of acquisition. The consideration transferred for an acquisition is measured at fair value of the consideration given. Acquisition related costs are expensed as incurred. The results of subsidiary undertakings are included from the date of acquisition.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the acquisition is recorded based on provisional amounts. During the measurement period, we will retrospectively adjust the provisional amounts recognized at the acquisition date reflecting new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. However, the measurement period does not exceed one year from the acquisition date.
During the measurement period, we recognize adjustments to the provisional amounts as if the accounting for the business combination had been completed at the acquisition date and we revise comparative information for prior periods presented in financial statements as needed, including making any change in depreciation, amortization, or other income effects recognized in completing the initial accounting.
Adoption of new accounting standards
In November 2015, the Financial Accounting Standards Board (“FASB”) amended Accounting Standards Codification (“ASC”) 740 to require companies to classify all deferred tax assets and liabilities as non-current on the balance sheet instead of separating deferred taxes into current and non-current amounts. Also, companies will no longer allocate valuation allowances between current and non-current deferred tax assets because those allowances also will be classified as non-current. The guidance may be adopted on either a prospective or retrospective basis. For public business entities, the guidance is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. However, early adoption in permitted. We have elected to adopt the guidance prospectively for annual periods beginning January 1, 2015.
Accounting pronouncements to be adopted
In August 2014, the FASB issued guidance for presentation of financial statement - going concern. The amendments in this update provide guidance in GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued or available to be issued and to provide related footnote disclosures. The amendments are effective for annual periods beginning after December 15, 2016 and interim periods, and for annual periods ending after December 15, 2016 and interim period within those periods. We have assessed that the adoption of this guidance will not have any impact on our consolidated financial position, results of operations and cash flows.
In January 2015, the FASB issued guidance to simplify the income statement presentation requirements by eliminating the concept of extraordinary items. The guidance is effective prospectively or retrospectively for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We believe the adoption of this guidance will not have a material impact on our consolidated financial position, results of operations and cash flows.
In February 2015, the FASB issued amendments to ASC 810 requiring re-evaluation of all legal entities under the revised consolidation model. Specifically, the amendments:
Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities;
Eliminate the presumption that a general partner should consolidate a limited partnership;
Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and
Provide a scope exception from consolidation guidance for reporting entities with interest in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds.
The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We are assessing what impact, if any, the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued amendments to ASC 835 that would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments. Entities must apply the amendments retrospectively. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. We have chosen not to early adopt. Had we early adopted, debt issuance costs of $13.7 million as of December 31, 2015 (2014: $13.4 million) would have been reclassified from ‘Other long term assets’ to a direct deduction from ‘Current portion of long-term debt’ and ‘Long-term debt’.
ASC 820, Fair Value Measurement, permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. Currently, investments using the practical expedient are categorized within the fair value hierarchy according to the date when the investment is redeemable. In May 2015, the FASB issued amendments to ASC 820 which have the effect of a) removing the requirement to categorize these investments and b) limiting disclosures of these investments. We believe the adoption of this guidance will not have a material impact on our consolidated financial position, results of operations and cash flows.
In May 2014, the FASB issued a new topic ASC 606, Revenue from Contracts With Customers. The intention of the topic is to harmonize revenue recognition requirements with the newly issued standard, IFRS 15, by the International Accounting Standards Board (IASB). The initial effective date for public business entities was for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The revised effective date for public entities is for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities will be permitted to adopt the standard as early as the original public entity effective date.We are assessing what impact, if any, the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.
In July 2015, the FASB issued amendments to ASC 330 that simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. The guidance is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. We believe the adoption of this guidance will not have a material impact on our consolidated financial position, results of operations and cash flows.
In August 2015, the FASB deferred by one year the effective date of its new revenue recognition standard for public and non-public entities reporting under US GAAP. The new revenue recognition standard will be effective for public entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Public entities will be permitted to adopt the standard as early as the original public entity effective date, i.e. annual reporting periods beginning after December 15, 2016 and interim periods therein. We are assessing what impact, if any, the adoption of this guidance will have on our consolidated financial position, results of operations and cash flows.
In September 2015, the FASB issued amendments to ASC 805. The guidance eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on
earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015. We are assessing what impact, if any, the adoption of this guidance will have on our consolidated financial position and results of operations.
In March 2016, the FASB issued guidance (“Topic 842”) to increase transparency and comparability among organizations by requiring i) recognition of lease assets and lease liabilities on the balance sheet and ii) disclosure of key information about leasing arrangements. The accounting applied by lessors under Topic 842 is largely unchanged from previous GAAP. Some changes to the lessor accounting guidance were made to align both of the following: i) the lessor accounting guidance with certain changes made to the lessee accounting guidance and ii) key aspects of the lessor accounting model with revenue recognition guidance. Topic 842 will be effective for fiscal years and interim periods beginning after December 15, 2018, and early adoption is permitted. A modified retrospective approach is required for adoption for all leases that exist at or commence after the date of initial application with an option to use certain practical expedients. We are currently assessing whether we will early adopt, and the impact on our financial statements is not currently estimable.
C.Research and Development
Not applicable.
D.Trend Information
Please see “Item 3.D—Risk Factors”, “Item 4—B. Business Overview” and “Item 5—Operating and Financial Review and Prospects—Factors Affecting our Results of Operation and Future Results.”
After the sectionbalance sheet date, we have seen significant macroeconomic uncertainty as a result of Item 5 entitled “Market Overviewthe global COVID-19 outbreak. The scale and Trends”.duration of this development remains uncertain and could materially impact our earnings and cash flow for the 2020 fiscal year.
E.Off-Balance Sheet Arrangements
At December 31, 2015,2019, we do not have any off balance-sheetoff-balance sheet arrangements.
F.Tabular Disclosure of Contractual Obligations
Contractual Obligations
The following table sets forth our contractual obligations for the periods indicated as of December 31, 2015:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Obligation | | Due in 2020 | | Due in 2021 — 2022 | | Due in 2023—2024 | | Due Thereafter |
| (in millions) | | | | | | | | |
Long-term debt (1) | $ | 1,222.9 | | | $ | 228.2 | | | $ | 851.0 | | | $ | 25.6 | | | $ | 118.1 | |
Interest commitments on long-term debt - floating and other interest rate swaps (2) | 134.3 | | | 62.3 | | | 46.9 | | | 18.5 | | | 6.6 | |
Finance lease obligations, net (2)(3) | 122.8 | | | 2.0 | | | 5.4 | | | 7.3 | | | 108.1 | |
| | | | | | | | | |
Total | $ | 1,480.0 | | | $ | 292.5 | | | $ | 903.3 | | | $ | 51.4 | | | $ | 232.8 | |
|
| | | | | | | | | | | | | | | | | | | |
| Total Obligation | | Due in 2016 | | Due in 2017—2018 | | Due in 2019—2020 | | Due Thereafter |
| (in millions) |
Long-term debt | $ | 1,344.8 |
| | $ | 121.7 |
| | $ | 655.0 |
| | $ | 240.1 |
| | $ | 328.0 |
|
Interest commitments on long-term debt - floating and other interest rate swaps (1) | 166.7 |
| | 55.4 |
| | 76.0 |
| | 31.1 |
| | 4.2 |
|
Capital lease obligations | 143.1 |
| | — |
| | 0.9 |
| | 2.3 |
| | 139.9 |
|
Interest commitments on capital lease obligations (1)(2) | 89.6 |
| | 7.5 |
| | 14.9 |
| | 14.7 |
| | 52.5 |
|
Total | $ | 1,744.2 |
| | $ | 184.6 |
| | $ | 746.8 |
| | $ | 288.2 |
| | $ | 524.6 |
|
__________________________________________ (1)Amounts shown gross of deferred financing costs of $6.0 million.
(2)Our interest commitment on our long-term debt is calculated based on assumed USD LIBOR rates of between 1.55% and 2.10% respectively, taking into account our various margin rates and interest rate swaps associated with our debt. Our interest commitment on our finance lease obligations is calculated on an assumed average Pound Sterling LIBOR of 5.2%.
| |
(1) | Our interest commitment on our long-term debt is calculated based on assumed USD LIBOR rates of between 0.80% and 1.30% respectively, taking into account our various margin rates and interest rate swaps associated with our debt. Our interest commitment on our capital lease obligations is calculated on an assumed average Pound Sterling LIBOR of 4.8%. |
| |
(2) | In the event of any adverse tax rate changes or rulings our lease obligation could increase significantly (please read the discussion above under “—Liquidity and Capital Resources—Borrowing Activities—Capital Lease Obligations”)(3)In the event of any adverse tax rate changes or rulings our lease obligation with regard to the Methane Princess could increase significantly (please refer to note 26 "Other Commitments and Contingencies" to our Consolidated Financial Statements included herein). However, Golar has agreed to indemnify us against any such increase. |
In February 2016, we agreed to acquire the ownership interests in the disponent owner and operator of the FSRU the Golar Tundra, from Golar for an aggregate purchase price of approximately $330.0 million less the assumption of outstanding lease obligations in respect of the Golar Tundra. In February 2016, we paid a $30.0 million deposit to Golar towards the totalindemnify us against any such increase.
purchase price of the Tundra Acquisition. We intend to pay the remaining portion of the cash purchase price using borrowings under the $800 million credit facility. The Tundra Acquisition is expected to close in May 2016.
G.Safe Harbor
See “Cautionary Statement Regarding Forward-Looking Statements.”
Item 6.Directors, Senior Management and Employees
A.Directors and Senior Management
Directors
The following provides information about each of our directors as of April 29, 2016.16, 2020. The business address for these individuals is 2nd Floor, S.E. Pearman Building, 9 Par-la-Ville Road, Hamilton HM 11, Bermuda.
|
| | | | | | | | | | | | | |
Name | | Age | | Position |
Tor Olav Trøim | | 5357 | | Chairman |
Doug Arnell | | 50 | | Director |
Paul Leand Jr. | | 4953 | | Class III Director and Conflicts Committee Member |
Lori Wheeler Naess | | 4549 | | Director and Audit Committee Chairperson |
Carl Steen | | 6569 | | Class II Director and Audit Committee Member |
Alf Thorkildsen | | 5963 | | Class I Director, Conflicts and Audit Committee Member |
Georgina Sousa | | 69 | | Director and Company Secretary |
Jeremy Kramer | | 58 | | Class III Director and Conflicts Committee Member |
Andrew Whalley | | 49 | | Director and Company Secretary |
Tor Olav Trøim has served as our directorDirector and chairmanChairman of our boardBoard of directorsDirectors since January 2009. Hehas served as a director of Golar since September 2011 havingand the Chairman of the Board of Golar since September 2017. Mr. Trøim previously served as a director and vice-president of Golar from its incorporation in May 2001 until October 2009, after which time he served as a director and Chairman of the Company’sGolar's listed subsidiary, Golar LNG Energy Limited. Mr. TroimTrøim was Vice President and a director of Seadrill Limited (“Seadrill”) between 2005 and 2014. Additionally between 1995 and 2014 he also served, at various times, as a director of a number of related public companies including Frontline Limited, Golden Ocean Group Limited, Archer Limited as well as Seatankers Management Limited. Prior to 1995 he served as an Equity Portfolio Manager with Storebrand ASA and Chief Executive Officer for the Norwegian Oil Company DNO AS. Mr. Trøim graduated as M.Sc Naval Architect from the University of Trondheim, Norway in 1985. He currently holds controlling interests in Magni Partners Bermuda and Magni Partners UK. He also serves as a director in Stolt Nielsen Limited, Borr Drilling and Valerenga Football Club.
Doug Arnell was appointed to our board of directors in February 2015 following his resignation as Chief Executive Officer of Golar Management Limited. Mr. Arnell joined Golar Management as Chief Commercial Officer & Deputy Chief Executive Officer in September 2010 and became Chief Executive Officer of Golar Management in February 2011. He previously worked for BG Group since 2003 in leadership roles in the areas of LNG, downstream natural gas marketing and upstream exploration and development. Prior to that, he held positions of Managing Director for El Paso’s European natural gas division and Senior Business Development Director for Enron International’s LNG business. Mr Arnell is the President and Chief Executive Officer of Helm Energy Advisors Inc., a private company that provides advisory services to the global energy sector. In total, Mr. Arnell has worked in the global natural gas industry for over 25 years.
Paul Leand Jr. has served on our boardBoard of directorsDirectors since March 2011.2011 and is a member of our Conflicts Committee. He has been a Director of NYSE-listed Ship Finance International Limited since 2003. Mr. Leand joined AMA Capital Partners LLC (“AMA”), an investment bank specializing in the maritime industry, in 1998 from First National Bank of Maryland. He was appointed CEO in 2004. From 1989 to 1998 Mr Leand served at the First National Bank of Maryland where he managed its Railroad Division and its International Maritime Division. He has ledworked extensively in the development ofU.S. capital markets in connection with AMA’s restructuring practice, helping AMA earn its position as the pre-eminent maritime restructuring advisor for both creditors and companies alike. Mr. Leand spearheaded the firm’s private equity investments in Chembulkmergers and PLM and Lloyds Fonds. Mr.acquisitions practice. Mr Leand serves as Chairmana member of Eagle BulkAmerican Marine Credit LLC's Credit Committee and served as a member of the Investment Committee of AMA Shipping Inc., Lloyd Fonds AG, North Atlantic Drilling, SeadrillFund l, a private equity fund formed and Ship Finance International Ltd.managed by AMA. Mr Leand holds a BS/BA from Boston University’s School of Management and is a director of publicly listed SEA CO LTD and privately held Helm Financial Corporation and GE SEACO SRL.
Lori Wheeler Naesswas appointed as a Director and Audit Committee Chairperson in February 2016. MsMs. Naess also serves on the Board and Audit Committee of Golar, Opera Limited (a US-listed company) and Klaveness Combination Carriers ASA (a publicly-listed shipping company in Norway). Prior to her appointment as Director, Ms. Naess was most recently a Director with PricewaterhouseCoopersat PwC in Oslo and was a Project Leader for the Capital Markets Group. Between 2010 and 2012 she was a Senior Advisor for the Financial Supervisory Authority in Norway and prior to this2010 she was also with PricewaterhouseCoopersPwC in roles in the U.S., Norway and Germany. MsMs. Naess is a U.S. Certified Public Accountant.Accountant (inactive).
Carl Steen has served on our boardBoard of directorsDirectors since his appointment in August 2012 and serves on our Audit Committee. Mr. Steen initiallyhas served on the Board of Directors of Golar since February 2015. Mr. Steen graduated in 1975 from ETH Zurich Switzerland with ana M.Sc. in Industrial and Management Engineering. After working for a number of high profile companies, Mr. Steen joined Nordea Bank from January 2001 to February 2011 as head of the bank’s Shipping, Oil Services & International Division. Mr. Steen served on the board of directors of Seadrill from February 2011 until October 2014. Mr. Steen holds directorship positions in various Norwegian and international companies including Euronav NV, Wilh Wilhelmsen Holding ASA and Euronav NV.Belships ASA.
Alf Thorkildsen was appointed to our boardBoard of directors and as our secretaryDirectors in February 2015 and serves on our Conflicts Committee and Audit Committee. Mr. Thorkildsen is currently a senior partner with Hitecvision, which he joined in 2013 from the position as Chief Executive OfficerCEO of Seadrill. During his tenure, Seadrill grew to become the world’s largest driller by market capitalization and enterprise value. Mr. Thorkildsen joined Seadrill in 2006 as CFO. Prior to this, he was the CFO of Smedvig ASA, a leading Norwegian drilling company, which was acquired by Seadrill in 2006. Mr. Thorkildsen started his career in 1980 in Larsen and Hagen Shipping and worked thereafter for 20 years in Shell in numerous senior positions.
Georgina Sousa has served as a director, Company Secretary and Resident Representative since October 2019. She is currently a director and Company Secretary of Golar, having served in those capacities since September 2019 and May 2019, respectively. Ms. Sousa also currently serves as a director of 2020 Bulkers Ltd. and Borr Drilling Ltd. Ms. Sousa was employed by Frontline Ltd. as Head of Corporate Administration from February 2007 until December 2018. She previously served as a director of Frontline from April 2013 until December 2018, Ship Finance International Limited from May 2015 until September 2016, North Atlantic Drilling Ltd. from September 2013 until June 2018, Sevan Drilling Limited from August 2016 until June 2018, Northern Drilling Ltd. from March 2017 until December 2018 and FLEX LNG LTD. from June 2017 until December 2018. Ms. Sousa also served as a Director of Seadrill Limited from November 2015 until July 2018, Knightsbridge Shipping Limited (the predecessor of Golden Ocean Group Limited) from 2005 until 2015 and Golar LNG Limited from 2013 until 2015. Ms. Sousa has extensive experience in corporate secretarial practice having previously held various company secretary positions, amongst other shipping companies, the above mentioned companies at various times.
