UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
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Commission file number 000-50113
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Golar LNG Limited
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(Exact name of Registrant as specified in its charter)
Golar LNG Limited
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(Translation of Registrant's name into English)
Bermuda
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(Jurisdiction of incorporation or organization)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
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(Address of principal executive offices)
Securities registered or to be registered pursuant to section 12(b) of the Act.
Title of each class Name of each exchange
on which registered
None
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Securities registered or to be registered pursuant to section 12(g) of the Act.
Common Shares, par value $1.00
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(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
None
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(Title of class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
65,612,000 Common Shares, par value $1.00
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 |_| Item 18 |X|
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS ............ 3
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE .......................... 3
ITEM 3. KEY INFORMATION .................................................. 3
ITEM 4. INFORMATION ON THE COMPANY ....................................... 12
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS ..................... 28
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES ....................... 41
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS ..................................................... 44
ITEM 8. FINANCIAL INFORMATION ............................................ 48
ITEM 9. THE OFFER AND LISTING ............................................ 48
ITEM 10. ADDITIONAL INFORMATION ........................................... 49
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK ................................................ 60
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES ................................................ 60
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES .................. 61
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS .............................................. 61
ITEM 15. CONTROLS AND PROCEDURES .......................................... 61
ITEM 16. RESERVED ......................................................... 61
PART III
ITEM 17. FINANCIAL STATEMENTS ............................................. 61
ITEM 18. FINANCIAL STATEMENTS ............................................. 61
ITEM 19. EXHIBITS ......................................................... 62
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This document contains assumptions, expectations, projections,
intentions and beliefs about future events, in particular under Item 4,
"Information on the Company - Our Business Strategy" and Item 5, "Operating and
Financial Review and Prospects". These statements are intended as
"forward-looking statements." We may also from time to time make forward-looking
statements in our periodic reports to the United States Securities and Exchange
Commission, other information sent to our stockholders, and other written
materials. We caution that assumptions, expectations, projections, intentions
and beliefs about future events may and often do vary from actual results and
the differences can be material.
All statements in this document that are not statements of historical
fact are forward-looking statements. Forward-looking statements include, but are
not limited to, such matters as:
o future operating or financial results;
o statements about future, pending or recent acquisitions, business
strategy, areas of possible expansion, and expected capital spending
or operating expenses;
o statements about LNG market trends, including charter rates,
development of a spot market, factors affecting supply and demand, and
opportunities for the profitable trading of LNG;
o expectations about the availability of vessels to purchase, the time
which it may take to construct new vessels, or vessels' useful lives;
and
o our ability to obtain additional financing.
When used in this document, words such as "believe," "intend,"
"anticipate," "estimate," "project," "forecast," "plan," "potential," "will,"
"may," "should," and "expect" and similar expressions are intended to identify
forward-looking statements but are not the exclusive means of identifying such
statements.
We undertake no obligation to publicly update or revise any
forward-looking statements contained in this document, whether as a result of
new information, future events or otherwise, except as required by law. In light
of these risks, uncertainties and assumptions, the forward-looking events
discussed in this document might not occur, and our actual results could differ
materially from those anticipated in these forward-looking statements.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following selected consolidated and combined financial and other
data summarize our historical consolidated and combined financial information.
We derived the information as at December 31, 2003 and 2002 and for each of the
years in the three-year period ended December 31, 2003 from our audited combined
and consolidated financial statements included in Item 18 of this annual report
on Form 20-F, prepared in accordance with accounting principles generally
accepted in the United States, or U.S. GAAP. The selected income statement data
with respect to the years ended December 31, 2000 and 1999 and the selected
balance sheet data as at December 31, 2001, 2000 and 1999, has been derived from
audited combined and consolidated financial statements prepared in accordance
with U.S. GAAP not included herein. The following table should also be read in
conjunction with Item 5. "Operating and Financial Review and Prospects" and the
Company's Consolidated and Combined Financial Statements and Notes thereto
included herein.
We are a holding company that was formed on May 10, 2001. We acquired
our liquefied natural gas, or LNG, operations from Osprey Maritime Limited, or
Osprey, a company indirectly controlled by our Chairman and President and major
shareholder, John Fredriksen. The LNG operations were a fully integrated
business of Osprey prior to our acquisition of them. Accordingly, the following
financial information for the years ended December 31, 2000 and 1999 and for
periods that include the five months to May 31, 2001 has been derived from the
financial statements and accounting records of Osprey and reflects significant
assumptions and allocations. Our financial position, results of operations and
cash flows could differ from those that would have resulted if we operated
autonomously or as an entity independent of Osprey in the period for which
annual historical financial data is presented for the years ended December 31,
2000 and 1999 and for periods that include the five months to May 31, 2001
below, and, similarly may not be indicative of our future operating results or
financial performance.
At or for the Fiscal Year Ended
December 31
-------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------ -------
(in thousands of $, except per common share
data and fleet data)
Income Statement Data:
Total operating revenues 132,765 130,611 114,223 113,009 81,792
Vessel operating expenses (1) 30,156 28,061 24,537 20,973 18,249
Voyage expenses (5) 2,187 -- -- -- --
Administrative expenses 7,138 6,127 8,232 7,715 7,935
Restructuring costs -- -- 1,894 -- --
Depreciation and amortization 31,147 31,300 31,614 36,488 29,464
Operating income 62,137 65,123 47,946 47,833 26,144
Net financial expenses (15,140) (40,367) (41,617) (44,820) (27,764)
Income (loss) before income taxes and minority interests 46,997 24,756 6,329 3,013 (1,620)
Income taxes and minority interests (7,427) (2,381) 1,963 3,517 237
Net income (loss) 39,570 27,137 4,366 (504) (1,857)
Earnings (loss) per common share
- - basic and diluted (2) 0.68 0.48 0.08 (0.01) (0.03)
Cash dividends per common share -- -- -- -- --
Weighted average number of shares - basic 58,533 56,012 56,012 56,012 56,012
Weighted average number of shares - diluted (2) 58,569 56,021 56,019 56,012 56,012
Balance Sheet Data (at end of year):
Cash and cash equivalents 117,883 52,741 57,569 5,741 2,567
Restricted cash and short-term investments 32,095 12,760 14,163 13,091 --
Marketable securities 13,810 -- -- -- --
Short-term investments -- -- -- 14,231 --
Amounts due from related parties 180 281 261 -- --
Long-term restricted cash 623,179 -- -- -- --
Newbuildings 207,797 291,671 132,856 -- 158,110
Vessels and equipment, net 211,098 617,583 641,371 765,559 541,922
Vessels under capital lease, net 553,385 -- -- -- --
Total assets 1,785,602 987,935 855,991 817,990 724,101
Current portion of long-term debt 61,331 48,437 41,053 10,171 --
Current indebtedness due to related parties -- 32,703 85,278 12,000 12,000
Long-term debt 593,904 629,173 483,276 204,329 126,308
Long-term debt due to related parties -- -- -- 287,400 329,400
Obligations under capital leases 616,210 -- -- -- --
Minority interest 18,706 13,349 25,820 26,011 14,250
Stockholders' equity 340,435 196,136 174,397 257,034 225,056
Common shares outstanding (2) 65,612 56,012 56,012 56,012 56,012
Fleet Data (unaudited)
Number of vessels at end of year (3) 7 6 6 6 5
Average number of vessels during year (3) 6.34 6 6 6 5
Average age of vessels (years) 19.3 21.4 20.4 19.4 22.1
Total calendar days for fleet 2,315 2,190 2,190 2,182 1,825
Total operating days for fleet (4) 2,140 2,166 2,060 2,103 1,673
Average daily time charter equivalent earnings (5) $57,300 $59,000 $53,600 $50,900 $43,300
Average daily vessel operating costs (6) $13,000 $12,800 $11,200 $9,600 $10,000
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Footnotes
1. Vessel operating expenses are the direct costs associated with running a
vessel including crew wages, vessel supplies, routine repairs, maintenance
and insurance. In addition, they include an allocation of overheads
allocable to vessel operating expenses.
2. Since our financial results for the years ended December 31, 2000, 1999 and
for the periods that include the five months to May 31, 2001, were "carved
out" of those of Osprey, we did not record any specific share capital for
the period before we acquired Osprey's LNG assets and operations. To
provide a measurement of earnings per share for those periods, we use for
basic earnings per share the 12,000 shares issued in connection with the
formation of Golar on May 10, 2001 and the subsequent issuance of 56
million shares in our Norwegian placement as described in Note 1 to our
Combined Financial Statements. Basic earnings per share is computed based
on the income (loss) available to common shareholders and the weighted
average number of shares outstanding. The computation of diluted earnings
per share assumes the conversion of potentially dilutive instruments.
3. We have a 60 per cent interest in one of our vessels and a 100 per cent
interest in our remaining six vessels, which we lease under long-term lease
agreements.
4. The operating days for our fleet is the total number of days in a given
period that the vessels were in our possession less the total number of
days offhire. We define days offhire as days spent on repairs, drydockings,
special surveys and vessel upgrades or awaiting employment during which we
do not earn charter hire.
5. The majority of our vessels are operated under time charters. The Methane
Princess however, operated under voyage charters from delivery in August
2003, until December 31, 2003. Under a time charter, the charterer pays
substantially all of the vessel voyage costs whereas under a voyage
charter, the vessel owner pays such costs. Vessel voyage costs are
primarily fuel and port charges. Accordingly, charter income from a voyage
charter would be greater than that from an equally profitable time charter
to take account of the owner's payment of vessel voyage costs. In order to
compare vessels trading under different types of charters, it is standard
industry practice to measure the revenue performance of a vessel in terms
of average daily time charter equivalent earnings, or TCEs. For time
charters, this is calculated by dividing time charter revenues by the
number of calendar days minus days for scheduled offhire. We perform this
calculation on a vessel by vessel basis. For voyage charters, this is
calculated by dividing voyage revenues, net of vessel voyage costs, by the
number of days on charter. Scheduled off-hire days are excluded from this
calculation. Net voyage revenues, a non-GAAP measure, provides more
meaningful information to us about the operating revenues generated from
our voyage charters than gross voyage revenues, the most directly
comparable GAAP measure. Net voyage revenues are also widely used by
investors and analysts in the tanker shipping industry for comparing
financial performance between companies and to industry averages. For 2003
our total net revenues, i.e. net of voyage expenses, were $130,578,000.
6. We calculate average daily vessel operating costs by dividing vessel
operating costs by the number of calendar days. We do this calculation on a
vessel by vessel basis.
B. Capitalization and Indebtedness
Not Applicable
C. Reasons for the Offer and Use of Proceeds
Not Applicable
D. Risk Factors
Some of the following risks relate principally to our business or to
the industry in which we operate. Other risks relate principally to the
securities market and ownership of our shares. Any of these risks, or any
additional risks not presently known to us or that we currently deem immaterial,
could significantly and adversely affect our business, our financial condition,
our operating results and the trading price of our shares.
Risks Related to our Business
Currently, we generate a substantial majority of our revenue under
seven long-term agreements with two customers, and the unanticipated loss of any
of these agreements or either customer would likely interrupt our related cash
flow.
We currently generate substantially of our revenue under a total of
seven long-term charters with two large and established customers. In the year
ended December 31, 2003, BG Group plc, or BG, accounted for 48.8 per cent and
Pertamina accounted for 46.7 per cent of our total operating revenues,
respectively. Pertamina chartered two vessels during 2003 and BG chartered four.
In February 2004 BG took a fifth vessel on long-term time charter. All of our
charters have fixed terms, but might nevertheless be lost in the event of
unanticipated developments such as a customer's breach. Our customers may
terminate their charters with us if, among other events, the relevant vessel is
lost or damaged beyond repair. The unanticipated loss of any of these charters
or either customer would likely interrupt our related cash flow because we
cannot be sure that we would be able to enter into attractive replacement
charters on short notice. A persistent and continued interruption of our cash
flow could, in turn, substantially and adversely affect our financial condition.
If construction of any of the three LNG carriers we have ordered and
which are yet to be delivered, were to be substantially delayed or left
incomplete, our earnings and financial condition could suffer.
We have binding contracts for the construction of three new LNG
carriers, or newbuildings, by two established Korean shipyards, which have yet
to be delivered. While each shipbuilding contract contains a liquidated damages
clause requiring the shipyard to refund a portion of the purchase price if
delivery of a vessel is delayed more than 30 days, any such delay could
adversely affect our earnings and our financial condition. In addition, if these
shipyards were unable to deliver a particular vessel on time, we might be unable
to perform related short or long-term charters and our earnings and financial
condition could suffer.
Completion of our newbuilding program is dependent on additional debt
financing.
We have installments relating to the construction cost of our three
newbuildings still under construction, which are due on October 31, 2004 and
during 2005 and 2006. We currently do not have financing in place to meet all of
these payments. In order to fulfill these financial commitments, we will need to
obtain further loans or other financing in the amount of approximately $313
million. We have taken delivery of two vessels during the period from December
31, 2003 to June 29, 2004 and have obtained financing for both. It is standard
in the shipping industry to finance between 50 and 80 per cent of the purchase
price of vessels, or construction cost in the case of newbuildings, through bank
financing. In the case of vessels that have charter coverage, the debt finance
percentage may increase significantly. If we were to obtain 50 per cent debt
financing to cover the installments due on our three remaining unfinanced
newbuildings, this would equate to additional finance of approximately $229
million of the $313 million required. For further information concerning our
future financing plans, see Item 5; "Operating and Financial Review and
Prospects, Liquidity and Capital Resources - Newbuilding Contracts and Capital
Commitments". While we believe we will be able to arrange financing for the full
amount of newbuilding payments due, to the extent we do not timely obtain
necessary financing for a newbuilding, the completion of that newbuilding could
be delayed or we could suffer financial loss, including the loss of all or a
portion of the progress payments we had made to the shipyard and any deficiency
if the shipyard is not able to recover its costs from the sale of the
newbuilding.
We are considering various alternatives for the employment of our
newbuildings, failure to find profitable employment for them could adversely
affect our operations.
We have and will incur further substantial costs for the newbuildings
that we have ordered. Our first newbuilding, delivered in August 2003, the
Methane Princess, is now employed on a long-term charter with BG. Our second
newbuilding to be delivered, the Golar Winter, started a ten month charter on
May 31, 2004. We are considering various employment opportunities for our third
newbuilding, which was delivered in June 2004 and our three newbuildings
currently under construction that may include medium-term or long-term charter
contracts, trading in the developing spot LNG carrier charter market, that is,
carrying LNG under short-term contracts of up to one year or on a per voyage
basis, and entering LNG trading as a principal. If we cannot obtain profitable
employment for these vessels, our earnings will suffer. If we are unable to
secure term charter coverage for a newbuilding, we may be unable to obtain the
financing necessary to complete that newbuilding. In addition, whether or not we
employ our newbuildings profitably, we must service the debt that we incur to
finance them.
If we do not accomplish our strategic objective of entering into other
areas of the LNG industry, we may incur losses and our strategy to continue
growing and increasing operating margins may not be realized.
A part of our strategy reflects our assessment that we should be able
to expand profitably into areas of the LNG industry other than the carriage of
LNG. We have not previously been involved in other LNG industry businesses and
our expansion into these areas may not be profitable. Our plan to consider
opportunities to integrate vertically into upstream and downstream LNG
activities depends materially on our ability to identify attractive partners and
projects and obtain project financing at a reasonable cost.
Our loan and lease agreements impose restrictions that may adversely
affect our earnings or may prevent us from taking actions that could be in our
shareholders' best interest.
Covenants in our loan and lease agreements limit our ability to:
o merge into or consolidate with any other entity or sell or
otherwise dispose of all or substantially all of their assets;
o make or pay equity distributions;
o incur additional indebtedness;
o incur or make any capital expenditure; or
o materially amend, or terminate, any of our current charter
contracts or management agreements.
In addition, if the ownership interest in us of John Fredriksen, our
chairman, and his affiliated entities falls below 25 per cent of our share
capital, a default of some of our loan agreements and lease agreements to which
we are a party would occur.
In addition, covenants in our loan and lease agreements may
effectively prevent us from paying dividends should our board of directors wish
to do so and may require us to obtain permission from our lenders and lessors to
engage in some other corporate actions. Our lenders' and lessors' interests may
be different from those of our shareholders and we cannot guarantee investors
that we will be able to obtain our lenders' and lessors' permission when needed.
This may adversely affect our earnings and prevent us from taking actions that
could be in our shareholders' best interests.
If we do not maintain the financial ratios contained in our loan and
lease agreements, we could face acceleration of the due date of our debt and the
loss of our vessels.
Our loan and lease agreements require us to maintain specific
financial levels and ratios, including minimum available cash, ratios of current
assets to current liabilities (excluding current long-term debt), ratios of net
debt to earnings before interest, tax, depreciation and amortization and the
level of stockholders equity. Although we currently comply with these
requirements, if we were to fall below these levels we would be in default of
our loans and lease agreements and the due date of our debt could be accelerated
and our lease agreements terminated, which could result in the loss of our
vessels.
Provisions in our UK vessel leases may further limit our flexibility.
In addition to the general restrictions contained in our loan
agreements and UK vessel lease agreements, our UK vessel lease agreements in
respect of six of our vessels currently on long-term charter also limit our
ability to time charter our six currently operating vessels to time charterers,
other than BG and Pertamina, who do not have credit ratings of at least BBB+,
unless we post additional security over and above the letters of credit already
provided as security for our lease obligations. This will impact us when these
vessels finish their long-term charters. Additionally our seventh lease
agreement in respect of the Golar Winter imposes certain restrictions on
chartering. These restrictions could limit our operational flexibility and
negatively impact our financial position or cash flows in the future.
We no longer have legal title to our seven currently operating vessels
that are subject to UK vessel leases and have agreed to indemnify the UK vessel
lessor for adverse tax consequences, which could adversely affect our results
and financial position.
While we have complete operational control and responsibility for our
seven currently operating vessels that are subject to UK vessel leases, we do
not have legal title to them. In the event that we were in default under a lease
agreement, the lessor could terminate those leases potentially resulting in the
sale of the vessels. While we would realize 99.9 per cent of the net proceeds of
the sale of the vessels, it may not be in our best interests to sell the vessels
at that time. In addition, our ability to realize our portion of the net
proceeds will depend on the cooperation of our lessors, who are recognized UK
financial institutions that have secured their obligations to us, and the
willingness of buyers to take the vessels subject to our time charters with BG
and Pertamina, to whom our lessors and we have given the right of quiet
enjoyment in respect of some of our leases. This means that any sale would be
subject to the buyer's continuing to perform the BG and Pertamina time charters
of the vessels. Any funds that we receive on the sale of the vessels following a
lease termination will also be subordinate to lien claimants, and claims of our
lenders and our lessors for unpaid amounts. In the event of any adverse tax rate
changes or rulings, we may be required to return all or a portion of the cash
inflow that we received in connection with the lease financing transactions,
post additional security or make additional payments to our lessors.
Servicing our debt and lease agreements substantially limits our funds
available for other purposes.
A large part of our cash flow from operations must go to paying
principal and interest on our debt and lease agreements. As of December 31,
2003, our net total indebtedness (including capital lease obligations) was $498
million and our ratio of net indebtedness to total capital was 0.59. We may
incur additional debt of as much as $313 million to fund completion of our three
newbuildings, and we may incur additional indebtedness to fund our possible
expansion into other areas of the LNG industry. Debt payments reduce our funds
available for expansion into other parts of the LNG industry, working capital,
capital expenditures and other purposes. In addition, our business is capital
intensive and requires significant capital outlays that result in high fixed
costs. We cannot assure investors that our existing and future contracts will
provide revenues adequate to cover all of our fixed and variable costs.
Maritime claimants could arrest our vessels, which could interrupt our
cash flow.
If we are in default on some kinds of obligations, such as those to
our crew members, suppliers of goods and services to our vessels or shippers of
cargo, these parties may be entitled to a maritime lien against one or more of
our vessels. In many jurisdictions, a maritime lien holder may enforce its lien
by arresting a vessel through foreclosure proceedings. In a few jurisdictions,
claimants could try to assert "sister ship" liability against one vessel in our
fleet for claims relating to another of our vessels. The arrest or attachment of
one or more of our vessels could interrupt our cash flow and require us to pay
to have the arrest lifted. Under some of our present charters, if the vessel is
arrested or detained for as little as 14 days as a result of a claim against us,
we may be in default of our charter and the charterer may terminate the charter.
It may be difficult to serve process on or enforce a United States
judgment against us, our officers, our directors or some of our experts or to
initiate an action based on United States federal or state securities laws
outside of the United States.
We are a Bermuda corporation and our executive offices are located
outside of the United States. Our officers and directors reside outside of the
United States. In addition, substantially all of our assets and the assets of
our officers, directors and some of our experts are located outside of the
United States. As a result, you may have difficulty serving legal process within
the United States upon us or any of these persons or enforcing a judgment
obtained in a U.S. court to the extent assets located in the United States are
insufficient to satisfy the judgment. In addition, there is uncertainty as to
whether the courts outside of the United States would enforce judgments of
United States courts obtained against us or our officers and directors or
entertain original actions predicated on the civil liability provisions of the
United States federal or state securities laws. As a result, it may be difficult
for you to enforce judgments obtained in United States courts against our
directors, officers and non-U.S. experts or to bring an action against our
directors, officers or non-U.S. experts outside of the United States that is
based on United States federal or state securities law.
We may not be exempt from U.S. taxation on our U.S. source shipping
income, which would reduce our net income and cash flow by the amount of the
applicable tax.
We currently believe we are exempt from tax under either U.S. Internal
Revenue Code, or the Code, Section 883 or the U.S.-U.K. Income Tax Treaty in
effect for 2003, which we refer to as the U.K. Treaty, and intend to claim such
exemption on our U.S. tax returns for 2003. Beginning in 2004, however, final
regulations under Code Section 883 will come into effect. In addition, the U.K.
Treaty has been replaced by a new U.K. Treaty, which we refer to as the New U.K.
Treaty, and will no longer apply for years 2005 and thereafter. It is unclear
whether we will continue to be eligible to claim exemption from tax beginning in
2004 under Code Section 883 and beginning in 2005 under the New U.K. Treaty.
If we were not eligible for exemption from tax under Code Section 883
and the U.K. Treaty, we would be subject to a four percent tax on our U.S.
source shipping income, which is comprised of 50 per cent of our shipping income
attributable to the transport of cargoes to or from United States ports. In the
absence of such exemption, our potential tax liability for the three calendar
years 2001, 2002 and 2003 would have been $488,000, $337,400 and $571,000,
respectively.
Many of our seafaring employees are covered by industry-wide
collective bargaining agreements and the failure of industry groups to renew
those agreements may disrupt our operations and adversely affect our earnings.
We employ approximately 400 seafarers who serve on our ships either
directly or through crewing agents, of which a significant portion are subject
to industry-wide collective bargaining agreements that set basic standards. We
cannot assure you that these agreements will prevent labor interruptions. Any
labor interruptions could disrupt our operations and harm our financial
performance.
If we are treated as a passive foreign investment company, a U.S.
investor in our common shares would be subject to disadvantageous rules under
U.S. tax laws.
If we are treated as a passive foreign investment company in any year,
U.S. holders of our shares would be subject to unfavorable U.S. federal income
tax treatment. We do not believe that we were a passive foreign investment
company in 2003 or will be in any future year. However, passive foreign
investment company classification is a factual determination made annually and
thus may be subject to change if the portion of our income derived from other
passive sources, including the spot trading of LNG for our own account, were to
develop or to increase substantially. Moreover, the Internal Revenue Services
may disagree with our position that time charters do not give rise to passive
income for purposes of the passive foreign investment company rules.
Accordingly, there is a possibility that we could be treated as a passive
foreign investment company for 2003 or for any future year. The passive foreign
investment company rules are discussed in more detail in Item 10 of this annual
report under the heading "Additional Information; Taxation - U.S. Taxation of
U.S. Holders".
Terrorist attacks, such as the attacks on the United States on
September 11, 2001, and other acts of violence or war may affect the financial
markets and our business, results of operations and financial condition.
Terrorist attacks such as the attacks on the United States on
September 11, 2001 and the United States' continuing response to these attacks,
as well as the threat of future terrorist attacks, continues to cause
uncertainty in the world financial markets. The conflict in Iraq may lead to
additional acts of terrorism and armed conflict around the world, which may
contribute to further economic instability in the global financial markets,
including the energy markets. These uncertainties could also adversely affect
our ability to obtain additional financing on terms acceptable to us or at all.
Future terrorist attacks, may also negatively affect our operations
and financial condition and directly impact our vessels or our customers. Future
terrorist attacks could result in increased volatility of the financial markets
in the United States and globally and could result in an economic recession in
the United States or the world. Any of these occurrences could have a material
adverse impact on our operating results, revenue, and costs.
An increase in costs could materially and adversely affect our
financial performance.
Our vessel operating expenses depend on a variety of factors including
crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, many of which are beyond our control and affect the
entire shipping industry. These may increase vessel operating expenses further.
If costs continue to rise, that could materially and adversely affect our
results of operations.
An increase in interest rates could materially and adversely affect
our financial performance
At December 31, 2003 we had a total long-term debt outstanding of $655
million, of which currently $520 million is floating rate debt ($30 million
having been fixed in January 2004). We also use interest rate swaps to manage
interest rate risk. As at December 31, 2003 our interest rate swap arrangements
effectively fix the interest rate exposure on $172 million of floating rate
debt. If interest rates rise significantly, that could materially and adversely
affect our results of operations. Additionally, to the extent that our lease
obligations are secured by restricted cash deposits, our exposure to interest
rate movements are hedged to a large extent. However, movements in interest
rates may require us to place more cash into our restricted deposits and this
could also materially and adversely affect our results of operations.
Risks Related to the LNG Shipping Industry
Over time, charter rates for LNG carriers may fluctuate substantially.
If rates happen to be lower at a time when we are seeking a charter for a
vessel, our earnings will suffer.
Charter rates for LNG carriers fluctuate over time as a result of
changes in the supply-demand balance relating to current and future LNG carrier
capacity. This supply-demand relationship largely depends on a number of factors
outside our control. The LNG market is closely connected to world natural gas
prices and energy markets, which we cannot predict. A substantial or extended
decline in natural gas prices could adversely affect our charter business as
well as our business opportunities. Our ability from time to time to charter or
re-charter any vessel at attractive rates will depend on, among other things,
then prevailing economic conditions in the LNG industry.
The LNG transportation industry is competitive and if we do not
continue to compete successfully, our earnings could be adversely affected.
Although we currently generate a substantial majority of our revenue
under long-term contracts, the LNG transportation industry is competitive,
especially with respect to the negotiation of long-term charters. Furthermore,
new competitors with greater resources could enter this industry and operate
larger fleets through consolidations, acquisitions, or the purchase of new
vessels, and may be able to offer lower charter rates and more modern fleets. If
we do not continue to compete successfully, our earnings could be adversely
affected. Competition may also prevent us from achieving our goal of profitably
expanding into other areas of the LNG industry.
Shipping companies generally must conduct operations in many parts of
the world, and accordingly their vessels are exposed to international risks
which could reduce revenue or increase expenses.
Shipping companies, including those that own LNG carriers, conduct
global operations. Changing economic, regulatory and political conditions in
some countries, including political and military conflicts, have from time to
time resulted in attacks on vessels, mining of waterways, piracy, terrorism and
other efforts to disrupt shipping. The terrorist attacks against targets in the
United States on September 11, 2001, the military response by the United States
and the conflict in Iraq may increase the likelihood of acts of terrorism
worldwide. Acts of terrorism, regional hostilities or other political
instability could affect LNG trade patterns and reduce our revenue or increase
our expenses. Further, we could be forced to incur additional and unexpected
costs in order to comply with changes in the laws or regulations of the nations
in which our vessels operate. These additional costs could have a material
adverse impact on our operating results, revenue, and costs.
Our insurance coverage may not suffice in the case of an accident or
incident.
The operation of any ocean-going vessel carries an inherent risk of
catastrophic marine disaster and property loss caused by adverse weather
conditions, mechanical failures, human error, hostilities and other
circumstances or events. The transportation of LNG is subject to the risk of LNG
leakage and business interruptions due to political circumstances in foreign
countries, hostilities and labor strikes. Events such as these may result in
lost revenues and increased costs for us.
We carry insurance to protect against the accident-related risks
involved in the conduct of our business and environmental damage and pollution
insurance. However, we cannot assure investors that we have adequately insured
ourselves against all risks, that any particular claim will be paid out of such
insurance or that we will be able to procure adequate insurance coverage at
commercially reasonable rates or at all in the future. More stringent
environmental regulations that are currently being considered or that may be
implemented in the future may result in increased costs for insurance against
the risks of environmental damage or pollution. Our insurance policies contain
deductibles for which we will be responsible. They also contain limitations and
exclusions that, although we believe them to be standard in the shipping
industry, may increase our costs or lower our profits. Moreover, if the mutual
insurance protection and indemnity association that provides our tort insurance
coverage were to suffer large unanticipated claims related to the vessel owners,
including us, that it covers, we could face additional insurance costs.
If any of our LNG carriers discharged fuel oil into the environment,
we might incur significant liability that would increase our expenses.
As with all vessels using fuel oil for their engines, international
environmental conventions, laws and regulations, including United States'
federal laws, apply to our LNG carriers. If any of the vessels that we own or
operate were to discharge fuel oil into the environment, we could face claims
under these conventions, laws and regulations. We must also carry evidence of
financial responsibility for our vessels under these regulations. United States
law also permits individual states to impose their own liability regimes with
regard to oil pollution incidents occurring within their boundaries, and a
number of states have enacted legislation providing for unlimited liability for
oil spills.
Any future changes to the laws and regulations governing LNG carrier
vessels could increase our expenses to remain in compliance.
The laws of the nations where our vessels operate as well as
international treaties and conventions regulate the production, storage, and
transportation of LNG. While we believe that we comply with current regulations
of the International Maritime Organization, or IMO, any future noncompliance
could subject us to increased liability, lead to decreases in available
insurance coverage for affected vessels and result in the denial of access to,
or detention in, some ports. Furthermore, in order to continue complying in the
future with United States federal and state laws and regulations as then in
force, or with then current regulations adopted by the IMO, and with any other
future regulations, we may be forced to incur additional costs relating to such
matters as LNG carrier construction, maintenance and inspection requirements,
development of contingency plans for potential leakages and insurance coverage.
Risks Related to our Common Shares
Our Chairman may have the ability to effectively control the outcome
of significant corporate actions.
John Fredriksen, our chairman, and his affiliated entities
beneficially own 42.7 per cent of our outstanding common shares. As a result,
Mr. Fredriksen and his affiliated entities have the potential ability to
effectively control the outcome of matters on which our shareholders are
entitled to vote, including the election of all directors and other significant
corporate actions.
Our annual historical financial information may not accurately reflect
what our results of operations, financial position and cash flows would have
been had we been a separate, stand-alone entity during the periods presented.
All of the annual historical financial information for periods prior
to 2002 that we have included in this annual report has been carved out from the
consolidated financial statements and information of Osprey. We were not a
separate, stand-alone entity for the annual periods presented and therefore this
financial information may not accurately reflect what our results of operations,
financial position and cash flows would have been had we been a separate,
stand-alone entity during the periods presented. In addition, the annual
historical information is not necessarily indicative of what our results of
operations, financial position or cash flows will be in the future.
Because we are a Bermuda corporation, you may have less recourse
against us or our directors than shareholders of a U.S. company have against the
directors of that U.S. Company.
Because we are a Bermuda company the rights of holders of our common
shares will be governed by Bermuda law and our memorandum of association and
bye-laws. The rights of shareholders under Bermuda law may differ from the
rights of shareholders in other jurisdictions. Among these differences is a
Bermuda law provision that permits a company to exempt a director from liability
for any negligence, default, or breach of a fiduciary duty except for liability
resulting directly from that director's fraud or dishonesty. Our bye-laws
provide that no director or officer shall be liable to us or our shareholders
unless the director's or officer's liability results from that person's fraud or
dishonesty. Our bye-laws also require us to indemnify a director or officer
against any losses incurred by that director or officer resulting from their
negligence or breach of duty except where such losses are the result of fraud or
dishonesty. In addition, under Bermuda law the directors of a Bermuda company
owe their duties to that company, not to the shareholders. Bermuda law does not
generally permit shareholders of a Bermuda company to bring an action for a
wrongdoing against the company, but rather the company itself is generally the
proper plaintiff in an action against the directors for a breach of their
fiduciary duties. These provisions of Bermuda law and our bye-laws, as well as
other provisions not discussed here, may differ from the law of jurisdictions
with which investors may be more familiar and may substantially limit or
prohibit shareholders ability to bring suit against our directors.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We are a holding company formed on May 10, 2001 and we currently own
and/or operate a fleet of nine liquefied natural gas, or LNG, carriers. We are
engaged in the acquisition, ownership, operation and chartering of LNG carriers
through our subsidiaries. We operate eight of our vessels through wholly-owned
subsidiaries and we have a 60 per cent interest in the owning company of the
ninth vessel. This ninth vessel, the Golar Mazo, was delivered to us in January
2000 as a newbuilding. Additionally, we have contracts to build three additional
LNG carriers. Seven of our LNG carriers are all currently employed under
long-term charter contracts, one is employed on a short-term charter, and we
currently expect to employ the newbuilding that was delivered in June 2004 on
the spot market.
We are incorporated under the laws of the Islands of Bermuda and
maintain our principal executive headquarters at Par-la-Ville Place, 14
Par-la-Ville Road, Hamilton, Bermuda. Our telephone number is (+1) 441-295-4705.
Our principal ship-management offices are located at 30 Marsh Wall, London,
United Kingdom.
Our business was originally founded in 1946 as Gotaas-Larsen Shipping
Corporation. Gotaas-Larsen entered the LNG shipping business in 1970 and was
acquired by Osprey Maritime Limited, then a Singapore listed publicly traded
company, in 1997. In August 2000, World Shipholding Ltd., a company indirectly
controlled by John Fredriksen, our chairman and president, commenced an
acquisition of Osprey. World Shipholding gained a controlling interest of more
than 50 per cent of Osprey in November 2000 and increased this interest to over
90 per cent in January 2001. World Shipholding completed its acquisition in May
2001. Osprey was delisted from the Singapore Stock Exchange in May 2001.
On May 21, 2001, we acquired the LNG shipping interests of Osprey,
which included one newbuilding contract and an option for a further newbuilding
contract. We also entered into a purchase agreement with Seatankers Management
Company Ltd., a company indirectly controlled by our chairman, John Fredriksen,
to purchase its one newbuilding contract for an LNG carrier and its options to
build three new LNG carriers. Two of the newbuilding options have since been
exercised and two have expired.
On 18 June 2003, Osprey transferred its assets and liabilities, and
consequently its holding of our shares, to World Shipholding. As of that date
World Shipholding held 50.01 per cent of our issued share capital. World
Shipholding owns 42.7 per cent of our shares as at June 29, 2004 following
issuance of further shares by us during 2003.
In July 2003 we issued 5.6 million shares via a direct offering
raising $55.2 million and in December 2003 we issued a further 4.0 million
shares via direct offering raising $51.0 million.
In September 2003 we signed a contract for the construction of a fifth
newbuilding together with the option for two further newbuildings. In February
2004 we exercised one of the options and signed a sixth newbuilding contract.
