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, 2006
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[_] SHELL COMPANY 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.
Name of each exchange
Title of each class on which registered
Common Shares, par value $1.00 NASDAQ
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Securities registered or to be registered pursuant to section 12(g) of the Act.
None
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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.
65,562,000 Common Shares, par value $1.00
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Yes [_] No [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 of 15(d) of
the Securities Exchange Act 1934
Yes [_] No [X]
Note - Checking the box will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
[_] Item 17 [X] Item 18
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
INDEX TO REPORT ON FORM 20-F
PART I PAGE
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS............ 2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.......................... 2
ITEM 3. KEY INFORMATION.................................................. 2
ITEM 4. INFORMATION ON THE COMPANY....................................... 13
ITEM 4A. UNRESOLVED STAFF COMMENTS 25
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................... 25
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................... 48
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS..................................................... 52
ITEM 8. FINANCIAL INFORMATION............................................ 53
ITEM 9. THE OFFER AND LISTING............................................ 54
ITEM 10. ADDITIONAL INFORMATION........................................... 55
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................ 60
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN
EQUITY SECURITIES 61
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................. 62
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.............................................. 62
ITEM 15. CONTROLS AND PROCEDURES.......................................... 62
ITEM 16. RESERVED......................................................... 64
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERT................................. 64
ITEM 16B CODE OF ETHICS................................................... 64
ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 64
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES....... 65
ITEM 16E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS....................................................... 65
PART III
ITEM 17. FINANCIAL STATEMENTS............................................. 65
ITEM 18. FINANCIAL STATEMENTS............................................. 65
ITEM 19. EXHIBITS......................................................... 66
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
Matters discussed in this report may constitute forward-looking
statements. The Private Securities Litigation Reform Act of 1995 provides safe
harbor protections for forward-looking statements in order to encourage
companies to provide prospective information about their business. 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 liquid natural gas, or 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.
Golar LNG Limited, or the Company, desires to take advantage of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995 and is
including this cautionary statement in connection with this safe harbor
legislation. This report 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. 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.
In addition to these assumptions and matters discussed elsewhere herein,
important factors that, in our view, could cause actual results to differ
materially from those discussed in the forward-looking statements include: our
future operating or financial results; our future payment of dividends and the
availability of cash for payment of dividends; our ability to retain and attract
senior management and other key employees; our ability to manage growth; our
ability to maintain our business in light of our proposed business and location
expansion; the outcome of legal, tax or regulatory proceedings to which we may
become a party; adverse conditions in the shipping or the marine fuel supply
industries; our ability to retain our key suppliers and key customers; our
contracts and licenses with governmental entities remaining in full force and
effect; material disruptions in the availability or supply of crude oil or
refined petroleum products; changes in the market price of petroleum, including
the volatility of spot pricing; increased levels of competition; compliance or
lack of compliance with various environmental and other applicable laws and
regulations; our ability to collect accounts receivable; changes in the
political, economic or regulatory conditions in the markets in which we operate,
and the world in general; our future, pending or recent acquisitions, business
strategy, areas of possible expansion, and expected capital spending or
operating expenses; our failure to hedge certain financial risks associated with
our business; uninsured losses; our ability to maintain our current tax
treatment; our failure to comply with restrictions in our credit agreements;
increases in interest rates; and other important factors described from time to
time in our SEC filings.
Please note in this annual report, "we", "us", "our", and "The Company",
all refer to Golar LNG Limited and to its wholly owned subsidiaries.
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 financial information. We derived the
information as at December 31, 2006 and 2005 and for each of the years in the
three-year period ended December 31, 2006 from our audited Consolidated
Financial Statements included in Item 18 of this annual report on Form 20-F,
prepared in accordance with accounting principles generally accepted in the
United States of America, or U.S. GAAP.
The selected income statement data with respect to the year ended
December 31, 2002 and 2003 and the selected balance sheet data as at December
31, 2004, 2003 and 2002, has been derived from audited 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
Financial Statements and Notes thereto included herein.