Jeremy Kramerwas appointed to our boardBoard of directorsDirectors in September 2016 and asserves on our secretary in February 2015. Mr. Whalley is a Bermudian lawyer called to the Bar in 1995. He has experience in aviation and shipping law, as well as general corporate matters.Conflicts Committee. He is currentlyalso on the Board of counsel to Alexanders,Directors of DHT Holdings where he serves as Chairman of the Audit Committee. In addition, Mr Kramer is on the Board of Directors of 2020 Bulkers Ltd. Mr. Kramer was a Bermuda law firm and is also an independent consultant providing legal and corporate secretarial services. Mr. Whalley is a director and co-founder of Provenance Information Assurance Limited, a company involvedSenior Portfolio Manager in the developmentStraus Group at Neuberger Berman from 1998 to 2016, managing equity portfolios primarily for high net worth clients. Prior to that, he worked at Alliance Capital from 1994 to 1998, first as a Securities Analyst and then as a Portfolio Manager focused on small and mid-cap equity securities. Mr. Kramer also managed a closed-end fund, the Alliance Global Environment Fund. He worked at Neuberger Berman from 1988 to 1994 as a Securities Analyst. Mr. Kramer earned an MBA from Harvard University Graduate School of software for the legalization of documents.Business in 1988. He graduated with a BA from Connecticut College in 1983.
Executive Officers
Other than our secretary, weWe currently do not have any executive officers and rely on the executive officers and directors of Golar Management Ltd and Golar Management Norway AS who perform executive officer services for our benefit pursuant to the management and administrative services agreement and who are responsible for our day-to-day management subject to the direction of our board of directors. Golar Management also provides certain commercial and technical management services to our fleet. The following provides information about each of the executive officers of Golar Management who perform executive officer services for us and who are not also members of our board of directors as of April 29, 2016.16, 2020. The business address for our executive officers is 2nd Floor, S.E. Pearman Building, 9 Par-la-Ville Road, Hamilton HM 08,11, Bermuda.
| | | | | | | | | | | | | | |
Name | | Age | | Position |
| | | | |
NameGraham Robjohns | | Age55 | | PositionChief Executive Officer |
Graham RobjohnsØistein Dahl | | 5159 | | Principal Executive Officer |
Oistein Dahl | | 55 | | Chief Operating Officer |
Brian Tienzo | | 42 | | Principal Financial and Accounting Officer |
Graham Robjohns hasacted as our Chief Executive Officer since October 2019. Mr Robjohns is also Chief Financial Officer and Deputy Chief Executive Officer of Golar, a position he has held since March 2018. Previously, between July 2011 and March 2018, Mr. Robjohns served as our Principal Executive Officer since July 2011. Fromand between April 2011 toand July 2011 Mr Robjohns served as our Chief Executive Officer and Chief Financial Officer. Mr. RobjohnsHe has also served as Chief Executive Officer for Seadrill Partners LLC fromheld various senior positions in Golar Management since May 2001. From June 2012 to August 2015.He has served as a director of Seadrill Partners LLC since 2012.2015, Mr. Robjohns served aswas also the Chief Financial Officer of Golar Management from November 2005 until June 2011. Mr. Robjohns also served as Chief Executive Officer of Golar LNG Management from November 2009 until July 2011. Mr. Robjohns served as Group Financial Controller of Golar Management from May 2001 to November 2005 and as Chief Accounting Officer of Golar Management from June 2003 until November 2005. Seadrill Partners LLC.He was the 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, Mr. Robjohns worked for PricewaterhouseCoopers in their corporation tax department. He is a member of the Institute of Chartered Accountants in England and Wales.
OisteinØistein Dahlhas served as our Chief Operating Officer since 2012. He served as Managing Director of Golar Management Norway (previously Golar Wilhelmsen) since September 2011 and as Chief Operating Officer of Golar Management since April 2012. Prior to September 2011, he worked for the Leif Höegh & Company Group (roll-on roll-off, tank, bulk, reefer general cargo and LNG vessels). He held various positions within the Höegh Group of companies within vessel management, newbuilding and projects, as well as business development before becoming President for Höegh Fleet business in October 2007, a position he held for four years. Mr. Dahl has also worked within offshore engineering and with the Norwegian Class Society, DNV.DNV-GL. Mr. Dahl has a MSc degree from the NTNU technical university in Trondheim.
Brian Tienzo has acted as our our Principal Financial and Accounting Officer since July 2011. Mr. Tienzo was our Controller from April 2011 until July 2011. Mr. Tienzo has also served as the Chief Financial Officer
B.Compensation
Reimbursement of Expenses of Our General Partner
Our general partner does not receive compensation from us for any services it provides on our behalf, although it will be entitled to reimbursement for expenses incurred on our behalf. In addition, we will reimburse Golar Management for expenses incurred pursuant to the managementManagement and administrative services agreement.Administrative Services Agreement. Please read “Item 7 — 7—Major Unitholders and Related Party Transactions — Transactions—Management and Administrative Services Agreement.”
Executive Compensation
We did not pay any compensation to our directors or officers or accrue any obligations with respect to management incentive or retirement benefits for our directors and officers prior to our initial public offering. Under the managementManagement and administrative services agreement,Administrative Services Agreement, we reimburse Golar Management for its reasonable costs and expenses incurred in connection with the provision of executive officer and other administrative services to us. In addition, we pay Golar Management a management fee equal to 5% of its costs and expenses incurred on our behalf. During the year ended December 31, 2015, we paid Golar Management $2.92019, we incurred $9.6 million of expenses in connection with the provision of these services to us.
Golar Management compensates Mr. Robjohns Mr. Dahl and Mr. TienzoDahl in accordance with its own compensation policies and procedures. Officers and employees of affiliates of our general partner may participate in employee benefit plans and arrangements sponsored by Golar, our general partner or their affiliates, including plans that may be established in the future.
Compensation of Directors
Our officers or officers of Golar who also serve as our directors do not receive additional compensation for their service as directors but may receive director fees in lieu of other compensation paid by Golar. Each non-management director receives compensation for attending meetings of our board of directors, as well as committee meetings. In addition, each director is reimbursed for out-of-pocket expenses in connection with attending meetings of the board of directors or committees. Each director is fully indemnified by us for actions associated with being a director to the extent permitted under Marshall Islands law.
Golar LNG Options
During the year ended December 31, 2015,2019, we paid to our directors aggregate cash compensation of approximately $0.5$0.6 million. We do not have a retirement plan for membersour directors or executive officers.
Golar LNG Partners LP Long Term Incentive Plan
The Golar LNG Partners LP Long Term Incentive Plan (the “GMLP LTIP”) was adopted by our board of our management team or our directors. In addition to cash compensation, during 2015 we also recognized andirectors, effective as of May 30, 2016. An expense of $0.3$0.2 million has been recognized for the year ended December 31, 2019 relating to 120,000 share the award of 99,000 options in Golar LNG issued to certain of ourpurchase common units to directors and officers duringmanagement under the year. As of the grant date theGMLP LTIP. The options have an exercise price of these options was $56.70, however, the exercise price is$20.55 per unit and will be reduced by the value of dividendsthe distributions declared and paid. At December 2019, all options were fully vested. The options have a contractual term ofoption period was five years and vest evenly over two years. See note 26 “Related Party Transactions”27 "Unit-Based Compensation" to our Consolidated Financial Statements included herein.
C.Board Practices
General
Our partnership agreement provides that our board will consist of seven members, three of whom are appointed by our general partner in its sole discretion and four of whom are elected by our common unitholders. Directors appointed by our general partner will serve as directors for terms determined by our general partner. Our current board of directors consists of three members appointed by our general partner, Lori Naess, Tor Olav Trøim and Doug Arnell. Georgina Sousa.
Directors elected by our common unitholders are divided into three classes serving staggered three-year terms. At our 2015 annual meeting on September 20, 2015, Andrew Whalley and Paul Leand Jr. were both elected as Class III directors respectively with a term expiring at the 2018 annual meeting. In addition, Carl E. Steen27, 2019, Alf Thorkildsen was elected as a Class II director with a term expiring at the 2017 annual meeting.
In February 2016, our general partner appointed Lori Naess as a director to fill the vacancy created by the resignation of Ms.Blankenship in September 2015.
Following the resignation of Bart Veldhuizen in February 2015, pursuant to the provisions of our partnership agreement, the remaining directors elected by our common unitholders designated Alf Thorkildsenre-elected as a Class I director to fillof the vacancy created by Bart Veldhuizen.Partnership whose term will expire at the 2022 annual meeting. Carl Steen serves as a Class II elected director whose term will expire at the 2020 annual meeting. Paul Leand and Jeremy Kramer serve as Class III directors of the Partnership with terms that expire at the 2021 annual meeting.
At each subsequent annual meeting, of directors will beare elected to succeed the class of directors whose terms have expired by a plurality of the votes of the common unitholders. Directors elected by our common unitholders will be nominated by the board of directors or by any limited partner or group of limited partners that holds at least 10% of the outstanding common units. Our board has determined that Mr. Kramer, Mr. Leand, Ms. Naess, Mr. Leand, Mr. Steen and Mr. Thorkildsen satisfy the independence standards established by The Nasdaq Stock Market LLC as applicable to us.
There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.
Each outstanding common unit is entitled to one vote on matters subject to a vote of common unitholders. However, to preserve our ability to be exempt from U.S. federal income tax under Section 883 of the Code, if at any time, any person or group owns beneficially more than 4.9% or more of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted (except for purposes of nominating a person for election to our board). The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of such class of units. Our general partner, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.
The Series A Preferred Units generally have no voting rights except (i) with respect to amendments to the partnership agreement that would adversely affect the rights of the Series A Preferred Units, (ii) or in the event the Partnership proposes to issue Parity Securities or Senior Securities. However, if and whenever distributions payable on the Series A Preferred Units are in arrears for six or more quarterly periods, whether or not consecutive, holders of Series A Preferred Units (voting together as a class with all other classes of parity securities upon which like voting rights have been conferred and are exercisable) will be entitled to replace one of the members of our board of directors appointed by our general partner with a person nominated by such holders (unless the holders of Series A Preferred Units, voting together as a class with all other classes of parity securities upon which like voting rights have been conferred and are exercisable, have previously elected a member of our board of directors, and such director continues then to serve on the board of directors).
Committees
We have an audit committee that, among other things, reviewswhich is responsible for overseeing the quality and integrity of our external financial reporting, engagesappointment, compensation and oversight of our external auditors and oversees our management assessment of internal audit activitiescontrols and procedures, andas more fully set forth in its written charter, which has been adopted by the adequacy of our internal accounting controls.board. Our audit committee currently is comprised of three independent directors, Lori Naess, Carl Steen, and Alf Thorkildsen. Lori Naess qualifies as an “audit committee financial expert” for purposes of SEC rules and regulations.
We also have a conflicts committee currently comprised of twothree members of our board of directors. The conflicts committee is available at the board’s discretion to review specific matters that the board believes may involve conflicts of interest. The conflicts committee will determine if the resolution of the conflict of interest is fair and reasonable to us. The members of the conflicts committee may not be officers or employees of us or directors, officers or employees of our general partner or its affiliates and must meet the independence standards established by The Nasdaq Stock Market LLC to serve on an audit committee of a board of directors and certain other requirements. Any matters approved by the conflicts committee will be conclusively deemed to be fair and reasonable to us, approved by all of our partners, and not a breach by our directors, our general partner or its affiliates of any duties any of them may owe us or our unitholders. Our conflicts committee is currently comprised of Paul Leand Jr., Alf Thorkildsen and Alf Thokildsen.
ExemptionsJeremy Kramer. For exemptions from Nasdaq Corporate Governance Rules
Because we qualify as a foreign private issuer under SEC rules, we are permitted to follow the corporate governance practices of the Marshall Islands (the jurisdiction in which we are organized) in lieu of certain Nasdaq corporate governance requirements that would otherwise be applicable to us.rules see "Item 16G. Corporate Governance.”
D.Employees
Nasdaq rules do not require a listed company that is a foreign private issuer to have a board of directors that is comprised of a majority of independent directors. Under Marshall Islands law,Other than our Secretary, we are not required to have a board of directors comprised of a majority of directors meeting the independence standards described in Nasdaq rules. In addition, Nasdaq rules do not require limited partnerships like us to have board of directors comprised of a majority of independent directors. Accordingly, while our board is currently comprised of a majority of independent directors, our board of directors may not be comprised of a majority of independent directors in the future.
Nasdaq rules do not require foreign private issuers like us to establish a compensation committee or a nominating/corporate governance committee. Similarly, under Marshall Islands law, we are not required to have a compensation committee or a nominating/corporate governance committee. In addition, Nasdaq rules do not require limited partnerships like us to have a compensation committee or a nominating/corporate governance committee. Accordingly, we do not have a compensation committee or a nominating/corporate governance committee.
D.Employees
any employees and rely on the executive officers, directors and other key employees of Golar Management who perform services for us pursuant to the Management and Administrative Services Agreement. Employees of Golar Management, including those employees acting as our executive officers and employees of Golar Management Norway, GMM and GMC provide services to our subsidiaries pursuant to the fleet management agreements and the managementManagement and administrative services agreement. Administrative Services Agreement. As of December 31, 2015,2019, Golar and its subsidiaries employed approximately 575494 seagoing staffemployees and contractors who serve on our vessels. Golar and its subsidiaries may employ additional seagoing staff to assist us as we grow. Certain subsidiaries of Golar, including Golar Management, and Golar Management Norway, GMM and GMC, provide commercial and technical management services, including all necessary crew-related services, to our subsidiaries pursuant to the fleet management agreements.
Pursuant to our management agreements, our Manager and certain of its affiliates provide us with all of our employees (other than our secretary).employees. Our board of directors has the authority to hire other employees as it deems necessary.
E.Unit Ownership
Security Ownership of Certain Beneficial Owners and Management
See “Item 7—Major Unitholders and Related Party Transactions—A. Major Unitholders”.
Item 7.Major Unitholders and Related Party Transactions
A.Major Unitholders
The following table sets forth the beneficial ownership of our common units and subordinated units as of April 29, 2016
16, 2020 by each person that we know to beneficially own more than 5% of our outstanding common or subordinated units and by our directors and executive officers as a group. The number of units beneficially owned by each person is determined under SEC rules and the information is not necessarily indicative of beneficial ownership for any other purpose:
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| | | | | | | | | | | | | | | |
| | Common Units Beneficially Owned | | Subordinated Units Beneficially Owned | | Percentage of Total Common and Subordinated Units |
Name of Beneficial Owner | | Number | | Percent | | Number | | Percent | | Beneficially Owned |
Golar LNG Limited | | 1,908,096 |
| | 4.2 | % | | 15,949,831 |
| | 100 | % | | 29.2 | % |
Kayne Anderson Capital Advisors, L.P.(1) | | 4,380,373 |
| | 7.0 | % | | — |
| | — |
| | 7.2 | % |
Oppenheimer Funds, Inc.(2) | | 3,990,289 |
| | 8.8 | % | | — |
| | — |
| | 6.5 | % |
Huber Capital Management, LLC(3) | | 2,915,303 |
| | 6.4 | % | | — |
| | — |
| | 4.8 | % |
Oceanic Hedge Fund, Oceanic Opportunities Master Fund, L.P., Oceanic CL Fund LP, Oceanic Investment Management Limited, Tuftonic Oceanic (Isle of Man) Limited, Oceanic Opportunities GP Limited, Oceanic CL GP Limited, and Cato Brahde(4) | | 2,346,213 |
| | 5.2 | % | | — |
| | — |
| | 3.8 | % |
All directors and executive officers as a group (10 persons) | | * |
| | * |
| | — |
| | — |
| | * |
|
| | | | | | | | | | | | | | | | | |
| | Common Units Beneficially Owned | | | | | | | |
Name of Beneficial Owner | | Number | | Percent | | | | | |
Golar LNG Limited | | 21,333,586 | | | 30.8 | % | | | | | |
FMR LLC (1) | | 6,976,826 | | | 10.1 | % | | | | | |
Invesco Ltd.(2) | | 6,371,953 | | | 9.2 | % | | | | | |
Huber Capital Management LLC (3) | | 3,619,619 | | | 5.2 | % | | | | | |
| | | | | | | | | |
| | | | | | | | | |
All directors and executive officers as a group (9 persons) | | * | | | * | | | | | | |
______________
* Less than 1%
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(1) | Based solely on information contained in a Schedule 13G/A filed on January 27, 2016 by Kayne Anderson Capital Advisors, LP. |
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(2) | Based solely on information contained in a Schedule 13G/A filed on February 4, 2016 by Oppenheimer Funds, Inc. |
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(3) | Based solely on information contained in a Schedule 13G filed on February 16, 2016 by Huber Capital Management, LLC. |
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(4) | Based solely on information contained in a Schedule 13G/A filed on December 31, 2015. |
(1)Based solely on information contained in a Schedule 13G/A filed on January 10, 2020 by FMR LLC.
(2)Based solely on information contained in a Schedule 13G filed on February 12, 2020 by Invesco Ltd.