In April 2004 we took delivery of our second newbuilding, the Golar
Winter, and in June 2004 we took delivery of out third newbuilding, the Golar
Frost.
As at December 31, 2003 we had invested $12.2 million in Korea Line
Corporation, a Korean shipping company listed on the Korean stock exchange.
During the period to June 29, 2003 we purchased additional shares at a cost of
$21.9 million. As at June 29, 2004 we owned 21.09% of Korea Line.
B. Business Overview
Golar LNG is a leading independent owner and operator of liquid
natural gas ("LNG") ships. We currently have a fleet of nine LNG vessels and a
further three that are under construction, one to be delivered in October 2004
and two in the first half of 2006. We are also actively using our 30 years of
experience in the LNG transportation industry to assist us in developing our
business in other areas of the LNG supply chain, in particular innovative marine
based solutions such as floating LNG regasification terminals.
The Natural Gas Industry
Natural gas is one of the world's fastest growing energy sources and
is likely to continue to be so for at least the next 20 years. Already
responsible for approximately 20 per cent of the world's energy supply, the
International Energy Agency, or IEA, projects that demand for natural gas will
rise by approximately 2.2 per cent per annum over the next two decades.
According to the IEA, unprecedented growth in new gas fired power plants are
expected to provide a substantial part of this incremental demand.
The rate of growth of natural gas consumption has been almost twice
that of oil consumption during the last decade. The primary factors contributing
to the growth of natural gas demand include:
o Costs: Technological advances and economies of scale have lowered
capital expenditure requirements.
o Environmental: Natural gas is a clean-burning fuel. It produces less
carbon dioxide and other pollutants and particles per unit of energy
production than coal, fuel oil and other common hydrocarbon fuel
sources.
o Demand from Power Generation: According to the IEA, natural gas is the
fastest growing fuel source for electricity generation worldwide.
o Market Deregulation: Deregulation of the gas and electric power
industry in the United States, Europe and Japan, has resulted in new
entrants and an increased market for natural gas
o Significant Natural Gas Reserves: Approximately half of the world's
remaining hydrocarbon reserves are natural gas.
The LNG Industry
Overview
LNG is liquefied natural gas, produced by cooling natural gas to
- -163(degree)C (-256(Degree) Fahrenheit), or just below the boiling point of
LNG's main constituent, methane. LNG is produced in liquefaction plants situated
around the globe near gas deposits. In its liquefied state, LNG occupies
approximately 1/600th the volume of its gaseous state. Liquefaction makes it
possible to transport natural gas efficiently and safely by sea in specialized
vessels known as LNG carriers. LNG is stored at atmospheric pressure in
cryogenic tanks. LNG is converted back to natural gas in regasification plants
by raising its temperature.
The first LNG project was developed in the mid-1960s and by the
mid-1970s LNG had begun to play a larger role as energy companies developed
remote gas reserves that could not be served by pipelines in a cost-efficient
manner. The LNG industry is highly capital intensive and has historically been
characterised by long-term contracts. The long-term charter of LNG carriers to
carry the LNG is, and remains, an integral part of almost every project.
Over the last 10 years, LNG consumption has shown sustained growth of
approximately 6.75 per cent per annum. The Energy Information Administration of
the United States Department of Energy forecasts annual growth of LNG imports
into the United States through 2025 amounting to approximately 11 per cent per
annum. There is however, no guarantee that this will happen.
Production
There are three major regional areas that supply LNG. These are,
Southeast Asia, including Australia, Malaysia, Brunei and Indonesia, secondly
the Middle East, including Qatar, Oman and United Arab Emirates (with facilities
planned in Iran and Yemen), and finally, the Atlantic Basin countries, including
Algeria, Libya, Nigeria and Trinidad with facilities under construction in Egypt
and Norway and planned in Equitorial New Guinea, Angola and Venezuela. Qatar,
Oman, Trinidad and Nigeria have all begun large scale LNG production in recent
years. It is worth noting that expansion of existing facilities is one of the
major sources of incremental LNG production and most projects with gas reserves
available are considering growth of production.
Consumption
The two major areas that dominate worldwide consumption of LNG are
East Asia; including Japan, which remains by far the biggest importer in the
world, South Korea and Taiwan; and Europe, specifically Spain, France, Italy,
Belgium and Turkey. East Asia currently accounts for approximately 70 per cent
of the global LNG market while Europe accounts for approximately 21 per cent.
The United States presently accounts for approximately 8 per cent of the global
LNG market, but is by far the fastest growing market with an increase of more
than 100% in 2003 alone.
There are currently 14 LNG importing countries with 47 importing
terminals. Japan and South Korea are currently the two largest importers of LNG,
accounting for approximately 65 per cent of the world total LNG imports in 2003.
Almost all natural gas consumption in Japan and South Korea is based on LNG
imports.
The cost of constructing LNG import facilities has decreased in real
terms. This has helped small or low volume markets such as Puerto Rico, Turkey
and Greece to receive imports on a cost-effective basis.
Four LNG import terminals operate in the United States, namely; Lake
Charles, Louisiana, Boston, Massachusetts, Elba Island, Georgia and Cove Point,
Maryland. Cove Point re-opened during the second half of 2003. Expansion plans
exist for the Lake Charles, Elba Island and Cove Point facilities and in
addition as many as 20 companies are currently pursuing more than 30 possible
onshore regasification plants aimed at significantly increasing domestic import
capacity. However, it is likely that the majority of these plants will not be
constructed, due to cost and environmental restrictions.
The LNG Fleet
As of June 2004, the world fleet consisted of 168 LNG carriers with a
total capacity of approximately 19.3 million cubic meters (cbm). The average age
of the fleet was 14 years. Currently there are orders for 76 new LNG carriers to
be constructed for delivery from the second quarter of 2004 through Q2 2008.
The current 'standard' size for LNG carriers is approximately 138,000
to 145,000 cubic meters ('cbm'), up from 125,000 cbm during the 1970's. To
assist with transportation unit cost reduction the average size of vessels is
rising steadily and there are fairly advanced plans for vessels of up to 250,000
cbm. There are also some smaller LNG carriers, mainly built for dedicated short
distance trades. Apart from one such vessel, all the newbuildings to be
delivered from 2004 through 2008 are 137,000 cbm or more. The cost of LNG
carriers has fluctuated from $280 million in the early 1990s to approximately
$170-175 million currently for the current standard size.
LNG carriers are designed for an economic life of approximately 40
years. Therefore all but a very few of the LNG carriers built in the 1970s still
actively trade. In recent contract renewals, LNG vessels have been placed under
time charters with terms surpassing those vessels' 40th anniversaries, which
demonstrates the economic life for such older vessels. As a result, limited
scrapping of LNG carriers has occurred or is likely to occur in the near future.
In view of the fact that LNG is much less of a pollutant than other products
such as oil and given that much more is spent on maintenance of LNG vessels than
oil tankers, the pressure to phase out older vessels has been much less than for
crude oil tankers. We cannot however say that such pressure will not begin to
build in the future.
The current worldwide maximum production capacity of shipyards for LNG
carriers is in excess of 30 ships a year after rapid expansion of production
facilities over the past five years, particularly in Korea. The actual output
depends upon the relative cost of LNG ships to other vessels and the relative
demand for both. The construction period for an LNG carrier is 30-34 months.
However, based on current yard availability, the earliest delivery date for a
new LNG vessel ordered today is likely to be in late 2007. Any new project/trade
with LNG vessel demand before then will have to rely on third party vessels
until potential new orders can be delivered.
Our Business Strategy
We are a leading independent owner and operator of LNG vessels and, we
believe, the only shipping company dedicated exclusively to LNG transportation.
Our objective is to provide safe, reliable and efficient LNG transportation
services to our customers and to use this as the foundation to fulfill our
vision of becoming an industry leader in LNG transportation services and of
expansion into other profitable areas of the LNG chain. Our strategy is
therefore to expand and diversify our LNG shipping operations, concentrating on
our existing customers whilst offering the same level of service to selected new
customers and in this way to capitalise on our shipping assets and thirty years
of industry experience by investing upstream and downstream in the LNG chain.
We intend to cement our relationships with our existing customers and
continue to develop relationships with those who require a shipping partner for
whom LNG transportation is the core business. We will primarily concentrate on
customers and partners who are relatively close to their markets geographically,
in the same way that our existing customers are. For example BG, are mainly
based around the Atlantic, and Pertamina and CPC who are Far East based. MISC,
are also essentially Far East based, although through utilization of our
relatively economic ships they are currently able to compete in the U.S. as
well. We thereby hope to achieve higher margins whilst maintaining strong
service-based relationships because our customers will have the confidence to
place their 'shipping risk' with us on the basis that our core business is safe
and reliable ship operation, whilst theirs is the profitable sale of gas.
To enhance our core margins further we are seeking opportunities to
invest upstream and downstream in the LNG supply chain, where our shipping
experience can add value. We believe we can achieve this aim while at the same
time diversifying our sources of income from LNG and thereby strengthening the
Company. In further pursuit of this we will also consider investing in both
established LNG operations and technologies as well as newly developing
technologies, such as offshore liquefaction and regasification operations. Thus
we are continuing our participation the Italian (Livorno) Floating
Regasification Terminal project, which is now reaching a significant state of
development. We are also actively looking at other projects, which may include
the provision of technical marine and LNG expertise for floating terminal
projects such as Livorno, or for other technically innovative projects as well
as the provision or sourcing of any shipping requirement for these projects.
Additionally, there is the potential to use our industry experience in
other areas including buying and selling of physical cargoes of LNG on a
back-to-back basis, i.e. for any firm purchase there is also a firm sale, where
it compliments the provision of services to our customers.
Background to Our Strategy
As Japan and Korea are now mature LNG markets and demand there is
growing only relatively slowly, LNG producers are now competing for the
lucrative and fast growing U.S. and European Markets. Geography favours the
Atlantic Basin and Mediterranean, and producers in these areas have an advantage
due to their proximity to these new markets. However, the largest reserves and
some of the keenest sellers are currently in the Middle East, which is
significantly further away from the fastest developing markets. This has caused
a major change in emphasis with regard to LNG Shipping as for the first time
cost reduction has become as great a priority as safety and reliability,
particularly for those Middle East producers who are struggling with today's
higher costs of entry into the LNG supply business.
Our strategy is based on supporting our existing customers who are
predominantly located relatively close to their markets and whose priorities
remain reliability and safety ahead of cost considerations. Our strength lies in
being able to offer them modern margin enhancing transportation without
compromising safety and reliability, based on long-term relationships and a
demonstrable track record and our aggressive ship ordering policy.
Our Strategic position and competitive strengths.
We believe that we are the only company focusing exclusively on the
LNG transportation industry and that we have established ourselves as a leading
independent owner and operator of LNG ships. Listed below are what we believe to
be our key competitive strengths:
o Customer relationships. Our customers and partners include some of the
biggest participants in the LNG market: BG Group, Pertamina, Malaysia
International Shipping Corporation and Chinese Petroleum Corporation.
o High level of committed revenue. Seven of our existing nine ships are
on long-term charter, which provides us with a secure and stable cash
flow for the majority of our fleet.
o LNG shipping experience: We have a substantial LNG ship management
base to ensure experienced crew availability and 30 years of
experience of operating LNG ships. We currently operate nine of our
own vessels and four for the National Gas Shipping Company of Abu
Dhabi (NGSCO). Our in-house management has experience of working with
major oil and gas producers active in the LNG market and our vessels
and crews have loaded cargoes from virtually all of the world's LNG
export terminals and have delivered cargoes to most of the major LNG
import facilities in the world.
o Our newbuildings. We have one vessel being delivered in October 2004
and a further two during the first half of 2006, as well as an option
for a fourth vessel for delivery in 2007. Due in part to the limited
number of shipyards qualified to build LNG carriers and the limited
number of berths in those yards, certainly for delivery on these
dates, we believe that these contracts may provide us with a
competitive advantage by allowing us to deploy new LNG carriers
earlier than our competitors. Further more, we believe that unlike
most other companies, we can provide a multi-ship solution that can
cater for the major part of even a substantial project's transport
requirements.
o Our experience and our management. With our extensive experience and
our management's skill we believe we are able to offer technological
solutions not just for adoption of large vessel and alternative
propulsion concepts, but for the development of innovative marine
based solutions such as the Floating Regasification terminal project
in Livorno, Italy and also position ourselves to take advantage of
market opportunities as they arise.
Customers
We currently have customer relationships with four large participants
in the LNG industry, although most of our revenues are derived from two
customers. Our customers are BG Group and its subsidiaries, Pertamina, the
state-owned oil and gas company of Indonesia, the National Gas Shipping Company,
which provides LNG shipping services to the state-owned Abu Dhabi National Oil
Company and the Malaysia International Shipping Corporation (MISC).
We have had charters with Pertamina since 1989. Our revenues from
Pertamina were $61.9 million in 2003, $61.0 million in 2002 and $62.8 million in
2001. This constitutes 47 per cent, 47 per cent and 55 per cent of our revenues
for those years, respectively. BG has chartered LNG carriers from us and our
predecessors since 2000. Our revenue from BG was $64.8 million in 2003, $68.1
million in 2002 and $45.8 million in 2001, constituting 49 per cent, 52 per cent
and 40 per cent of our revenues for those years respectively. BG charters five
vessels from us. The National Gas Shipping Company has contracted with us to
provide management services for four LNG carriers that it owns. Since 1994, the
National Gas Shipping Company, a subsidiary of the Abu Dhabi National Oil
Company, has provided shipping services to the state owned Abu Dhabi Gas
Liquefaction Company. The vessels that we manage for the National Gas Shipping
Company are currently employed delivering LNG pursuant to long-term supply
contracts between the Abu Dhabi Gas Liquefaction Company and the Tokyo Electric
Power Company of Japan. It has been the intention from the start of the project
in 1996 that NGSCO should take over management when they had developed their own
in-house ship management department. Two ships will be delivered back to NGSCO
in July 2004 and the last two ships in January 2005.
Competition
While virtually all of the existing world LNG carrier fleet is still
committed to long-term charters, there is competition for employment of vessels
whose charters are expiring and vessels that are under construction. Competition
for long-term LNG charters is based primarily on price, vessel availability,
size, age and condition of the vessel, relationships with LNG carrier users and
the quality, LNG experience and reputation of the operator. In addition, vessels
coming off charter and newly constructed vessels may operate in the emerging LNG
carrier spot market that covers short-term charters of one year or less as well
as voyage charters.
While we believe that we are the only independent LNG carrier owner
and operator that focuses solely on LNG, other independent shipping companies
also own and operate LNG carriers and have new vessels under construction. These
companies include Bergesen DY ASA (Norway) and Exmar S.A. (Belgium). Three
Japanese ship owning groups, Mitsui O.S.K. Lines, Nippon Yusen Kaisha and K
Line, all of whom used to provide LNG shipping services exclusively to Japanese
LNG companies, are now aggressively moving into the western markets. New
competitors have also recently entered the market and include Maran Navigation
of Greece, A P Moller of Denmark, and Teekay Shipping of Canada, and all have
shown significant intent to compete in the LNG shipping market. There are other
owners who may also attempt to participate in the LNG market if possible.
In addition to independent LNG operators, some of the major oil and
gas producers, including Royal Dutch/Shell, BP Amoco, and BG who own LNG
carriers and are reported to have contracted for the construction of new LNG
carriers.
As discussed above we are considering strategic opportunities in other
areas of the LNG industry. To the extent we do expand into new businesses, there
can be no assurance that we will be able to compete successfully in those areas.
Our new businesses may involve competitive factors that differ from those in the
carriage of LNG and may include participants that have greater financial
strength and capital resources than us.
Our Fleet
Current Fleet
We currently lease seven LNG carriers under long-term leases (between
20 and 30 years), we own an eighth vessel and we have a 60 per cent interest in
another LNG carrier through a joint venture with the Chinese Petroleum
Corporation, the Taiwanese state oil and gas company. Two of our vessels serve
routes between Indonesia and Taiwan and South Korea, while five are involved in
the transportation of LNG from facilities in the Middle East, North Africa and
Trinidad to ports principally in the United States and Europe but also Japan.
One vessel is on short-term charter to the Malaysian International Shipping
Company and one vessel, delivered in June 2004, is currently unemployed.
The following table lists the LNG carriers in our current fleet:
- --------------------------------------------------------------------------------
Year of Capacity, Current Charter
Vessel Name Delivery cbm. Charterer Expiration
- --------------------------------------------------------------------------------
Golar Mazo(1) 2000 135,000 Pertamina 2017
- --------------------------------------------------------------------------------
Golar Spirit 1981 128,000 Pertamina 2006
- --------------------------------------------------------------------------------
Khannur 1977 125,000 BG 2009
- --------------------------------------------------------------------------------
Golar Freeze 1977 125,000 BG 2008
- --------------------------------------------------------------------------------
Gimi 1976 125,000 BG 2010
- --------------------------------------------------------------------------------
Hilli 1975 125,000 BG 2012
- --------------------------------------------------------------------------------
Methane Princess 2003 138,000 BG 2024
- --------------------------------------------------------------------------------
Golar Winter 2004 138,000 Misc. 2005
- --------------------------------------------------------------------------------
Golar Frost 2004 137,000 --
- --------------------------------------------------------------------------------
(1) We own a 60 per cent interest in the Golar Mazo through a joint venture
with the remaining 40 per cent owned by Chinese Petroleum Corporation.
Our currently trading fleet represents approximately 5 per cent of the
worldwide fleet by number of vessels.
Newbuildings
We have executed newbuilding contracts for the delivery of six LNG
carriers since the beginning of 2001, three of which have already been
delivered. The following table summarizes our newbuildings currently under
construction, all of which have capacities of between 140,000 cbm and 145,700
cbm:
Hull number Shipbuilder Expected Delivery Date
----------- ----------- ----------------------
1460 Hyundai October 2004
2226 Daewoo January 2006
2234 Daewoo May 2006
The contract prices for the above vessels totals $476.3 million. In
addition we have an option with Daewoo for one further newbuilding.
The selection of and investment in newbuildings is a key strategic
decision for us. We believe that years of experience in the shipping industry
have equipped our senior management with the experience to determine when to
acquire options for newbuildings and when to order the construction of
newbuildings and the scope of those constructions. Our senior management has
established relationships with several shipyards, and this has enabled us to
access the currently limited shipyard slots to build LNG carriers.
Our Charters
Seven of our current LNG carriers are on long-term time charters to
LNG producers and importers. These charters generally provide us with stable
income and cash flows. In addition to their potential for earning revenues over
the course of their useful lives, we believe that our LNG carriers may also have
significant residual value when they are released from service.
Pertamina Charters. Two of our vessels, the Golar Mazo and the Golar
Spirit, are chartered by Pertamina, the state-owned oil and gas company of
Indonesia. The Golar Mazo, which we jointly own with the Chinese Petroleum
Corporation, transports LNG from Indonesia to Taiwan under an 18 year time
charter that expires at the end of 2017. The Golar Spirit is employed on a
20-year time charter that expires at the end of 2006. Pertamina has options to
extend the Golar Mazo charter for two additional periods of five years each, and
to extend the Golar Spirit charter for up to two years.
Under the Pertamina charters, the operating and drydocking costs of
the vessel are borne by Pertamina on a cost pass-through basis. Pertamina also
pay for hire of the vessels during scheduled drydockings up to a specified
number of days for every two to three year period.
BG Charters. BG, through its subsidiaries, charters five of our
vessels on long-term time charters. These vessels, the Golar Freeze, Khannur,
Gimi, Hilli and since February of this year, the Methane Princess each transport
LNG from export facilities in the Middle East and Atlantic Basin nations to
ports on the east coast of the United States, Europe and Japan. The trading
routes of these vessels are determined by BG. The Golar Freeze commenced a
five-year charter with BG on March 31, 2003. The charter for the Khannur expires
in 2009, the charter for the Gimi expires in 2010 and the charter for the Hilli
expires at a date between January 1, 2011 and December 31, 2012. The Charter for
the Methane Princess is for 20 years and therefore expires in 2024.
Our charterers may suspend their payment obligations under the charter
agreements for periods when the vessels are not able to transport cargo for
various reasons. These periods, which are also called offhire periods, may
result from, among other causes, mechanical breakdown or other accident, the
inability of the crew to operate the vessel, the arrest or other detention of
the vessel as the result of a claim against us, or the cancellation of the
vessel's class certification. The charters automatically terminate in the event
of the loss of a vessel.
Charter Renewal Options
Pertamina Charters. Pertamina has the option to extend the charter of
the Golar Mazo and the Golar Spirit. Pertamina may extend the charter of Golar
Mazo that expires in 2017, for up to 10 years by exercising the right to extend
for one or two additional five-year periods. Pertamina must give two years
notice of any decision to extend. The revenue during the period of charter
extension will be subject to adjustments based on our actual operating costs
during the period of the extension. For the Golar Spirit, Pertamina may extend
the charter beyond its current expiration in 2006 for up to two years. As with
the Golar Mazo, the hire rate during any extension is subject to adjustment to
reflect actual operating expenses during the term.
BG Charters. With the exception of the Golar Freeze charter, each of
the BG charters, including the charter for the Methane Princess, is subject to
options on the part of BG to extend those charters for two five-year periods. If
BG does not exercise its option to renew the Hilli charter, it may designate a
redelivery date between January 1, 2011 and December 31, 2012. The terms of the
Hilli charter contained in the chart below and the preceding table assumes that
BG will chose a redelivery date of December 31, 2012. The hire rates for
Khannur, Gimi and Hilli will be increased from January 1, 2010 onwards and
thereafter subject to adjustments based on escalation of three per cent per
annum of the operating costs of the vessel.
The following chart summarizes the current charters and renewal
options for each of our vessels and newbuildings that have charter coverage
arranged:
[The following table was depicted as a bar chart in the original document.]
Current
Time Charter Option
------------ ------
Golar Winter 2005.25
Methane Princess 2024.25 20
Golar Freeze 2008.25
Hilli 2012 10
Gimi 2010.9167 10
Khannar 2009.667 10
Golar Spirit 2006.9167 2
Golar Mazo 2017 10
Senior Management of Golar LNG Limited
Our senior management makes strategic and commercial decisions that
relate to our business, and analyzes and recommends to our board of directors
areas of possible expansion into other areas of the LNG supply chain. Our senior
management is responsible for:
o Vessel charters. Decisions relating to our current business
opportunities, including the negotiation of charters for our existing
fleet and for our newbuildings.
o Financing decisions. Decisions regarding our capital structure,
overall debt and equity financing, use of financing alternatives, the
selection and negotiation of financing to fund the construction of our
newbuildings and the consideration of financing alternatives for
projects in other areas of the LNG supply chain that we may consider.
o Newbuilding contracts. Decisions relating to investments in
newbuildings, including determining when these investments should be
made and the negotiation of newbuilding contracts with selected
shipyards.
o Future business strategies. Decisions regarding our possible expansion
into other areas of the LNG supply chain.
Golar Management (UK) Limited
We provide our own vessel management services through our wholly owned
subsidiary Golar Management (UK) Limited, or Golar Management, which has its
offices in London. The technical functions exercised by Golar Management include
operational support, vessel maintenance and technical support, crewing,
purchasing, accounting and treasury services. We do not contract out to third
parties any of our vessel management services other than some crewing
activities, which we subcontract to crewing agents. We have a fleet manager and
vessel superintendents who regularly inspect the vessels in our fleet. Golar
Management provides the following services to the vessels in our fleet of LNG
carriers:
o supervision of routine maintenance and repair of the vessel required
to keep each vessel in good and efficient condition; including the
preparation of comprehensive drydocking specifications and the
supervision of each drydocking;
o oversight of compliance with applicable regulations, including
licensing and certification requirements, and the required inspections
of each vessel to ensure that it meets the standards set forth by
classification societies and applicable legal jurisdictions as well as
our internal corporate requirements and the standards required by our
customers;
o engagement and provision of qualified crews (masters, officers, cadets
and ratings) and attendance to all matters regarding discipline, wages
and labor relations;
o arrangements to supply the necessary stores and equipment for each
vessel; and
o continual monitoring of fleet performance and the initiation of
necessary remedial actions to ensure that financial and operating
targets are met.
Ship Management
We are focused on operating our LNG carriers at the highest safety and
industry standards and at the same time maximizing revenue from each vessel. It
is our policy of having our crews perform routine maintenance on our vessels
while underway, rather than placing the vessels in drydocking for longer periods
of time. Since we do not earn hire from a vessel while it is in drydock we
believe that the expense of the additional crewmembers is outweighed by the
additional revenue that we receive.
To further minimize technical failure, off-hire and ensure compliance
with the latest safety and industry standards, we are about one year away from
completing a $32 million program to refurbish and modernize our four vessels
built in the 1970s. The Hilli refurbishment was largely completed during 2003;
two other ships are scheduled for major work during their drydockings in 2004
and the last 1970's built ship will be largely completed during drydocking in
late 2004 or early 2005. Due to the fact that the majority of the work will be
carried out during drydocking the program is expected to require limited
additional off-hire. We expect that this upgrading program will allow us to
operate each of these vessels to their 40th anniversary. We believe that the
capital expenditure of this program will result in lower maintenance costs and
improved performance in the future. We also believe this program will help us
maintain our proven safety record and ability to meet customer expectations.
Third Party Ship Management
In addition to managing our own fleet, we provide management services
to LNG carriers owned by third party ship owners. We currently manage four
vessels for the National Gas Shipping Company (NGSCO), a subsidiary of the Abu
Dhabi National Oil Company. These vessels are currently engaged on the route
between the Das Island LNG terminal in Abu Dhabi and various ports in Japan. It
has been the intention from the start of the project in 1996 that NGSCO should
take over management when they had developed their own in-house ship management
department. Two ships will be delivered back to NGSCO in July 2004 and the last
two ships in January 2005.
Insurance
The operation of any vessel, including LNG carriers, has inherent
risks. These risks include mechanical failure, personal injury, collision,
property loss, vessel or cargo loss or damage and business interruption due to
political circumstances in foreign countries or hostilities. In addition, there
is always an inherent possibility of marine disaster, including explosion,
spills and other environmental mishaps, and the liabilities arising from owning
and operating vessels in international trade.
We believe that our present insurance coverage is adequate to protect
us against the accident related risks involved in the conduct of our business
and that we maintain appropriate levels of environmental damage and pollution
insurance coverage consistent with standard industry practice. However, not all
risks can be insured, and there can be no guarantee that any specific claim will
be paid, or that we will always be able to obtain adequate insurance coverage at
reasonable rates.
We have obtained hull and machinery insurance on all our vessels
against marine and war risks, which include the risks of damage to our vessels,
salvage or towing costs, and also insure against actual or constructive total
loss of any of our vessels. However, our insurance policies contain deductible
amounts for which we will be responsible. We have also arranged additional total
loss coverage for each vessel. This coverage, which is called hull interest and
freight interest coverage, provides us additional coverage in the event of the
total loss of a vessel.
We have also obtained loss of hire insurance to protect us against
loss of income in the event one of our vessels cannot be employed due to damage
that is covered under the terms of our hull and machinery insurance. Under our
loss of hire policies, our insurer will pay us the daily rate agreed in respect
of each vessel for each day, in excess of a certain number of deductible days,
for the time that the vessel is out of service as a result of damage, for a
maximum of 240 days.
Protection and indemnity insurance, which covers our third-party legal
liabilities in connection with our shipping activities, is provided by a mutual
protection and indemnity association, or P&I club. This includes third-party
liability and other expenses related to the injury or death of crew members,
passengers and other third-party persons, loss or damage to cargo, claims
arising from collisions with other vessels or from contact with jetties or
wharves and other damage to other third-party property, including pollution
arising from oil or other substances, and other related costs, including wreck
removal. Subject to the capping discussed below, our coverage, except for
pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution
is $1 billion per vessel per incident. The thirteen P&I clubs that comprise the
International Group of Protection and Indemnity Clubs insure approximately 90
per cent of the world's commercial tonnage and have entered into a pooling
agreement to reinsure each association's liabilities. Each P&I club has capped
its exposure in this pooling agreement so that the maximum claim covered by the
pool and its reinsurance would be approximately $4.25 billion per accident or
occurrence. We are a member of the "UK Club" which is the largest P&I club in
the International Group. As a member of the P&I club, we are subject to a call
for additional premiums based on the club's claims record, as well as the claims
record of all other members of the P&I clubs comprising the International Group.
However, our P&I club has reinsured the risk of additional premium calls to
limit our additional exposure. This reinsurance is subject to a cap, and there
is the risk that the full amount of the additional call would not be covered by
this reinsurance.
The owners of the four vessels that we manage for the National Gas
Shipping Company maintain all marine insurances on those vessels. We are
protected by contractual defenses and by the National Gas Shipping Company's
contractual obligation to name us as a co-insured in the policies it maintains
for the vessels we manage for it. In addition, we carry shipmanager's liability
insurance for each of the vessels we manage for the National Gas Shipping
Company. Shipmanager's liability insurance protects us against losses caused by
our own negligence in connection with the management of these vessels which the
owner of the vessel could recover from us under the management contract,
assuming negligence is proven. This insurance has a general limit of $5 million
with a deductible of $50,000.
Environmental and other Regulations
Governmental and international agencies extensively regulate the
handling and carriage of LNG. These regulations include international
conventions and national, state and local laws and regulations in the countries
where our vessels operate or where our vessels are registered. We cannot predict
the ultimate cost of complying with these regulations, or the impact that these
regulations will have on the resale value or useful lives of our vessels.
Various governmental and quasi-governmental agencies require us to obtain
permits, licenses and certificates for the operation of our vessels. Although we
believe that we are substantially in compliance with applicable environmental
laws and regulations and have all permits, licenses and certificates required
for our operations, future non- compliance or failure to maintain necessary
permits or approvals could require us to incur substantial costs or temporarily
suspend operation of one or more of our vessels.
A variety of governmental and private entities inspect our vessels on
both a scheduled and unscheduled basis. These entities, each of which may have
unique requirements and each of which conducts frequent vessel inspections,
include local port authorities, such as the U.S. Coast Guard, harbor master or
equivalent, classification societies, flag state, or the administration of the
country of registry, charterers, terminal operators and LNG producers.
Golar Management is certified to the International Standards
Organization (ISO) Environmental Standard for the management of the significant
environmental aspects associated with the ownership and operation of a fleet of
liquefied natural gas carriers. This certification requires that the Company
commit managerial resources to act on its environmental policy through an
effective management system.
Regulation by the International Maritime Organization
The International Maritime Organization (IMO) is a United Nations
agency that provides international regulations affecting the practices of those
in shipping and international maritime trade. The requirements contained in the
International Management Code for the Safe Operation of Ships and for Pollution
Prevention, or ISM Code, promulgated by the IMO, govern our operations. The ISM
Code requires the party with operational control of a vessel to develop an
extensive safety management system that includes, among other things, the
adoption of a safety and environmental protection policy setting forth
instructions and procedures for operating its vessels safely and also describing
procedures for responding to emergencies. Golar Management is certified as an
approved ship manager under the ISM Code.
The ISM Code requires that vessel operators obtain a safety management
certificate, issued by each flag state, for each vessel they operate. This
certificate evidences onboard compliance with code requirements. No vessel can
obtain a certificate unless its shore-based manager has also been awarded and
maintains a Document of Compliance, issued under the ISM Code. Each of the
vessels in our fleet has received a safety management certificate.
Vessels that transport gas, including LNG carriers, are also subject
to regulation under the International Gas Carrier Code, or IGC, published by the
IMO. The IGC provides a standard for the safe carriage of LNG and certain other
liquid gases by proscribing the design and construction standards of vessels
involved in such carriage. Compliance with the IGC must be evidenced by a
Certificate of Fitness for the Carriage of Liquefied Gases of Bulk. Each of our
vessels is in compliance with the IGC and each of our newbuilding contracts
requires that the vessel receive certification that it is in compliance with
applicable regulations before it is delivered. Noncompliance with the IGC or
other applicable IMO regulations, may subject a shipowner or a bareboat
charterer to increased liability, may lead to decreases in available insurance
coverage for affected vessels and may result in the denial of access to, or
detention in, some ports.
The IMO also promulgates ongoing amendments to the international
convention for the Safety of Life at Sea 1974 and its protocol of 1988,
otherwise known as SOLAS. This provides rules for the construction of ships and
regulations for their operation with respect to safety issues. It requires the
provision of lifeboats and other life-saving appliances, requires the use of the
Global Maritime Distress and Safety System which is an international radio
equipment and watchkeeping standard, afloat and at shore stations, and relates
to the Treaty on the Standards of Training and Certification of Watchkeeping
Officers, or STCW, also promulgated by IMO. Flag states which have ratified the
convention and the treaty generally employ the classification societies, which
have incorporated SOLAS and STCW requirements into their class rules, to
undertake surveys to confirm compliance.
The most recent directive from the IMO, issued in the wake of
increased worldwide security concerns, is the International Security Code for
Ports and Ships (ISPS). The objective of the ISPS, which comes into effect on
July 1, 2004, is to detect security threats and take preventive measures against
security incidents affecting ships or port facilities. We have developed
Security Plans, appointed and trained Ship and Office Security Officers and all
ships have been certified to meet the new ISPS Code well in advance of the date
the code comes into force.
Environmental Regulation--OPA/CERCLA
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive
regulatory and liability regime for environmental protection and clean up of oil
spills. OPA affects all owners and operators whose vessels trade with the United
States or its territories or possessions, or whose vessels operate in the waters
of the United States, which include the U.S. territorial waters and the two
hundred nautical mile exclusive economic zone of the United States. The
Comprehensive Environmental Response, Compensation and Liability Act of 1980, or
CERCLA, applies to the discharge of hazardous substances whether on land or at
sea. While OPA and CERCLA would not apply to the discharge of LNG, they may
affect us because we carry oil as fuel and lubricants for our engines, and the
discharge of these could cause an environmental hazard. Under OPA, vessel
operators, including vessel owners, managers and bareboat or "demise"
charterers, are "responsible parties" who are all liable regardless of fault,
individually and as a group, for all containment and clean-up costs and other
damages arising from oil spills from their vessels. These "responsible parties"
would not be liable if the spill results solely from the act or omission of a
third party, an act of God or an act of war. The other damages aside from
clean-up and containment costs are defined broadly to include:
o natural resource damages and related assessment costs;
o real and personal property damages;
o net loss of taxes, royalties, rents, profits or earnings capacity;
o net cost of public services necessitated by a spill response, such as
protection from fire, safety or health hazards; and
o loss of subsistence use of natural resources.
OPA limits the liability of responsible parties for vessels other than
crude oil tankers to the greater of $600 per gross ton or $500,000 per vessel.
These limits of liability do not apply, however, where the incident is caused by
violation of applicable U.S. federal safety, construction or operating
regulations, or by the responsible party's gross negligence or 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. This limit is subject to possible adjustment for
inflation. OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents occurring within their
boundaries, and some states have enacted legislation providing for unlimited
liability for discharge of pollutants within their waters. In some cases, states
which have enacted their own legislation have not yet issued implementing
regulations defining shipowners' responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels,
contains a similar liability regime and provides for cleanup, removal and
natural resource damages. Liability under CERCLA is limited to the greater of
$300 per gross ton or $5 million. As with OPA, these limits of liability do not
apply where the incident is caused by violation of applicable U.S. federal
safety, construction or operating regulations, or by the responsible party's
gross negligence or 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 and CERCLA each preserve the right to recover
damages under existing law, including maritime tort law. We anticipate that we
will be in compliance with OPA, CERCLA and all applicable state regulations in
the ports where our vessels will call.