(in thousands of U.S. $, except number of shares, per
common share data and fleet data)
At or for the Fiscal Year Ended
December 31
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Income Statement Data:
Total operating revenues 239,697 171,042 163,410 132,765 130,611
Vessel operating expenses (1) 44,490 37,215 35,759 30,156 28,061
Voyage expenses (5) 9,582 4,594 2,561 2,187 -
Administrative expenses 13,657 12,219 8,471 7,138 6,127
Restructuring costs - 1,344 - - -
Depreciation and amortization 56,822 50,991 40,502 31,147 31,300
Operating income 115,146 64,679 76,117 62,137 65,123
Net financial expenses (52,156) (39,319) (25,304) (15,140) (40,367)
Income before equity in net earnings of investees,
income taxes and minority interests 62,990 25,360 50,813 46,997 24,756
Income taxes and minority interests (8,306) (9,323) (7,995) (7,427) (2,381)
Equity in net earnings of investees 16,989 18,492 13,015 - -
Net income 71,673 34,529 55,833 39,570 27,137
Earnings per common share
- basic (2) 1.09 0.53 0.85 0.68 0.48
- diluted (2) 1.05 0.50 0.84 0.68 0.48
Cash dividends declared per common share - - - - -
Weighted average number of shares - basic 65,562 65,568 65,612 58,533 56,012
Weighted average number of shares - diluted (2) 65,735 65,733 65,797 58,623 56,022
Balance Sheet Data (at end of year):
Cash and cash equivalents 56,616 62,227 51,598 117,883 52,741
Restricted cash and short-term investments 52,287 49,448 41,953 32,095 12,760
Amounts due from related parties 778 17 294 180 281
Long-term restricted cash 778,220 696,308 714,802 623,179 -
Equity in net assets of non-consolidated investees 97,255 65,950 48,869 12,176 -
Newbuildings 49,713 111,565 145,233 207,797 291,671
Vessels and equipment, net 669,639 533,008 371,867 211,098 617,583
Vessels under capital lease, net 796,186 676,036 706,516 553,385 -
Total assets 2,575,070 2,230,695 2,110,329 1,783,968 987,935
Current portion of long-term debt 72,587 67,564 66,457 61,331 48,437
Current indebtedness due to related parties - - - - 32,703
Current portion of obligations under capital leases 5,269 2,466 2,662 - -
Long-term debt 803,771 758,183 636,497 593,904 629,173
Long-term obligations under capital leases 1,009,765 801,500 842,853 616,210 -
Minority interest 32,436 27,587 26,282 18,706 13,349
Stockholders' equity 507,044 434,554 402,770 338,801 196,136
Common shares outstanding (2) 65,562 65,562 65,612 65,612 56,012
Fleet Data (unaudited)
Number of vessels at end of year (3) 12 10 9 7 6
Average number of vessels during year (3) 11.52 10 8.33 6.34 6
Average age of vessels (years) 13.7 15.3 15.9 19.3 21.4
Total calendar days for fleet 4,214 3,645 3,023 2,315 2,190
Total operating days for fleet (4) 3,845 2,976 2,660 2,140 2,166
Average daily time charter equivalent earnings (5) $55,700 $46,200 $54,900 $57,300 $59,000
Average daily vessel operating costs (6) $10,558 $10,210 $11,800 $13,000 $12,800
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, prior to the April 2005
reorganization, they included an allocation of overheads allocable to
vessel operating expenses.
(2) Basic earnings per share is computed based on the income available to
common shareholders and the weighted average number of shares
outstanding. The computation of diluted earnings per share assumes the
conversion of potentially dilutive instruments.
(3) In each of the periods presented above, we had a 60% interest in one of
our vessels and a 100% interest in our remaining vessels.
(4) The operating days for our fleet is the total number of days in a given
period that the vessels were in our possession less the total number of
days off-hire. We define days off-hire as days spent on repairs,
drydockings, special surveys and vessel upgrades or awaiting employment
during which we do not earn charter hire.
(5) The majority of our vessels are operated under time charters. However
some of our newer vessels operated under voyage charters during 2003 and
2004. Under a time charter, the charterer pays substantially all of the
vessel voyage costs whereas under a voyage charter, the vessel owner
pays such costs. However, we may also incur voyage related expenses when
positioning or repositioning vessels before or after the period of a
time charter. 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
off-hire. Where we are paid a fee to position or reposition a vessel
before or after a time charter, this additional revenue, less voyage
expenses, is included in the calculation of net time charter revenues.
We perform this calculation on a vessel-by-vessel basis. For voyage
charters, TCE is calculated by dividing voyage revenues, net of vessel
voyage costs, by the number of calendar days minus days for scheduled
off-hire.
Management believes net charter revenues (non-GAAP measure), the
numerator of the TCE calculation, provides more meaningful information
to us about the operating revenues generated from our various charters
than gross revenues, the most directly comparable GAAP measure. Net
revenues are also widely used by investors and analysts in the tanker
shipping industry for comparing financial performance between companies
and to industry averages.
The following table reconciles our net revenues to total revenues for
the years ended December 31, 2006, 2005, 2004, and 2003. For the year
ended December 31, 2002 we did not earn any voyage revenues and did not
incur any voyage expenses.
(in thousands of U.S.$) 2006 2005 2004 2003
----------------------- ---- ---- ---- ----
Total revenues 239,697 171,042 163,410 132,765
Voyage expenses (9,582) (4,594) (2,561) (2,187)
Net revenues 230,115 166,448 160,849 130,578
Voyage related expenses can also be incurred when our vessels are off
hire. This principally occurs during periods of commercial waiting time
when a small amount of fuel is consumed whilst the vessel is idle.
(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 common shares.