(3)Based solely on information contained in a Schedule 13G filed on February 14, 2020 by Huber Capital Management LLC.
B.Related Party Transactions
From time to time we have entered into agreements and have consummated transactions with certain related parties. We may enter into related party transactions from time to time in the future. In connection with our initial public offering,IPO, we established a conflicts committee, comprised entirely of independent directors, which must approve all proposed material related party transactions.
IPO Omnibus Agreement
We are subject to an omnibus agreement that we entered into with Golar and certain of its affiliates, our general partner and certain of our subsidiaries in connection with our IPO. On October 5, 2011, we entered into an amendment to the omnibus agreement with the other parties thereto. The following discussion describes certain provisions of the omnibus agreement, as amended.
NoncompetitionNon-competition
Under the omnibus agreement, Golar agreed, and caused its controlled affiliates (other than us, our general partner and our subsidiaries) to agree, not to acquire, own, operate or charter any FSRU or LNG carrier operating under a charter for five or more years. We refer to these vessels, together with any related charters, as “Five-Year Vessels” and to all other FSRUs and LNG carriers, together with any related charters, as “Non-Five-Year Vessels.” The restrictions in this paragraph did not prevent Golar or any of its controlled affiliates (other than us and our subsidiaries) from:
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(1) | acquiring, owning, operating or chartering Non-Five-Year Vessels; |
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(2) | acquiring one or more Five-Year Vessels if Golar promptly offers to sell the vessel to us for the acquisition price plus any administrative costs (including re-flagging and reasonable legal costs) associated with the transfer to us at the time of the acquisition; |
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(3) | putting a Non-Five-Year Vessel under charter for five or more years if Golar offers to sell the vessel to us for fair market value (x) promptly after the time it becomes a Five-Year Vessel and (y) at each renewal or extension of that charter for five or more years; |
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(4) | acquiring one or more Five-Year Vessels as part of the acquisition of a controlling interest in a business or package of assets and owning, operating or chartering those vessels; provided, however, that: |
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(a) | if less than a majority of the value of the business or assets acquired is attributable to Five-Year Vessels, as determined in good faith by Golar’s board of directors, Golar must offer to sell such vessels to us for their fair market value plus any additional tax or other similar costs that Golar incurs in connection with the acquisition and the transfer of such vessels to us separate from the acquired business; and |
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(b) | if a majority or more of the value of the business or assets acquired is attributable to Five-Year Vessels, as determined in good faith by Golar’s board of directors, Golar must notify us of the proposed acquisition in advance. Not later than 10 days following receipt of such notice, we will notify Golar if we wish to acquire such vessels in cooperation and simultaneously with Golar acquiring the Non-Five-Year Vessels. If we do not notify Golar of our intent to pursue the acquisition within 10 days, Golar may proceed with the acquisition and then offer to sell such vessels to us as provided in (a) above; |
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(5) | acquiring a non-controlling interest in any company, business or pool of assets; |
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(6) | acquiring, owning, operating or chartering any Five-Year Vessel if we do not fulfill our obligation to purchase such vessel in accordance with the terms of any existing or future agreement; |
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(7) | acquiring, owning, operating or chartering a Five-Year Vessel subject to the offers to us described in paragraphs (2), (3) and (4) above pending our determination whether to accept such offers and pending the closing of any offers we accept; |
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(8) | providing ship management services relating to any vessel; or |
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(9) | acquiring, owning, operating or chartering a Five-Year Vessel if we have previously advised Golar that we consent to such acquisition, operation or charter. |
(1)acquiring, owning, operating or chartering Non-Five-Year Vessels;
(2)acquiring one or more Five-Year Vessels if Golar promptly offers to sell the vessel to us for the acquisition price plus any administrative costs (including re-flagging and reasonable legal costs) associated with the transfer to us at the time of the acquisition;
(3)putting a Non-Five-Year Vessel under charter for five or more years if Golar offers to sell the vessel to us for fair market value (x) promptly after the time it becomes a Five-Year Vessel and (y) at each renewal or extension of that charter for five or more years;
(4)acquiring one or more Five-Year Vessels as part of the acquisition of a controlling interest in a business or package of assets and owning, operating or chartering those vessels; provided, however, that:
(a)if less than a majority of the value of the business or assets acquired is attributable to Five-Year Vessels, as determined in good faith by Golar’s board of directors, Golar must offer to sell such vessels to us for their fair market value plus any additional tax or other similar costs that Golar incurs in connection with the acquisition and the transfer of such vessels to us separate from the acquired business; and
(b)if a majority or more of the value of the business or assets acquired is attributable to Five-Year Vessels, as determined in good faith by Golar’s board of directors, Golar must notify us of the proposed acquisition in advance. Not later than 10 days following receipt of such notice, we will notify Golar if we wish to acquire such vessels in cooperation and simultaneously with Golar acquiring the Non-Five-Year Vessels. If we do not notify Golar of our intent to pursue the acquisition within 10 days, Golar may proceed with the acquisition and then offer to sell such vessels to us as provided in (a) above;
(5)acquiring a non-controlling interest in any company, business or pool of assets;
(6)acquiring, owning, operating or chartering any Five-Year Vessel if we do not fulfill our obligation to purchase such vessel in accordance with the terms of any existing or future agreement;
(7)acquiring, owning, operating or chartering a Five-Year Vessel subject to the offers to us described in paragraphs (2), (3) and (4) above pending our determination whether to accept such offers and pending the closing of any offers we accept;
(8)providing ship management services relating to any vessel; or
(9)acquiring, owning, operating or chartering a Five-Year Vessel if we have previously advised Golar that we consent to such acquisition, operation or charter.
If Golar or any of its controlled affiliates (other than us or our subsidiaries) acquires, owns, operates or charters Five-Year Vessels pursuant to any of the exceptions described above, it may not subsequently expand that portion of its business other than pursuant to those exceptions.
In addition, under the omnibus agreement we and our affiliates may not acquire, own, operate or charter Five-Year Vessels only. The restrictions in this paragraph will not:
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(1) | prevent us from owning, operating or chartering any Non-Five-Year Vessel that was previously a Five-Year Vessel while owned by us; |
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(2) | prevent us or any of our subsidiaries from acquiring Non-Five-Year Vessels as part of the acquisition of a controlling interest in a business or package of assets and owning, operating or chartering those vessels; provided, however, that: |
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(a) | if less than a majority of the value of the business or assets acquired is attributable to Non-Five-Year Vessels, as determined in good faith by us, we must offer to sell such vessels to Golar for their fair market value plus any additional tax or other similar costs that we incur in connection with the acquisition and the transfer of such vessels to Golar separate from the acquired business; and |
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(b) | if a majority or more of the value of the business or assets acquired is attributable to Non-Five-Year Vessels, as determined in good faith by us, we must notify Golar of the proposed acquisition in advance. Not later than 10 days following receipt of such notice, Golar must notify us if it wishes to acquire the Non-Five-Year Vessels in cooperation and simultaneously with us acquiring the Five-Year Vessels. If Golar does not notify us of its intent to pursue the acquisition within 10 days, we may proceed with the acquisition and then offer to sell such vessels to Golar as provided in (a) above; |
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(3) | prevent us or any of our subsidiaries from acquiring, owning, operating or chartering any Non-Five-Year Vessels subject to the offer to Golar described in paragraph (2) above, pending its determination whether to accept such offer and pending the closing of any offer it accepts; or |
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(4) | prevent us or any of our subsidiaries from acquiring, owning, operating or chartering Non-Five-Year Vessels if Golar has previously advised us that it consents to such acquisition, ownership, operation or charter. |
(1)prevent us from owning, operating or chartering any Non-Five-Year Vessel that was previously a Five-Year Vessel while owned by us;
(2)prevent us or any of our subsidiaries from acquiring Non-Five-Year Vessels as part of the acquisition of a controlling interest in a business or package of assets and owning, operating or chartering those vessels; provided, however, that:
(a)if less than a majority of the value of the business or assets acquired is attributable to Non-Five-Year Vessels, as determined in good faith by us, we must offer to sell such vessels to Golar for their fair market value plus any additional tax or other similar costs that we incur in connection with the acquisition and the transfer of such vessels to Golar separate from the acquired business; and
(b)if a majority or more of the value of the business or assets acquired is attributable to Non-Five-Year Vessels, as determined in good faith by us, we must notify Golar of the proposed acquisition in advance. Not later than 10 days following receipt of such notice, Golar must notify us if it wishes to acquire the Non-Five-Year Vessels in cooperation and simultaneously with us acquiring the Five-Year Vessels. If Golar does not notify us of its intent to pursue the acquisition within 10 days, we may proceed with the acquisition and then offer to sell such vessels to Golar as provided in (a) above;
(3)prevent us or any of our subsidiaries from acquiring, owning, operating or chartering any Non-Five-Year Vessels subject to the offer to Golar described in paragraph (2) above, pending its determination whether to accept such offer and pending the closing of any offer it accepts; or
(4)prevent us or any of our subsidiaries from acquiring, owning, operating or chartering Non-Five-Year Vessels if Golar has previously advised us that it consents to such acquisition, ownership, operation or charter.
If we or any of our subsidiaries acquires, owns, operates or charters Non-Five-Year Vessels pursuant to any of the exceptions described above, neither we nor such subsidiary may subsequently expand that portion of our business other than pursuant to those exceptions.
Upon a change of control of us or our general partner, the noncompetition provisions of the omnibus agreement will terminate immediately. Upon a change of control of Golar, the noncompetition provisions of the omnibus agreement applicable to Golar will terminate at the time that is the later of the date of the change of control and the date on which all of our outstanding subordinated units have been converted to common units.
Under the omnibus agreement, a change of control occurs upon (i) the sale, lease, exchange or other transfer of all or substantially all assets to another entity, (ii) the consolidation or merger into another entity, and (iii) an entity other than Golar or its affiliates becoming the beneficial owner of more than 50% of all outstanding voting stock.
Rights of First Offer on FSRUs and LNG carriers
Under the omnibus agreement, we and our subsidiaries granted to Golar a right of first offer on any proposed sale, transfer or other disposition of any Five-Year Vessels or Non-Five-Year Vessels owned by us. Under the omnibus agreement, Golar and its subsidiaries granted a similar right of first offer to us for any Five-Year Vessels they might own. These rights of first offer do not apply to a (a) sale, transfer or other disposition of vessels between any affiliated subsidiaries, or pursuant to the terms of any current or future charter or other agreement with a charter party or (b) merger with or into, or sale of substantially all of the assets to, an unaffiliated third-party.
Prior to engaging in any negotiation regarding any vessel disposition with respect to a Five-Year Vessel with a non-affiliated third-party or any Non-Five-Year Vessel, we or Golar will deliver a written notice to the other relevant party setting forth the material terms and conditions of the proposed transaction. During the 30-day period after the delivery of such notice, we and Golar will negotiate in good faith to reach an agreement on the transaction. If we do not reach an agreement within such 30-day period, we or Golar, as the case may be, will be able within the next 180 calendar days to sell, transfer, dispose or re-charter the vessel to a third party (or to agree in writing to undertake such transaction with a third party) on terms generally no less favorable to us or Golar, as the case may be, than those offered pursuant to the written notice.
Upon a change of control of us or our general partner, the right of first offer provisions of the omnibus agreement will terminate immediately. Upon a change of control of Golar, the right of first offer provisions applicable to Golar under the omnibus agreement will terminate at the time that is the later of the date of the change of control and the date on which all of our outstanding subordinated units have converted to common units.
Indemnification
Under the omnibus agreement, Golar agreed to indemnify us for a period of five years after our initial public offering against certain environmental and toxic tort liabilities with respect to the assets contributed or sold to us to the extent arising prior to the time they were contributed or sold to us. Liabilities resulting from a change in law after the closing of our initial public offering are excluded from the environmental indemnity. There is an aggregate cap of $5.0 million on the amount of indemnity coverage provided by Golar for environmental and toxic tort liabilities. No claim may be made unless the aggregate dollar amount of all claims exceeds $500,000, in which case Golar is liable for claims only to the extent such aggregate amount exceeds $500,000.for:
Golar will also indemnify us for liabilities related to:
certain defects in title to the assets contributed or sold to us and any failure to obtain, prior to the time they were contributed to us, certain consents and permits necessary to conduct our business, which liabilities arise within three years after the closing of our initial public offering;
•certain income tax liabilities attributable to the operation of the assets contributed or sold to us prior to the time they were contributed or sold; and
•any liabilities in excess of our scheduled payments under the UK tax lease used to finance the Methane Princess, including liabilities in connection with termination of such lease.
Amendments
The omnibus agreement may not be amended without the prior approval of the conflicts committee of our board of directors if the proposed amendment will, in the reasonable discretion of our board of directors, adversely affect holders of our common units.
Golar Power Omnibus Agreement
In June 2016, in connection with the formation of Golar Power, we entered into the Golar Power Omnibus Agreement with Golar and Golar Power. Pursuant to the Golar Power Omnibus Agreement, Golar Power agreed not to acquire, own, operate or charter any FSRU or LNG carrier operating under a charter for five or more years, subject to certain exceptions. The non-competition provisions applicable to Golar Power under the Golar Power Omnibus Agreement are similar to those applicable to Golar pursuant to the Omnibus Agreement that we entered into in connection with our initial public offering. In addition, under the Golar Power Omnibus Agreement, the Golar Power Entities granted to us a right of first offer on any proposed sale, transfer or other disposition of any Five-Year Vessels owned or acquired by any Golar Power Entity.
Upon a change of control of us or our general partner, the Golar Power Omnibus Agreement shall terminate immediately. In the event that one or more Golar LNG Entities (as defined in the Golar Power Omnibus Agreement) cease to own, in the aggregate, at least 33 1/3% of the ownership interests in Golar Power, the Golar Power Omnibus Agreement shall terminate as of the date such ownership interest falls below 33 1/3%.
Our Management Agreements
Management and Administrative Services Agreement
In connection with our IPO, we entered into a management and administrative services agreement (as amended and restated, the management and administrative services agreement) with Golar Management, pursuant to which Golar Management agreed to provide certain commercial, management and administrative support services to us such as accounting, auditing, legal, insurance, IT, cash management, clerical, investor relations and other administrative services. In addition, certain officers and directors of Golar Management are to provide executive officer functions for our benefit. These officers of Golar Management are responsible for our day-to-day management, subject to the direction of our board of directors. As of July 1, 2011, weWe and Golar Management entered into an amended and restated management and administrative services agreement to reflect changes in the titles of certain of our officers. The material provisions of the amended and restated management and administrative services agreement, including terms related to our obligations and the obligations of Golar Management to provide us with services, remain unchanged from those contained in the managementManagement and administrative services agreementAdministrative Services Agreement entered into at the time of our IPO. The management and administrative services agreement expires in May 2016, but we expect to extendWe have extended this agreement on similar terms.terms for a period of 5 years on April 1, 2016.
The managementManagement and administrative services agreementAdministrative Services Agreement may be terminated prior to the end of its term by us upon 120 days’ notice for any reason in the sole discretion of our board of directors. For each of the years ended December 31, 2015, 2014, and 2013, the fees under the management and administrative services agreement were $2.9 million, $2.9 million, and $2.6 million, respectively. Golar Management may terminate the managementManagement and administrative services agreementAdministrative Services Agreement upon 120 daysdays’ notice in the event of certain circumstances, such as a change of control of us or our general partner, an order to wind up the partnership, amongst other events. A change of control under the management services agreementManagement and Administrative Services Agreement means an event in which securities of any class entitling the holders thereof to elect a majority of the members of the board of directors of the entity are acquired, directly or indirectly, by a person or group, who did not immediately before such acquisition, own securities of the entity entitling such person or group to elect such majority.
We reimburse Golar Management for its reasonable costs and expenses incurred in connection with the provision of these services. In addition, we pay Golar Management a management fee equal to 5% of its costs and expenses incurred in connection with providing services to us for the month after Golar Management submits to us an invoice for such costs and expenses, together with any supporting detail that may be reasonably required.
A portion of the management fee paid to Golar Management pursuant to the management and administrative services agreement described above related to services provided by Helm Energy Advisors Inc., a private company that provides advisory services to the global energy sector and of which Mr. Arnell is the President and Chief Executive Officer.
Under the managementManagement and administrative services agreement,Administrative Services Agreement, we agreed to indemnify Golar Management and its employees and agents against all actions which may be brought against them under the managementManagement and administrative servicesAdministrative Services Agreement agreement including, without limitation, all actions brought under the environmental laws of any jurisdiction, and against and in respect of all costs and expenses they may suffer or incur due to defending or settling such actions; provided, however that such indemnity excludes any or all losses which may be caused by or due to the fraud, gross negligence or willful misconduct of Golar Management or its employees or agents.
Corporate Services Agreement with Golar Management (Bermuda) Limited (“GMB”). GMB a wholly-owned subsidiary of Golar which owns 100% of Golar Management acts as the registered office in Bermuda and provides corporate secretarial, registrar and administration services to us with effect from January 1, 2017. The corporate services agreement may be terminated prior to the end of its term by either party upon 30 days' notice.