OPA requires owners and operators of vessels to establish and maintain
with the U.S. Coast Guard evidence of financial responsibility sufficient to
meet the limit of their potential strict liability under OPA. The U.S. Coast
Guard has enacted regulations requiring evidence of financial responsibility in
the amount of $900 per gross ton for vessels other than oil tankers, coupling
the OPA limitation on liability of $600 per gross ton with the CERCLA liability
limit of $300 per gross ton. Under the regulations, evidence of financial
responsibility may be demonstrated by insurance, surety bond, self-insurance or
guaranty. Under OPA regulations, an owner or operator of more than one vessel is
required to demonstrate evidence of financial responsibility for the entire
fleet in an amount equal only to the financial responsibility requirement of the
vessel having the greatest maximum liability under OPA/CERCLA. Each of our
shipowning subsidiaries that has vessels trading in U.S. waters has applied for,
and obtained from the U.S. Coast Guard National Pollution Funds Center,
three-year certificates of financial responsibility, supported by guarantees
which we purchased from an insurance-based provider. We believe that we will be
able to continue to obtain the requisite guarantees and that we will continue to
be granted certificates of financial responsibility from the U.S. Coast Guard
for each of our vessels that is required to have one.
Environmental Regulation--Other
Most U.S. states that border a navigable waterway have enacted
environmental pollution laws that impose strict liability on a person for
removal costs and damages resulting from a discharge of oil or a release of a
hazardous substance. These laws may be more stringent than U.S. federal law. The
European Union has proposed regulations, which, if adopted, may regulate the
transmission, distribution, supply and storage of natural gas and LNG at land
based facilities. It is not clear what form these regulations, if adopted, would
take.
Inspection by Classification Societies
Every seagoing vessel must be "classed" by a classification society.
The classification society certifies that the vessel is "in class," signifying
that the vessel has been built and maintained in accordance with the rules of
the classification society and complies with applicable rules and regulations of
that particular class of vessel as laid down by that society.
For maintenance of the class certificate, regular and extraordinary
surveys of hull, machinery, including the electrical plant and any special
equipment classed, are required to be performed by the classification society,
to ensure continuing compliance. Most vessels are drydocked twice during a
5-year class cycle for inspection of the underwater parts and for repairs
related to inspections. If any defects are found, the classification surveyor
will issue a "recommendation" which must be rectified by the shipowner within
prescribed time limits. The classification society also undertakes on request of
the flag state other surveys and checks that are required by the regulations and
requirements of that flag state. These surveys are subject to agreements made in
each individual case and/or to the regulations of the country concerned.
Most insurance underwriters make it a condition for insurance coverage
that a vessel be certified as "in class" by a classification society, which is a
member of the International Association of Classification Societies. All of our
vessels have been certified as being "in class". The Golar Mazo and each of the
vessels that we manage for the National Gas Shipping Corporation are certified
by Lloyds Register, and our other vessels are each certified by Det norske
Veritas, both members of the International Association of Classification
Societies.
In-House Inspections
We inspect all of our vessels on a regular basis, both at sea and
while the vessels are in port. Each vessel in our fleet is inspected on an
annual basis by our fleet safety officer, annually by an independent third party
safety auditor and at four-month intervals by one of our technical
superintendents. The results of these inspections, which are conducted both in
port and underway, result in a report containing recommendations for
improvements to the overall condition of the vessel, maintenance, safety and
crew welfare. Based in part on these evaluations, we create and implement a
program of continual maintenance for our vessels and their systems. These
programs are subject to a computer based tracking system in order to assure
compliance.
C. Organizational Structure
As is customary in the shipping industry, we own, lease and operate
our vessels, and our newbuildings while under construction, through separate
wholly-owned subsidiaries. With the exception of the Golar Mazo and Golar Frost,
we lease our vessels from lessors, who are all subsidiaries of UK Banks. We own
a 100 per cent interest in the owning subsidiaries of each of our three
newbuildings yet to be delivered. We own the Golar Mazo in a joint venture with
the Chinese Petroleum Corporation in which we own 60 per cent and Chinese
Petroleum owns the remaining 40 per cent of the vessel owning company. Our
vessel management services and vessel manning services are provided through
separate, wholly-owned subsidiaries.
The following chart lists each of our subsidiaries, the subsidiaries'
purpose, or the vessel it owns, leases or operates, and its country of
incorporation as at June 29, 2004. Unless otherwise indicated, we own 100 per
cent of each subsidiary.
Jurisdiction of
Subsidiary Incorporation Purpose
- ---------- ------------- -------
Golar Gas Holding Company Inc. Republic of Liberia Holding Company
and leases five
vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Republic of Liberia Holding Company
Oxbow Holdings Inc. British Virgin Islands Holding Company
Faraway Maritime Shipping Inc. Republic of Liberia Owns Golar Mazo
(60% ownership)
Golar LNG 2215 Corporation Republic of Liberia Leases Methane
Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns newbuilding
Hull 1460
Golar LNG 2220 Corporation Republic of Liberia Leases Golar
Winter
Golar LNG 2234 Corporation Republic of Liberia Owns newbuilding
Hull 2234
Golar Liberia Inc. Republic of Liberia Owns newbuilding
Hull 2226
Golar International Ltd. Republic of Liberia Vessel management
Golar Maritime Services, S.A. Spain Vessel management
Gotaas-Larsen International Ltd. Republic of Liberia Vessel management
Golar Management Limited Bermuda Management
Golar Maritime Limited Bermuda Management
Golar Management (UK) Limited United Kingdom Management
Golar Freeze (UK) Limited United Kingdom Operates Golar
Freeze
Golar Khannur (UK) Limited United Kingdom Operates Khannur
Golar Gimi (UK) Limited United Kingdom Operates Gimi
Golar Hilli (UK) Limited United Kingdom Operates Hilli
Golar Spirit (UK) Limited United Kingdom Operates Golar
Spirit
Golar 2215 (UK) Limited United Kingdom Operates Methane
Princess
Golar Winter (UK) Limited United Kingdom Operates Golar
Winter
D. Property, Plant and Equipment
The Company's Vessels
The following tables set forth the fleet that we operate and the newbuildings
that we have on order:
Capacity Current Charter
Vessel Delivered cbm. Flag Charterer Expiration
- ------ --------- -------- ---- --------- ---------------
Golar Frost 2004 137,000 LIB -- n/a
Golar Winter 2004 138,000 UK MISC 2005
Methane Princess 2003 138,000 UK BG 2023
Golar Mazo 2000 135,000 LIB Pertamina 2017
Golar Spirit 1981 128,000 UK Pertamina 2006
Golar Freeze 1977 125,000 UK BG 2008
Khannur 1977 125,000 UK BG 2009
Gimi 1976 125,000 UK BG 2010
Hilli 1975 125,000 UK BG 2012
Expected Date Capacity Current Charter
Newbuilding of Delivery cbm. Flag Charterer Expiration
- ----------- ------------- -------- ---- --------- ---------------
Hull No. 1460 October 2004 140,000 -- n/a n/a
Hull No. 2226 January 2006 145,700 -- n/a n/a
Hull No. 2234 May 2006 145,700 -- n/a n/a
Key to Flags:
LIB - Liberian, UK - United Kingdom
We do not own any interest in real property. We sublease approximately
8,000 square feet of office space in London for our ship management operations.
In addition, we have leasehold interests in two London offices that we formerly
occupied which we have assigned or sublet to unrelated third parties. We lease
approximately 540 square feet of office space in Bilbao, Spain for our crewing
operations.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Overview and Background
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes, and the other financial information included elsewhere in this
document. Our financial statements have been prepared in accordance with U.S.
GAAP. This discussion includes forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from those
contained in the forward-looking statements.
The following discussion assumes that our business was operated as a
separate corporate entity prior to its inception. Prior to May 10, 2001, we did
not exist as a corporate entity, and prior to May 31, 2001, our business was
operated as part of the shipping business of Osprey. For the period from January
1, 2001 to May 31, 2001, our financial statement activity has also been carved
out of the consolidated financial statements of Osprey, and from May 31, 2001 to
December 31, 2003, all of our results were reflected in the stand-alone
consolidated financial statements of Golar as a separate entity. In addition,
some costs have been reflected in the historical combined financial statements
which are not necessarily indicative of the costs that Golar would have incurred
had it operated as an independent, stand-alone entity for all periods presented.
In August 2000, World Shipholding Ltd commenced an acquisition of
Osprey and gained a controlling interest of more than 50 per cent of Osprey in
November 2000. This interest increased to over 90 per cent in January 2001 and
World Shipholding completed its acquisition in May 2001. This acquisition was
accounted for by World Shipholding as a step-by-step purchase transaction and
the purchase price was therefore allocated to the assets and liabilities
acquired based on their fair value as of each acquisition date, with vessels
being valued on the basis of discounted expected future cash flows. In each step
of the acquisition, the fair value of the net assets acquired exceeded the
purchase price with resulting negative goodwill allocated to the recorded values
of the vessels. These purchase price allocations were pushed down and reflected
in Osprey's financial statements from February 1, 2001.
Effective May 31, 2001, we acquired the LNG shipping interests of
Osprey, which included one newbuilding contract and an option for a further
newbuilding contract. We also entered into a purchase agreement with Seatankers,
to purchase its one newbuilding contract for a LNG carrier and its option to
build three new LNG carriers.
In addition to controlling Seatankers, as of May 31, 2001 Mr.
Fredriksen indirectly controlled 50.01 per cent (currently 42.7 per cent) of our
shares through World Shipholding. As required under U.S. GAAP, our purchase of
the LNG operations of Osprey and Seatankers has been reflected in our financial
statements as transactions between entities under common control. We have
recorded the LNG assets and liabilities we acquired at the amounts previously
reflected in the books of World Shipholding and Seatankers on what is known as a
"predecessor basis". Under the predecessor basis of accounting, tangible and
intangible assets acquired and liabilities assumed are recorded in our books at
the amount at which they would have been recorded on the books of World
Shipholding and Seatankers. The difference between our purchase price and this
predecessor basis was reflected as a reduction in equity in a capital
reorganization.
Current Business
Our activities are currently focused on the chartering of our LNG
carriers. Seven of our nine vessels are on long-term charters, which provide us
with stable and predictable cash flows for the majority of our business. We also
currently manage four LNG carriers for a third party; two of these will be
re-delivered in 2004 and two in 2005.
Vessels may operate under different charter arrangements including
time charters, voyage charters and bareboat charters. A time charter is a
contract for the use of a vessel for a specific period of time at a specified
daily rate. Under a time charter, the charterer pays substantially all of the
vessel voyage costs, which consist primarily of fuel and port charges. A
bareboat charter is also a contract for the use of a vessel for a specific
period of time at a specified daily rate but the charterer pays the vessel
operating costs as well as voyage costs. Operating costs include crew wages,
vessel supplies, routine repairs, maintenance, lubricating oils and insurance. A
voyage charter is generally for a specific voyage and the charterer pays for
operating costs but not voyage costs. We define charters for a period of less
than one year as short-term, charters for a period of between one and four year
as medium-term and charters for a period of more than four years as long-term.
Seven of our currently trading LNG carriers are employed under
long-term time charters, which do not come up for renewal until 2006 and later.
The following table sets out our current charters, including future committed
charters, and their expirations:
- ---------------------------------------------------------------------------------------
Approximate Annual Current Charter Charterers Renewal
Vessel Name Charter Hire Expiration Option Periods
- ---------------------------------------------------------------------------------------
Golar Mazo (1) $31 million / year 2017 5 years plus 5 years
- ---------------------------------------------------------------------------------------
Golar Spirit (2) $21 million / year 2006 1 year plus 1 year
- ---------------------------------------------------------------------------------------
Khannur $15.3 million / year 2009 5 years plus 5 years
- ---------------------------------------------------------------------------------------
Golar Freeze $19.6 million / year 2008 None
- ---------------------------------------------------------------------------------------
Gimi $15.3 million / year 2010 5 years plus 5 years
- ---------------------------------------------------------------------------------------
Hilli $15.3 million / year 2012 5 years plus 5 years
- ---------------------------------------------------------------------------------------
Methane Princess (3) $24.3 million / year 2024 5 years plus 5 years
- ---------------------------------------------------------------------------------------
Golar Winter (4) short-term charter 2005 Not yet agreed
- ---------------------------------------------------------------------------------------
(1) On a wholly-owned basis and excluding operating cost recovery from
charterer (see below).
(2) Excludes operating cost recovery from charterer (see below).
(3) Commenced in February 2004.
(4) No extension had been agreed as at June 29, 2004, but can be mutually
agreed 30 days prior to completion of the charter.
The long-term contracts for the Golar Spirit and Golar Mazo are time
charters but the economic terms are analogous to bareboat contracts, under which
the vessels are paid a fixed rate of hire, being the rate in the above table,
and the vessel operating costs are borne by the charterer on a cost pass through
basis. These contracts contain no escalation clauses.
Employment History
The following table sets out the employment of the LNG carriers now
owned and/or operated by us during the period 1999 to 2003.
- --------------------------------------------------------------------------------
Vessel Name 1999 2000 to 2003
- --------------------------------------------------------------------------------
Golar Mazo Not applicable (a) Long-term time charter to Pertamina
commenced on delivery in 2000
- --------------------------------------------------------------------------------
Golar Spirit Long-term time charter Long-term time charter to Pertamina
to Pertamina
- --------------------------------------------------------------------------------
Khannur Short-term charters Short-term charters until start of
long-term time charter with BG in
December 2000
- --------------------------------------------------------------------------------
Golar Freeze Medium-term charter Short-term charters until start of
medium-term time charter with BG in
November 2000. Long-term time
charter with BG from March 2003.
- --------------------------------------------------------------------------------
Gimi Short-term charters Short-term charters until start of
long-term time charter with BG in
May 2001
- --------------------------------------------------------------------------------
Hilli Medium-term charter Medium-term charter until start of
long-term time charter with BG in
September 2000
- --------------------------------------------------------------------------------
Methane Princess Not applicable (b) Short-term charters until start of
long-term time charter with BG in
February 2004
- --------------------------------------------------------------------------------
(a) This vessel was delivered to us and began trading on January 15, 2000.
(b) This vessel was delivered to us and began trading on August 29, 2003.
In the second half of 2000, and the first half of 2001, Golar Freeze,
Gimi, Hilli and Khannur, then owned by Osprey, were committed to long-term time
charters with a subsidiary of BG at rates that were lower than prevailing market
rates. The employment under these charters results in minimal periods of
offhire, generally limited to scheduled offhire for drydocking. We have
subsequently renegotiated the charters paid by BG, and have had the charters
extended to the dates shown above.
Possible Future LNG Industry Business Activities
Depending on market conditions, we may diversify our operations. Our
senior management is currently considering vertically integrated infrastructure
investments.
Two of our current vessels are available for trade in the short-term
or "spot" market, one has secured a 10-month charter commencing May 31, 2004 and
one is currently unemployed. The LNG spot market has only recently developed and
it is at an early stage. Rates payable in that market may be uncertain and
volatile although potentially higher than rates for long-term charters. The
supply and demand balance for LNG carriers is also uncertain. These factors
could influence the results of operations from spot market activities.
All future possible LNG activities are also dependant on our
management's decisions regarding the utilization of our assets. In the longer
term, results of operations may also be affected by strategic decisions by
management as opportunities arise to make investments in LNG logistics
infrastructure facilities to secure access to markets as well as to take
advantage of potential industry consolidation.
In February 2002, we announced our participation in a joint
development arrangement headed by Marathon Oil Company to construct and operate
a major LNG import facility on Mexico's Baja Peninsula. Other participants in
the project include Grupo GGS, S.A. de C.V., a subsidiary of GGS Holdings
Limited, or GGS, a Mexican company involved in the development of various
infrastructure projects, including oil and natural gas projects. Under the
agreement with Marathon and GGS, costs incurred in relation to the development
of the project have been shared as follows: Marathon 80 per cent, GGS 10 per
cent, Golar LNG Limited 10 per cent prior to the establishment of a lead project
company and execution of a shareholders' agreement. However, this project is not
currently being actively progressed.
In June 2002, we announced that we had signed a heads of agreement
(letter of intent) with the Italian offshore and contracting company Saipem SPA
for the joint marketing and development of Floating Regasification Terminals, or
FRT's, for the Italian gas market. The concept is based on the conversion of a
Moss type LNG carrier ('Moss type' is in reference to the type and shape of the
cargo tanks), either existing or newly built. The activities will be managed
through a dedicated joint venture, where Saipem will handle the engineering and
technical aspects of the FRT's. We will contribute to the joint venture by
identifying suitable LNG carriers as well as providing maritime expertise.
Progress has been made in respect of this project with a potential customer,
Cross Energy S.R.L. who is planning to site a FRT off the coast of Livorno in
Italy. A final decision on the permit for the FRT is expected to be made by the
Italian authorities some time between June and October of 2004 but we cannot be
certain of this time frame. The ultimate size of our investment has yet to be
determined.
Factors Affecting Our Results
The principal factors that have affected, and are expected to continue
to affect, our core LNG shipping business are:
The employment of our vessels, daily charter rates and the number of
unscheduled offhire days
Non-utilization for vessels not subject to charters
Vessel operating expenses
Administrative expenses
Useful lives of our fleet and the related depreciation and
amortization expense
Net financial expenses including mark to market charges for interest
rate swaps and interest rates and foreign exchange gains or losses
that arise on the translation of our lease obligations and the cash
deposits that secure them.
Operating revenues are primarily generated by charter rates paid for
our short-term, medium-term and long-term charters and are therefore related to
both our ability to secure continuous employment for our vessels as well as the
rates that we secure for these charters. Four of the five ships currently under
charter with subsidiaries of BG have derived a cash flow benefit from negotiated
rate increases that took effect from August 1, 2001 for one vessel and from
January 1, 2002 for the other three.
The number of days that our vessels earn hire substantially influences
our results. We attempt to minimize unscheduled offhire by conducting a program
of continual maintenance for our vessels. The charter coverage we have for all
our vessels has resulted in a minimal number of waiting days in 2001, 2002 and
2003. Our vessels may be out of service, that is, offhire, for three main
reasons: scheduled drydocking or special survey or maintenance, which we refer
to as scheduled offhire, days spent waiting for a charter, which we refer to as
waiting time and unscheduled repairs or maintenance, which we refer to as
unscheduled offhire. Generally, for vessels that are under a time charter, hire
is paid for each day that a vessel is available for service. However, two of our
long-term charters provide for an allowance of a specified number of days every
two to three years that our vessels may be in drydock, for one vessel the
allowance is fixed whilst the other vessel will only be placed offhire if the
number of days in drydock every two years exceeds that allowance. The shipping
industry uses average daily time charter earnings, or TCE, to measure revenues
per vessel in dollars per day for vessels on charters. We calculate TCE by
taking time charter revenues, or voyage revenues, net of voyage expenses,
recognized ratably over the period of the voyage, earned and dividing by the
number of days in the period less scheduled offhire.
Our exposure to credit risk is limited as our long-term charterers pay
monthly in advance. This trend is expected to continue as the majority of our
vessels are under long-term charters with customers with whom we have had a
positive collection history.
Voyage expenses are primarily expenses such as fuel and port charges,
which are paid by us under voyage charters. Under time charters such voyage
expenses are paid for by our customers. Accordingly voyage expenses will vary
depending on the number of vessels we have operating on voyage charters.
Vessel operating expenses include direct vessel operating costs
associated with running a vessel and an allocation of shore-based overhead costs
directly related to vessel management. Vessel operating costs include crew
wages, which are the most significant component, vessel supplies, routine
repairs, maintenance, lubricating oils and insurance. Accordingly, the level of
this operating cost is directly related to the number of vessels we operate.
Overhead allocated to vessels includes certain technical and operational
support, information technology, legal, accounting and corporate costs that are
related to vessel operating activity. These costs are allocated based on
internal cost studies, which management believes are reasonable estimates.
Operating expenses increased during 2001 and 2002 mainly due to increased crew
and related pension costs and insurance costs and in 2003 principally because of
the addition of Methane Princess to the fleet.
Administrative expenses are composed of general corporate overhead
including primarily personnel costs, corporate services, public filing fees,
property costs and expenses related to other similar functions. Personnel costs
comprise approximately 60 per cent of our administrative expenses and include
salaries, pension costs, fringe benefits, travel costs and social insurance.
Depreciation and amortization expense, or the periodic cost charged to
our income for the reduction in usefulness and long-term value of our ships, is
also related to the number of vessels we own or operate under long term capital
leases. We depreciate the cost of our owned vessels, less their estimated
residual value, and amortize the amount of our capital lease assets, over their
estimated useful lives on a straight-line basis. We amortize our deferred
drydocking costs over two to five years based on each vessel's next anticipated
drydocking. No charge is made for depreciation of newbuildings until they are
delivered. We amortize our office equipment and fittings over three to six years
based on estimated economic useful life. Income derived from sale and
subsequently leased assets is deferred and amortized in proportion to the
amortization of the leased assets.
Interest expense depends on the overall levels of borrowing we incur
and may significantly increase when we acquire or lease ships or on the delivery
of newbuildings. During a newbuilding construction period, interest expense
incurred is capitalized in the cost of the newbuilding. Interest expense may
also change with prevailing interest rates although the effect of these changes
may be reduced by interest rate swaps or other derivative instruments. Currently
$135 million of debt under our Methane Princess facility has a fixed interest
rate. Furthermore, $171.8 million of our floating rate debt under our Mazo
facility is swapped to fixed rate, and we may also enter into interest rate swap
arrangements on our other debt if this is considered to be advantageous to us.
Interest expense in the carved out combined financial statements relates to a
debt facility in Osprey that was specifically designated to LNG operations and a
facility specific to the Golar Mazo.
Interest income will also depend on prevailing interest rates and the
level of our cash deposits and restricted cash deposits. Interest income in the
carved out combined financial statements includes an allocation of Osprey group
interest income. The Osprey group operated a centralized treasury system and did
not have separate bank accounts for each of its subsidiaries. There were
separate bank accounts for Golar Mazo. For the remaining LNG activities,
interest income has been allocated in the carved out combined financial
statements based on operating cash flows, net of debt service.
Other financial items are composed of financing fee arrangement costs,
amortization of deferred financing costs, market valuation adjustment for
interest rate derivatives and foreign exchange gain/loss. The market valuation
adjustment for our interest rate derivatives may have a significant impact on
our results of operations and financial position although it does not impact our
liquidity. Foreign exchange gains and losses, which were minimal prior to 2003
as our activities are primarily denominated in US dollars, increased during the
year principally due to the lease finance transactions that we entered into
during 2003 which are both denominated in British Pounds. A foreign exchange
gain arose during 2003 as a result of the retranslation of our capital lease
obligations and the cash deposits securing those obligations. The gain arose due
to the appreciation of the British Pound against the US Dollar during the year.
This gain represents an unrealised gain. Further foreign exchange gains or
losses will arise over time as a result of exchange rate movements. Our
liquidity position will only be affected to the extent that we choose or are
required to withdraw monies from or pay additional monies into the deposits
securing our capital lease obligations.
Since most of these key items are directly related to the number of
LNG carriers we own or lease and their financing, the acquisition or divestment
of additional vessels and entry into additional newbuilding contracts would
cause corresponding changes in our results.
Although inflation has had a moderate impact on operating expenses,
interest costs, drydocking expenses and corporate overheads, management does not
expect inflation to have a significant impact on direct costs in the current and
foreseeable economic environment other than potentially in relation to insurance
costs and crew costs. It is anticipated that insurance costs, which have risen
considerably over the last three years, may well continue to rise over the next
few years and particularly in 2004. Two of our vessels charters are based on
operating cost pass through and a third has an insurance cost pass through and
so we will be protected from the full impact of such increases. LNG
transportation is a specialized area and the number of vessels is increasing
rapidly. There will therefore be an increased demand for qualified crew and this
may put inflationary pressure on crew costs. Only the two vessels on full cost
pass through charters would be protected from any crew cost increases.
A number of factors could substantially affect the results of
operations of our core long-term charter LNG shipping business as well as the
future expansion of any spot market business. These factors include the pricing
and level of demand and supply for natural gas and specifically LNG. Other
uncertainties that could also substantially affect these results include changes
in the number of new LNG importing countries and regions and availability of
surplus LNG from projects around the world, as well as structural LNG market
changes allowing greater flexibility and enhanced competition with other energy
sources.
Critical Accounting Policies
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires that
management make estimates and assumptions affecting the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The following is a discussion of the
accounting policies applied by the Company that are considered to involve a
higher degree of judgement in their application. See Note 2 to the Company's
audited Consolidated and Combined Financial Statements and Notes thereto
included herein for details of the Company's significant accounting policies.
Vessels and Depreciation and Amortization
The cost of the Company's vessels, less the estimated residual value,
is depreciated, (owned vessels) or amortized (leased vessels) on a straight-line
basis over the vessels' remaining economic useful lives. Management estimates
the useful life of the Company's vessels to be 40 years and this is a common
life expectancy applied in the LNG shipping industry. If the estimated economic
useful life is incorrect, an impairment loss could result in future periods. Our
vessels are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. In assessing the
recoverability of our vessels' carrying amounts, we must make assumptions
regarding estimated future cash flows and estimates in respect of residual or
scrap value. Factors we consider important which could affect recoverability and
trigger impairment include significant underperformance relative to expected
operating results and significant negative industry or economic trends.
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
must 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. A change in our estimates might require that we classify our time
charters as capital leases, which would include recording an asset similar to a
loan receivable and removing the vessel from our balance sheet. The lease
payments to us would reflect a declining revenue stream to take into account our
interest carrying costs, which would impact the timing of our revenue stream.
Capital Leases
We have sold several of our vessels to, and subsequently leased the
vessels from UK financial institutions that routinely enter into finance leasing
arrangements. We have accounted for these arrangements as capital leases. As
identified in our critical accounting policy for time charters, we must make
estimates and assumptions in determining the classification of our leases. In
addition, these estimates, such as incremental borrowing rates and the fair
value or remaining economic lives of the vessels, impact the measurement of our
vessels and liabilities subject to the capital leases. Changes to our estimates
could affect the carrying value of our lease assets and liabilities, which could
impact our results of operations.
We have also recorded deferred credits in connection with these lease
transactions. The deferred credits represent the upfront benefits derived from
undertaking financing in the form of UK leases. The deferred credits are
amortized over the remaining economic lives of the vessels to which the leases
relate on a straight-line basis. The benefits under lease financings are derived
primarily from tax depreciation assumed to be available to lessors as a result
of their investment in the vessels. If that tax depreciation ultimately proves
not to be available to the lessor, or is clawed back from the lessor (e.g. on a
change of tax law), the lessor will be entitled to adjust the rentals under the
relevant lease so as to maintain its after tax position, except in limited
circumstances. Any increase in rentals is likely to affect our ability to
amortize the deferred credits and consequently could have a negative impact on
our results and operations.
We have also recorded deferred credits in connection with these lease
transactions, which represent the benefit of financing available from UK lease
finance arrangements, which has been received in advance. This benefit is
primarily derived from the tax benefits available to the lessors as a result of
their investment in the vessels. Under our lease agreements, we have indemnified
the lessors with respect to these amounts in the event that changes in tax law
preclude them from realising the tax benefits. We amortize these amounts over
the remaining economic lives of the leased vessels. If tax laws were to
adversely impact the lessors' ability to realise the tax benefits, the lessors
have the ability to reclaim through future lease payments the amounts previously
funded to us. This could increase our lease payments and affect our ability to
reduce the deferred credit through amortization, which would have a negative
impact on our results of operations.
Insurance Receivables
We have recognized amounts related to various insurance claims in our
results of operations. We recognize such insurance claims when facts and
circumstances support the legal recovery and we believe it is virtually certain
that the insurance claims will be recovered. If our insurance companies dispute
our assessment of the facts and circumstances or refuse to honour all or a
portion of our claims, the amounts recognized for our insurance receivables may
not be collectible, which would adversely impact our results of operations.
Pension Benefits
The determination of our defined benefit pension obligations and
expense for pension benefits is dependent on our selection of certain
assumptions used by actuaries in calculating such amounts. Those assumptions are
described in note 22 of the notes to our consolidated and combined financial
statements included in this annual report and include, among others, the
discount rate, expected long-term rate of return on plan assets and rates of
increase in compensation. In accordance with U.S. generally accepted accounting
principles, actual results that differ from our assumptions are accumulated and
amortized over future periods and therefore, generally affect our recognized
expense and recorded obligation in such future periods. We are guided in
selecting our assumptions by our independent actuaries and, while we believe
that our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our
pension obligations and our future pensions expense.
Carve out of the Financial Statements of Osprey
For the year ended December 31, 2001, the five months to May 31, 2001,
have been carved out of the financial statements of Osprey and are presented on
a combined basis. For the seven months from June 1, 2001 to December 31, 2001
and for the years ended December 31, 2002 and 2003, the financial statements as
a separate entity are presented on a consolidated basis.
Osprey was a shipping company with activities that included oil
tankers and product carriers as well as LNG carriers. Where Osprey's assets,
liabilities, revenues and expenses relate to the LNG business, these have been
identified and carved out for inclusion in these financial statements. Where
Osprey's assets, liablities, revenues and expenses relate to one specific line
of business but not the LNG business, these have been identified and not
included in these financial statements. The preparation of the carved out
financial statement requires allocation of certain assets and liabilities and
revenues and expenses where these items are not identifiable as related to one
specific activity. Management has deemed the related allocations are reasonable
to present the financial position, results of operations, and cash flows of the
Company. The financial positions, results of operations and cash flows of the
Company are not necessarily indicative of those that would have been achieved
had the Company operated autonomously for all years presented as the Company may
have made different operational and investment decisions as a Company indepedent
of Osprey.
Recently Issued Accounting Standards and Securities and Exchange Commission
Rules
In December 2003, the FASB issued revised FASB Interpretation 46 ("FIN
46-R"), "Consolidation of Variable Interest Entities, an Interpretation of ARB
51." FIN 46-R requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The consolidation
requirements of FIN 46-R apply to variable interest entities no later than the
end of the first reporting period that ends after March 15, 2004. FIN 46-R
applies to those entities that are considered special purpose entities, no later
than as of the end of the first reporting period that ends after December 15,
2003. The Company has adopted FIN 46-R and has determined that the entities that
possess legal title to the six vessels leased by Golar are variable interest
entities in which Golar has a variable interest and is the primary beneficiary.
Golar has measured the leased vessels transferred to the variable interest
entities at the same amounts as if the transfer had not occurred, which is cost
less accumulated depreciation at the time of transfer. The adoption of FIN 46-R
did not have a material impact upon Golar's financial statements. The Company
does not have any other variable interest entities.
Results of operations
Our results for the years ended December 31, 2003, 2002 and 2001 were
affected by several key factors:
o the pushdown of purchase accounting adjustments on January 31, 2001,
resulting from the acquisition of Osprey by World Shipholding, thereby
recording in our books a significant reduction in vessel carrying
values;
o the application of the predecessor basis of accounting with effect
from May 31, 2001 resulting from our acquisition of the LNG interest
of Osprey and Seatankers;
o the issue of new equity and refinancing of our principal loan facility
with effect from May 31, 2001 in connection with the acquisition by
Golar of the LNG business of Osprey;
o restructuring costs incurred in connection with the reorganization of
our operations, in particular the closure of Osprey's Singapore office
and associated employment severance costs;
o the adoption of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivatives and Hedging Activities
o lease finance arrangements that we entered into during 2003; and
o the delivery of our first newbuilding, the Methane Princess in August
2003.
The impact of these factors is discussed in more detail below.
Year ended December 31, 2003, compared with the year ended December 31, 2002
Operating Revenues. Total operating revenues of $132.8 million were
$2.2 million higher than last year but after deducting voyage expenses of $2.2
million incurred in 2003 in connection with the Methane Princess they were the
same for both years. Although there was an increase in the number of offhire
days incurred in 2003 compared to 2002, this was offset by earnings from the
addition of the Methane Princess to the fleet at the end of August 2003. The
increased number of offhire days in 2003 was due to two vessels drydocking and
offhire in respect of other maintenance and repairs. In contrast only one vessel
drydocked in 2002 but because of an allowance in the charter no offhire time was
incurred. Revenues earned by the Methane Princess during 2003 were derived from
voyage charters. All revenues earned during 2002 were derived from time
charters. The fleet earned an average daily time charter equivalent rate of
$57,300 and $59,000 in 2003 and 2002, respectively.
Vessel Operating Expenses. Vessel operating expenses increased 7 per
cent from $28.1 million in 2002 to $30.2 million in 2003. This was mainly
because of the addition of the Methane Princess to our fleet, which contributed
$1.3 million of the increase. Additional costs were also incurred in respect of
crew; costs associated with repairs to our vessels, including the cost of
repair, associated survey costs and the cost of insurance deductibles; and
higher insurance costs mainly due to additional war risk premium levied on two
of our ships trading in Indonesian waters on charter to Pertamina. This premium
ceased to apply in May 2003. Insurance costs were further affected by increase
in market rates and this trend is expected to continue with an expected
significant increase in premiums during 2004. Some of these increased costs were
offset by savings elsewhere which resulted in an overall cost increase of $0.8
million in addition to the $1.3 million contributed by the Methane Princess. In
the years ended December 31, 2003 and 2002, the average daily operating costs of
our vessels were $13,000 and $12,800, respectively. Included in these amounts
are $928 per day and $1,027 per day, respectively of overheads allocable to
vessel operating expenses. These are onshore costs such as technical and
operational staff support, information technology and legal, accounting and
corporate costs attributable to vessel operations. These costs are allocated
based on internal cost studies, which management believes are reasonable
estimates.
Voyage expenses. During 2002 all our vessels were on time charters and
therefore did not incur any voyage expenses because under a time charter our
customers pay for such expenses. During 2003 our first newbuilding, the Methane
Princess operated under voyage charters from delivery until the end of the year.
The level of voyage expenses we incur will be largely dependent on the number of
vessels we have operating on voyage charters.
Administrative Expenses. Administrative expenses increased 17 per cent
from $6.1 million in 2002 to $7.1 million in 2003. The increase was mainly due
to an increase of $1.0 million in our share of development costs in respect of
the Baja project during 2003. In preparation for increased ship operation
activities, our headcount increased from 2002 by seven in our London office and
as a result wages and other staff related costs also increased, but this was
largely off set by reduced costs elsewhere, principally the lack of costs
associated with the listing of our shares in the U.S. in 2002. A significant
proportion of our administrative expenses are incurred in British Pounds (GBP)
at our office in London. Movement in the exchange rate of the U.S. dollar
against GBP will therefore impact our future administrative expenses.
Depreciation and Amortization. Depreciation and amortization decreased
marginally from $31.3 million in 2002 to $31.1 million in 2003. An increase due
to the addition of the Methane Princess to the fleet and higher drydock cost
amortization was off set by the amortization of the deferred credit arising from
our lease finance arrangements.