Risks Related to our Business
We generate a substantial majority of our revenue under six long-term agreements
with two customers, and the unanticipated loss of one or more of these
agreements or either of these customers would likely interrupt our related cash
flow.
We receive a substantial majority of our revenue from six long-term
charters with two large and established customers. In the year ended December
31, 2006, BG Group plc, or BG, accounted for 36.9% and Pertamina (the state
owned oil and gas company of Indonesia) accounted for 26.1% of our total
operating revenues, respectively. Pertamina chartered two of our vessels during
2006, although the Golar Spirit time charter expired in November 2006. BG
chartered five of our vessels during 2006. All of these 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 at short notice. A persistent and
continued interruption of our cash flow could, in turn, substantially and
adversely affect our financial condition.
Three of our vessels are currently operating in the spot market for LNG vessels,
failure to find profitable employment for them could adversely affect our
operations.
We currently have three vessels; the Golar Frost, the Golar Winter and
the Golar Spirit (following the end of its long-term charter with Pertamina in
November 2006) operating in the spot/ short-term charter market for LNG vessels,
prior to them entering their intended long-term commitments. In the case of the
Golar Frost, if our "Livorno" project is successful, it is anticipated that this
vessel will be used as a floating LNG terminal. In respect of the Golar Spirit
and the Golar Winter we have signed letters of commitment to enter into ten-year
charter contracts with Petrobras of Brazil for modified LNG vessels capable of
regasifying LNG and referred to as Floating Storage and Regasification Units, or
FSRU. The current schedule is for Golar Spirit to enter the shipyard in October
2007 and delivery and charter commencement to occur during the second quarter of
2008. The Golar Winter is expected to enter the shipyard in October 2008 and
delivery and commencement of charter during the second quarter of 2009. If we
cannot obtain profitable employment for these vessels in the interim, our
earnings will suffer. In addition, whether or not we employ these ships
profitably, we must service the debt that we incur to finance them as well as
pay for operating costs.
Our charters with Shell have variable rates and certain termination rights.
Three of our vessels are time chartered to Shell, Gracilis (formerly the
Golar Viking), Grandis and Granosa under five year charter agreements. However,
the rates we can earn from these charters are variable relative to the market
and Shell, have certain termination rights. In the event that Shell does not
employ the vessels for their own use, they will market the vessels for use by
third parties. If Shell cannot find employment for these ships there could be
periods where the vessels incur commercial waiting time and do not earn
revenues. If these vessels are not employed profitably or the charters are
terminated our cash flows could be seriously impacted.
If there was a substantial delay in completion of the modification of two of our
vessels to FSRUs or if they do not meet performance requirements our earnings
and financial condition could suffer.
In April 2007, we were awarded two time charters by Petrobras to employ
Golar Winter and Golar Spirit as FSRU vessels. Employment of Golar Spirit under
this contract is expected to commence during the second quarter of 2008 and
Golar Winter is expected to commence during the second quarter of 2009. The
contract duration for both vessels is ten years with an option for Petrobras to
extend for a further five years. Any substantial delay in the conversion of our
vessels into FSRUs would mean we would not be able to satisfy the terms of the
timecharter agreements, which could lead to the cancellation of these contracts
by Petrobras, which would have a significant negative impact on our cash flows
and earnings. Additionally, if once delivered to Petrobras, the vessels do not
meet the performance requirement under the charters, the charter rates could be
adjusted downwards or the contracts could be cancelled.
We may incur losses if we do not accomplish our strategic objective of
profitably entering into other areas of the LNG industry
A principal component part of our strategy reflects our assessment that
we should be able to expand profitably into areas of the LNG industry other than
the carriage of LNG. We have not previously been involved in other LNG industry
businesses and our expansion into these areas may not be profitable and we may
incur losses including losses in respect of expenses incurred in relation to
project development. Our plan to consider opportunities to integrate vertically
into upstream and downstream LNG activities depends materially on our ability to
identify attractive partners and projects and obtain project financing at a
reasonable cost.
Our loan and lease agreements impose restrictions that may adversely affect our
earnings or may prevent us from taking actions that could be in our
shareholders' best interest.
Covenants in our loan and lease agreements limit our ability to:
o merge into or consolidate with any other entity or sell or otherwise
dispose of all or substantially all of their assets;
o make or pay equity distributions;
o incur additional indebtedness;
o incur or make any capital expenditure; or
o materially amend, or terminate, any of our current charter contracts
or management agreements.
If the ownership interest in us of John Fredriksen, our chairman, and
his affiliated entities falls below 25% of our share capital, a default of some
of our loan agreements and lease agreements to which we are a party would occur.
Similarly, if we were to be in any other form of default which we could not
remedy, such as payment default, our lessors, having legal title to our leased
vessels, or our lenders, who have mortgages over some of our vessels, could be
entitled to sell our vessels in order to repay our debt and or lease
liabilities.