Fleet management agreements
Each vessel in our fleet is subject to management agreements, pursuant to which certain commercial and technical management services are provided by certain subsidiaries of Golar principally Golar Management, and Golar Management Norway, as described below. Under these fleet management agreements, our subsidiaries pay fees to, and reimburse the costs and expenses of the vessel managers as described below.
Golar Management Limited
The vessel owning subsidiaries (or disponent owners of the vessels) have each entered into separate vessel management agreements directly (or in the case of Golar Mazo, indirectly) with Golar Management to manage the vessels in accordance with sound and commercial technical vessel management practice, so far as practicable, which includes principally:practicable.
Commercial and technical management of the vessel. Managing day-to-day vessel operations, including but not limited to, seeking, negotiating and administering charter parties with respect to the vessels and receipts of payments thereunder, ensuring regulatory compliance, arranging for the vetting of vessels, appointing counsel and negotiating the settlement of all claims in connection with the operation of each vessel, appointing surveyors and technical consultants as necessary, arranging and supervising of drydockings, repairs, alterations and maintenance of such vessel and purchasing of stores, spares and lubricating oils, arranging insurance for vessels and providing technical support;
Vessel Maintenance and crewing: including supervising the maintenance and general efficiency of vessels, and ensuring the vessels are in seaworthy condition, provision of competent, suitably qualified crew for each vessel and arranging transportation for crew.
To carry out the services required pursuant to the vessel management agreements, Golar Management is entitled to engage the services of sub-managers to carry out its duties.
The aggregate management fees payable under these fleet management agreements for each of the years ended December 31, 2015, 2014,2019, 2018, and 20132017 was $7.6$4.5 million, $7.7$5.2 million, and $6.7$5.9 million, respectively. The vessel management fees are reviewed annually and revised by mutual agreement of the parties. In addition, pursuant to the vessel management agreements, Golar Management is to be reimbursed an amount equal to the disbursements and expenses in connection with the provision of the services contracted under the management agreement.
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Vessels | Vessels Management Agreements |
| Term | Notice for termination |
Golar Mazo*
Methane Princess
Golar Spirit
Golar Winter
Golar Freeze
NR Satu
Golar Grand
Golar Maria Golar Igloo Golar Eskimo
| Equal to the Pertamina charter term
Indefinite
Indefinite
Indefinite
Indefinite
Indefinite
Indefinite
Indefinite Indefinite Indefinite
| 12 months**
30 days
30 days
30 days
30 days
30 days
30 days
30 days 30 days 30 days
|
*The vessel management agreement is between Faraway and Aurora Management Inc. (“Aurora Management”), in which the Partnership has a 90% ownership interest, but which Aurora Management has indirectly subcontracted to Golar Management.
**The vessel management agreement may be terminated prior to the end of the initial Pertamina charterits term in 2017by us upon 12 months’ notice under certain circumstances, including but not limited to, loss of ownership of the vessel, loss of the vessel, cease of charter to Pertamina, non-payment of money owed, material breach of the agreement, bankruptcy or dissolution of either party or the inability to carry out obligations under the agreement due to force majeure.30 days' notice.
Technical Management Sub-AgreementSub-agreements with Golar Management Norway (formerly Golar Wilhelmsen)GMN, GMM and GMC, or collectively, the "sub-managers"
In order to assist with the technical management of each of the vessels in our current fleet, Golar Management has entered into the BIMCO Standard Ship Management AgreementAgreements with Golar Management Norway, or GMN, GMM and GMC as sub-managers, for the operations of our fleet (the Vessels Sub-Management Agreement)Agreements). The Vessels Sub-Management Agreement provides that GMN must use its best endeavors toAgreements provide the following technical services:
Crew Management. GMN must provide suitably qualified crew for each vessel and provide for the management of the crew including, but not limited to, arranging for all transportation of the crew, ensuring the crew meets all medical requirements of the flag state, and conducting union negotiations.
Technical Management. that: (a) GMN must provide for the technical management of each vessel, which includes, but is not limited to the provision of competent personnel to supervise the maintenance and efficiency of the vessel; arrange and supervise drydockings, repairs, alterations and maintenance of such vessel and arrange and supply the necessary stores, spares and lubricating oils.
The aggregate management fees payable under the technical management sub-agreementoils; (b) GMM must provide suitably qualified crew for each vessel; and (c) GMC must provide suitably qualified crew for each vessel and provide for the management of the years ended December 31, 2015, 2014,crew including, but not limited to, arranging for all transportation of the crew, ensuring the crew meets all medical requirements of the flag state, and 2013 was $3.5 million, $3.5 million, and $2.7 million, respectively. conducting union negotiations.
Golar Management is responsible for payment of the annual management feefees to GMNthe sub-managers in respect of the vessels. We are not responsible for paying thisthe management feefees to GMN. This fee isthe sub-managers. These fees are subject to upward adjustments based on cost of living indexes in the domiciledomiciles of GMN. GMN isthe sub-managers. The sub-managers are entitled to extra remuneration for the performance of tasks outside the scope of the Vessels Sub-Management Agreement.Agreements.
The Vessels Sub-Management AgreementAgreements will terminate upon failure by eitherany party to meet its obligations under the agreement, in the case of the sale or total loss of the vessel, or in the event an order or resolution is passed for the winding up, dissolution, liquidation or bankruptcy of eitherany party or if a receiver is appointed. In addition, Golar Management must indemnify GMNthe sub-managers and itstheir employees, agents and subcontractors against all actions, proceedings, claims, demands or liabilities arising in connection with the performance of the agreement.
Agency Agreement with PT Pesona Sentra Utama (or PT Pesona). PT Pesona, an Indonesian company established in 2005 and engaged in technical crewing management in Indonesia, owns 51% of the issued share capital in our subsidiary, PTGI, the owner and operator of NR Satu, in order to comply with Indonesian cabotage requirements. Under the agency agreement PT Pesona provides agency and local representation services for us with respect to NR Satu, which includes, but not limited to, accounting, charter administration, legal and liaison services with respect to Indonesian legal and government authorities and clerical services. Under the agency agreement PT Pesona currently receivesreceived a fee of $400,000 per annum.$0.5 million, $0.9 million and $0.5 million for the years ended December 31, 2019, 2018, and 2017, respectively. This fee is subject to review annually and revision by mutual agreement of the parties.
The PT Pesona agency agreement shall continue indefinitely, unless and until terminated upon notice by either party within 30 days of expected termination. PT Pesona and certain of its subsidiaries also charged vessel management fees to us for the provision of technical and commercial management of the NR Satu amounting to $0.2 million for each of the years ended December 31, 2019, 2018, and 2017.
Other Related Party Transactions
The following is a discussion of certain other related party transactions and agreements that we entered into or were party to during the year ended December 31, 2015 and through to April 29, 2016:
Vessel Acquisitions and Related Transactions
Tundra Acquisition
In May 2016, we completed the Tundra Acquisition and paid total cash purchase consideration of $107.2 million. In May 2017, we elected to exercise our right (the "Tundra Put Right") under the Tundra Letter Agreement to require Golar to repurchase Tundra Corp at a price equal to the original purchase price. In connection with the acquisitionexercise of the Golar Grand from Golar in November 2012,Tundra Put Right, we entered into an Option Agreement with Golar. Under the Option Agreement, we had the option to requireand Golar to enter into a new time charter with Golar as charterer until October 2017 if the charterer did not renew or extend the existing charter after the initial term. In February 2015, we exercised our option requiring Golar to charter the vessel until October 2017 at approximately 75% of the hire rate that would have been payable by BG Group (see note 26 of our consolidated financial statements).
In connection with the Golar Eskimo acquisition, we entered into an agreement with Golar pursuant to which it paidwe agreed to us an aggregate amountsell Tundra Corp to Golar on the date of $22.0 million in six equal monthly installments for the period January 1, 2015 to June 30, 2015 forclosing of the right to use the Golar Eskimo. WeTundra Put Sale on October 17, 2017 in return remittedfor Golar's promise to Golar $12.9pay an amount equal to $107.2 million (the “Deferred Purchase Price”) plus an additional amount equal to 5% per annum of hire payments actually received with respectthe Deferred Purchase Price (the “Additional Amount”). The Deferred Purchase Price and the Additional Amount were applied to the vessel during this period.
We financed a portion of the cashnet purchase price of the Golar Eskimo with the proceeds of a $220.0 million unsecured non-amortizing loan to us from Golar (or the Eskimo Vendor Loan) that required repayment within two years (with a prepayment incentive fee of up to 1.0% of the loan amount) and bore interest at a blended rate equal to three-month LIBOR plus a margin of 2.84%. The loan was repaid in full in November 2015.Hilli Acquisition on July 12, 2018.
In November 2015, prior to the Tundra Acquisition, Tundra Corp sold the Golar Tundra to a subsidiary of CMBL (the “Tundra SPV”)Tundra SPV for $254.6 million and subsequently leased back the vessel under a bareboat charter (the “Tundra Lease”). In connection withcharter. Following the Tundra Lease,Put Sale, Golar entered intois the primary guarantor of the obligations of Tundra Corp (now a wholly-owned subsidiary of Golar) under the Tundra Lease. We, however, are a party to a guarantee in favorpursuant to which we are the deficiency guarantor of Tundra SPV, pursuant to which,Corp’s obligations under the Tundra Lease. This means that in the event that Tundra Corp is in default of its obligations under the Tundra Lease and Golar, as the primary guarantor, willis unable to settle any liabilities due within five business days. In addition, we entered into a further guarantee, pursuant to which, in the event Golar is unable to satisfy its obligations as the primary guarantor,days, Tundra SPV may recover such amounts from us, as the deficiency guarantor. Monthly payments under the Tundra Lease are approximately $2.0 million. Under a separate side agreement, Golar has agreed to indemnify us for any costs incurred in our capacity as the deficiency guarantor. Upon
Hilli Acquisition
On August 15, 2017, we entered into the completion of the Tundra Acquisition, Golar’s guarantee of the obligations of Tundra Corp under the Tundra Lease will terminate along with its agreement to indemnify us pursuant to the separate side agreement, and we will become the primary guarantor of Tundra Corp’s obligations under the Tundra Lease.
In February 2016, we agreedHilli Purchase Agreement to acquire from Golar interestsand affiliates of Keppel and B&V 50% of the common units in TundraHilli LLC, which owns Hilli Corp, the disponent owner and operator of the Hilli. Concurrently with the execution of the Hilli Purchase Agreement, we paid a $70 million deposit to Golar, Tundra, forupon which we received interest at a rate of 5% per annum. We applied the deposit and interest accrued to the net purchase price on July 12, 2018, upon completion of $330.0 million less approximately $230.0 millionthe Hilli Acquisition.
(i) Partnership guarantee
Hilli Corp is a party to a Memorandum of net lease obligations under the Tundra Lease and net working capital adjustments. The Golar Tundra is subject to the Golar Tundra Time CharterAgreement, dated September 9, 2015, with WAGL,Fortune Lianjiang Shipping S.A., a company jointly owned by the Nigerian National Petroleumsubsidiary of China State Shipbuilding Corporation and Sahara Energy Resource Ltd.(“Fortune”), pursuant to which Hilli Corp has sold to and leased back from Fortune the Hilli under a 10-year bareboat charter agreement (the “Hilli Facility”). The Hilli Facility provided for an initial term of five years, which may be extendedpost-construction financing for an additional five years at WAGL’s option. The Golar Tundra is expected to commence operations under the Golar Tundra Time CharterHilli in the second quarteramount of 2016.$960 million. Under the Hilli Facility, Hilli Corp will pay to Fortune forty consecutive equal quarterly repayments of 1.375% of the construction cost, plus interest based on LIBOR plus a margin of 3.95%. In connection with the Tundraclosing of the Hilli Acquisition, we will enteragreed to provide a several guarantee (the “Partnership Guarantee”) of 50% of the outstanding principal, interest, expenses and other amounts payable by Hilli Corp under the Hilli Facility pursuant to a Deed of Amendment, Restatement and Accession relating to a guarantee between Golar, Fortune and us dated July 12, 2018. We entered into a $480.0 million interest rate swap in relation to our proportionate share of the obligation under the Hilli Facility.
(ii) Letter of credit
On November 28, 2018, we entered into an agreement to guarantee (the "LOC Guarantee") the letter of credit issued by a financial institution in the event of Hilli Corp’s underperformance or non-performance under the LTA. Under the LOC Guarantee, we are severally liable for any outstanding amounts that are payable, based on the percentage ownership that Golar holds in us, multiplied by our percentage ownership in Hilli Common Units. Accordingly, the maximum amount we are liable for under the LOC guarantee is approximately $20.0 million.
Pursuant to the Partnership Guarantee and the LOC Guarantee, we are required to comply with certain covenants and ratios, refer to note 25 "Related Party Transaction - Indemnifications and guarantees - Hilli guarantees".
(iii) Operating expense reimbursement
Pursuant to the Hilli Purchase Agreement, we agreed to reimburse Golar, pursuantKeppel and B&V for (a) 50% of the amount, if any, by which Operating Expenses (as defined below) are less than $32.4 million per year and (b) 50% of the amount, if any, by which withholding taxes on Operating Expense payments are less than $4.2 million per year, for a period of eight years commencing on July 12, 2018, up to a maximum amount of $20 million in the aggregate. Golar, Keppel and B&V have agreed, for a period of eight years commencing on July 12, 2018 of the Hilli Acquisition, to reimburse us for (a) 50% of the amount, if any, by which Golar will payOperating Expenses are greater than $39.5 million per year and (b) 50% of the amount, if any, by which withholding taxes on Operating Expense payments are greater than $5.2 million per year, up to us a daily fee plusmaximum amount of $20 million in the aggregate. “Operating Expenses” means, all expenditures made by Hilli LLC and its subsidiaries, including vessel operating expenses, aggregating approximately $2.6 million per month,taxes, maintenance expenses and employee compensation and benefits, and capital expenditures, but exclude withholding taxes thereon. Included within the Hilli LLC declared distributions for the right to use the FSRUyears ended December 31, 2019 is $2.2 million of reimbursements from the date of the closing of the Tundra Acquisition until the date that the Golar, Tundra commences operations under the Golar Tundra Time Charter. In return we will remit to Golar any hire income received with respect to the Golar Tundra during this period. IfKeppel and B&V for any reason the Golar Tundra Time Charter has not commenced by the 12 month anniversary of the closing of the Tundra Acquisition, we shall have the right to require that Golar repurchase the shares of Tundra Corp at a price equal to the purchase price (the “Tundra Put Option”). In February 2016, we paid a $30.0 million deposit to Golar towards the total purchase price of the Tundra Acquisition. We intend to pay the remaining portion of the cash purchase price using borrowings under the $800 million credit facility. The Tundra Acquisition is expected to close in May 2016.Operating Expenses.
Trading and Other Balances
Receivables and payables with Golar and its subsidiariesaffiliates primarily comprise primarily of unpaid management fees advisoryand expenses for management and administrative services.services and vessel management services performed by Golar and its affiliates, dividends due in respect of the Hilli Common Units, and other related party arrangements. In addition, certain receivables and payables arise when we pay an invoice on behalf of a related party and vice versa. Receivables and payables are generally settled quarterly in arrears. Trading balances due to Golar and its subsidiaries are unsecured, interest-free and intended to be settled in the ordinary course of business. They primarily relate to recharges for trading expenses paid on our behalf, including vessel management and administrative service fees due to Golar. In November 2015 and in January 2016,2019, we also provided loans toborrowed $15.0 million from Golar, inwith the amount of $50 million and $30 million and for fixed periods of 28 days and 60 days respectively. We chargedloan bearing interest on these loan at a rate of LIBOR plus 5%5.0%. We repaid the loan in full, including interest of $0.1 million, on December 30, 2019. In February 2020, we borrowed $25.0 million from Golar, with interest of LIBOR plus 5.0%. We repaid the loan in full, including interest.
Methane Princess Lease Security Deposit Movements
This represents net advances to Golar since the IPO, which correspond with the net release of funds from the security deposits held relating to the Methane Princess lease. This is in connection with the Methane Princess tax lease indemnity provided by Golar under the Omnibus Agreement. Accordingly, these amounts held with Golar will be settled as part of the eventual termination of the Methane Princess lease (see note note 26. As of our consolidated financial statements).December 31, 2019 and 2018 such net advances amounted to $2.3 million and $2.9 million, respectively.
Dividends to China Petroleum Corporation
During the years ended December 31, 2015, 20142019, 2018 and 2013,2017, Faraway Maritime Shipping Co. (owns and operates the Golar Mazo), which is 60% owned by us and 40% owned by CPC, paid total dividends to CPC of $11.4$nil, $nil, and $7.0 million, $13.7 million,, and $10.6 million, respectively. The decrease in dividends distributed was mainly due to the reduction in net income from the Golar Mazo following the expiration of her charter in December 2017.