Net Financial Expenses. Interest income was $14.8 million and $1.1
million for the years ended December 31, 2003 and 2002, respectively. Interest
income in 2003 includes an amount of $14.1 million attributable to fixed cash
deposits, which secure our capital lease obligations. Interest expense was $37.2
million and $23.6 million for the years ended December 31, 2003 and 2002,
respectively. The expense for 2003 includes an amount of $14.6 million
attributable to our capital lease obligations. The increase in both income and
expense is due to the finance lease transactions that we entered into during
2003, the aim of which were to restructure our financing arrangements. Net
financial expenses were further affected by prevailing lower interest rates in
2003 compared to 2002. Other financial items changed from an expense of $17.9
million for the year ended December 31, 2002 to net income of $7.2 million in
the year ended December 31, 2003. The change was primarily due to the movement
in the fair value of interest rate swaps, which resulted in a charge of $16.5
million in 2002 compared with a gain of $6.4 million in 2003. Additionally a
foreign exchange gain of $3.0 million arose during 2003 as a result of the
retranslation of our capital lease obligations and the cash deposits securing
those obligations. The gain arose due to the appreciation of the British Pound
against the US Dollar during the year. This gain represents an unrealised gain
Minority Interest and Income Taxes. Minority interest, consisting of
the 40 per cent interest in the Golar Mazo, increased from a credit of $2.5
million in 2002 to a charge of $7.0 million in 2003. The credit in 2002 was due
to the impact of the minority interests share of mark-to-market charge for
interest rate swaps amounting to $6.6 million. Income taxes relate to the
taxation of our UK vessel management operations and also to vessel operating
companies in 2003. As a result of transferring the operations of six of our
vessels to UK incorporated companies during the year our income tax charge in
2003 increased to $0.4 million. These UK companies did not exist in our group in
2002. Our income tax change is expected to increase as a function of the number
of vessels we operate in the UK and the profitability of the U.K. companies.
Net Income (Loss). As a result of the foregoing, we earned net income
of $39.6 million in 2003, increased from $27.1 million in 2002.
Year ended December 31, 2002, compared with the year ended December 31, 2001
Operating Revenues. Total operating revenues increased 14 per cent
from $114.2 million in 2001 to $130.6 million in 2002. This resulted primarily
from higher average charter rates and a decrease in offhire days in 2002. The
fleet earned an average daily time charter rate of $59,000 and $53,600 in 2002
and 2001, respectively. The increase in rates from 2001 to 2002 was due to
increased rates in respect of the Hilli, Gimi and Khannur, effective January 1,
2002 and a rate increase in respect of the Golar Freeze effective August 1,
2001. In the years ended December 31, 2002 and 2001 total days offhire were 24
and 130, respectively. The decrease is due to the fact that three vessels
underwent drydocking during 2001 whilst there was no loss of income associated
with the drydocking of one vessel in 2002.
Vessel Operating Expenses. Vessel operating expenses increased 14 per
cent from $24.5 million in 2001 to $28.1 million in 2002. This was principally
attributable to increased crew, insurance and repair costs. Crew costs account
for approximately $1.9 million of the increase due to a combination of crew
restructuring, including changing crew nationalities, increased training
programs, a higher level of surplus crew and additional pension costs as
determined by our actuarial valuations. Crew pension costs were $0.8m higher in
2002 compared to 2001. Insurance costs increased approximately $0.5 million due
to the general increase in the market rates for insurance and because of
additional war insurance premiums applied to two of our vessels trading in
Indonesian waters. This additional premium has ceased to be applicable from May
2003. Repair costs increased approximately $0.6 million as a result of a number
of individual repairs required. In the years ended December 31, 2002 and 2001,
the average daily operating costs of our vessels were $12,800 and $11,200,
respectively. Included in these amounts are $1,027 per day and $928 per day,
respectively of overheads allocable to vessel operating expenses. These are
onshore costs such as technical and operational staff support, information
technology and legal, accounting and corporate costs attributable to vessel
operations. These costs are allocated based on internal cost studies, which
management believes are reasonable estimates.
Administrative Expenses. Administrative expenses decreased 26 per cent
from $8.2 million in 2001 to $6.1 million in 2002, principally due to a charge
of $2.4 million in 2001 of expenses relating to a planned public offering in the
United States. We incurred $0.8 million of expenses, included in administrative
expenses, relating to our share of development costs in respect of the Baja
project during 2002 ($nil 2001). We expect to incur costs in respect of Baja
during 2003. Other than these Baja related costs we anticipate recurring
administrative expenses in the future to be in line with those incurred in 2002,
allowing for market related and inflationary increases.
Restructuring costs. Restructuring costs of $1.9 million in the year
ended December 31, 2001 consist primarily of employment severance costs incurred
in connection with the restructuring of Osprey's Singapore operations following
the acquisition by Word Shipholding. There were no restructuring costs incurred
in the year ended December 31, 2002.
Depreciation and Amortization. Depreciation and amortization decreased
marginally from $31.6 million in 2001 to $31.3 million in 2002.
Net Financial Expenses. Interest income was $1.1 million and $3.3
million for the years ended December 31, 2002 and 2001, respectively. This
decrease reflects a higher average cash balance for the Golar Mazo in the 2001
period and lower interest rates during 2002. Interest expense was $23.6 million
and $32.5 million for the years ended December 31, 2002 and 2001, respectively.
This decrease of 27 per cent reflects a combination of lower average interest
rates, a restructuring of the our debt in the first half of 2001 and an increase
in capitalized interest in respect of newbuilding instalments paid by cash from
$1.1 million in 2001 to $2.2 million in 2002. Other financial items increased to
$17.9 million for the year ended December 31, 2002 from $12.4 million in the
year ended December 31, 2001, primarily due to a mark to market charge for
interest rate swaps of $16.5 million in 2002 compared with $8.2 million in 2001.
During the first half of 2001, we wrote off $2.3 million of deferred finance
fees as a result of refinancing a loan facility, in 2002 we wrote off $0.4
million of deferred finance fees as a result of loan repayments.
Minority Interest and Income Taxes. Minority interest, consisting of
the 40 per cent interest in the Golar Mazo, decreased from $1.6 million in 2001
to a credit of $2.5 million in 2002, principally due to the impact of the
minority interests share of mark to market charge for derivative instruments
amounting to $6.6 million in 2002 and $2.5 million in 2001. Income taxes, which
relate to the taxation of the United Kingdom branch operations of a subsidiary
and certain interest income, were insignificant in both periods.
Net Income (Loss). As a result of the foregoing, we earned net income
of $27.1 million in 2002, increased from $4.4 million in 2001.
B. Liquidity and Capital Resources
We operate in a capital intensive industry and we have historically
financed our purchase of LNG carriers and other capital expenditures through a
combination of borrowings from commercial banks, cash generated from operations
and equity capital. Our liquidity requirements relate to servicing our debt,
funding our newbuilding program, funding investments, including the equity
portion of investments in vessels, funding working capital and maintaining cash
reserves against fluctuations in operating cash flows.
Revenues from our time charters and our management contracts are
received monthly in advance. Inventory requirements, consisting primarily of
fuel, lubricating oil and spare parts, are low due to the majority of these
items being paid for by the charterer under time charters. We believe our
current resources are sufficient to meet our working capital requirements for
our employed vessels; however, our newbuilding program, currently consisting of
three committed contracts for vessels currently under construction, and to a
lesser extent the Golar Frost, which was delivered in June 2004 but is currently
without employment, will result in increased financing and working capital
requirements. Payments for our newbuildings are made as construction progresses
in accordance with our contracts with shipyards. The financing of our
newbuilding program is discussed further below.
We have sufficient facilities to meet our anticipated funding needs
until October 31, 2004. As of June 29, 2004, additional facilities of $313
million will be needed to meet commitments under the newbuilding construction
program on October 31, 2004 and thereafter, including $107 million payable on
October 31, 2004 on delivery of our fourth newbuilding. It is standard in the
shipping industry to finance between 50 and 80 per cent of the purchase price of
vessels, or construction cost in the case of newbuildings, through traditional
bank financing. In the case of vessels that have term charter coverage, the debt
finance percentage may increase significantly. We received 100 per cent
financing for the cost of one of our newbuildings that is on a long-term charter
with BG. If we were to obtain 50 per cent debt financing to cover the
instalments due on our three remaining unfinanced newbuildings, this would
result in additional financing of approximately $229 million of the $313 million
required.
It is intended that the funding for our commitments under the
newbuilding construction program will come from a combination of cash raised
from equity issues during 2003, debt finance, lease arrangements and cash flow
from operations. Alternatively, if market and economic conditions favour equity
financing, we may raise additional equity. In 2003, we raised $106 million from
equity offerings, which will be used for newbuilding commitments and other
investments. We are in discussions with a number of financial institutions and
others to provide sufficient facilities to meet our construction commitments in
full as they fall due. Details of newbuilding commitments and proposed funding
arrangements are detailed below.
Our funding and treasury activities are conducted within corporate
policies to maximize investment returns while maintaining appropriate liquidity
for our requirements. Cash and cash equivalents are held primarily in U.S.
dollars with some balances held in British Pounds. We have not made use of
derivative instruments other than for interest rate and currency risk management
purposes.
The following table summarizes our cash flows from operating,
investing and financing activities:
Year Ended December 31,
2003 2002 2001
---- ---- ----
(in millions of $)
Net cash provided by operating activities 57.4 71.2 42.0
Net cash used in investing activities (658.5) (163.3) (657.9)
Net cash provided by financing activities 666.2 87.3 667.7
Net increase (decrease) in cash and cash equivalents 65.1 (4.8) 51.8
Cash and cash equivalents at beginning of year 52.7 57.5 5.7
Cash and cash equivalents at end of year 117.9 52.7 57.5
With $106 million of new equity raised during 2003, our short-term
liquid resources have increased. As of December 31, 2003, 2002 and 2001 the
Company had cash and cash equivalents of $117.9 million, $52.7 million and $57.5
million, respectively. In addition, at December 31, 2003, 2002 and 2001 we had
restricted cash of $32.1 million, $12.8 million and $14.2 million, respectively
that represents balances retained on accounts in accordance with certain loan
and lease covenants.
We generated cash from operations of $57.4 million in 2003, compared
with $71.2 million in 2002 and $42.0 million in 2001. The decrease in 2003 from
2002 is principally due to additional drydocking expenditure in 2003 of $11.1
million.
Net cash used in investing activities in 2003 was $658.5 million, of
which approximately $562.3 million related to placement of funds into deposits
to provide security for capital lease obligations; $77.8 million related to
newbuilding purchase instalments; $12.2 million related to the purchase of
equity securities in Korea Line Corporation and $6.3 million was in respect of
additions to vessels and equipment. Newbuiling instalment payments made in 2003
were net of an amount of $12.9 million received from the shipyard in relation to
the late delivery of the Methane Princess. Net cash used in investing activities
in 2002 was $163.3 million, of which $158.8 million related to newbuilding
purchase instalments and $5.9 million was in respect of additions to vessels and
equipment. Net cash used in investing activities in the year ended December 31,
2001 totalled $657.9 million, of which $530.9 million was used in the
acquisition of the LNG interests of Osprey and Seatankers and $140.0 million
towards ship construction and refurbishment.
Net cash provided by financing activities was $666.2 million in 2003
compared with $87.3 million and $667.7 million in the years ended December 31,
2002 and 2001, respectively. In 2003, we entered into two refinancing
transactions involving lease arrangements for six vessels, which are further
explained below. During 2003, we drew down a total of $506.1 million in debt and
received proceeds from lease obligations of $616.3 million, none of which were
from related parties. Repayments of debt totalled $561.2 million in 2003, of
which $32.7 million was to a related party. Furthermore, during 2003, we raised
$106.2 million from the issue of 9.6 million shares in two separate offerings,
5.6 million shares in July 2003 and 4.0 million in December 2003. During 2002,
we drew down a total of $210.6 million in debt, of which $16.3 million was from
a related party. Repayments of debt totalled $109.9 million in 2002, of which
$68.8 million was to a related party. Financing in 2001 came principally from a
new $325 million floating rate loan facility undertaken to refinance floating
rate facilities, and from net proceeds of $275.8 million from our equity
placement in Norway, both of which occurred in May 2001. In addition, we
received $85.3 from a related party, Greenwich, as discussed below. Repayments
of loan facilities totalled $15.2 million in 2001.
Long-Term Debt
On November 26, 1997 Osprey entered into a loan facility of $214.5
million secured by a mortgage on the vessel Golar Mazo, which we refer to as the
Mazo facility. This facility, which we assumed from Osprey, bears floating rate
interest of LIBOR plus a margin. The loan is repayable in bi-annual instalments
that commenced on June 28, 2001. The balance of the facility, on a 100 per cent
basis, as at December 31, 2003 totalled $181.3 million. In connection with the
Mazo facility, Osprey entered into a collateral agreement with the banking
consortium and a bank Trust Company. This agreement requires that certain cash
balances, representing interest and principal payments for defined future
periods, be held by the Trust Company during the period of the loan.
In connection with the Mazo facility, Osprey entered into interest
rate swaps to reduce the impact of changes in interest rates. Following the
adoption of FAS 133 on January 1, 2001, the interest rate swaps are marked to
market at the end of each period and the resulting gain or loss is recorded in
the income statement. The mark to market charge in the years ended December 31,
2003, 2002 and 2001 were $6,401,000 gain, $16,458,000 loss and $6,342,000 loss,
respectively.
In May 2001, we entered into a secured loan facility with a banking
consortium for an amount of $325.0 million, which we refer to as the Golar LNG
facility. The Golar LNG facility was refinanced in April 2003, with cash, in
connection with a lease finance arrangement for five vessels, as discussed
further below, and an amount of $265 million provided by the same syndicate of
banks; we refer to this loan as the New Golar LNG facility. The amount
outstanding on the old facility was $282.5 million and accordingly a net $17.5
million was repaid. The loan accrues floating interest at a rate per annum equal
to the aggregate of LIBOR plus a margin. The loan has a term of four years and
two months and is repayable in 16 quarterly instalments together with a final
balloon payment of $138.8 million due on May 31, 2007.
In October 2002, we entered into a secured subordinated loan facility
with a banking consortium for an amount of $60.0 million, to which we refer to
as the Golar LNG subordinated facility. This loan was also refinanced in April
2003. The new second priority loan, which we refer to as the New Golar LNG
subordinated facility, was also for an amount of $60 million provided by the
same syndicate of banks. It accrues floating interest at a rate per annum equal
to the aggregate of LIBOR, plus a margin, increasing by 0.25 percent per annum
on 30 November 2004 and 30 November 2005. The loan has a term of four years and
two months and is repayable in 15 quarterly instalments commencing in November
2003.
Both the New Golar LNG facility and the New Golar LNG subordinated
facility are secured by mortgages on the vessels Golar Spirit, Khannur, Gimi,
Hilli and Golar Freeze, executed by the UK Lessor of the vessels in favour of
our subsidiary, GGHC, and by a mortgage transfer executed by GGHC in favour of
the lending banks. The New Golar LNG subordinated facility's security is second
in priority to the New Golar LNG facility. The new loans contain similar
provisions to the old loans in respect of restrictions and financial covenants.
During 2001 and 2002, we entered into borrowing arrangements with Greenwich
Holdings Limited, a company indirectly controlled by Mr. Fredriksen, to provide
initial funding in respect of our newbuilding contracts discussed in further
detail below.
During 2001, we obtained loans totalling $85.3 million from Greenwich
in order to finance instalments due on our newbuildings the Methane Princess,
the Golar Winter and hull number 1460. We repaid $52.6 million in March 2002
following the initial financing of the Methane Princess. We repaid the balance
of the loan during 2003, $16.0 million in June 2003 and $16.7 million in August
2003.
During 2002, we obtained further loans totalling $16.3 million from
Greenwich in order to finance further instalments due on our newbuildings. This
loan was repaid in November 2002.
On December 31, 2001, we signed a loan agreement with Lloyds TSB Bank
Plc to finance 100 per cent of the cost of one of our newbuildings, hull number
2215, after we secured a 20-year charter for this vessel, which we refer to as
the Methane Princess facility (previously referred to as the 2215 facility). In
August 2003, prior to the delivery of the vessel we refinanced this facility in
connection with a lease finance arrangement in respect of the Methane Princess
as discussed further below. The new facility is also for $180 million, with the
same bank and has a similar repayment profile. It accrues a floating rate of
interest of LIBOR plus a margin up to the date the vessel is delivered to the
Charterer under the BG Charter and thereafter at LIBOR plus a reduced margin
determined by reference to Standard and Poors ("S&P") rating of the Charterer
from time to time. The margin could increase if the rating for the Charterer at
any time fell below an S&P rating of "B". As at June 29, 2003, $135 million of
debt in respect of the Methane Princess facility was fixed interest rate debt.
Of the $135 million $115 million is fixed until 2015, $10 million until 2009 and
$10 million until 2007, at a current weighted average rate of 5.68per cent
(inclusive of margin). After these transactions, at December 31, 2003, we had
total long-term debt outstanding of $655.2 million, compared with $710.3 million
and $609.6 million at December 31, 2002 and 2001, respectively.
The outstanding debt of $655.2 million as of December 31, 2003 was
repayable as follows:
Year ending December 31,
(in millions of $)
2004 61.3
2005 64.0
2006 70.5
2007 177.8
2008 22.8
2009 and later 258.8
---------------------------------------------------------------------------
655.2
===========================================================================
In March 2004, we entered into a into a secured loan facility with a
banking consortium for an amount of $110.0 million, in respect of the Golar
Frost which we refer to as the Golar Frost facility. The loan accrues floating
interest at a rate per annum equal to the aggregate of LIBOR plus a margin. The
loan has a term of three years is repayable in 5 semi-annual instalments
together with a final balloon payment. In June 2004 we took delivery of the
Golar Frost and drew down the loan.
The margins we pay under our current loan agreements over and above
LIBOR at a fixed or floating rate currently range from 0.865 per cent to 2.0 per
cent.
Capital Lease Obligations
In April 2003 we entered into a lease finance arrangement, which we
refer to as the Five Ship Leases, in respect of five of our vessels (Golar
Spirit, Golar Freeze, Hilli, Gimi and Khannur), with a subsidiary of a major UK
bank, which we refer to as the UK Lessor. We sold five 100 per cent owned
subsidiaries which owned the relevant vessels, to the UK Lessor and received a
cash sum of $452.6 million through refinancing, by the UK Lessor, of debt owed
by the five subsidiary companies to us. Each of the five companies now owned by
the UK Lessor subsequently entered into 20 year leases with a subsidiary of
ours, Golar Gas Holding Company Inc., or GGHC, who in turn sub-leased the
vessels to five UK subsidiary companies newly incorporated by us for the purpose
of taking over the business of operating one each of the above named vessels.
We used $325 million of the proceeds we received together with $17.5
million of our cash reserves to repay two existing loans, the Golar LNG facility
and the Golar LNG subordinated facility. The outstanding amounts of these loans
upon repayment were $282.5 million and $60 million respectively. We then drew
down on two new facilities; $265 million secured by a mortgage executed by the
UK Lessor in favour of our subsidiary GGHC as security for the Lessor's
obligations to pay certain sums to GGHC under the lease agreements and by a
mortgage transfer executed by GGHC in favour of the lending banks; and $60
million secured by a similar but second priority mortgage. The total proceeds
from the new loans of $325 million together with $89.5 million of the proceeds
from the lease finance arrangement were used to make deposits with two banks
amounting to $414.5 million who then issued letters of credit securing GGHC's
obligations under the leases amounting to the present value of rentals due under
the leases. Lease rentals are payable quarterly. At the end of each quarter the
required deposit to secure the present value of rentals due under the leases
will be recalculated taking into account the rental payment due at the end of
the quarter. The surplus funds released as a result of the reduction in the
required deposit are available to pay the lease rentals due at the end of the
same quarter. After making this deposit and settling all outstanding fees
relating to the transaction the cash in flow was approximately $32.5 million.
In August 2003, we entered into a lease finance arrangement in respect
of our first newbuilding the Methane Princess, to which we refer to as the
Methane Princes Lease. We arranged a new $180 million loan facility in respect
of the Methane Princess (Methane Princess facility) as noted above and at the
same time novated our shipbuilding contract to a subsidiary of a UK bank (UK
Lessor) under the terms of which the UK Lessor advanced an amount equal to the
amounts already paid by us under the shipbuilding contract to the Shipyard who
in turn repaid us the same amount. We subsequently entered into a 30-year lease
agreement in respect of the vessel with the UK Lessor. We used monies drawn down
from the Methane Princess facility (secured by a mortgage executed by the UK
Lessor in favour of us as security for the UK Lessor's obligations to pay
certain sums to us under the lease agreement and by a mortgage transfer executed
by us in favour of the lending bank) together with some of our own cash reserves
to make deposits with a bank ("LC Bank") who then issued a letter of credit
securing our obligations to the UK Lessor. We used the monies refunded by the
Shipyard under the novation agreement together with our own cash to repay the
original loan in respect of the Methane Princess. Upon delivery of the vessel
and payment of the final delivery instalment the total advanced by the UK Lessor
was $163.7 million and the amount placed on deposit with the LC Bank was $143.9
million. After settling all outstanding fees relating to the transaction the
cash in flow was approximately $18.5 million.
Our lease rentals include an interest element that is accrued at a rate of
GBP LIBOR for both our leases and we receive interest income on our restricted
cash deposits at a rate of GBP LIBOR.
As at 31 December 2003, the Company is committed to make minimum rental payments
under capital lease, as follows:
Year ending December 31, Five ship Methane Total
lease Princess
Lease
(in thousands of $)
2004 19,780 5,731 25,511
2005 21,027 6,070 27,097
2006 22,294 6,388 28,682
2007 23,631 6,721 30,352
2008 24,993 7,024 32,017
2009 and later 770,239 354,455 1,124,694
- -------------------------------------------------------------------------------
Total minimum lease payments 881,964 386,389 1,268,353
Less: Imputed interest (422,208) (229,935) (652,143)
- -------------------------------------------------------------------------------
Present value of minimum lease payments 459,756 156,454 616,210
===============================================================================
The profiles of the Five Ship Leases are such that the lease liability
continues to increase until 2008 and thereafter decreases over the period to
2023 being the primary term of the leases. The value of deposits used to obtain
letters of credit to secure the lease obligations as of December 31, 2003 was
$479.3 million.
The profile of the Methane Princes lease is such that the lease
liability continues to increase until 2014 and thereafter decreases over the
period to 2034 being the primary term of the lease. The value of the deposit
used to obtain letters of credit to secure the lease obligations as of December
31, 2003 was $163.3 million.
In April 2004, we signed a lease agreement in respect of the Golar
Winter with another UK bank (the 'Winter Lessor'). The vessel was also delivered
in April 2004. Under the agreement we received an amount of $166 million, before
fees and expenses. Our obligations to the Lessor under the lease are secured by
(inter alia) a letter of credit provided by another UK bank (the 'LC Bank'). We
have deposited $39 million with the LC bank as security for the letter of
credit. The effective amount of net financing received is therefore $127 million
before fees and expenses.
Our existing financing agreements impose operation and financing
restrictions on us which may significantly limit or prohibit, among other
things, our ability to incur additional indebtedness, create liens, sell capital
shares of subsidiaries, make certain investments, engage in mergers and
acquisitions, purchase and sell vessels, enter into time or consecutive voyage
charters or pay dividends without the consent of our lenders and Lessors. In
addition, our lenders and Lessors may accelerate the maturity of indebtedness
under our financing agreements and foreclose upon the collateral securing the
indebtedness upon the occurrence of certain events of default, including our
failure to comply with any of the covenants contained in our financing
agreements. Various debt and lease agreements of the Company contain covenants
that require compliance with certain financial ratios. Such ratios include
equity ratio covenants, minimum net worth covenants, minimum value clauses, and
minimum free cash restrictions in respect of us and our subsidiaries. As of
December 31, 2003, 2002 and 2001, we complied with all covenants of our various
debt and lease agreements.
In addition to mortgage security, some of our debt is also
collateralised through pledges of shares by guarantor subsidiaries of Golar.
Newbuilding Contracts and Capital Commitments
As of December 31, 2003, we had contracts to build four new LNG
carriers and in February 2004 we entered into a contract for the construction of
a further newbuilding. We took delivery of our second newbuilding, the Golar
Winter, in April 2004, which was financed by the lease finance arrangement noted
above. In June 2004, we took delivery of our third newbuilding, the Golar Frost,
which we financed with the loan facility also mentioned above. The Golar Frost's
delivery was delayed from the original planned delivery date and as a result
Golar received compensation from the shipyard in the amount of $9 million.
As at June 29, 2004, we therefore have three newbuildings still under
construction. Amounts outstanding and payable under contracts to build these
three new LNG carriers as of June 2004, total approximately $389 million,
excluding financing costs, and are due in instalments over the period to May
2006. We also have budgeted capital expenditure of approximately $27.5 million
over the period to December 2005, in connection with our vessels refurbishment
program and routine vessel drydocks.
As of June 29, 2004, we require additional financing of approximately
$313 million to fund all of our newbuilding construction commitments.
The commitments up to September 2004 will be funded from existing
facilities, cash reserves and cash generated from operations. Additional
facilities are required to meet progress payments on October 2004 and further
progress payments arising periodically thereafter until completion of the
program in 2006.
As noted above, two vessels have been delivered since December 31,
2003 and one new contract for a further newbuilding has been entered into. The
following table sets out as at December 31, 2003 and June 29, 2004 the estimated
timing of the remaining commitments under our present newbuilding contracts.
Actual dates for the payment of instalments may vary due to progress of the
construction.
December 31, June 29,
2003 2004
------- -------
(in millions of $)
2004 354,800 137,846
2005 -- 29,600
2006 107,200 221,800
- --------------------------------------------------------------------------------
Total 462,000 389,246
================================================================================
Our senior management evaluates funding alternatives depending on the
prevailing market conditions. We anticipate that the additional financing
required to fund the completion of the remaining newbuilding construction costs
will come from a combination of additional debt and lease financing, cash
reserves and cash from operations, supplemented by equity proceeds as
circumstances may warrant or permit. It is standard in the shipping industry to
finance between 50 and 80 per cent of the construction cost of newbuildings
through traditional bank financing and in the case of vessels that have charter
coverage the debt finance percentage may increase significantly. We may finance
up to 100 per cent of these newbuilding costs through additional tranches of
bank debt secured by the respective newbuildings. We would make such borrowings
as needed while construction proceeds. Alternatively, if market and economic
conditions favour equity financing at any such time, we may use somewhat less
debt and instead raise equity to fund a larger portion of these costs.
Currently, we are seeking a mixture of long-term, medium-term and short-term
charters for our three remaining newbuildings. The charter coverage of a
newbuilding may affect our ability to finance its completion.
C. Research and Development, Patents and Licenses
Not applicable
D. Trend Information
See our discussion above under 'overview and background'.
E. Off-Balance Sheet Arrangements
As of December 31, 2003 we did not have any significant off-balance
sheet arrangements.
F. Contractual Obligations
The following table sets forth our contractual obligations for the
periods indicated as at December 31, 2003:
(in millions of $) Long-term Capital lease Operating New Total
debt obligations (1) leases (2) buildings
- --------------------------------------------------------------------------------------------
2004 61.3 25.5 1.4 354.8 443.0
2005 64.0 27.1 -- -- 91.1
2006 70.5 28.7 -- 107.2 206.4
2007 177.8 30.4 -- -- 208.2
2008 22.8 32.0 -- -- 54.8
2009 and later 258.8 1,124.7 -- -- 1,383.5
----------------------------------------------------------------
Total 655.2 1,268.4 1.4 462.0 2,387.0
Less: Imputed interest -- (652.1) -- -- (652.1)
- --------------------------------------------------------------------------------------------
Total 655.2 616.3 1.4 462.0 1,734.9
============================================================================================
(1) In the event of any adverse tax rate changes we may be required to
return all or a portion of the cash inflow (approximately $51 million)
that we received in connection with the lease financing transactions,
post additional security or make additional payments to the UK lessor
in the form of lease rentals.
(2) Total minimum lease payments have been reduced by minimum sublease
rentals under non-cancellable leases of $1,594,000 for the year ended
December 31, 2004.
Our consolidated balance sheet as of December 31, 2003 includes $94.2
million classified as "Other long-term liablilities." This caption consists
primarily of deferred credits relating to our capital lease transactions and
liabilities under our pension plans. These liabilities have been excluded from
the above table as the timing and/or the amount of any cash payment is
uncertain. See Note 24 of the Notes to Consolidated and Combined Financial
Statements for additional information regarding our other long-term liabilities.
A total of $217 million of newbuilding obligations due in 2004 have
been financed and paid during the period to June 29, 2004. In February 2004 we
entered into a contract for a further newbuilding as noted above.
We are a party to a joint development agreement with Marathon Baja
Limited ("Marathon"), a subsidiary of Marathon Oil and GGS Holdings Limited
("GGS") in connection with a project to build a LNG import and re-gasification
facility and power generation completion in the Mexican State of Baja
California. Under the agreement with Marathon and GGS, costs incurred in
relation to the development of the project are shared as follows: Marathon 80%,
GGS 10%, Golar 10%. During the quarter ended March 31, 2004 and years ended
December 31, 2003 and 2002, our 10% share of the development costs were $59,000,
$1,459,000 and $1,077,000 respectively.
In April 2004, we entered into a lease arrangement in respect of the
Golar Winter as discussed above.
See Item 11 for a discussion of quantitative and qualitative disclosures about
market risks.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Information concerning each director and executive officer of the Company
as at June 29, 2004 is set forth below.
Name Age Position
John Fredriksen 60 Chairman of the Board, President and
Director
Tor Olav Tr0im 41 Deputy Chairman of the Board, Chief
Executive Officer, Vice President and
Director
Graeme McDonald 47 Group Technical Director
Graham Robjohns 39 Chief Accounting Officer and Group
Financial Controller
Charlie Peile 50 Head of Commercial Department
Olav Eikrem 48 General Manager of the Fleet
Kate Blankenship 39 Company Secretary and Director
Biographical information with respect to each of our directors and executive
officers is set forth below.
John Fredriksen has served as the chairman of our board of directors, our
president and a director since our inception in May 2001. He has been the chief
executive officer, chairman of the board, president and a director of Frontline
Ltd. since 1997. Frontline Ltd. is a Bermuda based tanker owner and operator
listed on the New York Stock Exchange and the Oslo Stock Exchange. Mr.
Fredriksen has served for over nine years as a director of Seatankers, a ship
operating company.
Tor Olav Tr0im has served as our chief executive officer, our vice-president and
a director since our inception in May 2001. He has been the vice president and a
director of Frontline Ltd. since 1996. He also served as deputy chairman of
Frontline Ltd. in 1997. Until April 2000, Mr. Tr0im was the chief executive
officer of Frontline Management, a management company that is a subsidiary of
Frontline Ltd. Mr. Tr0im also serves as a consultant to Seatankers and since May
2000, has been a director and vice-chairman of Knightsbridge Tankers Limited, a
Bermuda based, Nasdaq National Market listed tanker owner. He is a director of
Aktiv Inkasso ASA, Northern Oil ASA, both Norwegian Oslo Stock Exchange listed
companies, and Northern Offshore Ltd., a Bermuda company listed on the Oslo
Stock Exchange. Since October 2003, he has served as vice president and a
director of Ship Finance Ltd. Prior to his service with Frontline, from January
1992, Mr. Tr0im served as managing director and a member of the board of
directors of DNO AS, a Norwegian oil company.
Graeme McDonald is our group technical director. He was previously general
manager of the fleet, a position he held with Osprey, since 1998. He has worked
in the shipping industry since 1973 and held various positions with Royal Dutch
Shell companies, including manager of LNG shipping services at Shell
International Trading and Shipping Company Ltd. and manager of LNG marine
operations at Shell Japan Ltd.
Kate Blankenship has served as our secretary since our inception in May 2001 and
as a director since July 2003. She served as our chief accounting officer from
May 2001 until May 31, 2003. She has been the chief accounting officer and
secretary of Frontline Ltd since 1994 and a director since August 2003. She has
also been chief financial officer of Knightsbridge Tankers Ltd since August 2000
and secretary of Knightsbridge since December 2000. Since October 2003, she has
served as secretary and a director of Ship Finance Ltd. Prior to 1994, she was a
manager with KPMG Peat Marwick in Bermuda. She is a member of the Institute of
Chartered Accountants in England and Wales.
Graham Robjohns has served as our group financial controller since May 2001 and
as our chief accounting officer since June 1, 2003. He was financial controller
of Osprey Maritime (Europe) Ltd from March 2000 to May 2001. From 1992 to March
2000 he worked for Associated British Foods Plc. and then Case Technology Ltd
(Case), both manufacturing businesses, in various financial management positions
and as a director of Case. Prior to 1992, he worked for PricewaterhouseCoopers
in their corporation tax department. He is a member of the Institute of
Chartered Accountants in England and Wales.
Charlie Peile was appointed in September 2003 as Executive Vice President and
Head of Commercial. He was, for three years prior to that, Director of LNG
Shipping Solutions, the leading LNG advisory and consultancy company. For a
short period prior to that he was Managing Director of Stephenson Clarke Ltd., a
ship owning company based in Newcastle upon Tyne. He was with Gotaas-Larsen,
Golar's predecessors, from 1981 until 1997, for the last 7 years of which he was
Vice President Commercial, with special responsibility for LNG. He has been a
member of the Institute of Chartered Shipbrokers since 1977.
Olav Eikrem joined the company in October 2003 as General Manager Fleet. Mr.
Eikrem has an MSc degree in Mechanical Engineering from the Norwegian Institute
of Technology and is a Chief Engineer by profession. From 1997 to 2003 Mr.
Eikrem was Senior Manager and Director of Thome Ship Management, Singapore,
responsible for management of various different types of merchant ships. Prior
1997, he was Fleet Manager of Knutsen OAS Shipping, a Norwegian specialist
shuttle tanker operator and as Fleet Manager / Technical Superintendent of Jo
Tankers. Mr Eikrem has several years sea-going service in the capacity as
engineer and other positions onboard and has worked at shipyards in Norway.
Graham J. Griffiths joined us in October 2001 and was general manager of the
fleet. He has over 30 years experience in the shipping industry, including 20
years sea-going experience. Prior to joining us he was a technical manager for V
Ships Singapore and has held various positions in V Ships since 1986. He has
extensive experience in newbuilding projects and day-to-day management of oil
tankers, chemical/product tankers, gas carriers and dry bulk vessels. Since
October 2003 he has not been serving as an officer of the Company.
A. Shaun Morris served as a non-executive director since our inception in May
2001. He has also been a non-executive director of Frontline Ltd. since November
1997. He is currently a Partner at Appleby, Spurling & Kempe and has been with
that firm since 1988. He resigned as director on July 30, 2003.
Timothy Counsell served as a non-executive director since our inception in May
2001. He is a partner in the law firm of Appleby Spurling & Kempe, and joined
the firm in 1990. He is currently an alternate director of Bona Shipholding Ltd.
He resigned as director on July 30, 2003.
B. Compensation
During the year ended December 31, 2003, we paid to our directors and
executive officers (ten persons) aggregate cash compensation of $777,748 and an
aggregate amount of $52,193 for pension and retirement benefits.
C. Board Practices
Our directors do not receive any benefits upon termination of their
directorships. The Board does not have any committees.