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 or we are in any other form of default such as payment default, 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 amounts of available cash, ratios of
current assets to current liabilities (excluding current long-term debt), ratios
of net debt to earnings before interest, tax, depreciation and amortization and
the level of stockholders' equity. Although we currently comply with these
requirements if we were to fall below these levels we would be in default of our
loans and lease agreements and the due date of our debt could be accelerated and
our lease agreements terminated, which could result in the loss of our vessels.
Provisions in our loan and lease agreements may limit our flexibility.
In addition to the general restrictions, our loan agreements and UK
vessel lease agreements place certain restrictions on our ability to charter our
vessels without the consent of the relevant lender or lessor. In addition the
lease agreements in respect of five of our vessels, limit our ability to enter
into time charters other than with BG and Pertamina, who do not have credit
ratings of at least BBB+ without our lessors' consent, unless we post additional
security over and above the letters of credit already provided as security for
our lease obligations. This will impact us when these vessels finish their
long-term charters. These restrictions could limit our operational flexibility
and negatively impact our financial position or cash flows in the future.
Eight of our vessels are financed by UK tax leases. In the event of any adverse
tax rate changes or rulings or in the event of a lease termination we may be
required to make additional payments to the UK vessel lessors, which could
adversely affect our results and financial position.
In the event of any adverse tax rate changes or rulings, or in the event
that we terminate one or more of our leases, we would be required to return all
or a portion of, or in certain circumstances significantly more than, the
upfront cash benefits that we have received or that have accrued over time,
together with fees that were financed in connection with our lease financing
transactions, post additional security or make additional payments to our
lessors. The upfront benefits we have received equates to the cash inflow we
received in connection with the six leases we entered into during 2003 (in total
approximately (41 million British pounds).
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,
2006, our net total indebtedness (including capital lease obligations) was
$1,004 million and our ratio of net indebtedness to total capital was 0.65. As
of March 31, 2007, our net indebtedness was approximately $936 million. We may
also incur additional indebtedness to fund our possible expansion into other
areas of the LNG industry, for example in respect of our FSRU projects. Debt
payments reduce our funds available for expansion into other parts of the LNG
industry, working capital, capital expenditures and other purposes. In addition,
our business is capital intensive and requires significant capital outlays that
result in high fixed costs. We cannot assure investors that our existing and
future contracts will provide revenues adequate to cover all of our fixed and
variable costs.
It may be difficult to serve process on or enforce a United States judgment
against us, our officers, our directors or some of our experts or to initiate an
action based on United States federal or state securities laws outside of the
United States.
We are a Bermuda corporation and our executive offices are located
outside of the United States. Our officers and directors reside outside of the
United States. In addition, substantially all of our assets and the assets of
our officers, directors and some of our experts are located outside of the
United States. As a result, you may have difficulty serving legal process within
the United States upon us or any of these persons or enforcing a judgment
obtained in a U.S. court to the extent assets located in the United States are
insufficient to satisfy the judgment. In addition, there is uncertainty as to
whether the courts outside of the United States would enforce judgments of
United States courts obtained against us or our officers and directors or
entertain original actions predicated on the civil liability provisions of the
United States federal or state securities laws. As a result, it may be difficult
for you to enforce judgments obtained in United States courts against our
directors, officers and non-U.S. experts or to bring an action against our
directors, officers or non-U.S. experts outside of the United States that is
based on United States federal or state securities law.
We may not be exempt from U.S. taxation on our U.S. source shipping income,
which would reduce our net income and cash flow by the amount of the applicable
tax.
We currently believe we are exempt from tax under either Section 883 of
the U.S. Internal Revenue Code of 1986, as amended, or the Code. However, there
are factual circumstances beyond our control that could cause us to lose the
benefit of exemption.
If we, for whatever reason, were not eligible for exemption from tax
under Code Section 883, we would be subject to a four percent tax on our U.S.
source shipping income, which is comprised of 50 percent of our shipping income
attributable to the transport of cargoes to or from United States ports. In the
absence of such exemption, our potential tax liability for the calendar years
2006, 2005 and 2004 would have been $524,000, $627,000 and $880,000,
respectively.
We may be unable to attract and retain key management personnel in the LNG
industry, which may negatively impact the effectiveness of our management and
our results of operation.
Our success depends to a significant extent upon the abilities and the
efforts of our senior executives, and particularly John Fredriksen, our Chairman
and Tor Olav Troim, our deputy chairman for the management of our activities and
strategic guidance. While we believe that we have an experienced management
team, the loss or unavailability of one or more of our senior executives, and
particularly Mr. Fredriksen or Mr. Troim, for any extended period of time could
have an adverse effect on our business and results of operations.