Dividends toto/(from) Golar
We have declared and paid quarterly distributions totaling $52.1$36.8 million, $61.3$42.8 million and $63.7$52.3 million to Golar for each of the years ended December 31, 2015, 20142019, 2018 and 2013,2017, respectively in respect of the Common Units and General Partner units owned by it.
During the years ended December 31, 2019 and 2018, Hilli LLC declared quarterly distributions totaling $17.5 million and $5.6 million, in respect of the Hilli Common Units owned by us. As of December 31, 2019 and 2018, we have a dividend receivable of $4.5 million and $3.6 million, respectively.
Please seerefer to note 2625 “Related Party Transactions” to our consolidated financial statements.Consolidated Financial Statements included herein for additional information.
C.Interests of Experts and Counsel
Not applicable.
Item 8.Financial Information
A.Consolidated Statements and Other Financial Information
Please see “Item 18 —18. Financial Statements” below for additional information required to be disclosed under this item.
Legal Proceedings
From time to time we have been, and expect to continue to be, subject to legal proceedings and claims in the ordinary course of our business, principally personal injury and property casualty claims. These claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.
Indonesia
In November and December 2015, the Indonesian tax authorities issued letters to PTGI to, among other things, revoke a previously granted VAT importation waiver in the approximate amount of $24.0 million for the NR Satu.Satu. In April 2016,February 2018, PTGI initiated an actionfiled a Judicial Review with the Supreme Court of Indonesia, but in December 2018, the Indonesian tax court to disputeSupreme Court of Indonesia ruled against PTGI with regards the waivervalidity of wavier cancellation. We believe PTGI has strong merits to support its position. However, there can be no assurance that PTGI’s position will be prevail. In the event of a negative outcome, in addition to the liability for VAT, there is the possibility that interest and penalties at 2% per month may be applied from the point when the waiver was initially issued up until the date of payment of the VAT deemed due together with penalties applied. However, as the court proceedings have just commenced it is not possible to predict the maximum potential exposure. In the event that the cancellation of the waiver is upheld which we do not believe it probable that a liability exists as a result of this ruling, as no Tax Underpayment Assessment Notice has been received within the statute of limitations period. Should we receive such notice from the tax authorities, we intend to be probable,challenge the legality of the assessment. In any event, we believe PTGI will be indemnified by PTNR under the TCP for the NR Satu for any VAT liability as well as the related interest and penalties.penalties under our time charter party agreement entered into with them.
In December 2019, the Indonesian tax authorities issued tax assessments for land & buildings tax to our subsidiary, PTGI for the years 2015 to 2019 inclusive in relation to the NR Satu, for the amount of $3.5 million. We have subsequently paid the tax assessed to the tax authorities during January 2020 to avoid further penalties. However, we intend to appeal against the assessments for the land & buildings tax and we believe we have reasonable grounds for success, on the basis of no precedent set from past case law and new legislation effective prospectively from January 1, 2020, that now specifically lists FSRUs as being an object liable to land & buildings tax, when it previously did not.
United Kingdom
The UK tax lease benefits
One of our vessels is currently financed by a UK tax lease. Under the terms of the leasing arrangements of a UK tax lease, the benefits are derived primarily from the tax depreciation assumed to be available to the lessors as a result of their investment in the vessels. HMRCauthorities, Her Majesty's Revenue and Customs (the “HMRC”), has been challenging us regarding the use of similarUK lease structures and has been engaged in litigation of a test case, with an unrelated party, for some years. In August 2015, following an appealstructure relating to the Court of Appeal by the HMRC which set aside previous judgments in favor of the tax payer, the First Tier Tribunal (UK court) ruled in favor of HMRC.Methane Princess. We have reviewed the details of the case and the basis of the judgment with our legal and tax advisers to ascertain what impact, if any, the judgment may have on us and the possible range of loss. See Note 27exposure has been estimated at approximately $nil to $32.0 million (£24.0 million). Golar's discussions with HMRC on this matter have concluded without agreement and, in January 2020, Golar received a closure notice to the inquiry, which states the basis of HMRC’s position. In December 2019, in conjunction with the lessor, Golar obtained supplementary legal advice confirming Golar's position, and consequently a notice of appeal against the closure notice was submitted to HMRC. We remain confident of our position, however given the complexity of these discussions it is impossible to quantify the reasonably possible loss, and we continue to estimate the possible range of exposures as set out above. However, under the indemnity provisions of the Omnibus Agreement, Golar has agreed to indemnify us against any liabilities incurred as a consequence of a successful challenge by the UK Revenue Authorities with regard to the initial tax basis of the Methane Princess lease and in relation to other vessels previously financed by UK tax leases.
For further details, please refer to note 26 “Other Commitments and Contingencies” to our consolidated financial statementsConsolidated Financial Statements included herein for further details.herein.
Our Cash Distribution Policy
Rationale for Our Cash Distribution Policy
Our cash distribution policy reflects a judgment that our unitholders will be better served by our distributingdistribution of our cash available (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves) rather than retaining it. Because we believe we will generally finance any expansion capital expenditures from external financing sources, we believe that our investors are best served by our distributingdistribution of all of our available cash. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly (after deducting expenses, including estimated maintenance and replacement capital expenditures and reserves).
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy is subject to certain restrictions and may be changed at any time, including:
•Our unitholders have no contractual or other legal right to receive distributions other than the obligation under our partnership agreement to distribute available cash on a quarterly basis, which is subject to the broad discretion of our board of directors to establish reserves and other limitations.
•We will be subject to restrictions on distributions under our financing arrangements, including the Golar LNG Partners credit facility and lease arrangements. Our financing arrangements contain material financial tests and covenants that must be satisfied in order to pay distributions. If we are unable to satisfy the restrictions included in any of our financing arrangements or are otherwise in default under any of those agreements, it could have a material adverse effect on our ability to make cash distributions to our unitholders, notwithstanding our stated cash distribution policy.
•We are required to make substantial capital expenditures to maintain and replace our fleet. These expenditures may fluctuate significantly over time, particularly as our vessels near the end of their useful lives. In order to minimize these fluctuations, our partnership agreement requires us to deduct estimated, as opposed to actual, maintenance and replacement capital expenditures from the amount of cash that we would otherwise have available for distribution to our unitholders. In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted.
•Although our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions contained therein requiring us to make cash distributions, may be amended. During the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of non-affiliated common unitholders. After the subordination period has ended, ourOur partnership agreement can be amended with the approval of a majority of the outstanding common units. As of April 16, 2020, Golar currently owns approximately 4.2%held 30.8% of our common units, 2% general partner interest in us and all of our subordinated units.incentive distribution rights .
•Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement.
•Under Section 51 of the Marshall Islands Act, we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the fair value of our assets.
•PTGI is subject to restrictions on distributions under Indonesian laws due to its formation under the laws of Indonesia. Under Article 71.3 of the Indonesian Company Law (Law No. 40 of 2007), dividend distributions may be made only if PTGI has positive retained earnings. As ofFor the year ended December 31, 2015 and 2014,2019, PTGI had negative retained earnings and therefore could not make dividend payments under Indonesia law.paid $nil of dividends to PT Pesona.
•We may lack sufficient cash to pay distributions to our unitholders due to decreases in total operating revenues, decreases in hire rates, the loss of a vessel (including, without limitation, through a customer’s exercise of its purchase option) or increases in operating or general and administrative expenses, principal and interest payments on outstanding debt, taxes, working capital requirements, maintenance and replacement capital expenditures or anticipated cash needs. Please read “Item 3—3. Key Information—D. Risk Factors” for a discussion of these factors.
Minimum Quarterly Distribution
Common unitholders are entitled under our partnership agreement to receive a quarterly distribution of $0.3850 per unit, or $1.54 per unit per year, prior to any distribution on the subordinated units to the extent we have sufficient cash on hand to pay the distribution, after establishment of cash reserves and payment of fees and expenses. There is no guarantee that we will pay the minimum quarterly distribution on the common units and subordinated units in any quarter. Even if our cash distribution policy is not modified or revoked, theThe amount of distributions paid under our policy and the decision to make any distribution is determined by our board of directors, taking into consideration the terms of our partnership agreement. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is then existing, under our financing arrangements. Please read “Item 5—Operatingnote 21 "Debt" and note 25 "Related Party Transactions - Indemnifications and guarantee" in our Consolidated Financial Review and Prospects—Liquidity and Capital Resources”Statements included herein for a discussion of the restrictions contained in our credit facilities, and lease arrangements and guarantees that may restrict our ability to make distributions.
DuringFor the year ended December 31, 2015,2019, the aggregate amount of cash distributions paid was $152.9114.6 million.
On In February 12, 2016,2020, we paid a cash distribution of $0.5775$0.4042 per unitcommon and general partner units in respect of the three months ended December 31, 2015.2019. The aggregate amount of the distribution was $38.2$28.6 million.
On April 25, 2016,
Series A Preferred Units
Series A Preferred Units rank senior to our common units as to the payment of distribution. Distributions on Series A preferred units are payable out of amounts legally available therefor at an initial rate equal to 8.75% per annum of the stated liquidation preference. Distributions are payable quarterly in arrears on the 15th day of February, May, August and November of each year, when, as and if declared by our board of directors.
During the year ended December 31, 2019, the aggregate amount of cash distributions paid was $12.0 million. In February 2020, we declaredpaid a cash distribution of $0.5775$0.546875 per unit in respectSeries A Preferred Unit for the period from November 15, 2019 through February 14, 2020. The aggregate amount of the three months ended March 31, 2016. The distribution is payable on May 13, 2016 to all unitholders on record as of the close of business on May 6, 2016.was $3.0 million.
Subordination Period
General
During the subordination period, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.3850 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Distribution arrearages do not accrue on the subordinated units. The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units.
Incentive Distribution Rights
Incentive distribution rights represent the right to receive an increasing percentage of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner and Golar currently hold the incentive distribution rights. The incentive distribution rights may be transferred separately from our general partner interest. Any transfer by our general partner of the incentive distribution rights would not change the percentage allocations of quarterly distributions with respect to such rights.
On October 19, 2016 (the “IDR Exchange Closing Date”), pursuant to the terms of an Exchange Agreement (the “Exchange Agreement”), dated as of October 13, 2016, by and between the Partnership, Golar and our general partner, Golar and our general partner exchanged all of their incentive distribution rights in the Partnership (“Old IDRs”) for (i) the issuance by us on the IDR Exchange Closing Date of a new class of incentive distribution rights in the Partnership (“New IDRs”), (ii) an aggregate of 2,994,364 additional common units and an aggregate of 61,109 additional general partner units and (iii) the potential issuance in the future of an aggregate of up to 748,592 additional common units and up to 15,278 additional general partner units (collectively, the “Earn-Out Units”).
As of November 14, 2017 we had paid a distribution of available cash from operating surplus equal to $0.5775 per common unit in respect of each of the quarterly periods ended December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017. Accordingly, we issued 50% of the Earn-Out Units—374,295 common units and 7,639 general partner units—to Golar and the general partner, respectively.
On October 24, 2018, we declared a reduced quarterly distribution of $0.4042 per common unit in respect of the quarterly period ended September 30, 2018. Consequently, we did not meet the requirement to pay a distribution of available cash from operating surplus on each of the outstanding common units equal to or greater than $0.5775 per common unit in respect of each of the quarterly periods ended December 31, 2017, March 31, 2018, June 30, 2018 and September 30, 2018. The remaining 50% of the Earn-Out Units were not issued and will not be issued. See note 28 “Equity—Exchange of Incentive Distribution Rights” to our Consolidated Financial Statements included herein.
The following table illustrates the percentage allocations of the additional available cash from operating surplus among the common unitholders, our general partner and the holders of the incentive distribution rights up to the various target distribution levels.levels under the New IDRs. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of the common unitholders, our general partner and the holders of the incentive distribution rights in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Target Amount” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders, our general partner and the holders of the incentive distribution rights for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests shown for our general partner include its 2.0% general partner interest only and assume that our general partner has contributed any capital necessary to maintain its 2.0% general partner interest.
| | | Total Quarterly | | Marginal Percentage Interest in Distributions | | | | Total Quarterly Distribution Target Amount | Marginal Percentage Interest in Distributions | |
| Distribution Target Amount | | Unitholders | | General Partner | | Holders of IDRs | | | Common Unitholders | General Partner | IDR Holders | |
Minimum Quarterly Distribution | $0.3850 | | 98.0 | % | | 2.0 | % | | 0 | % | Minimum Quarterly Distribution | $0.5775 | 98% | 2% | 0% | |
First Target Distribution | up to $0.4428 | | 98.0 | % | | 2.0 | % | | 0 | % | First Target Distribution | Up to $0.6641 | 98% | 2% | 0% | |
Second Target Distribution | above $0.4428 up to $0.4813 | | 85.0 | % | | 2.0 | % | | 13.0 | % | Second Target Distribution | Above $0.6641 up to $0.7219 | 85% | 2% | 13% | |
Third Target Distribution | above $0.4813 up to $0.5775 | | 75.0 | % | | 2.0 | % | | 23.0 | % | Third Target Distribution | Above $0.7219 up to $0.8663 | 75% | 2% | 23% | |
Thereafter | above $0.5775 | | 50.0 | % | | 2.0 | % | | 48.0 | % | Thereafter | Above $0.8663 | 50% | 2% | 48% | |
B.Significant Changes
Not applicable.
Item 9.The Offer and Listing
C.A.Markets
Our common units started trading on The Nasdaq Global Market under the symbol “GMLP” on April 8, 2011. Our Series A Preferred Units started trading on The Nasdaq Global Market under the symbol “GMLPP” on October 26, 2017.
Item 10.Additional Information
The following table sets forth the high and low prices for the common units on the Nasdaq since the date of listing for the periods indicated.
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| High | | Low |
Year ended December 31, 2015 | $ | 32.28 |
| | $ | 7.55 |
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Year ended December 31, 2014 | $ | 39.35 |
| | $ | 26.54 |
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Year ended December 31, 2013 | $ | 36.00 |
| | $ | 27.55 |
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Year ended December 31, 2012 | $ | 39.05 |
| | $ | 25.52 |
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Year ended December 31, 2011 (1) | $ | 30.91 |
| | $ | 22.41 |
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| | | |
Second quarter 2016 (2) | $ | 18.35 |
| | $ | 14.00 |
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First quarter 2016 | $ | 16.63 |
| | $ | 8.02 |
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Fourth quarter 2015 | $ | 18.66 |
| | $ | 7.55 |
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Third quarter 2015 | $ | 25.10 |
| | $ | 14.14 |
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Second quarter 2015 | $ | 30.25 |
| | $ | 24.31 |
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First quarter 2015 | $ | 32.28 |
| | $ | 24.12 |
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Fourth quarter 2014 | $ | 38.39 |
| | $ | 26.54 |
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Third quarter 2014 | $ | 39.35 |
| | $ | 32.79 |
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Second quarter 2014 | $ | 38.50 |
| | $ | 29.44 |
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First quarter 2014 | $ | 31.70 |
| | $ | 28.66 |
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| | | |
Month ended April 30, 2016 (2) | $ | 18.35 |
| | $ | 14.00 |
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Month ended March 31, 2016 | $ | 16.63 |
| | $ | 13.76 |
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Month ended February 28, 2016 | $ | 14.98 |
| | $ | 11.24 |
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Month ended January 31, 2016 | $ | 14.21 |
| | $ | 8.02 |
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Month ended December 31, 2015 | $ | 14.92 |
| | $ | 7.55 |
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Month ended November 30, 2015 | $ | 18.66 |
| | $ | 14.16 |
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Month ended October 31, 2015 | $ | 18.65 |
| | $ | 14.09 |
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(1) For the period from April 8, 2011 through December 31, 2011.
(2) For the period from April 1, 2016 through April 28, 2016.
Item 10.Additional Information
A.Share Capital
Not applicable.
B.Memorandum and Articles of Association
The information required to be disclosed under Item 10B is incorporated by reference to (i) our Registration Statement on Form 8-A filed with the SEC on April 5, 2011.October 31, 2017 and (ii) our Registration Statement on Form 8-A/A filed with the SEC on November 13, 2017 (in each case, as may be amended from time to time).
C.Material Contracts
The following is a summary of each material contract other(other than material contracts entered into in the ordinary course of business,business), to which we or any of our subsidiaries is a party, for the two years immediately preceding the date of this Annual Report, eachReport:
1.Omnibus Agreement dated April 13, 2011, by and among Golar LNG Ltd., Golar LNG Partners LP, Golar GP LLC and Golar Energy Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms.
2.Amendment No. 1 to Omnibus Agreement, dated October 5, 2011 by and among Golar LNG Ltd., Golar LNG Partners LP, Golar GP LLC and Golar Energy Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms.