D. Employees
We hire all of our officers and crew through our manning offices in
Bilbao, in Spain and, until May 2003, in Manila, in the Philippines and through
crewing agents with whom we have crewing agreements in Croatia, the Philippines
and Indonesia. Each of our crewmembers undergoes a structured training process
that we have developed to ensure that our crew and officers will have the
required specialised knowledge and experience to operate our vessels. In
addition to the specialised knowledge required to handle LNG cargoes, LNG
carrier officers and crew must also have knowledge and experience in operating
vessels with steam turbine engines. As of December 31, 2003, we employed
approximately 625 people, either directly or through crewing agents, consisting
of 44 shore-based personnel, 400 seagoing employees serving on our ships and 180
seafarers serving on the ships we manage for NGSCO. Our masters and officers are
mostly Spanish, Croatian and Scandinavian, and our crews are mostly Filipino and
Indonesian. Our shore-based personnel currently include 39 employees in our
office in London and 5 people in our manning office in Bilbao. Our Filipino
employees are subject to collective bargaining agreements, which are
requirements of the Philippine government. These agreements set industry-wide
minimum standards, terms and conditions. We have not had any labour disputes
with our employees under the collective bargaining agreements and consider our
workplace relations to be good.
E. Share ownership
The following table sets forth information as of June 29, 2004,
regarding the total amount of common shares owned by all of our officers and
directors on an individual basis: The beneficial interests of our Directors and
officers in the common shares of the Company as of June 29, 2004, were as
follows:
Percentage of
Common Shares of Common Shares
Director or Officer $1.00 each Outstanding
- ------------------- ---------------- -------------
John Fredriksen* 28,012,000 42.7%
Tor Olav Tr0im -- --
-- --
Graeme McDonald -- --
Charles Peile 195 **
Olav Eikrem -- --
Graham Robjohns -- --
Kate Blankenship 5,000 **
* Mr. Fredriksen does not own any of our shares directly. The shares shown
next to Mr. Fredriksen's name are held by World Shipholding Ltd. See Item
7, "Major Shareholders and Related Party Transactions." World Shipholding
Ltd. is wholly-owned by Greenwich, which is, in turn, indirectly controlled
by Mr. Fredriksen.
** Less than one per cent
In additional to the above shareholdings, as of June 29, 2004, Mr. Tr0im
has a forward contract with an obligation to buy 60,000 of our shares. The
contract, which was acquired in the open market, becomes effective on December
17, 2004.
Option Plan
Our board of directors adopted the Golar LNG Limited Employee Share
Option Plan in February 2002. The plan authorizes our board to award, at its
discretion, options to purchase our common shares to employees of Golar LNG
Limited, and any of its subsidiaries, who are contracted to work more than 20
hours per week and to any director of Golar LNG Limited or its subsidiaries.
Under the terms of the plan, our board may determine the exercise
price of the options, provided that the exercise price per share is not lower
than the then current market value. No option may be exercised prior to the
first anniversary of the grant of the option except that the option will become
immediately exercisable if the option holder's employment is terminated (other
than for cause) or in the event of the option holder's death. All options will
expire on the tenth anniversary of the option's grant or at such earlier date as
the board may from time to time prescribe. The Plan will expire 10 years from
its date of adoption.
As of June 29, 2004, two million of the authorized and unissued common
shares were reserved for issue pursuant to subscription under options granted
under the Company's share option plan.
Details of share options held by the Company's Directors and officers
at June 29, 2004 are set out in the following table:
Number of Common Exercise Price per
Director or Officer Shares Subject to Option Ordinary Share Expiration Date
- ------------------- ------------------------ -------------- ---------------
John Fredriksen 200,000 $5.75 July 2011
Tor Olav Tr0im 100,000 $5.75 July 2011
ITEM 7. Major Shareholders and Related Party Transactions
A. Major shareholders
The Company is indirectly controlled by another corporation (see
below). The following table presents certain information regarding the current
ownership of the common shares with respect to (i) each person who is known by
the Company to own more than 5 per cent of the Company's outstanding common
shares; and (ii) all directors and officers as a group as of June 29, 2004.
Common Shares
Owner Amount Per cent
World Shipholding Ltd. (1) 28,012,000 42.69%
All Directors and Officers as a group (eight persons) 28,017,000 42.70%
(1) Our Chairman, John Fredriksen, indirectly controls World Shipholding Ltd.
Our major shareholders have the same voting rights as all other
holders of our Common Shares.
The Company is not aware of any arrangements, the operation of which
may at a subsequent date result in a change in control of the Company.
As at June 21, 2004, 12,117,222 of the Company's common shares are
held by forty nine holders of record in the United States.
B. Related party transactions
There are no provisions in our Memorandum of Association or Bye-Laws
regarding related party transactions. However, our management's policy is to
enter into related party transactions solely on terms that are at least
equivalent to terms we would be able to obtain from unrelated third parties. The
Bermuda Companies Act of 1981 provides that a company, or one of its
subsidiaries, may enter into a contract with an officer of the company, or an
entity in which an officer has a material interest, if the officer notifies the
Directors of its interest in the contract or proposed contract. The related
party transactions that we have entered into are discussed below.
Seatankers Management Company. Seatankers is indirectly controlled by
our Chairman, John Fredriksen In the years ended December 31, 2003 and 2002,
Seatankers has provided us with insurance administration services. In the years
ended December 31, 2003 and 2002, management fees to Seatankers of $25,000 and
$24,556, respectively, have been incurred by Golar. As at December 31, 2003 and
2002 an amount of nil and $14,556, respectively was due to Seatankers in respect
of these fees incurred.
Frontline Management (Bermuda). Frontline Management is a subsidiary
of Frontline Ltd., a publicly listed company, and is indirectly controlled by
our chairman, John Fredriksen. With effect from June 1, 2001, we entered into an
agreement with Frontline Management (Bermuda) Ltd. pursuant to which Frontline
Management provides budgetary and accounting support services, maintains our
corporate records, technical vessel supervision services, ensures our compliance
with applicable laws and requirements and assists us with corporate finance
matters.
In the years ended December 31, 2003 and 2002, we have incurred
management fees to Frontline of $273,547 and $379,550, respectively. As at
December 31, 2003 and 2002, an amount of $122,079 and $102,550 was due to
Frontline in respect of these management fees and costs incurred.
We believe that the compensation we pay to Frontline Management for
its administrative and management services is not more than the price we would
have paid to third parties in an arm's-length transaction and are under terms
similar to those that would be arranged with other parties.
Greenwich Holdings Limited ("Greenwich") - Newbuilding credit
facilities. Greenwich is indirectly controlled by our chairman, John Fredriksen.
Greenwich has entered into loan agreements with Nordea Bank Norge ASA and Den
norske Bank ASA, as lenders and Nordea, as facility agent and security agent.
Pursuant to separate promissory notes, Greenwich has on-loaned the proceeds of
its credit facilities with Nordea and Den norske Bank ASA to us. During 2003
these loans have been fully repaid.
Hulls No. 1460, 2220 and 1444
Pursuant to a loan agreement dated August 20, 2001, between Greenwich,
as borrower, Nordea and Den norske Bank ASA, as lenders and Den norske Bank ASA,
as facility agent and security agent, the lenders agreed to lend to Greenwich up
to $32.7 million. This loan was for the purpose of assisting Greenwich in
financing the payment by us of the first instalment of each of two newbuilding
contracts, representing 10 per cent of the total contract price of each vessel.
The initial instalment under the first contract, dated July 31, 2001, between
our wholly owned subsidiary Golar LNG 2220 Corporation and Daewoo Shipbuilding &
Marine Engineering Co., Ltd., as builder, providing for the construction of one
138,000 cmb LNG carrier hull number 2220, was in the amount of $16.2 million.
The initial instalment under the second contract dated July 24, 2001, between
our wholly owned subsidiary Golar LNG 1460 Corporation and Hyundai Heavy
Industries Co. Ltd., as builder, providing for the construction of one 140,000
cmb LNG carrier hull number 1460, was in the amount of $16.5 million. The loan
initially accrued interest at a rate equal to the sum of LIBOR plus 1.5 per cent
per annum and was to mature 364 days after the drawdown dates of the loan, which
were September 25, 2001 and August 21, 2001, respectively. We paid directly to
the lenders a non-refundable arrangement fee of $169,000 in respect of this
loan.
Pursuant to a promissory note dated August 21, 2001 in respect of
Golar LNG 1460 Corporation Greenwich on-loaned the proceeds of the loan in the
amount $16.5 million to finance the initial instalment due under our newbuilding
contract. The loan initially accrued interest at a rate equal to LIBOR plus 2.5
per cent and was to mature 360 days after the date of the promissory note.
Pursuant to a promissory note dated September 25, 2001 in respect of Golar LNG
2220 Corporation Greenwich on-loaned the proceeds of the loan in the amount
$16.2 million to finance the initial instalment due under our newbuilding
contract. The loan accrued interest at a rate equal to LIBOR plus 2.5 per cent
and wast to mature 360 days after the date of the promissory note. In connection
with this, two subsidiaries of ours guaranteed the loan and secured the loan
with an assignment of the shipbuilding contracts and the related refund
guarantee issued by the Korea Export and Import Bank. No consideration was paid
by Greenwich for the provision of the guarantee. Under the loan agreement and
the guarantee to the lenders, we subordinated our obligation to repay the loan
made by Greenwich to us to our obligations and those of Greenwich to the
lenders.
On June 11, 2002, Greenwich borrowed an additional $16.3 million from
Nordea and Den norske Bank ASA pursuant to an amendment to the August 20, 2001
loan. This loan was for the purpose of assisting Greenwich in financing the
payment by us of the second instalment under a contract dated May 10, 2001,
between our wholly owned subsidiary Golar LNG 1444 Corporation and Hyundai Heavy
Industries Co. Ltd., as builder, providing for the construction of one 137,000
cmb LNG carrier hull number 1444. Under this amendment to the loan agreement the
total outstanding loan accrued interest at a rate of equal to LIBOR plus 1.625
per cent and from February 20, 2003 at a rate equal to LIBOR plus 2.0 per cent.
The amendment provided for the repayment date on the original $32.7 million loan
to be extended to August 19, 2003 and for the additional $16.3 million to be
repayable four months after draw down on June 11, 2002. We paid directly to the
lenders a non-refundable arrangement fee of $323,000 in respect of this loan
amendment.
Pursuant to an addendum to the promissory note dated August 21, 2001,
Greenwich on-loaned the proceeds of the $16.3 million loan it borrowed on June
11, 2002 to us at an interest rate equal to LIBOR plus 2.625 per cent until
February 20, 2003 and thereafter at a rate equal to LIBOR plus 3.0 per cent.
This loan was to mature four months after the date of the promissory note. In
connection with this, two subsidiaries of ours guaranteed the loan and secured
the loan with an assignment of the shipbuilding contracts and the related refund
guarantee issued by the Korea Export and Import Bank. The proceeds of this loan
from were used to pay the second instalment due under the newbuilding contract
for hull number 1444. Under the loan agreement and the guarantee we had, as for
the initial loan, subordinated our obligation to repay the loan made by
Greenwich to us to our obligations and those of Greenwich to the lenders. No
consideration was paid by Greenwich for the provision of the guarantee.
In November 2002, we repaid the $16.3 million loan from Greenwich; in
June 2003 we repaid $16.0 million to Greenwich and in August 2003 we repaid
$16.7 million to Greenwich in respect of the $32.7 million loan secured on hulls
1460 and 2220.
Hull 2215
In August 2001 and September 2001, we obtained loans of $32.6 million and
$20 million respectively from Greenwich, in order to finance the first and
second instalments due on newbuilding hull number 2215. The floating interest
rate payable on these loans was LIBOR plus 2.5 per cent. We repaid the loans in
March 2002 from funds arising on drawn down from the Hull 2215 facility. Until
the repayment of the loans a subsidiary of ours had guaranteed loans totalling
$52.6 million made to Greenwich by Nordea and Den norske Bank and entered into
an assignment and security agreement in respect of its' building contract with
Den norske Bank as security agent. No consideration was paid by Greenwich for
the provision of the guarantee.
In the years ended December 31, 2003 and 2002, we paid interest of
$779,000 and $2,275,000, respectively to Greenwich in respect of the above loan
facilities. At December 31, 2003 no interest due to Greenwich was outstanding
(2002: $169,612).
Faraway Maritime Limited
During the year ended December 31, 2003, Faraway Maritime Shipping Inc.,
which is 60 per cent owned by us and 40 per cent owned by China Petroleum
Corporation ("CPC"), paid dividends totalling $4.2 million (2002: $25.0
million), of which $2.5 million was paid to us and $1.7 million was paid to CPC.
Graeme McDonald
Golar Management holds a promissory note executed by Mr. McDonald, Chairman
of Golar Management and Technical Director, on April 21, 1998, under which Mr.
McDonald promises to pay to Golar Management the principal sum of (pound)20,900
in monthly instalments of (pound)318. The note carries an interest rate of three
per cent and an acceleration clause in the event Mr. McDonald's employment with
us is terminated for any reason or in the event of a default on payment by Mr.
McDonald. Payments under the note commenced in May 1998 and the principal
balance as of December 31, 2003 and 2002 was (pound)1,158 and (pound)4,974 or
approximately $2,000 and $9,000, respectively.
C. Interests of Experts and Counsel
Not Applicable
ITEM 8. Financial Information.
A. Consolidated Statements and Other Financial Information
See Item 18.
Legal Proceedings
There are no legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on our company, our
financial condition, profitability, liquidity or our results of operations. From
time to time in the future we or our subsidiaries may be subject to various
legal proceedings and claims in the ordinary course of business.
Dividend Distribution Policy
Any future dividends declared will be at the discretion of the board
of directors and will depend upon our financial condition, earnings and other
factors. Our ability to declare dividends is also regulated by Bermuda law,
which prohibits us from paying dividends if, at the time of distribution, we
will not be able to pay our liabilities as they fall due or the value of our
assets is less than the sum of our liabilities, issued share capital and share
premium.
In addition, since we are a holding company with no material assets
other than the shares of our subsidiaries through which we conduct our
operations, our ability to pay dividends will depend on our subsidiaries'
distributing to us their earnings and cash flow. Some of our loan agreements
limit or prohibit our and our subsidiaries' ability to make distributions to us
without the consent of our lenders.
B. Significant Changes
None
ITEM 9. The Offer and Listing
A. Listing Details and Markets
Not applicable except for Item 9.A. 4. and Item 9. C.
Our common shares have traded on the Oslo Stock Exchange (OSE) since
July 12, 2001 under the symbol "GOL" and on the Nasdaq National Market since
December 12, 2002 under the symbol "GLNG".
The following table sets forth, for the two most recent fiscal years
from January 1, 2002 and for the first quarter of 2004, the high and low prices
for the common shares on the Oslo Stock Exchange and the Nasdaq National Market.
OSE NASDAQ
High Low High Low
First Quarter 2004 NOK125.50 NOK94.50 $18.36 $14.26
Fiscal year ended December 31
2003 NOK99.00 NOK35.00 $14.95 $5.00
2002 NOK62.00 NOK35.00 $7.75 $6.00
2001 NOK70.00 NOK35.00 n/a n/a
The following table sets forth, for each full financial quarter for the two most
recent fiscal years from January 1, 2002, the high and low prices of the common
shares on the Oslo Stock Exchange and the Nasdaq National Market.
OSE NASDAQ
High Low High Low
Fiscal year ended December 31, 2003
First quarter NOK45.00 NOK35.00 $6.75 $5.50
Second quarter NOK78.00 NOK36.00 $10.95 $5.00
Third quarter NOK91.00 NOK67.50 $12.14 $9.49
Fourth quarter NOK99.00 NOK74.50 $14.95 $11.74
Fiscal year ended December 31, 2002
First quarter NOK62.00 NOK43.00 n/a n/a
Second quarter NOK58.50 NOK41.00 n/a n/a
Third quarter NOK48.00 NOK35.50 n/a n/a
Fourth quarter NOK46.00 NOK35.00 $7.75 $6.00
The following table sets forth, for the most recent six months, the high
and low prices for our common shares on the OSE and the Nasdaq National Market.
OSE NASDAQ
High Low High Low
May 2004 NOK93.50 NOK85.75 $13.92 $12.31
April 2004 NOK107.50 NOK88.50 $15.59 $12.75
March 2004 NOK122.00 NOK98.00 $17.26 $14.26
February 2004 NOK116.50 NOK103.25 $16.87 $14.75
January 2004 NOK125.50 NOK94.50 $18.36 $14.26
December 2003 NOK99.00 NOK79.50 $14.95 $11.88
On May 31, 2004, the exchange rate between the Norwegian Kroner and the U.S.
dollar was NOK6.71590 to one U.S. Dollar.
ITEM 10. Additional Information
This section summarizes our share capital and the material provisions of
our Memorandum of Association and Bye-Laws, including rights of holders of our
shares. The description is only a summary and does not describe everything that
our Articles of Association and Bye-Laws contain. The Memorandum of Association
and the Bye Laws of the Company has previously been filed as Exhibits 1.1 and
1.2, respectively to the Company's Registration Statement on Form 20-F, (File
No. 000-50113) filed with the Securities and Exchange Commission on November 27,
2002, and are hereby incorporated by reference into this Annual Report.
A. Share capital
Not Applicable
B. Memorandum of Association and Bye-Laws
Our Memorandum of Association and Bye-laws. The object of our
business, as stated in Section six of our Memorandum of Association, is to
engage in any lawful act or activity for which companies may be organized under
The Companies Act, 1981 of Bermuda, or the Companies Act, other than to issue
insurance or re-insurance, to act as a technical advisor to any other enterprise
or business or to carry on the business of a mutual fund. Our Memorandum of
Association and Bye-laws do not impose any limitations on the ownership rights
of our shareholders.
Under our Bye-laws, annual shareholder meetings will be held in
accordance with the Companies Act at a time and place selected by our board of
directors. The quorum at any annual or general meeting is equal to one or more
shareholders, either present in person or represented by proxy, holding in the
aggregate shares carrying 33 1/3 per cent of the exercisable voting rights. The
meetings may be held at any place, in or outside of Bermuda, that is not a
jurisdiction which applies a controlled foreign company tax legislation or
similar regime. Special meetings may be called at the discretion of the board of
directors and at the request of shareholders holding at least one-tenth of all
outstanding shares entitled to vote at a meeting. Annual shareholder meetings
and special meetings must be called by not less than seven days' prior written
notice specifying the place, day and time of the meeting. The board of directors
may fix any date as the record date for determining those shareholders eligible
to receive notice of and to vote at the meeting.
Directors. Our directors are elected by a majority of the votes cast
by the shareholders in general meeting. The quorum necessary for the transaction
of the business of the board of directors may be fixed by the board but unless
so fixed, equals those individuals constituting a majority of the board of
directors who are present in person or by proxy. Executive directors serve at
the discretion of the board of directors.
The minimum number of directors comprising the Board of Directors at
any time shall be two. The Board currently comprises four directors. The minimum
and maximum number of directors comprising the Board from time to time shall be
determined by way of an ordinary resolution of the shareholders of the Company.
The shareholders may, at general meeting by ordinary resolution, determine that
one or more vacancies in the board of directors be deemed casual vacancies. The
board of directors, so long as a quorum remains in office, shall have the power
to fill such casual vacancies. Each director will hold office until the next
annual general meeting or until his successor is appointed or elected. The
shareholders may call a Special General Meeting for the purpose of removing a
director, provided notice is served upon the concerned director 14 days prior to
the meeting and he is entitled to be heard. Any vacancy created by such a
removal may be filled at the meeting by the election of another person by the
shareholders or in the absence of such election, by the board.
Subject to the provisions of the Companies Act, a director of a company
may, notwithstanding his office, be a party to or be otherwise interested in any
transaction or arrangement with that company, and may act as director, officer,
or employee of any party to a transaction in which the company is interested.
Under our Bye-laws, provided an interested director declares the nature of his
or her interest immediately thereafter at a meeting of the board of directors,
or by writing to the directors as required by the Companies Act, a director
shall not by reason of his office be held accountable for any benefit derived
from any outside office or employment. The vote of an interested director,
provided he or she has complied with the provisions of the Companies Act and our
Bye-laws with regard to disclosure of his or her interest, shall be counted for
purposes of determining the existence of a quorum.
Dividends. Holders of common shares are entitled to receive dividend
and distribution payments, pro rata based on the number of common shares held,
when, as and if declared by the board of directors, in its sole discretion. Any
future dividends declared will be at the discretion of the board of directors
and will depend upon our financial condition, earnings and other factors.
As a Bermuda exempted company, we are subject to Bermuda law relating
to the payment of dividends. We have been advised by Bermuda counsel, Appleby,
Spurling & Kempe, that we may not pay any dividends if, at the time the dividend
is declared or at the time the dividend is paid, there are reasonable grounds
for believing that, after giving effect to that payment;
o we will not be able to pay our liabilities as they fall due; or
o the realizable value of our assets, is less than an amount that is
equal to the sum of our
(a) liabilities,
(b) issued share capital, which equals the product of the par value
of each common share and the number of common shares then
outstanding, and
(c) share premium, which equals the aggregate amount of consideration
paid to us for such common shares in excess of their par value.
In addition, since we are a holding company with no material assets,
and conduct our operations through subsidiaries, our ability to pay any
dividends to shareholders will depend on our subsidiaries' distributing to us
their earnings and cash flow. Some of our loan agreements currently limit or
prohibit our subsidiaries' ability to make distributions to us and our ability
to make distributions to our shareholders.
C. Material contracts
Leases
In April 2003 we entered into a lease finance arrangement in respect
to five of the LNG carriers that we currently operate with a subsidiary of a
major UK bank, to which we refer as the UK Lessor. The five vessels are the
Golar Spirit, Golar Freeze, Hilli, Gimi and Khannur. As part of the UK vessel
lease arrangement, we sold five of our subsidiary companies, which owned the
relevant vessels, to the UK Lessor and received a cash sum of $452.6 million
through refinancing, by the UK Lessor, of debt owed by the five subsidiary
companies to us. Each of the five companies, now owned by the UK Lessor,
subsequently entered into 20 year leases with a subsidiary of ours, Golar Gas
Holding Company Inc., or GGHC, which, in turn, subleased the vessels to five UK
subsidiary companies newly incorporated by us for the purpose of assuming the
business of operating each of the these vessels. While the UK Lessor has legal
title to the vessels, the lease are all bareboat charters that give us complete
operational control over, and responsibility for, the vessels. In addition, on
expiration of the leases, we act as exclusive sales agent for the UK vessel
lessor and receive 99.9 per cent of the net proceeds in the form of a rebate to
us of lease rentals. However, we may not time charter the vessels to charterers,
other than BG and Pertamina that have credit ratings below BBB+, without the UK
Lessor's consent.
We used $325 million of the proceeds we received together with $17.5
million of our cash reserves to repay two existing loans, the Golar LNG facility
and the Golar LNG subordinated facility. The outstanding amounts of these loans
upon repayment were $282.5 million and $60 million respectively. We then drew
down on two new facilities; $265 million secured by a mortgage executed by the
UK Lessor in favour of our subsidiary GGHC as security for the lessor's
obligations to pay certain sums to GGHC under the vessel lease agreements and by
a mortgage transfer executed by GGHC in favour of the lending banks; and $60
million secured by a similar but second priority mortgage. The total proceeds
from the new loans of $325 million together with $89.5 million of the proceeds
from the vessel lease finance arrangement were used to make deposits with two
banks amounting to $414.5 million. These banks then issued letters of credit
securing our obligations under the vessel leases amounting to the present value
of rentals due under the leases. Lease rentals are payable quarterly. At the end
of each quarter the required deposit to secure the present value of rentals due
under the UK vessel leases will be recalculated taking into account the rental
payment due at the end of the quarter. The surplus funds released as a result of
the reduction in the required deposit are available to pay the UK vessel lease
rentals due at the end of the same quarter. After making this deposit and
settling all outstanding fees relating to the transaction, our approximate cash
inflow was approximately $32.5 million.
Each of the five UK vessel leases is for a period of 20 years that may
be extended by us annually thereafter as long as the vessels remain seaworthy,
and we are not otherwise in default of the leases. The principal security is
comprised of two cash deposits with two different banks that have issued letters
of credit securing our obligations under the UK vessel leases. The deposits are
equal to the net present value of the minimum lease payments. In addition to the
letters of credit. the UK Lessor's security includes a guarantee from the
Company and a third priority; pledge of the capital stock of our shipowning
subsidiaries that have subleased the vessels from GGHC, and an assignment of
those vessels' earnings, insurance, and charters to the UK Lessor. We have also
indemnified the UK Lessor against, among other things, increases in tax costs.
We may terminate the UK vessel leases by paying the UK Lessor a termination
rental in such an amount as will reduce the Lessor's investment balance, after
taking into account all tax effects, to zero. The UK vessel leases provide that
we will receive 99.9% of the net proceeds of any sale of the vessels by the UK
Lessor in the form of a rebate of lease rentals, subject to claims by third
parties, our lenders, and the UK Lessor itself. If we terminate the UK vessel
leases within the first five years we would be liable to a termination fee which
would also be charged against the net proceeds. In addition, we have agreed to
indemnify the UK Lessor for any adverse tax consequences or rulings, which could
result in our returning all or a portion of the cash inflow that we have
received, posting additional security, or making other payments to the UK
Lessor.
The UK vessel lease agreements and related documents also contain a
number of restrictive covenants that are similar to those of our New Golar LNG
Facility and the New Golar LNG Subordinated Facility. Violation of those
covenants and termination of the UK vessel leases could result in the sale of
the vessels at that time. As the leases contain a right of quiet enjoyment in
favour of BG and Pertamina, if there were a default and UK lease termination,
the price realized on sale of the vessels could depend in part on whether
potential buyers deem the assumption of the BG and Pertamina charters
advantageous at the time.
New Golar LNG Facility and New Golar LNG Subordinated Facility
In April 2003, we entered into a refinancing in respect of the Golar
LNG Facility and the Golar LNG subordinated facility. The new first priority
loan, or New Golar LNG facility, is for an amount of $265 million and is with
the same syndicate of banks as the Golar LNG facility. The loan accrues floating
interest at a rate per annum equal to the aggregate of LIBOR plus a margin. The
loan has a term of four years and two months and is repayable in 16 quarterly
instalments and a final balloon payment of $138.8 million payable on May 31,
2007. The new second priority loan ("New Golar LNG subordinated facility") is
for an amount of $60 million with the same syndicate of banks. It accrues
floating interest at a rate per annum equal to the aggregate of LIBOR, plus a
margin, increasing by 0.25 per cent per annum on 30 November 2004 and 30
November 2005. The loan has a term of four years and two months and is repayable
in 15 quarterly instalments of $4 million commencing in November 2003. Both
loans may be prepaid in whole or in part without premium or penalty, except for
losses and other reasonable costs and expenses incurred as a result of our
prepayment. The margins we currently pay under these loan agreements over and
above LIBOR at a fixed or floating rate ranges from 1.5 per cent to 2.0 per
cent.
The New Golar LNG Facility is secured by a mortgage executed by the UK
Lessor in favour of our subsidiary GGHC as security for the Lessor's obligations
to pay certain sums to GGHC under the lease agreements and by a mortgage
transfer executed by GGHC in favour of the lending banks. The New Golar LNG
subordinated Facility is secured by a similar but second priority mortgage. In
addition to the mortgages the New Golar LNG Facility and the New Golar LNG
subordinated Facility are secured, on a first and second priority basis
respectively, by a guarantee from us, a pledge of the capital stock of our
shipowning subsidiaries, and an assignment of our vessels' earnings, insurance,
and the vessels' charters to the lenders. The loan agreements and related
documents also contain a number of restrictive covenants that, subject to
specified exceptions, limit our ability and the ability of Golar Gas Holding
Company and our shipowning subsidiaries' to among other things:
o merge into or consolidate with another entity or sell or
otherwise dispose of all or substantially all of our assets;
o make or pay equity distributions;
o incur additional indebtedness;
o incur or make any capital expenditure, other than capital
expenditures for vessel upgrades required by our charterers;
o materially amend, or terminate, any of our current charter
contracts or management agreements; and
o enter into any business other than owning the shipowning
companies, in the case of Golar Gas Holding Company, and owning
and operating the ships, in the case of the shipowning
subsidiaries.
The agreement also contains an event of default if, among other
things, John Fredriksen and his affiliated entities cease to be the beneficial
or legal owner of at least 25 per cent of our common shares.
D. Exchange Controls
None
E. Taxation
The following discussion is a summary of the material tax
considerations relevant to us and an investment decision by a U.S. holder and a
non-U.S. holder, as defined below, with respect to our common shares. This
discussion does not purport to deal with the tax consequences of owning common
shares to all categories of investors, some of which, such as dealers in
securities, U.S. holders who own 10 per cent or more of our voting shares and
investors whose functional currency is not the U.S. dollar, may be subject to
special rules. U.S. holders and non-U.S. holders should consult their own tax
advisors concerning the overall tax consequences arising in their own particular
situation under U.S. federal, state, local or foreign law of the ownership of
common shares.
Bermuda Tax Considerations
The following are the material Bermuda tax consequences of our
activities to us and to shareholders owning common shares. We are incorporated
in Bermuda. Under current Bermuda law, we are not subject to tax on income or
capital gains, and no Bermuda withholding tax will be imposed upon payments of
dividends by us to our shareholders. No Bermuda tax is imposed on shareholders
with respect to the sale or exchange of common shares. Furthermore, we have
received from the Minister of Finance of Bermuda under the Exempted Undertaking
Tax Protection Act of 1966, as amended, an undertaking that, if Bermuda enacts
any legislation imposing any tax computed on profits or income or computed on
any capital asset, gain or appreciation, or any tax in the nature of an estate,
duty or inheritance tax, the imposition of such tax will not be applicable to us
or any of our operations or to our common shares obligations until March 2016.
As an exempted company, we are liable to pay to the Bermuda government an annual
registration fee calculated on a sliding-scale basis by reference to our
assessable capital, that is, our authorized capital plus any share premium.
U.S. Federal Income Tax Considerations
The following are the material U.S. federal income tax consequences to
us and to U.S. holders and non-U.S. holders, as defined below, regarding (1) our
operations and the operations of our vessel holding subsidiaries and (2) the
acquisition, ownership and disposition of our common shares. The following
discussion of U.S. federal income tax matters is based on the Internal Revenue
Code of 1986, as amended, or the "Code", judicial decisions, administrative
pronouncements, and existing and proposed regulations issued by the U.S.
Department of the Treasury, all of which are subject to change, possibly with
retroactive effect. In addition, the discussion is based, in part, on the
description of our business as described above and assumes that we conduct our
business as so described.
United States Taxation of Our Company
Taxation of Operating Income: In General
We anticipate that substantially all of our gross income will be
derived from the use and operation of vessels in international commerce and that
this income will principally consist of freights from the transportation of
cargoes, hire or lease income from time or voyage charters and the performance
of services directly related thereto, which we refer to as "shipping income".
Unless exempt from U.S. taxation under Section 883 of the Code, or under the
United States-United Kingdom Income Tax Treaty in effect for the calendar year
2003 (the "Treaty") in the case of the vessels operated by our United Kingdom
subsidiaries beginning April of 2003, we will be subject to U.S. federal income
taxation, in the manner discussed below, to the extent our shipping income is
derived from sources within the United States.
Shipping income that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States will be
considered to be 50 per cent derived from sources within the United States.
Shipping income attributable to transportation that both begins and ends in the
United States will be considered to be 100 per cent derived from sources within
the United States. We do not engage in transportation that gives rise to 100 per
cent U.S. source income.
Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100 per cent derived from sources
outside the United States. Shipping income derived from sources outside the
United States will not be subject to U.S. federal income tax.
Based upon our anticipated shipping operations, our vessels will be
operated in various parts of the world, including to or from U.S. ports. For the
three calendar years 2001, 2002 and 2003 the U.S. source income that we derived
from our vessels trading to U.S. ports was $12,200,000, $8,435,000 and
$14,283,000 respectively, and the potential U.S. federal income tax liability
resulting from this income, in the absence of our qualification for exemption
from taxation under Section 883 and the treaty, as described below, would have
been $488,000, $337,400 and $571,000 respectively.
Application of Code Section 883
The ensuing discussion is applicable to, and references to
"subsidiaries" shall mean, only those of our subsidiaries that are incorporated
under the laws of jurisdictions other than the United Kingdom.
Under Section 883 of the Code, we, and each of our subsidiaries, will
be exempt from U.S. taxation on our respective U.S. source shipping income, if
both of the following conditions are met:
o we, and each subsidiary are organized in a qualified foreign country
which is one that grants an equivalent exemption from tax to
corporations organized in the United States in respect of the shipping
income for which exemption is being claimed under Section 883, which
we refer to as "the country of organization requirement"; and
o more than 50 per cent of the value of our stock is treated as owned,
directly or indirectly, by individuals who are "residents" of
qualified foreign countries, which we refer to as the "ownership
requirement".
The U.S. Treasury Department has recognized (i) Bermuda, our country
of incorporation, and (ii) the country of incorporation of each of our
subsidiaries, as a qualified foreign country. Accordingly, we, and each
subsidiary satisfy the country of organization requirement.
In respect of the ownership requirement, Section 883 provides a
special publicly-traded rule which exempts us from having to satisfy the
ownership requirement if our shares are considered to be "primarily and
regularly traded on an established securities market" located in our country of
organization, Bermuda, in another qualified foreign country or in the United
States, which we refer to as the "publicly-traded test". Furthermore, if we
satisfy the publicly-traded test, the stock of our subsidiaries will be deemed
to be owned by individual residents of Bermuda and each of our subsidiaries will
satisfy the ownership requirement.
Final regulations interpreting Section 883 were promulgated by the
U.S. Treasury Department in August 2003, which we refer to as the "final
regulations." These regulations apply to taxable years beginning thirty days or
more after the date published as final regulations in the Federal Register. As a
result, such regulations will not be effective for calendar year taxpayers like
ourselves until the calendar year 2004.
The final regulations provide, in pertinent part, that stock of a
foreign corporation will be considered to be "primarily traded" on an
established securities market if the number of shares that are traded during any
taxable year on all established markets in that country exceeds the number of
shares traded during that year on established securities markets in any other
single country.
At present, the sole class of shares that is issued and outstanding is
our common shares. Our common shares are listed on the Oslo Stock Exchange,
which is an established securities market in Norway, and Norway has been
recognized by the U.S. Treasury Department as a qualified foreign country. Our
common shares are also listed on the Nasdaq National Market, which is an
established securities market in the United States. For the taxable year ending
December 31, 2003, the aggregate number of common shares that was traded on the
Oslo Stock Exchange exceeded the aggregate number of shares traded on any other
established securities market.
The final regulations further provide that stock will generally be
considered to be "regularly traded" on a securities market if stock representing
more than 50 per cent of the issuer's outstanding shares, by voting power and
value, is listed on such market, which we refer to as the "50 per cent listing
threshold", and with respect to the class of stock relied upon to satisfy the 50
per cent listing threshold:
o stock is traded on such market, other than in de minimis
quantities, on at least 60 days during the taxable year, or 1/6
of the days in a short taxable year, which we refer to as the
"trading frequency threshold"; and
o the aggregate number of shares of stock traded on such market is
at least ten percent of the average number of shares outstanding
during such year, or as appropriately adjusted in the case of a
short taxable year, which we refer to as the "trading volume
threshold".