If we were 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 were 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 2006 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 2006 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 and spares, 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, 2006, we had a total long-term debt and net capital
lease obligations outstanding of $1,076 million. As at March 31, 2007, we had a
total long-term debt and net capital lease obligations of $1,065 million of
which currently $930 million is exposed to a floating rate of interest. We also
use interest rate swaps to manage interest rate risk. As at March 31, 2007, our
interest rate swap arrangements effectively fix the interest rate exposure on
$479 million of floating rate bank debt and capital lease obligation. If
interest rates rise significantly, our results of operations could be materially
and adversely affected. Increases and decreases in interest rates will affect
the cost of floating rate debt but may also affect the mark-to-market valuation
of interest rate swaps which will also affect our results. 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.
An adverse foreign exchange movement between US dollars against other currencies
could materially affect our financial performance.
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,
such as British pounds (GBP), in relation to our administrative office in the
UK, operating expenses incurred in a variety of foreign currencies and Singapore
dollars, among others, in respect of our FSRU conversion contract. If the US
dollar weakens significantly this could increase our expenses and therefore
could have a negative effect to our financial results.
Conversely, eight of our vessels are financed by UK tax leases, which
are denominated in British pounds. The majority of our British pound capital
lease obligations are hedged by British pound cash deposits securing the lease
obligations or by currency swap. However, this is not a perfect hedge and a
significant strengthening of the US dollar could give rise to an increase in our
financial expenses and could materially affect our financial results (see Item
11- Foreign currency risk).
We hold a 20% interest in the share capital of Liquefied Natural Gas Limited, an
Australian listed company, at a cost of $8.6 million.
The value of our investment in Liquefied Natural Gas Limited ("LNGL")
could be impacted by, amongst other things, the investee's future results as
well as general stock market movements in the Australian stock exchange and
other events over which we have no control.
We may not be able to obtain financing for our growth or to fund our future
capital expenditures, which could negatively impact our results of operations,
financial condition and our ability to pay dividends.
In order to fund future vessel acquisitions, increased working capital
levels or capital expenditures, we would be required to use cash from operations
or incur borrowings or raise capital through the sale of debt or additional
equity securities. Use of cash from operations will reduce cash available for
dividend distributions to you. Our ability to obtain bank financing or to access
the capital markets for any future offerings may be limited by our financial
condition at the time of such financing or offering, as well as by adverse
market conditions resulting from, among other things, general economic
conditions and contingencies and uncertainties that are beyond our control. Our
failure to obtain the funds for future vessel acquisitions or capital
expenditures could impact our results of operations, financial condition and our
ability to pay dividends. The issuance of additional equity securities would
dilute your interest in our Company and reduce dividends payable to you. Even if
we are successful in obtaining bank financing, paying debt service would limit
cash available for working capital and increasing our indebtedness could have a
material adverse effect on our business, results of operations, cash flows,
financial condition and ability pay dividends.
Due to the lack of diversification in our lines of business, adverse
developments in the LNG business would negatively impact our results of
operations, financial condition and our ability to pay dividends.
We rely primarily on the revenues generated from our business of
transporting LNG. Due to the lack of diversification in our lines of business,
an adverse development in our LNG business would have a significant impact on
our business, financial condition and results of operations and our ability to
pay dividends to our shareholders.
We are a holding company, and our ability to pay dividends will be limited by
the value of investments we currently hold and by the distribution of funds from
our subsidiaries.
We are a holding company whose assets mainly comprise of equity
interests in our subsidiaries and other quoted and non-quoted companies. As a
result, should we decide to pay dividends we would be dependent on the
performance of our operating subsidiaries and other investments. If we were not
able to receive sufficient funds from our subsidiaries and other investments,
including from the sale of our investment interests, we will not be able to pay
dividends unless we obtain funds from other sources. We may not be able to
obtain the necessary funds from other sources on terms acceptable to us.
Risks Related to the LNG Shipping Industry
Risks involved with operating ocean-going vessels could affect our business and
reputation, which could adversely affect our revenues.
The operation of an ocean-going vessel carries inherent risks. These
risks include the possibility of:
o Marine disaster;
o Piracy;
o Environmental accidents; and
o Business interruptions caused by mechanical failure, human error,
war, terrorism, political action in various countries, labor
strikes, or adverse weather conditions.
Any of these circumstances or events could increase our costs or lower
our revenues. The involvement of our vessels in an oil spill or other
environmental disaster may harm our reputation as a safe and reliable LNG
carrier operator.
If our vessels suffer damage, they may need to be repaired. The costs of
vessel repairs are unpredictable and can be substantial. We may have to pay
repair costs that our insurance policies do not cover. The loss of earnings
whilst these vessels are being repaired, as well as the actual cost of these
repairs, would decrease our results of operations. If one of our vessels were
involved in an accident with the potential risk of environmental contamination,
the resulting media coverage could have a material adverse effect on our
business, our results of operations and cash flows, weaken our financial
condition and negatively affect our ability to pay dividends.
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,
the prevailing economic conditions in the LNG industry.
Maritime claimants could arrest our vessels, which could interrupt our cash
flow.