3.$175 million Facility Agreement, dated December 14, 2012, by and among a group of banks as the lender and PT Golar Indonesia as the borrower. See note 21 “Debt—NR Satu Facility” to our Consolidated Financial Statements for a summary of certain terms.
4.Supplemental Agreement to $175 million Facility Agreement, dated March 29, 2018, by and PT Bank Sumitomo Mitsui as the lender, Sumitomo Mitsui Banking Corporation Singapore Branch as the agent, PT Golar Indonesia as the borrower and guaranteed by Golar LNG Partners LP. See note 21 “Debt—NR Satu Facility” to our Consolidated Financial Statements for a summary of certain terms.
5.Bond Agreement dated May 20, 2015 between Golar LNG Partners LP and Nordic Trustee ASA as bond trustee. See note 21 “Debt—2015 Norwegian Bonds” to our Consolidated Financial Statements for a summary of certain terms.
6.Bareboat charter, Memorandum of Agreement and Common Terms Agreements, by and among Golar Eskimo Corp, and a subsidiary of China Merchants Bank Limited (Eskimo SPV), dated November 4, 2015, providing for the sale and leaseback of the Golar Eskimo. See note 5 “Variable Interest Entities—Eskimo Corp” to our Consolidated Financial Statements for a summary of certain terms.
7.Bareboat charter, Memorandum of Agreement and Common Terms Agreements, by and among Golar LNG NB13 Corporation, and a subsidiary of China Merchants Bank Limited (Tundra SPV), dated November 19, 2015, providing for the sale and leaseback of the Golar Tundra. See “Item 7—Major Unitholders and Related Party Transactions-B. Related Party Transactions” for information about the Tundra Acquisition.
8.Supplemental Agreement by and among Golar LNG NB13 Corporation, Golar LNG Limited, Golar LNG Partners LP and a subsidiary of China Merchants Bank Limited (Tundra SPV), dated April 28, 2016, as supplement to the Bareboat charter, Memorandum of Agreement and Common Terms Agreements dated November 19, 2015. See “Item 7—Major Unitholders and Related Party Transactions-B. Related Party Transactions” for information about the Tundra Acquisition.
9.Facilities Agreement for an $800 million senior secured amortizing term loan and revolving credit facility, dated April 27, 2016, the First Supplemental Letter to Facilities Agreement, dated April 27, 2016, the Second Supplemental Letter to Facilities Agreement, dated May 22, 2017, the Third Supplemental Letter to Facilities Agreement, dated June 29, 2017, Fourth Supplemental Letter to Facilities Agreement, dated January 16, 2018, Fifth Supplemental Letter to Facilities Agreement, dated 5 November, 2018, and the Sixth Supplemental Letter to Facilities Agreement, dated 5 November, 2018, by and among Golar Partners Operating LLC, Citigroup Global Markets Limited, DNB (UK) Limited, Nordea Bank Norge ASA, as agent and security agent and the other parties thereto. See note 21 “Debt—$800 million credit facility” to our Consolidated Financial Statements for a summary of certain terms.
10.Omnibus Agreement dated June 19, 2016, by and among Golar LNG Ltd., Golar Power Limited, Golar LNG Partners LP, Golar GP LLC and Golar Partners Operating LLC. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms.
11.Management and Administrative Services Agreement between Golar LNG Partners LP and Golar Management Limited, dated April 1, 2016, as amended. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms.
12.Bond Agreement dated February 10, 2017 between Golar LNG Partners LP and Nordic Trustee ASA as bond trustee. See See note 21 “Debt—2017 Norwegian Bonds” to our Consolidated Financial Statements for a summary of certain terms.
13.Purchase and Sale Agreement by and among Golar LNG Limited, KS Investments Pte. Ltd., Black & Veatch International Company and Golar Partners Operating LLC, dated August 15, 2017, as amended relating to acquisition of interest in Hilli LLC. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms.
14.Deed of Guarantee by Golar LNG Partners LP in favor of Sea 24 Leasing Co. Limited in respect of the obligations of Golar LNG NB13 Corporation, dated as of November 19, 2015. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.”.
15.Indemnity Letter, dated as of October 17, 2017, by and between Golar LNG Partners LP and Golar LNG Limited, pursuant to which is includedGolar LNG Limited agreed to indemnify Golar LNG Partners LP for any liabilities that may arise in connection with its deficiency guarantee of the listobligations of exhibitsGolar Tundra Corp to Golar LNG NB13 Corporation under the sale leaseback arrangement relating to the Golar Tundra. See note 25 “Related Party Transactions” to our Consolidated Financial Statements for a summary of certain terms.
16.Liquefaction Tolling Agreement, dated November 29, 2017, between Societe Nationale de Hydrocarbures, Perenco Cameroon SA, Golar Hilli Corporation and Golar Cameroon SASU. See note 10 “Investment in Item 19:Affiliate” to our Consolidated Financial Statements for a summary of certain terms.
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1. | Credit facility agreement dated September 29, 2008 providing for a Senior Secured Revolving Credit Facility by and among Golar LNG Partners L.P. (as borrower) and the Banks and Financial Institutions Referred to therein (as lenders). In September 2008, we entered into a revolving credit facility with a banking consortium to refinance existing loan facilities in respect of two of our vessels, the Methane Princess and the Golar Spirit (or the Golar LNG Partners credit facility). The loan is secured against the Golar Spirit and assignment to the lending bank of a mortgage given to us by the lessors of the Methane Princess and the Golar Spirit, with a second priority charge over the Golar Mazo. The Golar LNG Partners credit facility accrues floating interest at a rate per annum equal to LIBOR plus a margin. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” for a summary of certain terms.
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2. | Omnibus Agreement dated April 13, 2011, by and among Golar LNG Ltd., Golar LNG Partners LP, Golar GP LLC and Golar Energy Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms. |
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3. | Amendment No. 1 to Omnibus Agreement, dated October 5, 2011 by and among Golar LNG Ltd., Golar LNG Partners LP, Golar GP LLC and Golar Energy Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms. |
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4. | First Amended and Restated Management and Administrative Services Agreement between Golar LNG Partners LP and Golar Management Limited. In connection with our initial public offering, we entered into a management and administrative services agreement (as amended and restated, the management and administrative services agreement) with Golar Management, pursuant to which Golar Management agreed to provide certain management and administrative support services to us. As of July 1, 2011, we and Golar Management entered into an amended and restated management and administrative services agreement to reflect changes in the titles of certain of our officers. The material provisions of the amended and restated management and administrative services agreement, including terms related to our obligations and the obligations of Golar Management to provide us with services, remain unchanged from those contained in the management and administrative services agreement entered into at the time of our initial public offering. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions” for a summary of certain contract terms. |
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5. | Contribution and Conveyance Agreement, dated as of April 5, 2011, among Golar LNG Limited, Golar GP LLC, Golar LNG Partners LP, Golar LNG Holding Co., and Golar Partners Operating LLC, pursuant to which, among other things, Golar contributed interests in certain vessels in our initial fleet to us in connection with our initial public offering. |
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6. | Time Charter Party dated July 2, 1997 between Faraway Maritime Shipping Company and Pertamina. See “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms. |
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7. | Time Charter Party dated August 27, 2003 between Golar 2215 UK Ltd. and Methane Services Limited. See “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms. |
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8. | Time Charter Party dated September 4, 2007 between Golar Spirit UK Ltd. and Petróleo Brasileiro S.A. “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms.
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9. | Operation and Services Agreement dated September 4, 2007 between Golar Serviços de Operação de Embarcações Limitada and Petróleo Brasileiro S.A. “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms. |
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10. | Time Charter Party dated September 4, 2007 between Golar Winter UK Ltd. and Petróleo Brasileiro S.A. See “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms.
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11. | Operation and Services Agreement dated September 4, 2007 between Golar Serviços de Operação de Embarcações Limitada and Petróleo Brasileiro S.A. See “Item 4—Information on the Partnership—B. Business Overview—Charters” for a summary of certain contract terms. |
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12. | $20.0 Million Revolving Credit Agreement, dated April 11, 2011, by and between Golar LNG Partners LP and Golar LNG Limited, as amended by supplemental deed dated April 29, 2015. In connection with our initial public offering, we entered into a $20.0 million revolving credit facility (or the sponsor credit facility) with Golar, to be used to fund our working capital requirements. The sponsor credit facility matured in June 2015. |
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13. | Purchase, Sale and Contribution Agreement, dated October 5, 2011, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd., pursuant to which we acquired a 100% interest in subsidiaries that own and operate the FSRU, the Golar Freeze from Golar for a purchase price of $330.0 million for the vessel plus $9.0 million of working capital adjustments less assumed bank debt of $108.0 million.
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14. | Purchase, Sale and Contribution Agreement, dated July 9, 2012, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd., pursuant to which we acquired from Golar interests in the companies that own and operate the NR Satu for a purchase price of approximately $385.0 million for the vessel plus working capital adjustments of $3.0 million. |
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15. | Purchase, Sale and Contribution Agreement, dated November 1, 2012, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd, providing for, among other things, the acquisition of the Golar Grand for a purchase price of $265.0 million for the vessel plus working capital adjustments of $2.6 million less the assumed capital lease obligations of $90.8 million.
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16. | $175 million Facility Agreement, dated December 14, 2012, by and among a group of banks as the lender and PT Golar Indonesia as the borrower. PT Golar Indonesia, the company that owns and operates the FSRU, NR Satu, entered into a 7 year secured loan facility. The total facility amount is $175 million and is split into two tranches, a $155 million term loan facility and a $20 million revolving facility. The facility is with a syndicate of banks and bears interest at LIBOR plus a margin of 3.5%. The loan is payable on a quarterly basis with a final balloon payment of $52.5 million payable after 7 years. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long Term Debt—NR Satu Facility” for a summary of certain terms.
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17. | Purchase, Sale and Contribution Agreement, dated January 30, 2013, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd., providing for, among other things, the acquisition of the Golar Maria for a purchase price of approximately $215.0 million less the assumed debt of $89.5 million.
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18. | Bond Agreement dated October 11, 2012 between Golar LNG Partners LP and Norsk Tillitsmann ASA as bond trustee. We completed the issuance of NOK 1,300 million senior unsecured bonds that mature in October 2017. The bonds bear interest at a rate equal to 3 months NIBOR plus a margin of 5.20% payable quarterly. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-term Debt—Golar PArtners Operating Credit Facility” for a summary of certain terms. |
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19. | $275 million Facility Agreement, dated June 25, 2013, by and among a group of banks as the lender and Golar Partners Operating LLC as the borrower. We refinanced existing lease financing arrangements in respect of two vessels, the Golar Winter and the Golar Grand, and entered into a new five year, $275 million loan facility with a banking consortium. The total facility amount is $275 million and is split into two tranches, a $225 million term loan facility and a $50 million revolving facility. The facility bears interest at LIBOR plus a margin of 3%. The loan is payable on a quarterly basis with a final balloon payment of $130 million payable after 5 years. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” for a summary of certain terms.
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20. | Purchase, Sale and Contribution Agreement, dated December 5, 2013, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd., providing for the acquisition of the Golar Igloo for a purchase price of approximately $310.0 million less assumed debt of $161.3 million plus the fair value of the interest rate swap asset of $3.6 million and net working capital adjustments.
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21. | The Purchase, Sale and Contribution Agreement dated December 15, 2014, by and between Golar LNG Partners LP, Golar Partners Operating LLC and Golar LNG Ltd., providing for, among other things, the acquisition of the Golar Eskimo for a purchase price of $330.0 million for the vessel plus $9.0 million of working capital adjustments less assumed bank debt of $108.0 million.
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22. | Letter Agreement, dated January 20, 2015, by and between Golar LNG Partners LP and Golar LNG Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions—Other Related Party Transactions—Vessel Acquisitions and Related Transactions” for a summary of certain terms. |
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23. | Eskimo Vendor Loan agreement, dated as of January 20, 2015, by and between Golar LNG Partners LP and Golar LNG Limited. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions—Other Related Party Transactions—Vessel Acquisitions and Related Transactions” for a summary of certain terms. |
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24. | Facility Agreement between Golar Hull M021 Corp, Golar Hull M026 Corp, Golar Hull M2031 Corp, Golar Hull M2022 Corp, Golar Hull M2023 Corp, Golar Hull M2027 Corp, Golar Hull M2024 Corp, Golar LNG NB 12 Corporation, and a consortium of banks for $1.125 billion facility, dated July 24, 2013. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-Term Debt—Golar Igloo Debt”. |
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25. | Supplemental Agreement between Golar Hull M021 Corp, Golar Hull M026 Corp, Golar Hull M2031 Corp, Golar Hull M2022 Corp, Golar Hull M2023 Corp, Golar Hull M2027 Corp, Golar Hull M2024 Corp, Golar LNG NB 12 Corporation, and a consortium of banks for $1.125 billion facility, dated July 25, 2013. See “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Long-Term Debt”. |
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26. | Second Supplemental Agreement between Golar Hull M021 Corp, Golar Hull M026 Corp, Golar Hull M2031 Corp, Golar Hull M2022 Corp, Golar Hull M2023 Corp, Golar Hull M2027 Corp, Golar Hull M2024 Corp, Golar LNG NB 12 Corporation, and a consortium of banks for $1.125 billion facility, dated August 28, 2014. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-Term Debt”. |
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27. | $120 million Loan Agreement dated April 19, 2006, among Golar LNG 2234 Corporation, as Borrower, Fokus Bank ASA, as Swap Bank, Agent and Security Trustee and the lenders party thereto. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-Term Debt”. |
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28. | $125 million Facilities Agreement dated June 17, 2010, among Golar Freeze Holding Co., DnB NOR Bank ASA, as Facility Agent and Security Agent, the lenders party thereto and the other parties thereto. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-Term Debt”. |
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29. | Supplemental Deed, dated December 23, 2014, relating to the $120 million Loan Agreement dated April 19, 2006, among Golar LNG 2234 Corporation, as Borrower, Fokus Bank ASA, as Swap Bank, Agent and Security Trustee and the lenders party thereto. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources”. |
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30. | Time charter party agreement by and between Golar Grand Corporation and Golar Trading Corporation, with respect to the Golar Grand, dated as of May 27, 2015. See “Item 4—Information on the Partnership—B. Business Overview—Our Fleet and Customers”. |
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31. | Bond Agreement dated May 20, 2015 between Golar LNG Partners LP and Nordic Trustee ASA as bond trustee. See “Item 5-Operating and Financial Review and Prospects-Liquidity and Capital Resources-Long-Term Debt-Norwegian Bonds” for a summary of certain terms. |
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32. | Fourth Supplemental Deed to facility agreement, made by and among DNB Bank ASA (formerly known as DnB NOR Bank ASA), Citigroup Global Markets Limited and DVB Bank SE, London Branch, as the mandated lead arrangers, the other lenders party thereto, Golar LNG 2234 LLC, as borrower, and the other parties thereto, with respect to the Maria and Freeze refinancing. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Long-Term Debt—Golar Maria and Golar Freeze Facility”. |
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33. | Purchase and Sale Agreement made by and between Golar LNG Limited and Golar Partners Operating LLC, dated February 10, 2016 with respect to the acquisition of the Golar Tundra. See “Item 7—Major Unitholders and Related Party Transactions—B. Related Party Transactions—Other Related Party Transactions—Vessel Acquisitions and Related Transactions”.
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34. | Facilities Agreement for an $800 million senior secured amortizing term loan and revolving credit facility, dated April 27, 2016, by and among Golar Partners Operating LLC, Citigroup Global Markets Limited, DNB (UK) Limited, Nordea Bank Norge ASA, as agent and security agent and the other parties thereto. See “Item 5—Operating and Financial Review and Prospects—B. Liquidity and Capital Resources-Long-Term Debt—$800 million credit facility” for a summary of certain terms. |
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35. | Bareboat charter, Memorandum of Agreement and Common Terms Agreements, by and among Golar Eskimo Corp, and a subsidiary of China Merchants Bank Limited (Eskimo SPV), dated November 4, 2015, providing for the sale and leaseback of the Golar Eskimo. See note 5 “Variable Interest Entities” in the notes to our consolidated financial statements for a summary of certain terms. |
17.Amended and Restated Limited Liability Company Agreement of Golar Hilli LLC, Golar LNG Limited, by and among Golar LNG Limited, KS Investments Pte. Ltd., Black & Veatch International Company and Golar Partners Operating LLC, dated as of July 12, 2018. See note 10 “Investment in Affiliate” to our Consolidated Financial Statements for a summary of certain terms.
18.Bareboat charter by and between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., dated September 9, 2015, providing for the sale and leaseback of the Hilli. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms.
19.Additional Clauses to the Bareboat Charter Party dated September 9, 2015 between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., as additional clauses to Bareboat charter by and between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., dated September 9, 2015. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms. 20.Memorandum of Agreement by and between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., dated September 9, 2015 providing for, among other things, the sale and leaseback of the Hilli. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms.
21.Common Terms Agreements, by and between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., dated September 9, 2015. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms.