We currently satisfy the 50 percent listing threshold in respect of
our common shares listed on both the Oslo Stock Exchange and the Nasdaq National
Market.
Our shares are currently traded on the Oslo Stock Exchange on a level
sufficient to satisfy the trading frequency and trading volume thresholds. The
final regulations provide that the trading frequency threshold and the trading
volume threshold will be deemed satisfied if stock is traded on an established
securities market in the United States and the stock is regularly quoted by
dealers making a market in the stock, which we refer to as the "U.S. securities
market exception". We expect that our common shares will be regularly quoted on
the Nasdaq National Market by one or more dealers that make a market in our
common shares and therefore our common shares will also qualify for the U.S.
securities market exception.
Notwithstanding the foregoing, the final regulations provide, in
pertinent part, that stock will not be considered to be regularly traded on an
established securities market for any taxable year in which 50 per cent or more
of the outstanding shares of that stock, by vote and value, are owned, within
the meaning of the regulations, for more than half the days of the taxable year
by persons who each own 5 per cent or more of the vote and value of the
outstanding shares of that stock, known as the "5 per cent override rule". The 5
per cent override rule will not apply, however, if we can establish that
individual residents of qualified foreign countries, which we refer to as
"qualified shareholders", own sufficient shares of our stock to preclude
non-qualified shareholders from owning 50 per cent or more of the total value of
our stock for more than half the number of days during the taxable year which we
refer to as the "5 per cent override exception".
Based on our existing shareholdings, we would presently be subject to
the 5 per cent override rule for 2003 and in the absence of our being able to
qualify for the 5 per cent override exception, we would not qualify for the
special publicly-traded rule exempting us from having to satisfy the ownership
requirement. We believe that our ability to satisfy either the 5 per cent
override exception or the ownership requirement in accordance with the
regulations in particular those provisions applicable to determining an
individual taxpayer's residence or tax home, could be open to question.
Since the final regulations only come into force and effect beginning
the calendar year 2004, however, we intend to take the position on our U.S. tax
return filings for 2003 that we satisfy the publicly traded requirements of the
statute and, therefore, we and our subsidiaries are entitled to exemption from
U.S. federal income tax under Section 883 in respect of our U.S.-source shipping
income.
United States-United Kingdom Income Tax Treaty
Our United Kingdom subsidiaries are eligible to claim the benefits of
the Treaty for 2003. Commencing 2004, our United Kingdom subsidiaries are not
permitted under the final Section 883 regulations, to claim exemption from tax
on their U.S. source shipping income under Section 883 but rather must base
their claim for exemption on the Treaty.
Article 8 of the Treaty provides, in pertinent part, that profits
derived from "the operation of ships in international traffic" shall be taxable
only in the United Kingdom. Since all the U.S. source shipping income of our
United Kingdom subsidiaries for 2003 was derived from the operation of ships in
international traffic, all such income is exempt from U.S. federal income tax.
Article 8 also exempts from U.S. federal income tax gain derived by our United
Kingdom subsidiaries from the sale of their vessels operated in international
traffic.
While Article 16 of the Treaty imposes certain beneficial ownership
requirements and other limitations on companies claiming benefits under the
Treaty, this Article does not extend to benefits claimed under Article 8.
Taxation in Absence of Internal Revenue Code Section 883 or Treaty Exemption
4 per cent Gross Basis Tax Regime
To the extent the benefits of Section 883 or the treaty are
unavailable with respect to any item of U.S. source income, our U.S.-source
shipping income, to the extent not considered to be "effectively connected" with
the conduct of a U.S. trade or business as discussed below, would be subject to
a 4 per cent tax imposed by Code Section 887 on a gross basis, without benefit
of deductions. Since under the sourcing rules described above, no more than 50
per cent of our shipping income would be derived from U.S. sources, the maximum
effective rate of U.S. federal income tax on our shipping income would never
exceed 2 percent.
Net Basis and Branch Tax Regime
To the extent the benefits of the Section 883 exemption or the Treaty
are unavailable and our U.S. source shipping income is considered to be
"effectively connected" with the conduct of a U.S. trade or business, as
described below, any such "effectively connected" U.S. source shipping income,
net of applicable deductions, would be subject to the U.S. federal corporate
income tax currently imposed at rates of up to 35 per cent. In addition, we may
be subject to the 30 per cent "branch-level" taxes (or such lesser tax as
provided by an applicable income tax treaty) on earnings effectively connected
with the conduct of such trade or business, as determined after allowance for
certain adjustments, and on certain interest paid or deemed paid attributable to
the conduct of their U.S. trade or business.
Our U.S. source shipping income will be considered "effectively
connected" with the conduct of a U.S. trade or business only if:
o we have, or are considered to have, a fixed place of business in the
United States involved in the earning of shipping income; and
o substantially all of our U.S. source shipping income is attributable
to regularly scheduled transportation, such as the operation of a
vessel that follows a published schedule with repeated sailings at
regular intervals between the same points for voyages that begin or
end in the United States.
We do not have, or permit circumstances that would result in having,
any of our vessels operating to the United States on a regularly scheduled basis
or in having an office or other fixed place of business in the United States
involved in the earning of shipping income. Based on the foregoing and on the
expected mode of our shipping operations, we believe that none of our U.S.
source shipping income will be "effectively connected" with the conduct of a
U.S. trade or business.
Gain on Sale of Vessels
To the extent any of our vessels makes more than an occasional voyage
to U.S. ports, we may be considered to be engaged in the conduct of a U.S. trade
or business. As a result, any U.S. source gain on the sale of a vessel may be
partly or wholly subject to U.S. federal income tax as "effectively connected"
income (determined under rules different from those discussed above) under the
net basis and branch tax regime described above. However, to the extent
circumstances permit we intend to structure sales of our vessels in such a
manner, including effecting the sale and delivery of vessels outside of the
United States, as to not give rise to U.S. source gain.
U.S. Taxation of U.S. Holders
The term U.S. holder means a beneficial owner of our common shares
that is a U.S. citizen or resident, U.S. corporation or other U.S. entity
taxable as a corporation, an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust if a court within
the U.S. is able to exercise primary jurisdiction over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust and owns our common shares as a capital asset, generally,
for investment purposes.
If a partnership holds our common shares, the tax treatment of a
partner will generally depend upon the status of the partner and upon the
activities of the partnership. If you are a partner in a partnership holding our
common shares, you should consult your tax advisor.
Distributions
Any distributions made by us with respect to our common shares to a
U.S. holder will generally constitute dividends, to the extent of our current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. Dividends paid by us to a non-corporate U.S. holder may be eligible
for U.S. federal income preferential tax rates (through 2008) provided that (1)
our stock is readily tradable on an established securities market in the United
States; (2) we are not a passive foreign investment company, a foreign personal
holding company or a foreign investment company for the taxable year during
which the dividend is paid or the immediately preceding taxable year; and (3)
the U.S. individual holder has owned our stock for more than 60 days in the
120-day period beginning 60 days before the date on which our stock becomes
ex-dividend. No guidance has been issued by the Internal Revenue Service
defining when the stock of a foreign corporation will be treated as readily
tradable on an established securities market in the United States for this
purpose. In addition, as discussed below in "Anti-Deferral Regimes", there is no
assurance that we will not become a passive foreign investment company or a
foreign personal holding company in any year. Certain limitations may also apply
to any "extraordinary dividends" paid by us. Therefore, there is no assurance
that any dividends paid by us will be eligible for these preferential rates in
the hands of a U.S. individual holder. Any dividends paid by us which are not
eligible for these preferential rates will be taxed as ordinary income to a U.S.
holder.
Distributions in excess of our earnings and profits will be treated
first as a non-taxable return of capital to the extent of the U.S. holder's tax
basis in his common shares on a dollar for dollar basis and thereafter as
capital gain. Because we are not a U.S. corporation, a U.S. holder that is a
corporation will not be entitled to claim a dividends received deduction with
respect to any distributions it receives from us. Dividends paid with respect to
our common shares will generally be treated as "passive income" or, in the case
of certain types of U.S. holders, "financial services income", for purposes of
computing allowable foreign tax credits for U.S. foreign tax credit purposes.
Sale, Exchange or other Disposition of Our Common Shares
Subject to the discussion below under "Passive Foreign Investment
Company," a U.S. holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of our common shares in an amount equal to
the difference between the amount realized by the U.S. holder from such sale,
exchange or other disposition and the U.S. holder's tax basis in the common
shares. Such gain or loss will be treated as long-term capital gain or loss if
the U.S. holder's holding period in our stock is greater than one year at the
time of the sale, exchange or other disposition. Such capital gain or loss will
generally be treated as U.S.-source income or loss, as applicable, for U.S.
foreign tax credit purposes. A U.S. holder's ability to deduct capital losses is
subject to certain limitations.
Anti-Deferral Regimes
Notwithstanding the above rules regarding distributions and
dispositions, special rules may apply to some U.S. holders (or to the direct or
indirect beneficial owners of some non-U.S. holders) if one or more
anti-deferral regimes discussed below are applicable. The rules regarding each
of these regimes are complex, and U.S. holders should consult their tax advisers
with respect to the applicability and impact of these regimes to their ownership
of our shares.
Passive Foreign Investment Company
We will be a "passive foreign investment company" if either:
o 75 per cent or more of our gross income (including the gross income of
any subsidiary of which we own, directly or indirectly, 25 per cent or
more of the value of its stock) in a taxable year is passive income;
or
o at least 50 per cent of our assets (including the assets of any
subsidiary) in a taxable year (averaged over the year and generally
determined based upon value) are held for the production of, or
produce, passive income.
To date, our subsidiaries and we have derived most of our income from
time and voyage charters, and we expect to continue to do so. This income should
be treated as services income, which is not passive income for passive foreign
investment company purposes. However, passive income would include amounts
derived by reason of the temporary investment of funds raised in an offering and
amounts derived through spot trading of LNG for our own account.
On the basis of the above, we believe that we are not currently a
passive foreign investment company and do not expect to be a passive foreign
investment company in the foreseeable future. However, because there are
uncertainties in the application of the passive foreign investment company rules
(including whether the Internal Revenue Service disagrees with the conclusion
that time and voyage charters do not give rise to passive income for purposes of
the passive foreign investment company income test), and because it is an annual
test, there can be no assurance that we will not become a passive foreign
investment company in any year.
If we become a passive foreign investment company (and regardless of
whether we remain a passive foreign investment company), each U.S. holder who is
treated as owning our shares during any period in which we are so classified,
for purposes of the passive foreign investment company rules would be liable to
pay tax, at the then highest prevailing income tax rates on ordinary income,
plus interest, upon certain excess distributions and upon disposition of our
shares including, under certain circumstances, a disposition pursuant to an
otherwise tax free reorganization, as if the distribution or gain had been
recognized rateably over the U.S. holder's entire holding period of our shares.
An excess distribution generally includes dividends or other distributions
received from a passive foreign investment company in any taxable year of a U.S.
holder to the extent that the amount of those distributions exceeds 125 per cent
of the average distributions made by the passive foreign investment company
during a specified base period. The tax at ordinary rates and interest would not
be imposed if the U.S. holder makes a mark-to-market election, as discussed
below. Further, a U.S. holder that acquires our shares from a decedent (other
than certain non-resident aliens) whose holding period for the shares includes
time when we were a passive foreign investment company would be denied the
normally available step-up of income tax basis for the shares to fair market
value at the date of death and instead would have a tax basis limited to the
lower of fair market value of the shares or decedent's tax basis.
In some circumstances, a U.S. holder may avoid the unfavourable
consequences of the passive foreign investment company rules by making a
qualified electing fund election with respect to us. A qualified electing fund
election effectively would require an electing U.S. holder to include in income
its pro rata share of our ordinary earnings and net capital gain. However, a
U.S. holder cannot make a qualified electing fund election with respect to us
unless we comply with certain reporting requirements and we do not intend to
provide the required information. If we become a passive foreign investment
company and, provided our shares are regularly traded on a "qualified exchange",
a U.S. holder may make a mark-to-market election. A "qualified exchange"
includes a foreign exchange that is regulated by a governmental authority in
which the exchange is located and with respect to which certain other
requirements are met. The Internal Revenue Service has not yet identified
specific foreign exchanges that are "qualified" for this purpose. The Nasdaq
National Market, on which our common shares are traded, is a qualified exchange
for U.S. federal income tax purposes. Under the election, any excess of the fair
market value of the shares at the close of any tax year over the U.S. holder's
adjusted basis in the shares is included in the U.S. holder's income as ordinary
income. In addition, the excess, if any, of the U.S. holder's adjusted basis at
the close of any taxable year over fair market value is deductible in an amount
equal to the lesser of the amount of the excess or the net mark-to-market gains
on the shares that the U.S. holder included in income in previous years. If a
U.S. holder makes a mark-to-market election after the beginning of its holding
period, the U.S. holder does not avoid the interest charge rule discussed above
with respect to the inclusion of ordinary income attributable to periods before
the election.
Foreign Personal Holding Company
We will be a foreign personal holding company, for United States
federal income tax purposes, if both:
o five or fewer individuals who are United States citizens or residents
own or are deemed to own (under applicable attribution rules) more
than 50 per cent of all classes of our stock measured by voting power
or value; and
o we receive at least 60 per cent (50 per cent in years other than our
first taxable year as a foreign personal holding company) of our gross
income (regardless of source), as specifically adjusted, from certain
passive sources.
If we are classified as a foreign personal holding company, a portion
of our "undistributed foreign person holding company income" (as defined for
U.S. federal income tax purposes) would be imputed to all of our U.S. holders
who are shareholders on the last taxable day of our taxable year, or, if
earlier, the last day on which we are classifiable as a foreign personal holding
company. That portion of our income would be taxable as a dividend, even if no
cash dividend is actually paid. U.S. holders who dispose of their shares prior
to the date set forth above would not be subject to a tax under these rules. In
addition, an individual U.S. holder who acquires our common shares from a
decedent would be denied the step-up of tax basis of such shares to fair market
value on the decedent's date of death which would otherwise be available and
instead would have a tax basis equal to the lower of fair market value or the
decedent's basis. We believe that we are not a foreign personal holding company.
However, no assurance can be given that we will not qualify as a foreign
personal holding company in the future.
U.S. Taxation of "Non-U.S. Holders"
A beneficial owner of our common shares that is not a U.S. holder is
referred in this offering as a "non-U.S. holder."
Dividends on Our Common Shares
Non-U.S. holders generally will not be subject to U.S. federal income
tax or withholding tax on dividends made by us with respect to our common
shares, unless the dividends are effectively connected with the non-U.S.
holder's conduct of a trade or business in the U.S. or, if the non-U.S. holder
is entitled to the benefits of an income tax treaty with respect to those
dividends, the dividends are attributable to a permanent establishment
maintained by the non-U.S. holder in the U.S.
Sale, Exchange or Other Disposition of Our Common Shares
Non-U.S. holders generally will not be subject to U.S. federal income
tax or withholding tax on any gain realized upon the sale, exchange or other
disposition of our common shares, unless: (i) the gain is effectively connected
with the non-U.S. holder's conduct of a trade or business in the U.S., or if the
non-U.S. holder is entitled to the benefits of an income tax treaty with respect
to that gain, that gain is attributable to a permanent establishment maintained
by the non-U.S. holder in the U.S.; or (ii) the non-U.S. holder is an individual
who is present in the U.S. for 183 days or more during the taxable year of
disposition and other conditions are met.
If the non-U.S. holder is engaged in a U.S. trade or business for U.S.
federal income tax purposes, the income from our common shares, including
dividends on the common shares and the gain from the sale, exchange or other
disposition of the shares that is effectively connected with the conduct of that
trade or business, will generally be subject to regular U.S. federal income tax
in the same manner as discussed in the previous section relating to the taxation
of U.S. holders. In addition, if you are a corporate non-U.S. holder, your
earnings and profits that are attributable to the effectively connected income,
which are subject to certain adjustments, may be subject to an additional branch
profits tax at a rate of 30 per cent, or at a lower rate specified by an
applicable income tax treaty.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made
within the U.S. to you will be subject to information reporting requirements and
"backup withholding" if you are a non-corporate U.S. holder and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your federal
income tax returns; or
o in certain circumstances, fail to comply with applicable certification
requirements.
Non-U.S. holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on
Internal Revenue Service Form W-8BEN, W-8ECI or 8IMY, as applicable.
If you sell your common shares to or through a U.S. office or broker,
the payment of the proceeds is subject to both U.S. backup withholding and
information reporting unless you certify that you are a non-U.S. person, under
penalties of perjury, or you otherwise establish an exemption. If you sell your
common shares through a non-U.S. office of a non-U.S. broker and the sales
proceeds are paid to you outside the U.S., then information reporting and backup
withholding generally will not apply to that payment. However, U.S. information
reporting requirements, but not backup withholding, will apply to a payment of
sales proceeds, including a payment made to you outside the U.S., if you sell
your common shares through a non-U.S. office of a broker that is a U.S. person
or has some other contacts with the U.S.
Backup withholding is not an additional tax. Rather you generally may
obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the U.S. Internal
Revenue Service, provided that the required information is furnished to the
Internal Revenue Service.
United Kingdom tax considerations
We are currently liable to taxation in relation to the operations of
our United Kingdom subsidiaries and the taxation charged in our financial
statements is in respect of UK taxation. Our operations in the UK include that
of our vessel management subsidiary, Golar Management (UK) Ltd ("Golar
Management") and seven other ship operating subsidiaries (UK Shipping Co.'s).
Golar Management manages our vessels and provides certain other
services to our group including accounting and treasury services and derives its
income from fees charged to other non U.K. group companies. Our UK Shipping
Co.'s operate and charter out seven of our vessels. They pay lease rentals to
other non U.K. group companies in return for use of the ships.
We believe that all fees and rentals paid or charged are set at market
rates on an 'arms length' basis. The Inland Revenue in the U.K. could contest
this view, under legislation commonly referred to a 'transfer pricing', and they
may claim that Golar Management's income should be higher or that our UK
Shipping Co.'s should pay lower lease rentals. If they were to be successful in
this claim our U.K. subsidiary companies may have to pay an increased amount of
tax.
F. Dividends and Paying Agents
Not Applicable
G. Statements by Experts
Not applicable
H. Documents on display
Our Registration Statement effective became effective on November 29,
2002 and we are now subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements we will
file reports and other information with the SEC. These materials, including this
document and the accompanying exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling 1 (800) SEC-0330, and you may
obtain copies at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. 20549. The SEC maintains
a website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
I. Subsidiary Information
Not applicable
ITEM 11. Quantitative and qualitative Disclosures about market risk
We are exposed to various market risks, including primarily interest
rate and foreign currency exchange risk. We do not enter into derivative
instruments for speculative or trading purposes. In certain situations, we may
enter into derivative instruments to achieve an economic hedge of the risk
exposure. With the adoption of FAS 133, certain economic hedge relationships may
no longer qualify for hedge accounting due to the extensive documentation and
strict criteria of the new standard.
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, 2003, 2002 and 2001, the notional amount of the
interest rate swaps outstanding was $171.8 million, $183.8 million and $194.8
million, respectively and the amount of debt with a fixed rate of interest was
$105 million, $55 million and $zero respectively. The principal of the loans
outstanding as of December 31, 2003, 2002 and 2001 was $655.2 million, $710.3
million and $609.6 million, respectively. Based on our floating rate debt at
December 31, 2003, a one percentage point increase in the floating interest rate
would increase interest expense by $3.7 million per annum. For disclosures of
the fair value of the derivatives and debt obligations outstanding as of
December 31, 2003 and 2002, see Note 27 to the Financial Statements.
The interest rate we pay on our leases as at December 31, 2003 is
floating rate British Pound (GBP) LIBOR. This is hedge however by the fact that
we receive GBP LIBOR on our GBP cash deposits securing these obligations.
Foreign currency risk. The majority of our transactions, assets and
liabilities are denominated in U.S. dollars, our functional currency.
Periodically, we may be exposed to foreign currency exchange fluctuations as a
result of expenses paid by certain subsidiaries in currencies other than U.S.
dollars, primarily Sterling, and Pesetas, in relation to management offices we
have in the UK and Spain. There is a risk that currency fluctuations will have a
negative effect on the value of our cash flows.
We are also exposed to some extent in respect of the lease
transactions we entered into during the year ended December 31, 2003, which are
both denominated in GBP, although these are hedged by the GBP cash deposits that
secure these obligations. We use cash from the deposits to make payments in
respect of our leases. Gains or losses that we incur are unrealised unless we
choose or are required to withdraw monies from or pay additional monies into the
deposits securing our capital lease obligations. Among other things movements in
interest rates give rise to a requirement for us to make adjustments to the
amount of GBP cash deposits
As at December 31, 2003 we had not entered into derivative contracts
to minimize foreign currency risk. However, in April 2004 we entered into a
lease arrangement in respect of the Golar Winter (as noted above), the
obligation in respect of which is denominated in gbp. In order to hedge this
exposure we have entered into a currency swap with a bank, which is also our
lessor, to exchange our gbp payment obligations into U.S. Dollar payment
obligations. We could be exposed to a currency fluctuation risk if we terminated
this lease.
ITEM 12. Description of Securities other than equity securities
Not Applicable
ITEM 13. Dividend Arrearages and delinquencies
None
ITEM 14. Material Modifications to the Rights of Security Holders and use of
proceeds
None
ITEM 15. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, the Company
carried out an evaluation of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the principal executive officers and
principal financial officers concluded that the Company's disclosure controls
and procedures are effective in alerting them timely to material information
relating to the Company required to be included in the Company's periodic SEC
filings.
(b) Not Applicable
(c) Not Applicable
(d) Changes in internal controls over financial reporting
There have been no changes in internal controls over financial
reporting (identified in connection with management's evaluation of such
internal controls over financial reporting) that occurred during the year
covered by this annual report that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
ITEM 16. Reserved
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
The Company does not currently have a separate audit committee. The
Company expects to have an audit committee and an audit committee financial
expert in the year 2005.
ITEM 16 B. CODE OF ETHICS.
The Company has adopted a Code of Ethics, filed as Exhibit 14.1 to
this Annual Report that applies to all employees.
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for the audit of the Company's annual financial statements and
services provided by the principal accountant in connection with statutory and
regulatory filings or engagements for the two most recent fiscal years.
Fiscal year ended December 31, 2003 $ 447,191
Fiscal year ended December 31, 2002 $ 1,294,986
(b) Audit -Related Fees
The following table sets forth, for the two most recent fiscal years,
the aggregate fees billed for professional services in respect of assurance and
related services rendered by the principal accountant related to the performance
of the audit or review of the Company's financial statements which have not been
reported under Audit Fees above. These services comprise assurance work in
connection with financing and other agreements.
Fiscal year ended December 31, 2003 $ 91,263
Fiscal year ended December 31, 2002 $ 37,527
(c) Tax Fees
The following table sets forth, for the two most recent fiscal years, the
aggregate fees billed for professional services rendered by the principal
accountant for tax compliance, tax advice and tax planning.
Fiscal year ended December 31, 2003 $ 7,419
Fiscal year ended December 31, 2002 $ 13,041
(d) All Other Fees
For the fiscal years ended December 31, 2003 and 2002, there have been no
professional services rendered by the principal accountant for services other
than audit fees, audit-related fees and tax fees set forth above.
(e) Audit Committee's Pre-Approval Policies and Procedures
The Company's Board of Directors has adopted pre-approval policies and
procedures in compliance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X
that require the Board to approve the appointment of the independent auditor of
the Company before such auditor is engaged and approve each of the audit and
non-audit related services to be provided by such auditor under such engagement
by the Company. All services provided by the principal auditor in 2003 were
approved by the Board pursuant to the pre-approval policy.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable
ITEM 17. Financial statements
Not Applicable
ITEM 18. Financial statements
We specifically incorporate by reference in response to this item the
report of the independent auditors, the consolidated financial statements and
the notes to the consolidated financial statements appearing on pages F-1
through F-37.
ITEM 19. EXHIBITS
Number Description of Exhibit
1.1* Memorandum of Association of Golar LNG Limited as adopted on May
9, 2001, incorporated by reference to Exhibit 1.1 of the
Company's Registration Statement on Form 20-F, filed with the SEC
on November 27, 2002, File No. 000-50113 (the "Original
Registration Statement").
1.2* Bye-Laws of Golar LNG Limited as adopted on May 10, 2001,
incorporated by reference to Exhibit 1.2 of the Company's
Original Registration Statement.
1.3* Certificate of Incorporation as adopted on May 11, 2001,
incorporated by reference to Exhibit 1.3 of the Company's
Original Registration Statement.
1.4* Articles of Amendment of Memorandum of Association of Golar LNG
Limited as adopted by our shareholders on June 1, 2001
(increasing the Company's authorized capital), incorporated by
reference to Exhibit 1.4 of the Company's Original Registration
Statement.
4.1* Loan Agreement, between Golar LNG 2215 Corporation and Lloyds TSB
Bank, Plc, dated December 31, 2001, incorporated by reference to
Exhibit 4.1 of the Company's Original Registration Statement.
4.2* Loan Agreement, between Golar Gas Holding Company, Inc. and
Christiania Bank og Kreditkasse, Den norske Bank, Citibank and
Fortis Bank, dated May 31, 2001, incorporated by reference to
Exhibit 4.2 of the Company's Original Registration Statement.
4.3* Loan Agreement, between Faraway Maritime Shipping Company and
Bank of Taiwan dated November 26, 1997, incorporated by reference
to Exhibit 4.3 of the Company's Original Registration Statement.
4.4* Purchase Agreement, between Golar LNG Limited and Osprey Maritime
Limited, dated May 21, 2001, incorporated by reference to Exhibit
4.4 of the Company's Original Registration Statement.
4.5* Sale and Purchase Agreement, between Golar LNG Limited and
Seatankers Management Co. Ltd., dated May 21, 2001, incorporated
by reference to Exhibit 4.5 of the Company's Original
Registration Statement.
4.6* Golar LNG Limited Stock Option Plan, incorporated by reference to
Exhibit 4.6 of the Company's Original Registration Statement.
4.7* Service Agreement between Golar LNG Limited and Graeme McDonald,
incorporated by reference to Exhibit 4.7 of the Company's
Original Registration Statement.
4.8* Management Agreement between Golar LNG Limited and Frontline
Management (Bermuda) Limited, dated February 21, 2002,
incorporated by reference to Exhibit 4.8 of the Company's
Original Registration Statement.
4.9* Loan Agreement, between Golar Gas Holding Company, Inc. and
Nordea Bank Norge ASA as agent and Nordea Bank Norge ASA, Den
norske Bank ASA and Fortis Bank (Nederland) N.V., dated October
11, 2002, incorporated by reference to Exhibit 4.9 of the
Company's Original Registration Statement.
8.1 Golar LNG Limited subsidiaries.
14.1 Golar LNG Limited Code of Ethics.
31.1 Certification of the Principal Executive Officer under Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Accounting Officer under Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification under Section 906 of the Sarbanes-Oxley act of 2002
2002of the Principal Executive Officer.
32.2 Certification under Section 906 of the Sarbanes-Oxley act of 2002
2002of the Principal Accounting Officer.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Golar LNG Limited
---------------------------------------
(Registrant)
Date June 30, 2004 By /s/ Graham Robjohns
------------- ------------------------------------
Graham Robjohns
Principal Accounting Officer
Golar LNG Limited
Index to CONSOLIDATED AND COMBINED Financial Statements
Page
Report of Independent Registered Public Accounting Firm......................F-2
Audited Consolidated and Combined Statements of
Operations for the years ended December 31, 2003, 2002 and 2001..............F-3
Audited Consolidated and Combined Statements of
Comprehensive Income for the years ended December 31, 2003, 2002 and 2001....F-4
Audited Consolidated Balance Sheets as of December 31, 2003 and 2002.........F-5
Audited Consolidated and Combined Statements of
Cash Flows for the years ended December 31, 2003, 2002 and 2001..............F-6
Audited Consolidated and Combined Statements of
Changes in Stockholders' Equity for the years ended
December 31, 2003, 2002 and 2001 ............................................F-7
Notes to Consolidated and Combined Financial Statements......................F-8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Golar LNG Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated and combined statements of operations, comprehensive income,
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Golar LNG Limited and its subsidiaries (the "Company")
at December 31, 2003 and 2002, and the results of their operations and their
cash flows for the years ended December 31, 2003, 2002 and 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
West London, United Kingdom
June 29, 2004
Golar LNG Limited
Consolidated and Combined Statements of Operations for the years ended December
31, 2003, 2002 and 2001
(in thousands of $, except per share data)
Note 2003 2002 2001
Operating revenues
Time charter revenues 122,198 129,076 112,324
Voyage charter revenues 9,062 - -
Vessel management fees 1,505 1,535 1,899
- -----------------------------------------------------------------------------------------------
Total operating revenues 132,765 130,611 114,223
- -----------------------------------------------------------------------------------------------
Operating expenses
Vessel operating expenses 30,156 28,061 24,537
Voyage expenses 2,187 - -
Administrative expenses 7,138 6,127 8,232
Restructuring expenses 6 - - 1,894
Depreciation and amortization 31,147 31,300 31,614
- -----------------------------------------------------------------------------------------------
Total operating expenses 70,628 65,488 66,277
- -----------------------------------------------------------------------------------------------
Operating income 62,137 65,123 47,946
- -----------------------------------------------------------------------------------------------
Financial income (expenses)
Interest income 14,800 1,073 3,254
Interest expense (37,157) (23,553) (32,508)
Other financial items 7 7,217 (17,887) (12,363)
- -----------------------------------------------------------------------------------------------
Net financial expenses (15,140) (40,367) (41,617)
- -----------------------------------------------------------------------------------------------
Income before income taxes and minority interest 46,997 24,756 6,329
Minority interest in net income of subsidiaries 7,052 (2,469) 1,607
Income taxes 8 375 88 356
- -----------------------------------------------------------------------------------------------
Net income 39,570 27,137 4,366
===============================================================================================
Earnings per share
Basic and diluted 9 $0.68 $0.48 $0.08
===============================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated and Combined Statements of Comprehensive Income for the years ended
December 31, 2003, 2002 and 2001
(in thousands of $)
2003 2002 2001
Net income 39,570 27,137 4,366
Other Comprehensive income (loss), net of tax:
Recognition of minimum pension liability (3,102) (5,398) (1,472)
Unrealized gains on marketable securities 1,634 - -
Recognition of transition obligation under FAS 133 - - (2,850)
Reversal of transition obligation under FAS 133 - - 64
- -----------------------------------------------------------------------------------------------
Other comprehensive (loss) (1,468) (5,398) (4,258)
===============================================================================================
Comprehensive income 38,102 21,739 108
===============================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Balance Sheets as of December 31, 2003 and 2002
(in thousands of $)
Note 2003 2002
ASSETS
Current Assets
Cash and cash equivalents 117,883 52,741
Restricted cash and short-term investments 17 32,095 12,760
Marketable securities 11 13,810 -
Trade accounts receivable 12 1,488 -
Other receivables, prepaid expenses and accrued income 13 15,907 2,758
Amounts due from related parties 14 180 281
Inventories 3,203 2,482
- ------------------------------------------------------------------------------------------------
Total current assets 184,566 71,022
Restricted cash 17 623,179 -
Newbuildings 15 207,797 291,671
Vessels and equipment, net 16 211,098 617,583
Vessels under capital leases, net 17 553,385 -
Deferred charges 18 5,480 7,163
Other long term assets 19 97 496
- ------------------------------------------------------------------------------------------------
Total assets 1,785,602 987,935
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt 23 61,331 48,437
Current indebtedness due to related parties 23 - 32,703
Trade accounts payable 5,106 3,001
Accrued expenses 20 20,035 10,286
Amounts due to related parties 600 642
Other current liabilities 21 35,049 31,477
- ------------------------------------------------------------------------------------------------
Total current liabilities 122,121 126,546
Long-term liabilities
Long-term debt 23 593,904 629,173
Obligations under capital leases 17 616,210 -
Other long-term liabilities 24 94,226 22,731
- ------------------------------------------------------------------------------------------------
Total liabilities 1,426,461 778,450
Commitments and contingencies (See Note 29)
Minority interest 18,706 13,349
Stockholders' equity 340,435 196,136
- ------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 1,785,602 987,935
================================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated and Combined Statements of Cash Flows for the years ended December
31, 2003, 2002 and 2001
(in thousands of $)
Note 2003 2002 2001
Operating activities
Net income 39,570 27,137 4,366
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 31,147 31,300 31,680
Amortization of deferred charges 1,574 972 2,097
Income (loss) attributable to minority interests 7,052 (2,469) 1,607
Unrealized foreign exchange gains (2,993) - -
Drydocking expenditure (12,737) (1,600) (10,222)
Trade accounts receivable (1,488) 188 (77)
Inventories (721) 168 (591)
Prepaid expenses and accrued income (13,149) (156) 725
Amount due from/to related companies 59 (427) (238)
Trade accounts payable 2,105 1,006 196
Accrued expenses 9,863 3,518 267
Other current liabilities (2,865) 11,579 12,233
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 57,417 71,216 42,043
- ----------------------------------------------------------------------------------------------
Investing activities
Cash paid for Osprey's LNG interests, net
of cash acquired - - (530,945)
Additions to newbuildings 15 (77,783) (158,815) (132,856)
Additions to vessels and equipment (6,308) (5,912) (7,258)
Long-term restricted cash (543,643) - -
Purchases of marketable securities (12,176) - -
Restricted cash and short-term investments (18,605) 1,403 (1,072)
Proceeds from maturity of short term investments - - 14,231
- ----------------------------------------------------------------------------------------------
Net cash used in investing activities (658,515) (163,324) (657,900)
- ----------------------------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 23 506,128 194,335 325,000
Proceeds from short term debt due to
related parties 23 - 16,259 85,278
Proceeds from long-term capital
lease obligations 616,298 - -
Repayments of long-term debt (528,505) (41,054) (15,170)
Repayment of long term debt due to
related parties (32,703) (68,834 -
Additions to long-term lease obligations 2,660 - -
Financing costs paid (2,140) (3,424) (3,231)
Dividends paid to minority shareholders 28 (1,695) (10,002) -
Proceeds from issuance of equity 106,197 - 275,808
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 666,240 87,280 667,685
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 65,142 (4,828) 51,828
Cash and cash equivalents at beginning of period 52,741 57,569 5,741
Cash and cash equivalents at end of period 117,883 52,741 57,569
==============================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid, net of capitalized interest 36,551 25,603 37,811
Income taxes paid 66 321 411
Non-cash investing and financing activities:
Forgiveness of intercompany payables,
dividend out and return of capital - - 455,890
Liabilities assumed in business combination - - 214,500
==============================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated and Combined Statements of Changes in Stockholders' Equity for the
years ended December 31, 2003, 2002 and 2001
(in thousands of $, except number of shares)
Amounts
due Additional Accumulated
from Paid Other Total
Invested Related Share in Comprehensive Retained Stockholders'
Note Equity Parties Capital Capital Income Earnings Equity
---- ------ ------- ------- ------- ------ -------- ------
Combined balance at
December 31, 2000 1,016,288 (755,656) - - (3,598) - 257,034
Push down of World
Shipholding Ltd. basis 25 (133,758) - - - 6,384 - (127,374)
Net loss (3,210) - - - - - (3,210)
Change in amounts due from
parent and affiliates - 299,766 - - - - 299,766
Other comprehensive loss - - - - (2,786) - (2,786)
Combined balance at May 31, 2001 879,320 (455,890) - - - - 423,430
- ----------------------------------------------------------------------------------------------------------------------------------
Issue of ordinary shares,
net of issuance costs - - 56,012 219,796 - - 275,808
Forgiveness of
inter-company balances, dividend
out and return of capital (455,890) 455,890 - - - - -
Purchase of the Golar LNG
businesses from Osprey
Maritime and Seatankers,
Ltd, entities under common
control (423,430) - - (107,515) - - (530,945)
Net income - - - - - 7,576 7,576
Other comprehensive loss - - - - (1,472) - (1,472)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated balance at December 31, 2001 - - 56,012 112,281 (1,472) 7,576 174,397
Net income - - - - - 27,137 27,137
Other comprehensive loss - - - - (5,398) - (5,398)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated balance at December 31, 2002 - - 56,012 112,281 (6,870) 34,713 196,136
Issue of ordinary shares,
net of issuance costs 26 - - 9,600 96,597 - - 106,197
Net income - - - - - 39,570 39,570
Other comprehensive loss - - - - (1,468) - (1,468)
- ----------------------------------------------------------------------------------------------------------------------------------
Consolidated balance at December 31, 2003 - - 65,612 208,878 (8,338) 74,283 340,435
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Notes to Consolidated and Combined Financial Statements
1. GENERAL
Golar LNG Limited (the "Company" or "Golar") was incorporated in Hamilton,
Bermuda on May 10, 2001 for the purpose of acquiring the liquefied natural gas
("LNG") shipping interests of Osprey Maritime Limited ("Osprey") and of
Seatankers Management Co. Ltd. ("Seatankers"). Osprey, through its parent World
Shipholding Ltd. ("World Shipholding"), and Seatankers, are both indirectly
controlled by Mr. John Fredriksen. Mr. Fredriksen is a Director, the Chairman
and President of Golar. Osprey acquired its LNG interests in 1997 through the
acquisition of Gotaas Larsen Shipping Corporation ("Gotaas Larsen").