If we are in default on some kinds of obligations, such as those to our
crew members, suppliers of goods and services to our vessels or shippers of
cargo, these parties may be entitled to a maritime lien against one or more of
our vessels. In many jurisdictions, a maritime lien holder may enforce its lien
by arresting a vessel through foreclosure proceedings. In a few jurisdictions,
claimants could try to assert "sister ship" liability against one vessel in our
fleet for claims relating to another of our vessels. The arrest or attachment of
one or more of our vessels could interrupt our cash flow and require us to pay
to have the arrest lifted. Under some of our present charters, if the vessel is
arrested or detained for as little as 14 days as a result of a claim against us,
we may be in default of our charter and the charterer may terminate the charter.
The LNG transportation industry is competitive and if we do not continue to
compete successfully, our earnings could be adversely affected.
Although we currently generate a majority of our revenue under long-term
contracts, the LNG transportation industry is competitive, especially with
respect to the negotiation of long-term charters. Furthermore, new competitors
have entered the market and further new competitors with greater resources could
enter the industry and operate larger fleets through consolidations,
acquisitions, or the purchase of new vessels, and may be able to offer lower
charter rates and more modern fleets. If we do not continue to compete
successfully, our earnings could be adversely affected. Competition may also
prevent us from achieving our goal of profitably expanding into other areas of
the LNG industry.
Shipping companies generally must conduct operations in many parts of the world,
and accordingly their vessels are exposed to international risks, which could
reduce revenue or increase expenses.
Shipping companies, including those that own LNG carriers, conduct
global operations. Changing economic, regulatory and political conditions in
some countries, including political and military conflicts, have from time to
time resulted in attacks on vessels, mining of waterways, piracy, terrorism and
other efforts to disrupt shipping. The terrorist attacks against targets in the
United States on September 11, 2001, the military response by the United States
and the conflict in Iraq may increase the likelihood of acts of terrorism
worldwide. Acts of terrorism, regional hostilities or other political
instability could affect LNG trade patterns and reduce our revenue or increase
our expenses. Further, we could be forced to incur additional and unexpected
costs in order to comply with changes in the laws or regulations of the nations
in which our vessels operate. These additional costs could have a material
adverse impact on our operating results, revenue, and costs.
Our insurance coverage may not suffice in the case of an accident or incident.
The operation of any ocean-going vessel carries an inherent risk of
catastrophic marine disaster and property loss caused by adverse weather
conditions, mechanical failures, human error, hostilities and other
circumstances or events. The transportation of LNG is subject to the risk of LNG
leakage and business interruptions due to political circumstances in foreign
countries, hostilities and labor strikes. The occurrence of one or more of these
events may result in lost revenues and increased costs for us.
We carry insurance to protect against the accident-related risks
involved in the conduct of our business and environmental damage and pollution
insurance. However, we cannot assure investors that we have adequately insured
ourselves against all risks, that any particular claim will be paid out of such
insurance or that we will be able to procure adequate insurance coverage at
commercially reasonable rates or at all in the future. More stringent
environmental regulations that are currently being considered or that may be
implemented in the future may result in increased costs for insurance against
the risks of environmental damage or pollution. Our insurance policies contain
deductibles for which we will be responsible. They also contain limitations and
exclusions that, although we believe them to be standard in the shipping
industry, may increase our costs or lower our profits. Moreover, if the mutual
insurance protection and indemnity association that provides our tort insurance
coverage were to suffer large unanticipated claims related to the vessel owners,
including us, that it covers, we could face additional insurance costs.
If any of our LNG carriers discharged fuel oil into the environment, we might
incur significant liability that would increase our expenses.
As with all vessels using fuel oil for their engines, international
environmental conventions, laws and regulations, including United States'
federal laws, apply to our LNG carriers. If any of the vessels that we own or
operate were to discharge fuel oil into the environment, we could face claims
under these conventions, laws and regulations. We must also carry evidence of
financial responsibility for our vessels under these regulations. United States
law also permits individual states to impose their own liability regimes with
regard to oil pollution incidents occurring within their boundaries, and a
number of states have enacted legislation providing for unlimited liability for
oil spills.
Any future changes to the laws and regulations governing LNG carrier vessels
could increase our expenses to remain in compliance.
The laws of the nations where our vessels operate as well as
international treaties and conventions regulate the production, storage, and
transportation of LNG. While we believe that we comply with current regulations
of the International Maritime Organization, or IMO, any future non-compliance
could subject us to increased liability, lead to decreases in available
insurance coverage for affected vessels and result in the denial of access to,
or detention in, some ports. Furthermore, in order to continue complying in the
future with United States federal and state laws and regulations as then in
force, or with then current regulations adopted by the IMO, and with any other
future regulations, we may be forced to incur additional costs relating to such
matters as LNG carrier construction, maintenance and inspection requirements,
development of contingency plans for potential leakages and insurance coverage.