22.Deed of Amendment, restatement and accession relating to a guarantee between Golar LNG Limited, Golar LNG Partners LP and Fortune Lianjiang Shipping S.A., dated as of July 12, 2018, as an amendment to the guarantee under the Common Terms Agreements, by and between Golar Hilli Corp. and Fortune Lianjiang Shipping S.A., dated September 9, 2015. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms.
23.Guarantee Agreement by and between Golar LNG Partners LP and Standard Chartered Bank, dated as of November 28, 2018. See “Item 7-Major Unitholders and Related Party Transactions-B. Related Party Transactions.” for a summary of certain contract terms.
D.Exchange Controls
We are not aware of any governmental laws, decrees or regulations, including foreign exchange controls, in the Republic of The Marshall Islands that restrict the export or import of capital, or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities.
We are not aware of any limitations on the right of non-resident or foreign owners to hold or vote our securities imposed by the laws of the Republic of The Marshall Islands or our partnership agreement.
E.Taxation
Material U.S. Federal Income Tax Considerations
The following is a discussion of the material U.S. federal income tax considerations that may be relevant to prospective unitholders.
This discussion is based upon provisions of the Code, Treasury Regulations, and current administrative rulings and court decisions, all as in effect or existence on the date of this Annual Report and all of which are subject to change or differing interpretation, possibly with retroactive effect. Changes in these authorities may cause the tax consequences of unit ownership to vary substantially from the consequences described below. Unless the context otherwise requires, references in this section to “we,” “our” or “us” are references to Golar LNG Partners LP.
The following discussion applies only to beneficial owners of common units or Series A Preferred Units that own the common units as “capital assets” within the meaning of Section 1221 of the Code (i.e., generally,(generally, for investment purposes) and is not intended to be applicable to all categories of investors, such as unitholders subject to special tax rules (e.g., financial institutions, insurance companies, broker-dealers, tax-exempt organizations, retirement plans or individual retirement accounts or former citizens or long-term residents of the United States), persons who will hold the units as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes, or persons that have a functional currency other than the U.S. dollar, each of whom may be subject to tax rules that differ significantly from those summarized below. If a partnership or other entity or arrangement classified as a partnership for U.S. federal income tax purposes holds our common units or Series A Preferred Units, the tax treatment of its partners generally will depend upon the status of the partner and the activities of the partnership. Unitholders who are partners in a partnership holding our common units or Series A Preferred Units should consult a tax advisor regarding the tax consequences to them of the partnership’s ownership of our commonsuch units.
No ruling has been or will be requested from the IRS regarding any matter affecting us or our unitholders. The statements made herein may be challenged by the IRS and, if so challenged, may not be sustained upon review in a court.
This discussion does not contain information regarding any U.S. state or local, estate, gift or alternative minimum tax considerations concerning the ownership or disposition of common units.units or Series A Preferred Units. This discussion does not comment on all aspects of U.S. federal income taxation that may be important to particular unitholders in light of their individual circumstances, and each prospective unitholder is urged to consult its own tax advisor regarding the U.S. federal, state, local and other tax consequences of the ownership or disposition of common units.units or Series A Preferred Units.
Election to be Treated as a Corporation
We have elected to be treated as a corporation for U.S. federal income tax purposes. Consequently, among other things, U.S. Holders (as defined below) will not be directly subject to U.S. federal income tax on our income, but rather will be subject to U.S. federal income tax on distributions received from us and dispositions of units as described below.
U.S. Federal Income Taxation of U.S. Holders
As used herein, the term “U.S. Holder” means a beneficial owner of our common units or Series A Preferred Units that owns (actually or constructively) less than 10.0% of our equity and that is:
•an individual U.S. citizen or resident (as determined for U.S. federal income tax purposes),
•a corporation (or other entity that is classified as a corporation for U.S. federal income tax purposes) organized under the laws of the United States or any of its political subdivisions,
•an estate the income of which is subject to U.S. federal income taxation regardless of its source, or
•a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (ii) the trust has a valid election in effect to be treated as a U.S. person for U.S. federal income tax purposes.
Distributions
Subject to the discussion below of the rules applicable to PFICs, any distributions to a U.S. Holder made by us with respect to our common units or our Series A Preferred Units generally will constitute dividends which may be taxable as ordinary income or “qualified dividend income” as described in more detail below, to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles.principles, allocated to our common units or our Series A Preferred Units, as applicable. Distributions in excess of our earnings and profits allocated to our Series A Preferred Units or common units, as applicable, will be treated first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in its Series A Preferred Units or common units and, thereafter, as capital gain. U.S. Holders that are corporations generally will not be entitled to claim a dividends received deduction with respect to distributions they receive from us because we are not a U.S. corporation. Dividends received with respect to our common units or Series A Preferred Units generally will be treated as “passive category income” for purposes of computing allowable foreign tax credits for U.S. federal income tax purposes.
Dividends received with respect to our common units or Series A Preferred Units by a U.S. Holder that is an individual, trust or estate (or a U.S. Individual Holder) generally will be treated as “qualified dividend income,” which is currently taxable to such U.S. Individual Holder at preferential capital gain tax rates provided that: (i) our common units or Series A Preferred Units, as applicable, are readily tradable on an established securities market in the United States (such as The Nasdaq Global Market on which our common units and Series A Preferred Units are traded); (ii) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (which we do not believe we are, have been or will be, as discussed below under “-PFIC Status and Significant Tax Consequences”);year; (iii) the U.S. Individual Holder has owned the common units or Series A Preferred Units for more than 60 days during the 121-day period beginning 60 days before the date on which thesuch common units or Series A Preferred Units, as applicable become ex-dividend (and has not entered into certain risk limiting transactions with respect to such common units); and (iv) the U.S. Individual Holder is not under an obligation to make related payments with respect to positions in substantially similar or related property. There is no assurance that any dividends paid on our common units or Series A Preferred Units will be eligible for these preferential rates in the hands of a U.S. Individual Holder, and any dividends paid on our common units or Series A Preferred Units that are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Individual Holder.
Special rules may apply to any amounts received in respect of our common units or Series A Preferred Units that are treated as “extraordinary dividends.” In general, an extraordinary dividend is a dividend with respect to a common unit that is equal to or in excess of 10.0% of the unitholder’s adjusted tax basis (or fair market value upon the unitholder’s election) in such common unit, and a dividend with respect to a Series A Preferred Unit that is equal to or in excess of 5.0% of the unitholder’s adjusted tax basis (or fair market value upon the unitholder’s election) in such preferred unit. In addition, extraordinary
dividends include dividends received within a one year period that, in the aggregate, equal or exceed 20.0% of a unitholder’s adjusted tax basis (or fair market value). If we pay an “extraordinary dividend” on our common units or Series A Preferred Units that is treated as “qualified dividend income,” then any loss recognized by a U.S. Individual Holder from the sale or exchange of such common units will be treated as long-term capital loss to the extent of the amount of such dividend.
Medicare Tax on Net Investment Income
Certain U.S. Holders, including individuals, estates and trusts, will be subject to an additional 3.8% Medicare tax on, among other things, dividends and capital gains from the sale or other disposition of equity interests. For individuals, the additional Medicare tax applies to the lesser of (i) “net investment income” or (ii) the excess of “modified adjusted gross income” over $200,000 ($250,000 if married and filing jointly or $125,000 if married and filing separately). “Net investment income” generally equals the taxpayer’s gross investment income reduced by deductions that are allocable to such income. Unitholders should consult their tax advisors regarding the implications of the additional Medicare tax resulting from their ownership and disposition of our common units.
Sale, Exchange or Other Disposition of Common Units
Subject to the discussion of PFIC status below, a U.S. Holder generally will recognize capital gain or loss upon a sale, exchange or other disposition of our common units or Series A Preferred Units 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 adjusted tax basis in such units.common units or Series A Preferred Units. The U.S. Holder’s initial tax
basis in its units generally will be the U.S. Holder’s purchase price for the units and that tax basis will be reduced (but not below zero) by the amount of any distributions on thesuch units that are treated as non-taxable returns of capital, as discussed above under “-Distributions.“—Distributions.” Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Certain U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. A U.S. Holder’s ability to deduct capital losses is subject to limitations. Such capital gain or loss generally will be treated as U.S. source income or loss, as applicable, for U.S. foreign tax credit purposes.
PFIC Status and Significant Tax Consequences
Adverse U.S. federal income tax rules apply to a U.S. Holder that owns an equity interest in a non-U.S. corporation that is classified as a PFIC for U.S. federal income tax purposes. In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which the holder held our units, either:
•at least 75.0% of our gross income (including the gross income of our vessel-owning subsidiaries) for such taxable year consists of passive income (e.g., dividends, interest, capital gains from the sale or exchange of investment property, and rents derived other than in the active conduct of a rental business); or
•at least 50.0% of the average value of the assets held by us (including the assets of our vessel-owning subsidiaries) during such taxable year produce, or are held for the production of, passive income.
Income earned, or treated as earned (for U.S. federal income tax purposes), by us in connection with the performance of services would not constitute passive income for PFIC purposes. By contrast, rental income generally would constitute “passive income” unless we were treated as deriving that rental income in the active conduct of a trade or business under the applicable rules.
Based on our current and projected method of operation, we believe that we were not a PFIC for any prior taxable year, and we expect that we will not be treated as a PFIC for the current or any future taxable year. We believe that more than 25.0% of our gross income for each taxable year was or will be nonpassive income and more than 50.0% of the average value of our assets for each such year was or will be held for the production of such nonpassive income. This belief is based on certain valuation and projections regarding our assets, income and charters, and its validity is conditioned on the accuracy of such valuations and projections. While we believe such valuations and projections to be accurate, the shipping market is volatile and no assurance can be given that they will continue to be accurate at any time in the future.
Moreover, thereThere are legal uncertainties involved in determining whether the income derived from time-chartering activities constitutes rental income or income derived from the performance of services. While there is legal authority supporting our conclusions, including IRS pronouncements concerning the characterization of income derived from time charters as services income, the United States Court of Appeals for the Fifth Circuit (or the Fifth Circuit) held in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir. 2009) that income derived from certain marine time charter agreements should be treated as rental income rather than services income for purposes of a “foreign sales corporation” provision of the Code. In that case, the Fifth Circuit did not address the definition of passive income or the PFIC rules; however, the reasoning of the case could have implications as to how the income from a time charter would be classified under such rules. If the reasoning of this case were extended to the PFIC context, the gross income we derive or are deemed to derive from our time chartering activities may be treated as rental income, and we would likely be treated as a PFIC. The IRS has announced its nonacquiescencenon-acquiescence with the court’s holding in the Tidewater case and, at the same time, announced the position of the IRS that the marine time charter agreements at issue in that case should be treated as service contracts.
Distinguishing between arrangements
We believe that we were not a PFIC for any prior taxable year, and we expect that we will not be treated as generating rental incomea PFIC for the current year based on our current assets and those treated as generating services income involves weighing and balancing competing factual considerations, and there isoperations. However no legal authority under the PFIC rules addressing our specific method of operation. Conclusions in this area therefore remain matters of interpretation. We are not seeking a ruling from the IRS on the treatment of income generated from our time chartering operations. Thus, it is possibleassurance can be given that the IRS or a court could disagree withof law will
accept our position. In addition, althoughposition or that we intend to conduct our affairs in a manner to avoid being classified aswould not constitute a PFIC with respect to any taxable year, we cannot assure unitholders that the nature of our operations will not change in the future and that we will not become a PFIC infor any future taxable year.year if there were to be changes in our assets, income or operations.
As discussed more fully below, if we were to be treated as a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), a U.S. Holder would be subject to different taxation rules depending on whether the U.S. Holder makes an election to treat us as a “Qualified Electing Fund,” which we refer to as a “QEF election.” As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark-to-market” election with respect to our common units, as discussed below. If we are a PFIC, a U.S. Holder will be subject to the PFIC rules described herein with respect to any of our
subsidiaries that are PFICs. However, the mark-to-market election discussed below will likely not be available with respect to shares of such PFIC subsidiaries. In addition, if a U.S. Holder owns our common units during any taxable year that we are a PFIC, such holder must file an annual report with the IRS.
Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF election (or an Electing Holder), then, for U.S. federal income tax purposes, that holder must report as income for its taxable year its pro rata share of our ordinary earnings and net capital gain, if any, for our taxable years that end with or within the taxable year for which that holder is reporting, regardless of whether or not the Electing Holder received distributions from us in that year. The Electing Holder’s adjusted tax basis in the common units or Series A Preferred Units will be increased to reflect such taxed but undistributed earnings and profits. Distributions of earnings and profits that were previously taxed will result in a corresponding reduction in the Electing Holder’s adjusted tax basis in the common units or Series A Preferred Units and will not be taxed again once distributed. An Electing Holder generally will recognize capital gain or loss on the sale, exchange or other disposition of our common units.units or Series A Preferred Units. A U.S. Holder makes a QEF election with respect to any year that we are a PFIC by filing IRS Form 8621 with its U.S. federal income tax return. If contrary to our expectations, we determine that we are treated as a PFIC for any taxable year, we will provide each U.S. Holder with the information necessary to make the QEF election described above.
Taxation of U.S. Holders Making a “Mark-to-Market” Election
If we were to be treated as a PFIC for any taxable year and, as we anticipate, our common units or Series A Preferred Units were treated as “marketable stock,” then, as an alternative to making a QEF election, a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our common units or Series A Preferred Units, as applicable, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the U.S. Holder’s common units or Series A Preferred Units at the end of the taxable year over the holder’s adjusted tax basis in the commonsuch units. The U.S. Holder also would be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s adjusted tax basis in the common units over the fair market value thereof at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. A U.S. Holder’s tax basis in its common units would be adjusted to reflect any such income or loss recognized. Gain recognized on the sale, exchange or other disposition of our common units or Series A Preferred Units would be treated as ordinary income, and any loss recognized on the sale, exchange or other disposition of the common units or Series A Preferred Units, as applicable would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder. Because the mark-to-market election only applies to marketable stock, however, it would not apply to a U.S. Holder’s indirect interest in any of our subsidiaries that were determined to be PFICs.
Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
If we were to be treated as a PFIC for any taxable year, a U.S. Holder that does not make either a QEF election or a “mark-to-market” election for that year (or a Non-Electing Holder) would be subject to special rules resulting in increased tax liability with respect to (1) any excess distribution (i.e.(i.e., the portion of any distributions received by the Non-Electing Holder on our common units or Series A Preferred Units in a taxable year in excess of 125.0% of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder’s holding period for the common units), and (2) any gain realized on the sale, exchange or other disposition of thesuch units. Under these special rules:
•the excess distribution or gain would be allocated ratably over the Non-Electing Holder’s aggregate holding period for the common units;units or Series A Preferred Units;
•the amount allocated to the current taxable year and any taxable year prior to the taxable year we were first treated as a PFIC with respect to the Non-Electing Holder would be taxed as ordinary income; and
•the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayers for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.
These penalties would not apply to a qualified pension, profit sharing or other retirement trust or other tax-exempt organization that did not borrow money or otherwise utilize leverage in connection with its acquisition of our common units.units or Series A Preferred Units. If we were treated as a PFIC for any taxable year and a Non-Electing Holder who is an individual dies while owning our common units or Series A Preferred Units, such holder’s successor generally would not receive a step-up in tax basis with respect to such units.
U.S. Federal Income Taxation of Non-U.S. Holders
A beneficial owner of our common unitsor Series A Preferred Units (other than a partnership or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) that is not a U.S. Holder is referred to as a Non-U.S. Holder. Unitholders who are partners in a partnership (or an entity or arrangement treated as a partnership for U.S. federal income tax purposes) holding our common units, should consult a tax advisor regarding the tax consequences to them of the partnership’s ownership of our common units.
Distributions
Distributions we pay to a Non-U.S. Holder will not be subject to U.S. federal income tax or withholding tax if the Non-U.S. Holder is not engaged in a U.S. trade or business. If the Non-U.S. Holder is engaged in a U.S. trade or business, our distributions will be subject to U.S. federal income tax in the same manner as a U.S. Holder to the extent they constitute income effectively connected with the Non-U.S. Holder’s U.S. trade or business. Effectivelybusiness (provided, in the case of a Non-U.S. Holder entitled to the benefits of an income tax treaty with the United States, such distributions also are attributable to a U.S. permanent establishment). The after-tax amount of any effectively connected dividends received by a corporate Non-U.S. Holder may also be subject to an additional U.S. branch profits tax at a 30% rate (or, if applicable, a lower treaty rate). However, distributions paid to a Non-U.S. Holder that is engaged in a U.S. trade or business maygenerally will be exempt from taxation underU.S. federal income tax if such Non-U.S. Holder is entitled to the benefits of an income tax treaty ifwith the income arising fromUnited States and the distribution is not attributable to a U.S. permanent establishment maintained by the Non-U.S. Holder.