As of December 31, 2003 the Company operated a fleet of seven LNG carriers, six
of which are under long-term charter contracts with the seventh vessel
commencing a long-term charter contract in 2004. Additionally, as of December
31, 2003, the Company was building four new LNG carriers. Since December 31,
2003 the Company has taken delivery of two of the newbuildings and has entered
into a contract for the construction of one additional LNG carrier. The Company
currently leases seven (December 31, 2003: six) of its vessels under long-term
lease agreements and has a 100 per cent ownership interest in one vessel
(December 31, 2003: nil) and a 60 per cent ownership interest in one (December
31, 2003: one) other vessel, the Golar Mazo. As of June 29, 2004 the three
newbuildings are being built at a cost of $476 million excluding financing
costs. These newbuildings are scheduled for delivery between October 2004 and
May 2006.
As of June 29, 2004 the Company believes it will have sufficient facilities to
meet its anticipated funding needs until October 31, 2004. However, the Company
does not currently have sufficient facilities to meet payments, in respect of
the three newbuildings, due on October 31, 2004 and thereafter. The company will
require additional facilities of $313 million to meet commitments under the
newbuilding construction program for the three newbuildings payable on October
31, 2004 and thereafter, including $107.3 million payable on October 31, 2004
upon the scheduled delivery of one of the newbuildings. The construction
contracts include penalty clauses for non-payment of instalments, which could
result in the yards retaining the vessels with no compensation to Golar for
advance payments previously made. The Company expects that funds required to
meet the commitments as at October 31, 2004 and thereafter will be provided from
a combination of cash reserves, debt financing, lease arrangements and cash flow
from operations. The Company has been discussing its financing requirements with
a number of financial institutions and others to provide financing for the
remaining instalments due on delivery of its three unfinanced vessels. The
Company believes that upon conclusion of these discussions, sufficient
facilities will be obtained to meet these commitments as they fall due.
Accordingly, the financial statements have been prepared on a going concern
basis of accounting.
Acquisition of Osprey by World Shipholding
In August 2000, World Shipholding commenced the acquisition of Osprey, which at
that time was a publicly listed Singapore company with LNG tankers, oil tankers
and product tankers. World Shipholding gained a controlling interest of more
than 50 per cent of Osprey in November 2000. In January 2001, World
Shipholding's interest increased to over 90 per cent and the acquisition was
completed in May 2001. The acquisition of Osprey by World Shipholding was
accounted for as a purchase transaction and the purchase price was therefore
allocated to the assets and liabilities acquired based on their fair value as of
each acquisition date with vessels being valued on the basis of independent
appraisals. The fair value of the net assets acquired exceeded the purchase
price. As such, the negative goodwill associated with the acquisition was
allocated to reduce the values of the vessels and the new basis reflected in
Golar LNG's financial statements through push down accounting (as indicated in
Note 25), which occurred on January 31, 2001.
Acquisition of LNG interests by Golar LNG Limited
On May 21, 2001, the Company entered into purchase agreements with Osprey and
Seatankers to purchase its LNG shipping interests. These LNG shipping interests
comprised the ownership of LNG carriers, a contract and options to build LNG
vessels and a management organization that provides management services for LNG
carriers owned by the Company and third parties. To finance the purchase of the
LNG operations, the Company raised $280 million through the placement in Norway
of 56 million shares at a price of $5.00 per share. Osprey subscribed for 28
million shares with the remaining 28 million shares being subscribed by private
investors. In addition, a wholly owned subsidiary of the Company raised $325
million through a credit facility secured by the underlying vessels. The
purchase price for the LNG operations was $530.9 million as indicated below:
(in millions of $)
Proceeds from share issuance 280.0
Credit facility 325.0
----------
605.0
Less: transaction fees and expenses (4.2)
Less: surplus cash available (69.9)
----------
Purchase price 530.9
Less: net assets acquired (423.4)
----------
Excess of purchase price over net assets acquired 107.5
==========
The purchase price included amounts paid to Osprey and Seatankers totalling $5.0
million for the assignment of newbuilding contracts and options. The purchase
price paid was net of an amount of $128.7 million, being 60 per cent of the loan
assumed relating to the financing of the Golar Mazo as described in Note 23.
Additionally, the Company forgave certain intercompany receivables totalling
$455.9 million.
As at the date of acquisition, Mr. John Fredriksen indirectly controlled 50.01%
of the Company through the initial 12,000 shares issued at the Company's
formation and the 28 million shares purchased by Osprey. As required under
generally accepted accounting principles in the United States, the purchase of
the LNG operations has been treated by the Company as a transaction between
entities under common control. The Company recorded the LNG assets and
liabilities acquired from World Shipholding and Seatankers at the amounts
previously reflected in the books of World Shipholding and Seatankers on what is
known as a "predecessor basis". The difference between the purchase price as
described above and the net assets recorded in the Company's books using the
predecessor basis was reflected as a reduction in equity in the amount of $107.5
million.
On June 18, 2003 World Shipholding acquired Osprey's shareholding in Golar. As
of December 31, 2003, Mr. John Fredriksen indirectly controlled 42.7 per cent of
the Company.
2. ACCOUNTING POLICIES
Basis of accounting
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States. Investments in companies in which the
Company directly or indirectly holds more than 50 per cent of the voting control
are consolidated in the financial statements. All inter-company balances and
transactions have been eliminated. Investments in companies in which the Company
holds between 20 per cent and 50 per cent of an ownership interest, and over
which the Company exercises significant influence, are accounted for using the
equity method.
For the years ended December 31, 2003 and 2002 the financial statements of Golar
as a separate entity are presented on a consolidated basis. For the year ended
December 31, 2001, the five months to May 31, 2001 have been carved out of the
financial statements of Osprey and are presented on a combined basis and for the
seven months from June 1, 2001 to December 31, 2001, the financial statements of
Golar as a separate entity are presented on a consolidated basis. With effect
from May 31, 2001 the predecessor basis of accounting has been applied to the
acquisition of the LNG interests of Osprey and Seatankers as discussed above.
The financial statements for the years ended December 31, 2003, 2002 and 2001,
therefore reflect the following:
o the pushdown of purchase accounting adjustments with effect from January 31,
2001 (resulting from the acquisition of Osprey by World Shipholding);
o the application of the predecessor basis of accounting with effect from May
31, 2001 resulting from the Company's acquisition of the LNG interest of
Osprey and Seatankers; and
o the establishment of a new equity and debt structure with effect from May
31, 2001 in connection with the common control acquisition by Golar of the
LNG business of Osprey and the carry over of the historic basis from this
date;
Osprey was a shipping company with activities that included oil tankers and oil
product carriers as well as LNG carriers. Where Osprey's assets, liabilities,
revenues and expenses relate to the LNG business, these have been identified and
carved out for inclusion in these financial statements for the year ended
December 31, 2001. Where Osprey's assets, liabilities, revenues and expenses
relate to one specific line of business but not the LNG business, these have
been identified and not included in these financial statements. The preparation
of the carved out financial statements requires allocation of certain assets and
liabilities and expenses where these items are not identifiable as related to
one specific activity. Administrative overheads of Osprey that cannot be related
to a specific vessel type of operations have been allocated based on the number
of vessels in Ospreys' fleet including its tanker operations. The Osprey group
operated a centralized treasury system and did not have separate bank accounts
for each of its subsidiaries. For the LNG operations there were separate bank
accounts for Golar Mazo and for the remaining LNG activities interest income has
been allocated in the carved out combined financial statements based on
operating cash flows, net of debt servicing. Management has deemed the related
allocations are reasonable to present the financial position, results of
operations, and cash flows of the Company. Management believes the various
allocated amounts would not materially differ from those that would have been
achieved had Golar operated on a stand-alone basis for all periods presented.
The financial position, results of operations and cash flows of the Company are
not necessarily indicative of those that would have been achieved had the
Company operated autonomously for the year ended December 31, 2001 as the
Company may have made different operational and investment decisions as a
Company independent of Osprey.
During the period of Osprey's ownership of the LNG business, overhead costs
allocated, as described above, are derived from costs associated with the
corporate headquarters in Singapore and from the London office, which managed
and continue to manage the operations of the business. The amount of costs,
presented as part of administrative expenses, that was allocated from the
Singapore headquarters was $743,000 for the year ended December 31, 2001. In
addition, of the $1,894,000 restructuring expenses incurred during 2001,
$1,598,000 was allocated from the Singapore headquarters.
The preparation of financial statements in accordance with generally accepted
accounting principles requires that management make estimates and assumptions
affecting the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The financial statements do
not purport to be indicative of either our future financial position or results
of operations had Golar been a stand-alone entity for the periods presented.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis. Revenues generated
from time charters, which are classified as operating leases by the Company, are
recorded over the term of the charter as service is provided. Reimbursement for
drydocking costs is recognized evenly over the period to the next drydocking,
which is generally between two to five years. Revenues include minimum lease
payments under time charters as well as the reimbursement of certain vessel
operating and drydocking costs.
Voyage charter revenues and associated expenses are recognized rateably over the
duration of the voyage. Under voyage charters, expenses such as fuel and port
charges are paid by the Company and have been recorded within operating
expenses, whereas under time charters, such voyage costs are paid by the
Company's customers. Estimated losses under a voyage charter are provided for in
full at the time such losses become evident. Voyage revenue is recognized on a
discharge-to-discharge basis. Under this basis, voyage revenue is recognized
evenly over the period from departure of a vessel from its last discharge port
to departure from the next discharge port.
Revenues generated from management fees are recorded rateably over the term of
the contract as service is provided.
Revenue includes amounts receivable from loss of hire insurance, which is
recognized on an accruals basis, to the value of $2,843,000, $163,000 and $nil
for the years ended December 31, 2003, 2002 and 2001, respectively.
Vessel operating costs include an allocation of administrative overheads that
relate to vessel operating activity which includes certain technical and
operational support staff for the vessels, information technology, legal,
accounting, and corporate costs. These costs are allocated based on internal
cost studies, which management believes are reasonable estimates. For the years
ended December 31, 2003, 2002 and 2001, $2,375,000, $2,250,000, and $2,033,000
have been allocated to vessel operating costs, respectively.
Cash and cash equivalents
The Company considers all demand and time deposits and highly liquid investments
with original maturities of three months or less to be equivalent to cash.
Short-term investments
The Company considers all short-term investments as held to maturity in
accordance with Statement of Financial Accounting Standards No. 115 "Accounting
for Certain Investments in Debt and Equity Securities". These investments are
carried at amortized cost. The Company places its short-term investments
primarily in fixed term deposits with high credit quality financial
institutions.
Marketable securities
Marketable equity securities held by the Company are considered to be
available-for-sale securities and as such are carried at fair value. The fair
value is determined by reference to quoted market prices. Any resulting
unrealized gains and losses are recorded as a separate component of other
comprehensive income in stockholders' equity.
Insurance claim receivables
Insurance claim receivables are recognized when the facts and circumstances
support the legal recovery and management believes it is virtually certain that
the claims will be recovered.
Inventories
Inventories, which are comprised principally of fuel, lubricating oils and ship
spares, are stated at the lower of cost or market value. Cost is determined on a
first-in, first-out basis.
Newbuildings
The carrying value of newbuildings represents the accumulated costs to the
balance sheet date, which the Company has had to pay by way of purchase
instalments, and other capital expenditures together with capitalized loan
interest. No charge for depreciation is made until the vessel is delivered.
Vessels and equipment
Vessels and equipment are stated at cost less accumulated depreciation. The cost
of vessels and equipment less the estimated residual value is depreciated on a
straight-line basis over the assets' remaining useful economic lives.
Refurbishment costs incurred during the period are capitalized as part of
vessels and equipment. Also included in vessels and equipment is drydocking
expenditure which is capitalized when incurred and amortized over the period
until the next anticipated drydocking, which is generally between two and five
years. For vessels that are newly built or acquired and for the amounts
reflected as part of the push down of the World Shipholding basis, the
consideration paid is allocated between drydocking and other vessels costs to
reflect the different useful lives of the component assets.
Useful lives applied in depreciation are as follows:
Vessels 40 years
Deferred drydocking expenditure two to five years
Office equipment and fittings three to six years
Vessels and equipment under capital lease
The Company leases certain vessels under agreements that are classified as
capital leases. Depreciation of vessels under capital lease is included within
depreciation and amortization expense in the statement of operations. Vessels
under capital lease are depreciated on a straight-line basis over the vessels'
remaining economic useful lives, based on a useful life of 40 years.
Refurbishment costs incurred during the period are capitalized as part of
vessels and equipment under capital lease. Also included in vessels and
equipment under capital lease, is drydocking expenditure which is capitalized
when incurred and amortized over the period until the next anticipated
drydocking, which is generally between two and five years. For vessels that are
newly built or acquired, the consideration paid is allocated between drydocking
and other vessel costs to reflect the different useful lives of the component
assets.
Deferred credit from capital leases
In accordance with Statement of Financial Accounting Standard ("SFAS") No.28
"Accounting for sales with leasebacks", income derived from the sale of
subsequently leased assets is deferred and amortized in proportion to the
amortization of the leased assets. Amortization of deferred income is offset
against depreciation and amortization expense in the statement of operations.
Impairment of long-lived assets
Long-lived assets that are held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, long-lived
assets to be disposed of are reported at the lower of carrying amount or fair
value less estimated costs to sell.
Deferred charges
Costs associated with long term financing, including debt arrangement fees, are
deferred and amortized over the term of the relevant loan. Amortization of
deferred loan costs is included in Other Financial Items.
Derivatives
The Company enters into interest rate swap transactions from time to time to
hedge a portion of its exposure to floating interest rates. These transactions
involve the conversion of floating rates into fixed rates over the life of the
transactions without an exchange of underlying principal. Hedge accounting is
used to account for these swaps provided certain hedging criteria are met. As of
January 1, 2001, the Company adopted SFAS 133, "Accounting for Derivatives and
Hedging Activities". Certain hedge relationships met the hedge criteria prior to
SFAS 133, but do not meet the criteria for hedge accounting under SFAS 133.
SFAS 133, as amended by SFAS 137 "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB Statement No.133" and
SFAS 138 "Accounting for Certain Derivative Instruments and Certain Hedging
Activities an amendment of FASB Statement No. 133" and SFAS 149 "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities", requires an
entity to recognize all derivatives as either assets or liabilities on the
balance sheet and measure these instruments at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. In order to
qualify for hedge accounting under SFAS 133, certain criteria and detailed
documentation requirements must be met.
The Company does not enter into derivative contracts for speculative or trading
purposes.
Upon initial adoption, the Company recognized the fair value of its derivatives
as liabilities of $2.8 million and a charge of $2.8 million was made to other
comprehensive income.
Foreign currencies
The Company's functional currency is the U.S. dollar as all revenues are
received in U.S. dollars and a majority of the Company's expenditures are made
in U.S. dollars. The Company reports in U.S. dollars.
Transactions in foreign currencies during the year are translated into U.S.
dollars at the rates of exchange in effect at the date of the transaction.
Foreign currency monetary assets and liabilities are translated using rates of
exchange at the balance sheet date. Foreign currency non-monetary assets and
liabilities are translated using historical rates of exchange. Foreign currency
transaction and translation gains or losses are included in the consolidated
statements of operations.
Stock-based compensation
Under SFAS 123, "Accounting for Stock-Based Compensation", disclosures of
stock-based compensation arrangements with employees are required and companies
are encouraged, but not required, to record compensation costs associated with
employee stock option awards, based on estimated fair values at the grant dates.
The Company has chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion No. 25
("APB 25") "Accounting for Stock Issued to Employees" Had compensation costs
been calculated and accounted for in accordance with the fair value method
recommended in SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
(in thousands of $, except per share data) 2003 2002 2001
Net income
As reported 39,570 27,137 4,366
Add: Stock-based employee compensation expense in reported - 57 47
net income under APB 25, net of tax
Less: Total stock-based compensation expense determined - (390) (324)
under SFAS 123 fair value method for all awards, net of tax
---------------------------
Pro-forma 39,570 26,804 4,089
===========================
Basic and diluted earnings per share
As reported $0.68 $0.48 $0.08
Pro-forma $0.68 $0.48 $0.07
Earnings per share
Basic earnings per share ("EPS") is computed based on the income available to
common stockholders and the weighted average number of shares outstanding for
basic EPS. Diluted EPS includes the effect of the assumed conversion of
potentially dilutive instruments (see Note 9).
Pensions
Defined benefit pension costs, assets and liabilities are recognized in
accordance with SFAS 87 "Employer's Accounting for Pensions", which requires
adjustment of the significant actuarial assumptions annually to reflect current
market and economic conditions. Under SFAS 87, part of the deficit of plan
obligations over plan assets has been recognised in the balance sheet, with the
remainder of the unrecognised actuarial losses spread over the employees'
remaining service lifetimes. A minimum liability is recognized equal to the
amount by which the plans are under funded (ignoring projected future salary
increases). The pension benefit obligation is calculated by using a projected
unit credit method.
Capital Leases
Leased vessels have been accounted for as capital leases in accordance with SFAS
13 "Accounting for Leases". Obligations under capital leases are carried at the
present value of future minimum lease payments, and the asset balance is
amortized on a straight-line basis over the remaining life economic useful lives
of the vessels. Interest expense is calculated at a constant rate over the term
of the lease.
Income Taxes
Income taxes is based on income before taxes. Deferred tax assets and
liabilities are recognized principally for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.
3. SUBSIDIARIES AND INVESTMENTS
The following table lists the Company's principal subsidiaries and their purpose
as at December 31, 2003. Unless otherwise indicated, we own 100 per cent of each
subsidiary.
Jurisdiction of
Name Incorporation Purpose
Golar Gas Holding Company Inc. Republic of Liberia Holding Company and leases
five vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Republic of Liberia Holding Company
Oxbow Holdings Inc. British Virgin Islands Holding Company
Faraway Maritime Shipping Inc. Republic of Liberia Owns Golar Mazo
(60% ownership)
Golar LNG 2215 Corporation Republic of Liberia Leases Methane Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns newbuilding Hull 1460
Golar LNG 2220 Corporation Republic of Liberia Owns Golar Winter
Golar Liberia Inc. Republic of Liberia Owns newbuilding Hull 2226
Golar International Ltd. Republic of Liberia Vessel management
Golar Maritime Services, S.A. Spain Vessel management
Gotaas-Larsen International Ltd. Republic of Liberia Vessel management
Golar Management Limited Bermuda Management
Golar Maritime Limited Bermuda Management
Golar Management (UK) Limited United Kingdom OperatesiGolarUFreezeited
Golar Khannur (UK) Limited United Kingdom Operates Khannur
Golar Gimi (UK) Limited United Kingdom Operates Gimi
Golar Hilli (UK) Limited United Kingdom Operates Hilli
Golar Spirit (UK) Limited United Kingdom Operates Golar Spirit
Golar 2215 (UK) Limited United Kingdom Operates Methane Princess
4. ADOPTION OF NEW ACCOUNTING STANDARDS
In December 2003, the FASB issued revised FASB Interpretation 46 ("FIN 46-R"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB 51." FIN
46-R requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The consolidation
requirements of FIN 46-R apply to variable interest entities no later than the
end of the first reporting period that ends after March 15, 2004. FIN 46-R
applies to those entities that are considered special purpose entities, no later
than as of the end of the first reporting period that ends after December 15,
2003. The Company has adopted FIN 46-R and has determined that the entities that
possess legal title to the six vessels leased by Golar are variable interest
entities in which Golar has a variable interest and is the primary beneficiary.
Golar has measured the leased vessels transferred to the variable interest
entities at the same amounts as if the transfer had not occurred, which is cost
less accumulated depreciation at the time of the transfer. The adoption of FIN
46-R did not have a material impact upon Golar's financial statements. The
Company does not have any other variable interest entities.
5. SEGMENTAL INFORMATION
The Company has not presented segmental information as it considers it operates
in one reportable segment, the LNG carrier market. During 2003, the vast
majority of the Company's fleet operated under time charters and these charters
were with two charterers, BG Group plc and Pertamina. In time charters, the
charterer, not the Company, controls the choice of which routes the Company's
vessel will serve. These routes can be worldwide. Accordingly, the Company's
management, including the chief operating decision makers, does not evaluate the
Company's performance either according to customer or geographical region.
6. RESTRUCTURING EXPENSES
Restructuring expenses of $1.9 million in the year ended December 31, 2001
consist of employment severance costs for management and administrative
employees in London and Singapore incurred in connection with the restructuring
of Osprey's operations following the acquisition by World Shipholding which was
completed prior to May 31, 2001. These have been allocated to the Company based
on the number of vessels in Ospreys' fleet including its tanker operations. The
total number of employees terminated, from which the cost has been allocated,
was 17. The cost of $1.9 million represents the actual cost and employee numbers
are actual numbers terminated. The cost of $1.9 million was charged to the
statement of operations in 2001 with no remaining provision as of December 31,
2001.
7. OTHER FINANCIAL ITEMS
(in thousands of $) 2003 2002 2001
Amortization of deferred financing costs 1,574 864 2,097
Financing arrangement fees and other costs 107 332 1,857
Market valuation adjustment for interest
rate derivatives (6,401) 16,458 8,221
Foreign exchange gain on capital lease
obligations and related restricted cash (2,993) - -
Foreign exchange loss on operations 496 233 188
----------------------------------------
(7,217) 17,887 12,363
=========================================
8. TAXATION
Bermuda
Under current Bermuda law, the Company is not required to pay taxes in Bermuda
on either income or capital gains. The Company has received written assurance
from the Minister of Finance in Bermuda that, in the event of any such taxes
being imposed, the Company will be exempted from taxation until the year 2016.
United States
Pursuant to the Internal Revenue Code of the United States (the "Code"), U.S.
source income from the international operations of ships is generally exempt
from U.S. tax if the Company operating the ships meets certain requirements.
Among other things, in order to qualify for this exemption, the company
operating the ships must be incorporated in a country which grants an equivalent
exemption from income taxes to U.S. citizens and U.S. corporations and must be
more than 50 per cent owned by individuals who are residents, as defined, in
such country or another foreign country that grants an equivalent exemption to
U.S. citizens and U.S. corporations. If the Company operating the ships is a UK
registered Company, which some of Golar's subsidiary companies are, an exemption
from US tax, where required, is afforded by the US-UK tax treaty agreement. The
management of the Company believes that by virtue of the above provisions, it
was not subject to tax on its U.S. source income.
A reconciliation between the income tax expense resulting from applying the U.S.
Federal statutory income tax rate and the reported income tax expense has not
been presented herein as it would not provide additional useful information to
users of the financial statements as the Company's net income is subject to
neither Bermuda nor U.S. tax.
Other Jurisdictions
Current taxation relates to taxation of the operations of the Company's United
Kingdom subsidiaries. The Company records deferred income taxes to reflect the
net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The Company recorded deferred tax assets of $97,000 and $211,000
at December 31, 2003 and 2002, respectively. These assets relate to differences
for depreciation and pension liabilities.
9. EARNINGS PER SHARE
Basic earnings per share for the year ended December 31, 2003 has been
calculated with reference to the weighted average number of common shares in
issue during the year. The Company's capital structure was determined with the
capital reorganization that took place on May 31, 2001. For the periods prior to
May 31, 2001, the preparation of the carved out combined financial statements
did not result in the recording of any specific share capital. To provide a
measurement of EPS for the year ended December 31, 2001, the computation of
basic EPS is based on the shares issued in connection with the formation of the
Company and the subsequent placement of 56 million shares as described in Note
1. The computation of diluted EPS for the years ended December 31, 2003 and
2002, assumes the foregoing and the conversion of potentially dilutive
instruments.
The components of the numerator for the calculation of basic and diluted EPS are
as follows:
(in thousands of $) 2003 2002 2001
Net income available to stockholders 39,570 27,137 4,366
The components of the denominator for the calculation of basic EPS and diluted
EPS are as follows:
(in thousands) 2003 2002 2001
Basic earnings per share:
Weighted average number of
common shares outstanding 58,533 56,012 56,012
Diluted earnings per share:
Weighted average number of
common shares outstanding 58,533 56,012 56,012
Dilutive share options 36 9 7
----------------------------------
58,569 56,021 56,019
==================================
10. LEASES
Rental income
The minimum future revenues to be received on time charters as of December 31,
2003 were as follows:
Year ending December 31, Total
(in thousands of $)
2004 149,460
2005 147,654
2006 137,886
2007 118,250
2008 106,514
2009 and later 775,259
-----------
Total 1,435,023
===========
The long-term contracts for two of the Company's vessels are time charters but
the economic terms are analogous to bareboat contracts, under which the vessels
are paid a fixed rate of hire and the vessel operating costs are borne by the
charterer on a costs pass through basis. The pass through of operating costs is
not reflected in the minimum lease revenues set out above.
The cost and accumulated depreciation of vessels leased to third parties at
December 31, 2003 were approximately $851.0 million and $87.2 million
respectively and at December 31, 2002 were approximately $675.5 million and
$58.7 million respectively.
Rental expense
The Company is committed to make rental payments under operating leases for
office premises. The future minimum rental payments under the Company's
non-cancellable operating leases are as follows:
Year ending December 31, Total
(in thousands of $)
2004 1,379
-------
Total minimum lease payments 1,379
=======
Total minimum lease payments have been reduced by minimum sublease rentals under
non-cancellable leases of $1,594,000 for the year ended December 31, 2004. This
relates to former office space that the Company no longer occupies. At the time
the Company entered into this sublease arrangement, a provision was recognized
for the difference between the Company's future obligation under the lease
agreement and its anticipated sublease income over the remaining term of the
lease. This provision is recognized as a reduction to rental expense over the
life of the lease agreement and eliminates the Company's ongoing rental expense
for these facilities. The provision is recorded in other current liabilities and
other long-term liabilities. The provision balance at December 31, 2003 and 2002
was $710,000 and $1,239,000, respectively, of which $710,000 and $656,000 is
shown in other current liabilities at December 31, 2003 and 2002, respectively.
Total rental expense for operating leases was $2,554,000, $2,709,000 and
$2,101,000 for the years ended December 31, 2003, 2002 and 2001, respectively
and total sublease income was approximately $1,161,000, $1,497,000 and
$1,158,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
The amortization of the provision described above was $529,000, $954,000 and
$450,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
11. MARKETABLE SECURITIES
Marketable equity securities held by the company are considered to be
available-for-sale securities and are therefore carried at fair value.
(in thousands of $) 2003
Cost 12,176
Unrealized gain 1,634
--------
Fair value 13,810
========
As at December 31, 2003 marketable securities related to the Company's
investment in Korea Line Corporation. The unrealized gain on marketable
securities of $1,634,000 in the year ended December 31, 2003, which has been
credited to other comprehensive income, includes an unrealized foreign currency
loss of $145,000.
12. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable are presented net of allowances for doubtful accounts
amounting to $nil as of December 31, 2003 and December 31, 2002.
13. OTHER RECEIVABLES, PREPAID EXPENSES AND ACCRUED INCOME
(in thousands of $) 2003 2002
Other receivables 8,025 2,135
Prepaid expenses 2,554 623
Accrued interest income 5,328 -
--------------------------
15,907 2,758
===========================
Other receivables at December 31, 2003 includes the net amount receivable of
$2,469,000 (2002: $161,300) under the Company's loss of hire insurance policy
relating to a period of off-hire in respect of one vessel due to required
repairs. Other receivables as at December 31, 2003 also includes the net amount
receivable of $3,701,000 (2002: $451,000) under the Company's hull and machinery
insurance policy relating to repair costs incurred by the Company for four
vessels.
14. DUE FROM RELATED COMPANIES
Amounts due from related companies as at December 31, 2003 and 2002 of $180,000
and $281,000, respectively, represent the recharge of expenses and rebates and
seconded staff costs.
15. NEWBUILDINGS
(in thousands of $) 2003 2002
Purchase price instalments 184,764 276,486
Interest and other costs capitalized 23,033 15,185
--------------------------
207,797 291,671
===========================
The amount of interest capitalized in relation to newbuildings was $17,270,000
and $12,268,000 for the years ended December 31, 2003 and 2002, respectively.
The Company took delivery of one newbuilding during 2003. This vessel, the
Methane Princess, was delayed from its original delivery date of March 31, 2003
until August 29, 2003 and as a result the Company received compensation from the
yard in the amount of $12,980,000. The cost of the newbuilding of $161,531,000,
net of compensation for late delivery, has been transferred to vessels under
capital leases (see note 17).
As at December 31, 2003, the Company had contracts to build four new LNG
carriers at a total contract cost of $647.9 million, excluding financing costs.
As at December 31, 2003, the instalments for these vessels, were due to be paid
as follows:
(in millions of $)
Paid in 12 months to 31 December 2001 65.0
Paid in 12 months to 31 December 2002 81.8
Paid in 12 months to 31 December 2003 39.1
Payable in 12 months to 31 December 2004 354.8
Payable in 12 months to 31 December 2005 -
Payable in 12 months to 31 December 2006 107.2
---------
647.9
=========
In February 2004, the Company entered into a shipbuilding contract for a further
LNG carrier and in April 2004 and June 2004, the Company took delivery of its
newbuilding hull number 2220 (Golar Winter) and newbuilding hull number 1444
(Golar Frost) respectively.
Having entered into a new shipbuilding contract and taken delivery of two
newbuildings since December 31, 2003, the instalments in respect of the
Company's three newbuildings yet to be delivered, as at June 29, 2004, are due
to be paid as follows:
(in millions of $)
Payable in 6 months to 31 December 2004 137.8
Payable in 12 months to 31 December 2005 29.6
Payable in 12 months to 31 December 2006 221.8
-----------
389.2
===========
As at December 31, 2003, the Company did not have facilities in place to finance
its entire newbuilding program. The Company will require additional financing of
approximately $313 million to fund its newbuilding construction commitments
outstanding as at June 29, 2004.
The commitments up to October 31, 2004 will be funded from existing facilities
and cash generated from operations. Additional facilities are required to meet
the final delivery instalments for three of the Company's newbuildings payable
on October 31, 2004 and during 2005 and 2006.
16. VESSELS AND EQUIPMENT, NET
(in thousands of $) 2003 2002
Cost 229,515 677,939
Accumulated depreciation (18,417) (60,356)
----------------------------
Net book value 211,098 617,583
=============================
Included in the above amounts, as at December 31, 2003 and 2002 is equipment
with a net book value of $657,000 and $778,000, respectively.
Depreciation expense for the years ended December 31, 2003, 2002 and 2001 was
$12,658,000, $31,300,000 and $31,614,000 respectively. Depreciation expense is
shown net of amounts allocated to other Osprey entities totalling $nil, $nil and
$367,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
During the year ended December 31, 2003, vessels with a total cost of
$454,105,000 (2002: $nil) and accumulated depreciation of $54,506,000 (2002:
$nil), were sold and leased back by the Company, and have been classified as
vessels under capital leases.
17. VESSELS UNDER CAPITAL LEASES, NET
(in thousands of $) 2003 2002
Cost 624,020 -
Accumulated depreciation (70,635) -
----------------------------
Net book value 553,385 -
=============================
Amortization expense for vessels under capital leases for the years ended
December 31, 2003, 2002 and 2001 was $21,143,000, $nil and $nil respectively.
As at December 31, 2003 Golar operated six vessels under capital leases. These
leases are in respect of two refinancing transactions undertaken during 2003.
The first transaction, which took place in April 2003, was the sale of five 100
per cent owned subsidiaries to a financial institution in the United Kingdom
(UK). The subsidiaries were established in Bermuda specifically to own and
operate one LNG vessel as their sole asset. Simultaneous to the sale of the five
entities, Golar leased each of the five vessels under five separate lease
agreements ("Five Ship Leases"). The second transaction, which occurred in
August 2003, was in relation to the Company's first newbuilding, the Methane
Princess. The Company novated the Methane Princess newbuilding contract
immediately prior to completion of construction and leased the vessel from the
same financial institution in the UK ("The Methane Princess Lease"). Golar's
obligations to the lessors in both transactions are secured by letters of credit
("LC") provided by other banks. Golar has used debt finance and cash to provide
security deposits for the banks providing the LC's.
As at 31 December 2003, the Company is committed to make quarterly minimum
rental payments under capital leases, as follows:
Year ending December 31, Five Methane
ship Princess
(in thousands of $) leases lease Total
2004 19,780 5,731 25,511
2005 21,027 6,070 27,097
2006 22,294 6,388 28,682
2007 23,631 6,721 30,352
2008 24,993 7,024 32,017
2009 and later 770,239 354,455 1,124,694
Total minimum lease payments 881,964 386,389 1,268,353
Less: Imputed interest (422,208) (229,935) (652,143)
Present value of minimum lease payments 459,756 156,454 616,210
The profiles of the Five Ship Leases are such that the lease liability continues
to increase until 2008 and thereafter decreases over the period to 2023 being
the primary term of the leases. The interest element of the lease rentals is
accrued at a rate of floating British Pound (GBP) LIBOR.
The profile of the Methane Princess Lease is such that the lease liability
continues to increase until 2014 and thereafter decreases over the period to
2034 being the primary term of the lease. The interest element of the lease
rentals is accrued at a rate of floating British Pound (GBP) LIBOR.