Risks Related to our Common Shares
Our Chairman may have the ability to effectively control the outcome of
significant corporate actions.
John Fredriksen, our chairman, and his affiliated entities beneficially
own 47.65% of our outstanding common shares. As a result, Mr. Fredriksen and his
affiliated entities have the potential ability to effectively control the
outcome of matters on which our shareholders are entitled to vote, including the
election of all directors and other significant corporate actions.
Because we are a Bermuda corporation, you may have less recourse against us or
our directors than shareholders of a U.S. company have against the directors of
that U.S. Company.
Because we are a Bermuda company the rights of holders of our common
shares will be governed by Bermuda law and our memorandum of association and
bye-laws. The rights of shareholders under Bermuda law may differ from the
rights of shareholders in other jurisdictions. Among these differences is a
Bermuda law provision that permits a company to exempt a director from liability
for any negligence, default, or breach of a fiduciary duty except for liability
resulting directly from that director's fraud or dishonesty. Our bye-laws
provide that no director or officer shall be liable to us or our shareholders
unless the director's or officer's liability results from that person's fraud or
dishonesty. Our bye-laws also require us to indemnify a director or officer
against any losses incurred by that director or officer resulting from their
negligence or breach of duty except where such losses are the result of fraud or
dishonesty. Accordingly, we carry directors' and officers' insurance to protect
against such a risk. 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.
Investor confidence and the market price of our common stock may be adversely
impacted if we are unable to comply with Section 404 of the Sarbanes-Oxley Act
of 2002.
We are subject to Section 404 of the Sarbanes-Oxley Act of 2002, which
requires us to include in our annual report on Form 20-F, our management's
report on, and assessment of the effectiveness of, our internal controls over
financial reporting. An additional requirement to be first applied in the annual
report for the fiscal year ended December 31, 2007, is that our independent
registered public accounting firm will be required to attest to and report on
management's assessment of the effectiveness of our internal controls over
financial reporting. If we fail to maintain the adequacy of our internal
controls over financial reporting, we will not be in compliance with all of the
requirements imposed by Section 404. Any failure to comply with Section 404
could result in an adverse reaction in the financial marketplace due to a loss
of investor confidence in the reliability of our financial statements, which
ultimately could harm our business and could negatively impact the market price
of our common stock. We believe the total cost of our initial compliance and the
future ongoing costs of complying with these requirements may be substantial.
A. History and Development of the Company
We are a LNG Shipping company formed on May 10, 2001. We currently own
and/or operate a fleet of twelve liquefied natural gas, or LNG, carriers (or
vessels), of which one was delivered in January 2006 and one in June 2006. We
are engaged in the acquisition, ownership, operation and chartering of LNG
carriers through our subsidiaries. We operate eleven of our vessels through
wholly owned subsidiaries and we have a 60% interest in the owning company of a
vessel, the Golar Mazo. Six of our LNG carriers are currently contracted under
long-term charters, three LNG carriers are currently contracted under short-term
charters and three vessels are in medium term, five-year market related charter
contracts with Shell.
We are incorporated under the laws of the Islands of Bermuda and
maintain our principal executive headquarters at Par-la-Ville Place, 14
Par-la-Ville Road, Hamilton, Bermuda. Our telephone number at that address is
(+1) 441-295-4705. Our principal administrative 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% of Osprey in November 2000 and increased this interest to over 90% in
January 2001. World Shipholding completed its acquisition in May 2001, at which
time Osprey was delisted from the Singapore Stock Exchange. On May 21, 2001, we
acquired the LNG shipping interests of Osprey.
We listed on the Oslo Stock Exchange in July 2001 and on Nasdaq in
December 2002.
On June 18, 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% of our issued and outstanding share capital. World
Shipholding currently owns 47.65% of our issued and outstanding common shares.
Our primary capital expenditures have been in connection with the
construction of newbuildings. During the past three years, we have invested
$659.6 million in our newbuildings, principally purchase installments and taken
delivery of five vessels. In February 2007, we signed an agreement to sell our
seventh newbuilding prior to its scheduled delivery in mid 2007 for proceeds of
approximately $92.5 million. In addition, over the same period, we have invested
a total of $41 million to acquire interests in a number of companies,
principally:
o During 2003 and 2004, we invested $34.1 million in Korea Line
Corporation, or Korea Line, a Korean shipping company listed on the
Korean stock exchange. As at December 31, 2006, and 2005 we held a
21% interest in Korea Line. However, between April and June 2007, we
disposed of our entire interest in Korea Line, for total proceeds of
approximately $173 million.
o In 2006, we purchased 23 million shares in Liquefied Natural Gas
Limited, or LNGL, an Australian publicly listed company, for a
consideration of $8.6 million, making us LNGL's largest shareholder.
As of December 2006, we had a 19.65% interest.
o In November 2006, we invested $5.0 million to purchase a 20%
interest in OLT Offshore Toscana S.p.A, or OLT-O, an Italian
unincorporated company involved in the construction, development,
operation and maintenance of a Floating Storage Regasification Unit,
or FSRU.