Disposition of Units
In general, a Non-U.S. Holder is not subject to U.S. federal income tax or withholding tax on any gain resulting from the disposition of our common units or Series A Preferred Units provided the Non-U.S. Holder is not engaged in a U.S. trade or business. A Non-U.S. Holder that is engaged in a U.S. trade or business will be subject to U.S. federal income tax in the same manner as a U.S. Holder in the event the gain from the disposition of units is effectively connected with the conduct of such U.S. trade or business (provided, in the case of a Non-U.S. Holder entitled to the benefits of an income tax treaty with the United States, such gain also is attributable to a U.S. permanent establishment). However, even if not engaged in a U.S. trade or business, individual Non-U.S. Holders may be subject to tax on gain resulting from the disposition of our common units or Series A Preferred Units if they are present in the United States for 183 days or more during the taxable year in which those units are disposed and meet certain other requirements.
Backup Withholding and Information Reporting
In general, payments to a non-corporate U.S. Holder of distributions or the proceeds of a disposition of our common units or Series A Preferred Units will be subject to information reporting. These payments to a non-corporate U.S. Holder also may be subject to backup withholding if the non-corporate U.S. Holder:
•fails to provide an accurate taxpayer identification number;
•is notified by the IRS that it has failed to report all interest or corporate distributions required to be reported on its U.S. federal income tax returns; or
•in certain circumstances, fails to comply with applicable certification requirements.
Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on IRS Form W-8BEN, W-8BEN-E, W-8ECI, W-8EXP or W-8IMY, as applicable.
Backup withholding is not an additional tax. Rather, a unitholder generally may obtain a credit for any amount withheld against its liability for U.S. federal income tax (and obtain a refund of any amounts withheld in excess of such liability) by timely filing a U.S. federal income tax return with the IRS.
In addition, individual citizens or residents of the United States holding certain “foreign financial assets” (which generally includes stock and other securities issued by a foreign person unless held in account maintained by a financial institution) that exceed certain thresholds (the lowest being holding foreign financial assets with an aggregate value in excess of: (1) $50,000 on the last day of the tax year or (2) $75,000 at any time during the tax year) are required to report information relating to such assets. Significant penalties may apply for failure to satisfy the reporting obligations described above.
Unitholders should consult their tax advisors regarding their reporting obligations, if any, that would result from their purchase, ownership or disposition of our units.
Non-United States Tax Considerations
Marshall Islands Tax Consequences
The following discussion is based upon the current laws of the Republic of the Marshall Islands applicable to persons who do not reside in, maintain offices in or engage in business in the Republic of the Marshall Islands.
We and certain of our subsidiaries are incorporated in the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding tax will be imposed upon payments of dividends by us to unitholders that are not residents or domiciled or carrying any commercial activity in the Marshall Islands, nor will such unitholders be subject to any Marshall Islands taxation on the sale or other disposition of commonour units.
United Kingdom Tax Consequences
The following is a discussion of the material United Kingdom tax consequences that may be relevant to prospective unitholders who are persons not resident for tax purposes in the United Kingdom (non-UK Holders).
Prospective unitholders who are resident in the United Kingdom are urged to consult their own tax advisors regarding the potential United Kingdom tax consequences to them of an investment in our common units. For this purpose, a company incorporated outside of the United Kingdom will be treated as resident in the United Kingdom in the event its central management and control is carried out in the United Kingdom.
The discussion that follows is based upon existing United Kingdom legislation and current H.M. Revenue & Customs practice as of the date of this Annual Report. Changes in these authorities may cause the tax consequences to vary substantially from the consequences of unit ownership described below. Unless the context otherwise requires, references in this section to “we”, “our”, or “us” are references to Golar LNG Partners LP.
Taxation of Non-UK Holders
Under the United Kingdom Tax Acts, non-UK holders will not be subject to any United Kingdom taxes on income or profits (including chargeable (capital) gains) in respect of the acquisition, holding, disposition or redemption of the common units, provided that:
•we are not treated as carrying on a trade, profession or vocation in the United Kingdom;
•such holders do not have a branch or agency or permanent establishment in the United Kingdom to which such common units pertain; and
•such holders do not use or hold and are not deemed or considered to use or hold their common units in the course of carrying on a trade, profession or vocation in the United Kingdom.
A non-United Kingdom resident company or an individual not resident in the United Kingdom that carries on a business in the United Kingdom through a partnership is subject to United Kingdom tax on income derived from the business carried on by the partnership in the United Kingdom. Nonetheless, we expect to conduct our affairs in such a manner that we will not be treated as carrying on business in the United Kingdom. Consequently, we expect that non-UK Holders will not be considered to be carrying on business in the United Kingdom for the purposes of the United Kingdom Tax Acts solely by reason of the acquisition, holding, disposition or redemption of their commonour units.
While we do not expect it to be the case, if the arrangements we propose to enter into result in our being considered to carry on business in the United Kingdom for the purposes of the United Kingdom Tax Acts, our unitholders would be considered to be carrying on business in the United Kingdom and would be required to file tax returns with the United Kingdom taxing authority and, subject to any relief provided in any relevant double taxation treaty (including, in the case of holders resident in the United States, the double taxation agreement between the United Kingdom and the United States), would be subject to taxation in the United Kingdom on any income and chargeable gains that are considered to be attributable to the business carried on by us in the United Kingdom.
EACH PROSPECTIVE UNITHOLDER IS URGED TO CONSULT HIS OWN TAX COUNSEL OR OTHER ADVISOR WITH REGARD TO THE LEGAL AND TAX CONSEQUENCES OF UNIT OWNERSHIP UNDER THEIR PARTICULAR CIRCUMSTANCES.
F.Dividends and Paying Agents
Not applicable.
G.Statements by Experts
Not applicable.
H.Documents on Display
Documents concerning us that are referred to herein may be inspected at our principal executive headquarters at 2nd Floor, S.E. Pearman Building, 9 Par-la-Ville Road, Hamilton HM 11, Bermuda.ThoseBermuda. Those documents electronically filed via the SEC’s Electronic Data Gathering, Analysis, and Retrieval (or EDGAR) system may also be obtained from the SEC’s website at www.sec.gov, free of charge, or from the SEC’s Public Reference Section at 100 F Street, NE, Washington, D.C. 20549, at prescribed rates. Further information on the operation of the SEC public reference rooms may be obtained by calling the SEC at 1-800-SEC-0330.
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 enter into a variety of derivative instruments and contracts to maintain the desired level of exposure arising from these risks.
Our policy is to hedge our exposure to risks, where possible, within boundaries deemed appropriate by management.
A discussion of our accounting policies for derivative financial instruments is included in note 2 “Basis of Preparation and Summary of Significant Accounting PoliciesPolicies” to our audited consolidated financial statements.Consolidated Financial Statements. Further information on our exposure to market risk is included in note 2524 “Financial Instruments” to our audited consolidated financial statements included elsewhere in this Annual Report.Consolidated Financial Statements.
The following analyses provide quantitative information regarding our exposure to foreign currency exchange rate risk and interest rate risk. There are certain shortcomings inherent in the sensitivity analyses presented, primarily due to the assumption that exchange rates change in a parallel fashion and that interest rates change instantaneously.
Interest rate risk. A significant portion of our long-term debt 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, 2015, the notional amount of the designated interest rate swaps hedged against our debt (excluding the cross currency swap) was $142.5 million. The principal of the loans and net capital lease obligations, net of restricted cash, outstanding as of December 31, 2015 was $1,294.6 million. Based on our floating rate bank debt outstanding (excluding balances drawn down on our revolving credit facilities) of $1,007.8 million as of December 31, 2015,Assuming a 1% increase in the floating interest rate (including the effect of interest rates under the related interest rate swap agreements) as applied against our floating rate debt balance and our proportionate share of obligation under the Partnership Guarantee as of December 31, 2019, this would increase our interest expense by $2.8 million forper annum. We have calculated our floating rate debt as the year ended December 31, 2016.principal outstanding on our long-term bank debt and net finance lease obligations (net of related restricted cash balances). For disclosure of the fair value of the derivatives and debt obligations outstanding as of December 31, 2015,2019, please seeread note 2524 “Financial Instruments” to our audited consolidated financial statements included elsewhere in this Annual Report.the Consolidated Financial Statements.
Foreign currency risk. A substantial amount of our transactions, assets and liabilities are denominated in currencies other than U.S. Dollars, such as Pound Sterling, in relation to the administrative expenses we will be charged by Golar Management in the UK and operating expenses incurred in a variety of foreign currencies and Brazilian RealsReais in respect of our Brazilian subsidiary which receives income and pays expenses in Brazilian Reals.Reais. Based on our Pound Sterling expenses for the year ended December 31, 2015,2019, a 10% depreciation of the U.S. Dollar against Pound Sterling would have increased our expenses by approximately $0.7$0.1 million. Based on our Brazilian RealsReais expenses for the year ended December 31, 2015,2019, a 10% depreciation of the U.S. Dollar against the Brazilian RealsReais would have increased our net revenue and expenses by approximately $0.9$0.3 million.
The base currency of the majority of our seafaring officers’ remuneration was the Euro, Indonesian Rupiah or Brazilian Reals.Reais. Based on the crew costs for the year ended December 31, 2015,2019, a 10% depreciation of the U.S. Dollar against the Euro, Indonesian Rupiah and the Brazilian RealsReais would increase our crew cost by approximately $1.9$3.0 million.
We are exposed to some extent in respect of the lease transaction entered into with respect to the Methane Princess, which is denominated in Pound Sterling, although it is economically hedged by the Pound Sterling cash deposit that secures the obligations under the lease. We use cash from the deposit to make payments in respect of the lease transaction entered into with respect to the Methane Princess. Gains or losses that we incur are unrealized unless we choose or are required to withdraw monies from or pay additional monies into the deposit securing this obligation. Among other things, movements in interest rates give rise to a requirement for us to adjust the amount of the Pound Sterling cash deposit. Based on this lease obligation and the related cash deposit as of December 31, 2015,2019, a 10% appreciation in the U.S. Dollar against Pound Sterling would give rise to a foreign exchange movement of approximately $0.9$0.8 million.
In 2012 we issued senior unsecured high-yield bonds denominated in Norwegian Kroner. We are therefore exposed to the currency movements on the outstanding principal amount of $147.0 million as of December 31, 2015. In order to hedge this exposure, we entered into cross currency interest rate swaps with banks to exchange our NOK payment obligations into U.S. Dollar payment obligations. We could be exposed to a currency fluctuation risk if upon the occurrence of a change of control event, the bondholders exercise their right of pre-payment.
Item 12.Description of Securities Other than Equity Securities
Not applicable.
PART II
Item 13.Defaults, Dividend Arrearages and Delinquencies
Not applicable.
Item 14.Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15.Controls and Procedures
(a) Disclosure Controls and Procedures
Management assessed the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) of the Securities Exchange Act of 1934, as of the end of the period covered by this annual report as of December 31, 2015.2019. Based upon that evaluation, our principal executive, officer and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of the evaluation date.
(b)Management’s Annual Report on Internal Control over Financial Reporting
In accordance with the requirements of Rule 13a-15 of the Securities Exchange Act of 1934, the following report is provided by management in respect of our internal control over financial reporting. As defined by the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Consolidated Financial Statements for external purposes in accordance with GAAP and includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Partnership;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Partnership are being made only in accordance with authorizations of management and directors of the Partnership; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Partnership’s assets that could have a material effect on the financial statements.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our published Consolidated Financial Statements for external purposes under GAAP.
In connection with the preparation of our annual Consolidated Financial Statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2015,2019, based on criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring OrganisationsOrganizations of the Treadway Commission.
Management’s assessment included an evaluation of the design of the Partnership’s internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this assessment, management has concluded and hereby reports that as of December 31, 2015,2019, the Partnership’s internal control over financial reporting is effective.
The Partnership’s independent registered public accounting firm has issued an attestation report on the effectiveness of the Partnership’s internal control over financial reporting.
(c) Attestation Report of the Registered Public Accounting Firm
The effectiveness of the Partnership’s internal control over financial reporting as of December 31, 20152019 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears on page F-3F-2 of our Consolidated Financial Statements.
(d) Changes in Internal Control over Financial Reporting
There were no changes in our internal controlscontrol over financial reporting that occurred during the period covered by this annual reportAnnual Report that have materially affected, or are reasonably likely to materially affect, the Partnership’sour internal control over financial reporting.
Item 16.[Reserved]
Item 16.[Reserved]
Item 16A.Audit Committee Financial Expert
Our board of directors has determined that Lori Wheeler Naess qualifies as an audit committee financial expert and is independent under applicable Nasdaq and SEC standards.
Item 16B.Code of Ethics
We have adopted the Golar LNG Partners LP Corporate Code of Business Ethics and Conduct that applies to all of our employees and our officers and directors. This document is available under the “Corporate Governance”“Governance” tab in the “Investor Relations”“Investors” section of our website (www.golarlngpartners.com). We intend to disclose, under this tab of our web site,website, any waivers to or amendments of the Golar LNG Partners LP Corporate Code of Business Ethics and Conduct for the benefit of any of our directors and executive officers.
Item 16C.Principal Accountant Fees and Services
In August 2014, we engaged Ernst & Young LLP as our principal accountants2019 and PricewaterhouseCoopers LLP was dismissed. The decision to change accountants was approved by2018, the Audit Committee and our Board of Directors.
Fees Incurredfees incurred by the Partnership for Ernst & Young LLP and PricewaterhouseCoopers LLP’s Services
In 2015 and 2014, the fees rendered by the auditorsLLP's services were as follows:
| | | 2015 | | 2014 | | 2019 | | 2018 |
Audit Fees | $ | 808,593 |
| | $ | 602,385 |
| Audit Fees | $ | 1,024,503 | | | $ | 1,404,179 | |
| Tax Fees | 104,471 |
| | 64,040 |
| Tax Fees | 129,289 | | | 66,789 | |
All Other Fees | | All Other Fees | 102,196 | | | 133,736 | |
| $ | 913,064 |
| | $ | 666,425 |
| | $ | 1,255,988 | | | $ | 1,604,704 | |
Audit Fees
Audit fees for 20152019 and 20142018 include fees related to aggregate fees billed for professional services rendered by the principal accountant, for the audit of the Partnership’s annual consolidated 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.
Total audit fees incurred with respect to Ernst & Young LLP were approximately $0.8 million and $0.5 million for 2015 and 2014, respectively. Total audit fees incurred with respect to PricewaterhouseCoopers LLP were $nil and approximately $0.1 million for 2015 and 2014, respectively.
Tax Fees
Tax fees for 20152019 and 2018 are largelythe aggregate fees billed for professional services rendered by the principal accountant for tax consultation services, provided by Ernst & Young LLP. Tax fees for 2014 were largely forcompliance, tax consultation services, provided by Ernst & Young LLPadvice and PricewaterhouseCoopers LLP, respectively.tax planning.
The Audit Committee has the authority to pre-approve permissible audit-related and non-audit services not prohibited by law to be performed by our independent auditors and associated fees. Engagements for proposed services either may be separately pre-approved by the audit committee or entered into pursuant to detailed pre-approval policies and procedures established by the audit committee, as long as the audit committee is informed on a timely basis of any engagement entered into on that basis. The audit committee separately pre-approved all engagements and fees paid to our principal accountant in 2015.2019.
All Other Fees
All other fees are the aggregate fees billed for professional services rendered by the principal accountant for other services that are not included in the scope of the current year audit or tax services as mentioned above. The majority of the balance comprises of advisory services provided during the year.
Item 16D.Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In December 2015,March 2018, our Board of Directors approved a common unit repurchase program of up to $25.0 million of theour outstanding common units of the Partnership in the open market over a two year period.two-year period and subsequently increased the common unit repurchase program to $50.0 million in December 2018. As of December 31, 2015,2019, we had repurchased a total of 496,0001,084,594 units under the common unitsunit repurchase program for an aggregate cost of $6.0$15.6 million.
In accordance with the provisions of the Partnership Agreement,partnership agreement, all common units repurchased are deemed canceled and not outstanding, with immediate effect.
| | | | | | | | | | | | | | | | | | | | | | | |
Month of repurchase | Total number of common units purchased | | Average price paid per common unit | | Total number of common units purchased as part of publicly announced plans or program | | Maximum value of common units that may be purchased under the plans or program |
| | | | | | | |
| | | | | | | |
March 2018 | 439,672 | | | $ | 18.18 | | | 439,672 | | | $ | 42,008,085 | |
June 2018 | 96,100 | | | $ | 15.31 | | | 535,772 | | | $ | 40,536,547 | |
December 2018 | 395,094 | | | $ | 11.39 | | | 930,866 | | | $ | 36,037,726 | |
Total as of December 31, 2018 | 930,866 | | | | | 930,866 | | | $ | 36,037,726 | |
August 2019 | 153,728 | | | $ | 10.19 | | | 1,084,594 | | | $ | 34,471,238 | |
Total as of December 31, 2019 | 1,084,594 | | | | | 1,084,594 | | | $ | 34,471,238 | |