As disclosed in Note 4, the Company determined that the entities that owned the
vessels were variable interest entities in which Golar had a variable interest
and was the primary beneficiary. Upon transferring the vessels to the financial
institutions, Golar measured the subsequently leased vessels at the same amounts
as if the transfer had not occurred, which was cost less accumulated
depreciation at the time of transfer.
As at December 31, 2003, the value of deposits used to obtain letters of credit
to secure the obligations for the lease arrangements described above was $642.6
million. These security deposits are referred to in these financial statements
as restricted cash and earn interest at GBP LIBOR. The Company's restricted cash
balances are as follows:
(in thousands of $) 2003 2002
Five Ship Leases security deposits 479,316 -
Methane Princess Lease security deposits 163,298 -
-----------------------
Total security deposits for lease obligations 642,614
Included in short-term restricted cash
and short-term investments (19,435) -
-----------------------
Long-term restricted cash 623,179 -
=======================
(in thousands of $) 2003 2002
Short term lease security deposits 19,435 -
Restricted cash relating to the
Mazo Facility (see note 23). 12,660 12,760
-----------------------
Short-term restricted cash and
short-term investments 32,095 12,760
=======================
18. DEFERRED CHARGES
Deferred charges represent financing costs, principally bank fees that are
capitalized and amortized to other financial items over the life of the debt
instrument. The deferred charges are comprised of the following amounts:
(in thousands of $) 2003 2002
Debt arrangement fees and other deferred
financing charges 7,443 8,232
Accumulated amortization (1,963) (1,069)
-----------------------
5,480 7,163
=======================
19. OTHER LONG TERM ASSETS
(in thousands of $) 2003 2002
Deferred tax assets 97 211
Deferred development costs - 285
-----------------------
97 496
=======================
20. ACCRUED EXPENSES
(in thousands of $) 2003 2002
Vessel operating and drydocking expenses 5,565 4,213
Administrative expenses 1,286 1,733
Interest expense 12,070 3,474
Provision for financing arrangement
fees and other costs 904 842
Provision for tax 210 24
-----------------------
20,035 10,286
=======================
21. OTHER CURRENT LIABILITIES
(in thousands of $) 2003 2002
Deferred drydocking and operating cost revenue 6,744 2,445
Marked to market interest rate swaps valuation 20,895 27,296
Provision for Baja project costs 1,403 1,077
Other provisions 710 659
Deferred credits from capital lease
transactions (note 24) 3,957 -
Other creditors 1,340 -
-----------------------
35,049 31,477
=======================
During 2002, Golar signed a joint development agreement with Marathon Baja
Limited ("Marathon"), a subsidiary of Marathon Oil and GGS Holdings Limited
("GGS"), to participate in a project to build a LNG import and re-gasification
facility and power generation complex near Tijuana in the Mexican State of Baja
California. Under the agreement with Marathon and GGS, costs incurred in
relation to the development of the project are to be shared as follows: Marathon
80%, GGS 10%, Golar 10% prior to the establishment of a lead project company and
execution of a shareholders' agreement.
Golar's policy is to expense its portion of the costs incurred during the
development phase, except where it relates to capital assets. During the year
ended December 31, 2003, the Company's 10 per cent share of the total
development costs of the project was $1,459,000 all of which were expensed and
included in administrative expenses. During the year ended December 31, 2002 an
amount of $792,000 was expensed and included in administrative expenses and an
amount of $285,000, relating to the purchase of land options, was capitalized.
The amount of $285,000 capitalized during the year ended December 31, 2002 was
written off during the year ended December 31, 2003 as it became unlikely that
the options would be exercised or that they retained any value. At December 31,
2003 the provision made by the Company for Baja project costs payable amounted
to $1,403,000 (2002: $1,077,000).
22. PENSIONS
The Company has two defined benefit pension plans covering a majority of the
employees of the Company and Osprey. Benefits are based on the employee's years
of service and compensation. Net periodic pension plan costs are determined
using the Projected Unit Credit Cost method. The Company's plans are funded by
the Company in conformity with the funding requirements of the applicable
government regulations. Plan assets consist of both fixed income and equity
funds managed by professional fund managers.
The Company uses a measurement date of December 31 for the majority of its
pension and other postretirement benefit plans.
The components of net periodic benefit costs are as follows:
(in thousands of $) 2003 2002 2001
Service cost 1,162 1,325 1,407
Interest cost 3,440 3,519 3,346
Expected return on plan assets (2,005) (2,249) 2,620)
Amortization of prior service cost - - -
Recognized actuarial loss 751 504 615
--------------------------------
Net periodic benefit cost 3,348 3,099 2,748
================================
For the year ended 31 December 2001, the net periodic benefit cost includes
amounts relating to the employees of Osprey, a related party. In 2001, the
Company administered the plans on behalf of Osprey and charged a management fee
to Osprey that includes a proportionate cost of plan contributions as well as
certain administration costs. As such, in the preparation of historical
financial statements, the Company has reduced administration expenses by
$473,000 for the year ended December 31, 2001, to reflect administration
expenses as if this management agreement had existed for those respective years.
The change in benefit obligation and plan assets and reconciliation of funded
status as of December 31 are as follows:
(in thousands of $) 2003 2002
Reconciliation of benefit obligation:
Benefit obligation at January 1 51,881 49,576
Service cost 1,162 1,325
Interest cost 3,440 3,519
Participant contributions - -
Actuarial loss / (gain) 3,222 (733)
Foreign currency exchange rate changes 885 660
Benefit payments (6,347) (2,466)
--------------------------
Benefit obligation at December 31 54,243 51,881
==========================
The accumulated benefit obligation at the end of 2003 and 2002 was $51.8 million
and $47.6 million, respectively.
(in thousands of $) 2003 2002
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 25,414 28,326
Actual return on plan assets 3,614 (2,462)
Employer contributions 1,476 1,525
Participant contributions - -
Foreign currency exchange rate changes 578 491
Benefit payments (6,347) (2,466)
--------------------------
Fair value of plan assets at December 31 24,735 25,414
==========================
Deficit of plan assets (29,508) (26,467)
over projected benefit obligation (1)
Unrecognized prior service cost - -
Unrecognized actuarial loss 12,413 11,189
--------------------------
Net amount recognized (17,095) (15,278)
==========================
Employer contributions and benefits paid under the pension plans include
$1,476,000 and $1,525,000 paid from employer assets in 2003 and 2002
respectively.
(1) The Company's plans are composed of two plans that are both under funded at
December 31, 2003 and December 31, 2002.
The details of these plans are as follows:
December 31, 2003 December 31, 2002
UK Scheme Marine scheme UK scheme Marine scheme
(in thousands of $)
Accumulated benefit obligation (8,806) (42,996) (7,408) (40,155)
Projected benefit obligation (9,201) (45,042) (7,688) (44,193)
Fair value of plan assets 6,013 18,722 5,015 20,399
Funded status (3,188) (26,320) (2,673) (23,794)
The amounts recognized in the Company's balance sheet as of December 31 were as
follows:
(in thousands of $) 2003 2002
Accrued benefit liability (27,067) (22,148)
Minimum pension liability 9,972 6,870
--------------------------
Net amount recognized (17,095) (15,278)
==========================
The asset allocation for the Company's Marine scheme at the end of 2003 and
2002, and the target allocation for 2004, by asset category follows:
Marine scheme Target
allocation 2004 (%) 2003 (%) 2002 (%)
Equity 30-65 33 52
Bonds 10-50 31 34
Other 20-40 30 14
Cash 0-22.5 6 0
-------------------------------------------------
Total 100 100
=================================================
The asset allocation for the Company's UK scheme at the end of 2003 and 2002,
and the target allocation for 2004, by asset category follows:
UK scheme Target
allocation 2004 (%) 2003 (%) 2002 (%)
Equity 80 82 73
Bonds 20 15 20
Other - - -
Cash - 3 7
-------------------------------------------------
Total 100 100
=================================================
The Company's investment strategy is to balance risk and reward through the
selection of professional investment managers and investing in pooled funds.
The Company is expected to make the following contributions to the scheme in
2004, as follows:
(in thousands of $) Marine scheme UK scheme
Employer contributions 1,320 356
The weighted average assumptions used to determine the benefit obligation for
the Company's plans at December 31 are as follows:
2003 2002
Discount rate 5.9% 6.6%
Rate of compensation increase 2.8% 2.7%
The weighted average assumptions used to determine the net periodic benefit cost
for the Company's plans for the year ended December 31 are as follows:
2003 2002
Discount rate 6.6% 7.1%
Expected return on plan assets 8.0% 8.0%
Rate of compensation increase 2.7% 4.0%
23. DEBT
(in thousands of $) 2003 2002
Total long-term debt due to third parties 655,235 677,610
Total short-term debt due to related parties - 32,703
----------------------------
Total debt 655,235 710,313
Less: current portion of long-term debt
due to third parties (61,331) (48,437)
Less: current portion short-term debt
due to related parties - (32,703)
----------------------------
593,904 629,173
============================
The outstanding debt as of December 31, 2003 is repayable as follows:
Year ending December 31,
(in thousands of $)
2004 61,331
2005 64,007
2006 70,514
2007 177,837
2008 22,794
2009 and later 258,752
Total 655,235
The weighted average interest rate for debt, which is denominated in US dollars,
as of December 31, 2003 and 2002 was 4.61 per cent and 5.03 per cent,
respectively. As at December 31, 2003, interest on US$105 million of debt in
respect of the Methane Princess facility was fixed, of which US$55 million was
fixed in 2002. The fixing is due to mature in 2015 at a weighted average rate of
6.77 per cent until the vessel enters into its long-term charter in February
2004 and at a weighted average rate of 5.89 per cent thereafter.
At December 31, 2003, the debt of the Company comprised the following, details
of which are set out below:
(in thousands of $) Maturity date
Mazo facility 181,263 2013
Methane Princess facility
(previously referred to as
'Hull 2215 facility') 175,472 2015
New Golar LNG facility 242,500 2007
New Golar LNG Subordinated facility 56,000 2007
----------------------------
655,235
============================
Mazo facility
On November 26, 1997, Osprey entered into a secured loan facility (the "Mazo
facility") with a banking consortium for an amount of $214.5 million and secured
by a mortgage on the vessel Golar Mazo. The facility was assumed by Golar from
Osprey in May 2001. The facility bears floating interest rate of LIBOR plus a
margin and the repayment terms are six monthly and commenced on June 28, 2001.
In connection with the Mazo facility, Osprey also entered into a collateral
agreement with the same banking consortium and a bank Trust Company. This
agreement requires that certain cash balances, representing interest and
principal repayments for defined future periods, be held by the Trust Company
during the period of the loan. These balances are referred to in these financial
statements as restricted cash.
New Golar LNG facility
In May 2001 the Golar group entered into a secured loan facility (the "Golar LNG
facility") with a banking consortium for an amount of $325.0 million. This loan
was refinanced in April 2003, ("New Golar LNG facility") with an amount of $265
million with the same syndicate of banks. The amount outstanding on the old
facility was $282.5 million and accordingly a net $17.5 million was repaid. The
loan accrues floating interest at a rate per annum equal to the aggregate of
LIBOR plus a margin. The loan has a term of four years and two months and is
repayable in 16 quarterly instalments and a final balloon payment of $138.8
million payable on May 31, 2007. The loan is secured by the assignment to the
lending banks of a mortgage given to Golar by the lessor of the five vessels
that are part of the Five Ship Leases (see note 17).
New Golar LNG Subordinated facility
In October 2002, Golar entered into a secured subordinated loan facility (the
"Golar LNG subordinated facility") with a banking consortium for an amount of
$60.0 million. This loan was also refinanced in April 2003. This new second
priority loan ("New Golar LNG subordinated facility") was also for an amount of
$60 million with the same syndicate of banks. It accrues floating interest at a
rate per annum equal to the aggregate of LIBOR, plus a margin, increasing by
0.25 per cent per annum on 30 November 2004 and 30 November 2005. The loan has a
term of four years and two months and is repayable in 15 quarterly instalments
commencing in November 2003. The loan is secured by the assignment to the
lending banks of a second priority mortgage given to Golar by the lessor of the
five vessels that are part of the Five Ship Leases (see note 17).
Methane Princess facility
In December 2001 the Company signed a loan agreement with Lloyds TSB bank Plc
for the purpose of financing newbuilding hull number 2215 (Methane Princess)
(the "Hull 2215 facility") for an amount up to $180 million.
In August 2003, prior to the delivery of the Methane Princess the Company
refinanced this facility (Methane Princess facility). The new facility is also
for $180 million, with the same bank and has a similar repayment profile. It
accrues a floating rate of interest of LIBOR plus a margin up to the date the
vessel is delivered to the Charterer under the BG Charter and thereafter at
LIBOR plus a reduced margin determined by reference to Standard and Poors
("S&P") rating of the Charterer from time to time. The margin could increase if
the rating for the Charterer at any time fell below an S&P rating of "B". As at
December 31, 2003, interest on $105 million of debt in respect of the Methane
Princess facility was fixed, of which $55 million was fixed in 2002, $30 million
in March 2003 and $20 million in October 2003. All fixings are due to mature in
2015 at a weighted average rate of 6.77 per cent (inclusive of margin) until the
vessel enters into its long-term charter in February 2004, and at a weighted
average rate of 5.89 per cent thereafter. The loan is secured by the assignment
to the lending bank of a mortgage given to Golar by the lessor of the Methane
Princess Lease (see note 17).
The margins Golar pays under its current loan agreements over and above LIBOR at
a fixed or floating rate range from 0.865 per cent to 2.0 per cent.
Greenwich loans
In August 2001, Golar obtained a loan of $32.7 million from Greenwich, in order
to finance the first instalments due on newbuilding hull numbers 1460 and 2220.
The loan was initially for a period of one year and the floating interest rate
payable on this loan was LIBOR plus 2.5% and increased to LIBOR plus 2.625% from
June 2002 and LIBOR plus 3% from February 2003. In connection with this loan,
until it was repaid, two subsidiaries of Golar had guaranteed a loan of $32.7
million made to Greenwich by Nordea and Den norske Bank and they both entered
into an assignment and security agreement in respect of their shipbuilding
contracts with Den norske Bank as security agent. No consideration has been paid
by Greenwich for the provision of the guarantee. The rate of interest that
Greenwich paid to the banks was LIBOR plus 1.5 per cent until June 2002, it then
increased to LIBOR plus 1.625 per cent and increased again to LIBOR plus 2 per
cent from February 2003.
Golar repaid $16.0 million in respect of this loan in June 2003 and $16.7
million in August 2003. Both repayments were financed by cash reserves.
Certain of the Company's debt are collateralized by ship mortgages and, in the
case of some debt, pledges of shares by each guarantor subsidiary. The existing
financing agreements impose operation and financing restrictions which may
significantly limit or prohibit, among other things, the Company's ability to
incur additional indebtedness, create liens, sell capital shares of
subsidiaries, make certain investments, engage in mergers and acquisitions,
purchase and sell vessels, enter into time or consecutive voyage charters or pay
dividends without the consent of the Lenders. In addition, Lenders may
accelerate the maturity of indebtedness under financing agreements and foreclose
upon the collateral securing the indebtedness upon the occurrence of certain
events of default, including a failure to comply with any of the covenants
contained in the financing agreements. Various debt agreements of the Company
contain certain covenants, which require compliance with certain financial
ratios. Such ratios include equity ratio covenants and minimum free cash
restrictions. As of December 31, 2003 and 2002 the Company complied with the
debt covenants of its various debt agreements.
24. OTHER LONG-TERM LIABILITIES
(in thousands of $) 2003 2002
Pension obligations (note 22) 27,067 22,148
Other provisions - 583
Deferred credits from capital lease transactions 67,159 -
-------------------------
94,226 22,731
========================
Deferred credits from capital lease transactions
(in thousands of $) 2003 2002
Deferred credits from capital lease transactions 73,771 -
Less: Accumulated amortization (2,655) -
-------------------------
71,116 -
Short-term (note 21) 3,957 -
Long-term 67,159 -
-------------------------
71,116 -
========================
In connection with the leasing transactions undertaken in the year ended
December 31, 2003 (see Note 17), the Company recorded an initial amount of $73.8
million, representing the difference between the net cash proceeds received upon
sale of the vessels and the present value of the minimum lease payments. The
amortization charge for the year is offset against depreciation and amortization
expense in the statement of operations.
The deferred credits represent the upfront benefits derived from undertaking
financing in the form of UK leases. The deferred credits are amortized over the
remaining economic lives of the vessels to which the leases relate on a
straight-line basis. The benefits under lease financings are derived primarily
from tax depreciation assumed to be available to lessors as a result of their
investment in the vessels. If that tax depreciation ultimately proves not to be
available to the lessor, or is clawed back from the lessor (e.g. on a change of
tax law), the lessor will be entitled to adjust the rentals under the relevant
lease so as to maintain its after tax position, except in limited circumstances.
Any increase in rentals is likely to affect the ability to reduce the deferred
credits through amortization.
25. PUSH DOWN ACCOUNTING
The effect of push down accounting in January 2001 was to reduce the value of
assets and liabilities recorded by Golar to reflect the change in basis realized
as a result of World Shipholding's acquisition of Osprey as follows:
(in thousands of $)
Vessels and equipment, net 109,832
Deferred charges 1,702
Goodwill 9,439
Pension obligations 9,999
FAS 133 transition obligation 2,786
---------
133,758
=========
26. SHARE CAPITAL AND SHARE OPTIONS
The Company was incorporated on May 10, 2001 and 12,000 common shares of $1.00
par value each were issued to the initial shareholder. In May 2001, the Company
issued 56,000,000 common shares at a price of $5.00 per share in a placement in
Norway subscribed to by approximately 130 financial investors. These shares were
issued to finance the acquisition of the LNG interest of Osprey as described in
Note 1.
In July 2003, the Company completed a direct equity offering of 5,600,000 common
shares in a placement in Norway, towards international institutional investors
at a price of $10.20 per share. In December 2003, the Company further issued
4,000,000 common shares at a price of $13.11 per share. Proceeds from both new
issues are intended to be dedicated to the future growth of the company.
At December 31, 2003 and December 31, 2002, authorized and issued share capital
is as follows:
Authorized share capital:
(in thousands of $, except share numbers) 2003 2002
100,000,000 common shares of $1.00 each 100,000 100,000
Issued share capital:
(in thousands of $, except share numbers)
Issued common shares of $1.00 each 65,612 56,012
In July 2001, the Board of the Company approved the grant of options to eligible
employees to acquire an aggregate amount of up to 2,000,000 shares in the
company.
In July 2001, the Board of Golar granted options to certain directors and
officers of the Company to acquire 400,000 shares at a subscription price of
$5.75. These options vested on July 18, 2002 and are exercisable for a maximum
period of nine years following the first anniversary date of the grant. The
following summarizes the share options transactions relating to this plan:
(in thousands of $, except per share data) Weighted
average
exercise
Shares price
Options outstanding at December 31, 2001 & 2002 400 $5.75
Cancelled during the year (100) $5.75
----------------------
Options outstanding at December 31, 2003 300 $5.75
======================
Options exercisable at:
December 31, 2001 & 2002 400 $5.75
=====================
December 31, 2003 300 $5.75
=====================
There were no options granted in the year ended December 31, 2003 and 2002. The
weighted average fair value of 400,000 options granted in 2001 was $1.785, which
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions:
2001
Risk free interest rate 4.39%
Expected life 5 years
Expected volatility 20%
Expected dividend yield 0%
Compensation cost of $nil, $56,700 and $47,300 has been recognized in the year
ended December 31, 2003, 2002 and 2001 respectively, in connection with the
grant of the 400,000 options in July 2001. This amount represents the difference
between the subscription price of $5.75 and the market price of $6.01 (the
equivalent to NOK56 at the exchange rate of NOK9.3153 to $1.00) on the date of
grant, recognized over the vesting period of the options.
In February 2002, the Board of Golar approved an employee share option scheme.
Under the terms of the scheme, options may be granted to any director or
eligible employee of the Company or its subsidiaries. Options are exercisable
for a maximum period of nine years following the first anniversary date of the
grant. The exercise price for the options may not be less than the average of
the fair market value of the underlying shares for the three trading days before
the date of grant. The number of shares granted under the plans may not in any
ten year period exceed seven per cent of the issued share capital of the
Company. No consideration is payable for the grant of an option. As at December
31, 2003 and 2002 no options had been granted under the employee share option
scheme.
27. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The Company has
entered into swaps that convert floating rate interest obligations to fixed
rates, which from an economic perspective hedge the interest rate exposure. The
Company does not hold or issue instruments for speculative or trading purposes.
The counterparties to such contracts are Credit Lyonnais, Bank of Taiwan, Credit
Agricole Indosuez, and Mizuho Corporate Bank Limited. Credit risk exists to the
extent that the counterparties are unable to perform under the contracts.
The Company manages its debt portfolio with interest rate swap agreements in
U.S. dollars to achieve an overall desired position of fixed and floating
interest rates. The Company has entered into the following interest rate swap
transactions involving the payment of fixed rates in exchange for LIBOR:
Notional Amount
Fixed
Instrument December 31, December 31, Maturity Interest
2003 2002 Dates Rates
(in thousands of $)
Interest rate swaps:
Receiving floating, pay fixed 171,763 183,776 2003 - 2009 6.393% to 6.43%
At December 31, 2003, the notional principal amount of the debt outstanding
subject to such swap agreements was $171.8 million (2002: $183.8 million).
Foreign currency risk
The majority of the vessels' gross earnings are receivable in U.S. dollars. The
majority of the Company's transactions, assets and liabilities are denominated
in U.S. dollars, the functional currency of the Company. However, the Company
incurs expenditure in other currencies. The Company's capital lease obligations
and related restricted cash deposits are denominated in British Pounds. There is
a risk that currency fluctuations will have a negative effect on the value of
the Company's cash flows. The Company has not entered into derivative contracts
to reduce its exposure to transaction risk. Accordingly, such risk may have an
adverse effect on the Company's financial condition and results of operations.
A foreign exchange gain of $3.0 million arose in the year ended December 31,
2003 (2002: $nil) as a result of the retranslation of our capital lease
obligations and the cash deposits securing those obligations. The gain arose due
to the appreciation of the British Pound against the US Dollar during the year.
This gain represents an unrealized gain and does not therefore materially impact
the Company's liquidity. Further foreign exchange gains or losses will arise
over time in relation to Golar's capital lease obligations as a result of
exchange rate movements. Gains or losses will only be realized to the extent
that monies are, or are required to be withdrawn or paid into the deposits
securing our capital lease obligations or if the leases are terminated.
Fair values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2003 and 2002 are as follows:
2003 2003 2002 2002
(in thousands of $) Carrying Value Fair Value Carrying Value Fair Value
Non-Derivatives:
Cash and cash equivalents 117,883 117,883 52,741 52,741
Investments in marketable
securities 13,810 13,810 - -
Restricted cash and short-term
investments 32,095 32,095 12,760 12,760
Long-term restricted cash 623,179 623,179 - -
Short-term - floating 61,331 61,331 81,140 81,140
Long term debt - floating 488,904 488,904 574,173 622,610
Long-term debt - fixed 105,000 106,303 55,000 56,379
Long-term obligations under
capital leases 616,210 616,210 - -
Derivatives:
Interest rate swap liability (20,898) (20,898) (27,296) (27,296)
The carrying value of cash and cash equivalents, which are highly liquid, is a
reasonable estimate of fair value.
The estimated fair value for restricted cash and short-term investments are
considered to be equal to the carrying value since they are placed for periods
of less than six months. The estimated fair value for long-term restricted cash
is considered to be equal to the carrying value since it bears variable interest
rates, which are reset on a quarterly basis.
The estimated fair value of marketable securities is based on the quoted market
price of these or similar instruments when available.
The estimated fair value for floating long-term debt is considered to be equal
to the carrying value since it bears variable interest rates, which are reset on
a quarterly or six monthly basis. The estimated fair value for long-term debt
with fixed rates of interest of more than one year is estimated by obtaining
quotes for breaking the fixed rate at the year end, from the related banking
institution.
The estimated fair value of long-term obligations under capital leases is
considered to be equal to the carrying value since they bear interest at rates,
which are reset on a quarterly basis.
The fair value of interest rate swaps is estimated by obtaining quotes from the
related banking institution.
As of December 31, 2003 long-term assets included $nil (2002: $285,000) relating
to the purchase of land options in respect of the Baja project. The amount
capitalized as of December 31, 2002 was written off during the year ended
December 31, 2003 as it became unlikely that the options would be exercised or
that they retained any value. The fair value of these options approximates to
carrying value.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents, restricted cash and short-term investments to the extent that
substantially all of the amounts are carried with the Nordea Bank of Finland
PLC, Mizuho Corporate Bank, Lloyds TSB Bank plc and The Bank of New York.
However, the Company believes this risk is remote as these banks are high credit
quality financial institutions.
During the year ended December 31, 2003, two customers accounted for a
substantial amount of the total revenues of the company. The Company's revenues
and associated accounts receivable are derived from its four time charters with
BG Group plc, two time charters with Pertamina and, to a much more limited
extent, from its four management contracts with National Gas Shipping Company
Limited (Abu Dhabi) ("NGSCO") and voyage charters in respect of the Methane
Princess. Pertamina is a state enterprise of the Republic of Indonesia. Credit
risk is mitigated by the long-term contracts with Pertamina being on a
ship-or-pay basis. Also, under the various contracts the Company's vessel hire
charges are paid by the Trustee and Paying Agent from the immediate sale
proceeds of the delivered gas. The Trustee must pay the ship owner before
Pertamina and the gas sales contracts are with the Chinese Petroleum Corporation
and KOGAS. The Company considers the credit risk of BG Group plc and NGSCO to be
low.
During the years ended December 31, 2003, 2002 and 2001, BG Group plc and
Pertamina each accounted for more than 10% of gross revenue.
During 2001, Pertamina and BG Group plc accounted for $62.8 million and $45.8
million respectively. During 2002, Pertamina and BG Group plc accounted for
$61.0 million and $68.1 million respectively.
During 2003, Pertamina and BG Group plc accounted for $61.9 million and $64.8
million respectively.
28. RELATED PARTY TRANSACTIONS
Golar was incorporated in 2001 for the purpose of acquiring the LNG shipping
interests of Osprey and Seatankers. Osprey, through its parent World
Shipholding, and Seatankers are indirectly controlled by Mr. John Fredriksen.
The purchase price paid for the LNG operations of Osprey was $525.9 million
based on an agreed gross value of the LNG carriers of $635.0 million, plus the
amount of net book value of all other non-shipping assets of the companies
acquired. The purchase price paid was net of an amount of $128.7 million, being
60 per cent of the loan assumed relating to the financing of the Golar Mazo as
described in Note 23, and cash of $27.2 million. Furthermore, the Company paid
$2.5 million to Osprey for the assignment of a newbuilding contract and options.
Additionally, immediately prior to the sale, certain inter-company balances due
to the companies forming the LNG shipping interests of Osprey from other Osprey
Companies totalling $450.3 million were forgiven. On May 28, 2001, the Company
entered into a purchase agreement with Seatankers to purchase its one
newbuilding contract for a LNG carrier and options to build three new LNG
carriers. The Company paid $2.5 million to Seatankers for the assignment of the
newbuilding contract and options.
In August 2001 and September 2001, Golar obtained loans of $32.6 million and $20
million respectively from Greenwich Holdings Limited, in order to finance the
first and second instalments due on newbuilding hull number 2215. The floating
interest rate payable on these loans was LIBOR plus 2.5 per cent. Golar repaid
the loans in March 2002 from funds arising on draw down from the Hull 2215
facility. Until the repayment of the loans a subsidiary of Golar had guaranteed
loans totalling $52.6 million made to Greenwich by Nordea and Den norske Bank
and entered into an assignment and security agreement in respect of its'
building contract with Den norske Bank as security agent. No consideration was
paid by Greenwich for the provision of the guarantee.
In August 2001, Golar obtained a loan of $32.7 million from Greenwich, in order
to finance the first instalments due on newbuilding hull numbers 1460 and 2220.
The loan was initially for a period of one year and the floating interest rate
payable on this loan was LIBOR plus 2.5%. In connection with this loan, until it
was repaid, two subsidiaries of Golar guaranteed a loan of $32.7 million made to
Greenwich by Nordea and Den norske Bank and they both entered into an assignment
and security agreement in respect of their shipbuilding contracts with Den
norske Bank as security agent. No consideration has been paid by Greenwich for
the provision of the guarantee.
Golar repaid $16.0 million in respect of this loan in June 2003 and $16.7
million in August 2003. Both repayments were financed by cash reserves.
In June 2002, Golar obtained $16.3 million in loan finance from Greenwich, by
way of an addendum to the existing loan agreement in respect of newbuilding hull
numbers 1460 and 2220 in order to finance the second instalment due on
newbuilding hull number 1444. This addendum also extended the repayment date of
the original loan, $32.7 million, from August 2002 until August 2003. The
floating interest rate payable on the loan of $16.3 million was LIBOR plus 2.625
per cent. This rate also applies to the original $32.7 million from June 2002.
The rate increased to LIBOR plus two per cent on any amounts still outstanding
as at February 20, 2003. The additional loan of $16.3 million was repaid in
November 2002 from funds arising on draw down from the original $60.0 million
Golar LNG subordinated facility. Until the repayment of the loan of $16.3m a
subsidiary of Golar had guaranteed a loan of $16.3 million made to Greenwich by
Nordea and Den norske Bank and entered into an assignment and security agreement
in respect of its' building contract with Den norske bank as security agent. No
consideration was paid by Greenwich for the provision of the guarantee.
During the years ended December 31, 2003 and 2002 the rate of interest that
Greenwich paid to the banks providing the above facilities was LIBOR plus 1.5
per cent until June 11, 2002, thereafter the rate was 1.625 per cent until
February 2003 and 2.0 per cent until the loans were fully repaid in August 2003.
The rate during the year ended December 31, 2001 was 1.5 per cent throughout. In
the years ended December 31, 2003, 2002 and 2001, the Company paid interest of
$779,000, $2,275,000 and $1,576,000, respectively to Greenwich in respect of
loan facilities. As at December 31, 2003, 2002 and 2001, $nil, $169,612 and
$291,000 respectively, of the interest due to Greenwich was outstanding.
For each of the loans from Greenwich noted above the Company has paid loan
arrangement fees directly to the lending banks. These fees during the years
ended December 31, 2003, 2002 and 2001 amounted to $81,756, $323,250 and
$415,700 respectively.
Historically the Company has been an integrated part of Osprey Maritime. As
such, the Singapore and London office locations of Osprey have provided general
and corporate management services for both the Company as well as other Osprey
entities and operations. As described in Note 2, management has allocated costs
related to these operations based on the number of vessels managed. Amounts
allocated to the Company and included within vessel operating expenses,
administrative expenses and depreciation expense were $3,227,000 for the year
ended December 31, 2001. There were no charges in 2003 and 2002.
In the years ended December 31, 2003, 2002 and 2001 Frontline Management
(Bermuda) Limited and Frontline Management AS both subsidiaries of Frontline
Ltd. ("Frontline") have provided services to the company. These services include
management support, corporate services and administrative services. In the years
ended December 31, 2003, 2002 and 2001, management fees payable to Frontline of
$273,547, $379,550 and $258,962, respectively, have been incurred by Golar. As
at December 31, 2003, 2002 and 2001 amounts of $122,079, $102,550 and $547,966,
respectively, were due to Frontline in respect of these fees and costs incurred.
Frontline is a publicly listed company. Its principal shareholder is Hemen
Holding Limited, a company indirectly controlled by John Fredriksen.
The Company agreed to provide services to Osprey for the management of two of
Osprey's VLCC vessels until November 2001. In the seven months ended December
2001, management fees of $106,667 were charged to Osprey in relation to such
services of which $nil was outstanding at December 31, 2001. In addition as at
December 31, 2003, 2002 and 2001 amounts of $nil, $9,610 and $261,000,
respectively, were due from Osprey in respect the above services net of certain
expenses recharged at cost. In the year ended December 31, 2003, 2002 and 2001,
Seatankers has provided insurance administration services to the Company. In the
years ended December 31, 2003, 2002 and 2001, management fees payable to
Seatankers of $25,000, $24,556 and $10,000, respectively, have been incurred by
Golar. As at December 31, 2003, 2002 and 2001, amounts of $nil, $14,556 and
$10,000, respectively, were due to Seatankers in respect of these fees incurred.
During the years ended December 31, 2003, 2002 and 2001, Faraway Maritime
Shipping Inc., which is 60% owned by Golar and 40% owned by China Petroleum
Corporation ("CPC"), paid dividends totalling $4.2 million, $25.0 million and
$nil respectively, of which 60 per cent was paid to Golar and 40 per cent was
paid to CPC.
Golar Management holds a promissory note executed by Mr. McDonald, Chairman of
Golar Management and Technical Director, on April 21, 1998, under which Mr.
McDonald promises to pay to Golar Management the principal sum of (pound)20,900
in monthly instalments of (pound)318. The note carries an interest rate of three
per cent and an acceleration clause in the event Mr. McDonald's employment is
terminated for any reason or in the event of a default on payment by Mr.
McDonald. Payments under the note commenced in May 1998 and the principal
balance as of December 31, 2003, 2002 and 2001 was (pound)1,158, (pound)4,974
and (pound)8,577 or approximately $2,000, $9,000 and $12,400, respectively.
Management believes transactions with related parties are under terms similar to
those that would be arranged with other parties.
29. COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) December 31, December 31,
2003 2002
Long-term loans secured on
vessels, vessels under capital
leases and newbuildings 655,235 710,313
Other Contractual Commitments and contingencies
The Company insures the legal liability risks for its shipping activities with
the United Kingdom Mutual Steamship Assurance Association (Bermuda), a mutual
protection and indemnity association. As a member of a mutual association, the
Company is subject to calls payable to the association based on the Company's
claims record in addition to the claims records of all other members of the
association. A contingent liability exists to the extent that the claims records
of the members of the association in the aggregate show significant
deterioration, which results in additional calls on the members.
30. SUBSEQUENT EVENTS
In February 2004, the Company signed a newbuilding contract for the construction
of an LNG carrier. In connection with this, on April 7, 2004, the Company paid
the first installment of $14.8 million.
In March 2004, the Company signed a loan agreement relating to a $110 million
credit facility to finance the Golar Frost ("the Golar Frost facility"). The
loan is for a period of three years and is repayable by six consecutive
six-monthly installments. In June 2004, the Company took delivery of the Golar
Frost and the final delivery installment was settled by drawing down on the
Golar Frost facility. The vessel's delivery was delayed from the original
planned delivery date and as a result Golar received compensation from the
shipyard in the amount of $9 million.
In April 2004, the Company signed a lease agreement in respect of the Golar
Winter with a major UK bank (the 'Lessor'). The vessel was also delivered in
April 2004. Under the agreement Golar received an amount of $166 million, before
fees and expenses. Golar's obligations to the Lessor under the lease are secured
by (inter alia) a letter of credit provided by another UK bank (the 'LC Bank').
Golar has deposited $39 million with the LC bank as security for the letter of
credit. The effective amount of net financing received is therefore $127 million
before fees and expenses.
During the period to June 29, 2004 Golar increased its investment in Korea Line
shares by 11.2 per cent to 21.09 per cent. Korea Line is listed on the Seoul
stock exchange. The consideration paid for the additional investment of 11.2 per
cent was $21.9 million, which was financed from cash reserves.
03849.0004 #496571