In April 2007, we were awarded contracts, by Petrobras, to convert Golar
Winter and Golar Spirit into FSRUs. Both time charters are for a period of ten
years with an option to extend for up to a further five years. Employment of
Golar Spirit is expected to commence during the second quarter of 2008 and the
Golar Winter is expected to commence in the second quarter of 2009. Both vessels
will need to undergo modifications before going on hire in Brazil. In December
2005, we signed an agreement with Keppel Shipyard Limited of Singapore for the
first ever conversion of an existing LNG carrier into a LNG Floating Storage and
Regasification Unit (FSRU). All major items have now been ordered and work
continues on the detailed engineering.
B. Business Overview
We are a leading independent owner and operator of liquid natural gas,
or LNG vessels. We have a fleet of twelve LNG vessels. We are also seeking to
develop our business in other areas of the LNG supply chain, in particular
innovative marine based solutions such as floating LNG regasification terminals.
The Natural Gas Industry
Natural gas is one of the world's fastest growing energy sources and is
likely to continue to be so for at least the next 20 years. Already responsible
for approximately 21% of the world's energy supply, the International Energy
Agency, or IEO, projects that LNG will provide for around 40% of the global
supply growth of natural gas between 2005 and 2010. 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
accounting for around 40% of the total incremental growth in
world-wide natural gas consumption.
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.
o Emerging economies: Projected average increases in emerging
economies consumption of natural gas of up to 4.1% per year up to
2025 are forecast by the IEA as compared to 2.3% per annum average
growth for transitional economies and 0.6% per annum for mature
economies.
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.
From 2000, LNG consumption has shown sustained annual growth of
approximately 8% per year. The Energy Information Administration of the United
States Department of Energy forecasts annual growth of LNG imports into the
United States to 2030 amounting to approximately 8-10% per year.
Production
There are three major regional areas that supply LNG. These are (i)
Southeast Asia, including Australia, Malaysia, Brunei and Indonesia, and under
construction in Russia (ii) the Middle East, including Qatar, Oman and United
Arab Emirates, with facilities under construction in Yemen, and (iii) the
Atlantic Basin countries, including Algeria, Egypt, Equatorial Guinea, Libya,
Nigeria and Trinidad with facilities under construction in Norway. The expansion
of existing LNG production facilities is one of the major sources of growth in
LNG production and most projects with gas reserves available are considering
growth of production.
Consumption
The two major geographic areas that dominate worldwide consumption of
LNG are East Asia; including Japan, which remains by far the biggest importer in
the world, South Korea and Taiwan; and Europe, specifically Spain, France,
Italy, Belgium and Turkey. East Asia currently accounts for approximately 60% of
the global LNG market while Europe accounts for approximately 27%. The United
States in 2006 accounted for approximately 7.2% of the global LNG market, a
decrease of 2% from 2005.
There are currently 16 LNG importing countries with about 50 importing
terminals. Japan and South Korea are currently the two largest importers of LNG,
accounting for approximately 55% of the world total LNG imports in 2005. Almost
all natural gas consumption in Japan and South Korea is based on LNG imports.
Five LNG import terminals operate in the United States, namely; Lake
Charles, Louisiana, Boston, Massachusetts, Elba Island, Georgia and Cove Point,
Maryland and the offshore terminal, Gulf Gateway. Expansion plans exist for the
Lake Charles (up to 1.8 bcf/day), Elba Island (up to 1.7 bcf/day) and Cove Point
(1.8 bcf/day) facilities. In addition four new terminals have commenced
construction with many more terminals under consideration. However, it is
unlikely that the majority of these plants will be constructed, due to demand,
cost and environmental restrictions.
The LNG Fleet
As of the end of May 2007, the world LNG carrier fleet consisted of 232
LNG carriers with a total capacity of approximately 30 million cubic meters, or
cbm. Currently there are orders for around 138 new LNG carriers with expected
delivery dates through to 2010.
The current 'standard' size for LNG carriers is approximately 155,000
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 now
firm orders for vessels of approximately 260,000 cbm. There are also some
smaller LNG carriers, mainly built for dedicated short distance trades. There
are seven newbuildings due to be delivered through to 2010 that are 100,000 cbm
or below. The cost of LNG carriers has fluctuated from $280 million in the early
1990s to approximately $220 million currently for the current standard size
depending on the mode of propulsion.
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 clean and non-corrosive when compared to other
products such as oil and given that more has tended to be 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 the region of 40 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 approximately
30-34 months. However, based on current yard availability, the earliest delivery
date for a new LNG vessel ordered today is likely to be in 2011. Any new
project/trade with LNG vessel demand before then will have to rely on existing
or ordered vessels until potential new orders can be delivered.
Our Business Strategy
We are a leading independent owner and operator of LNG vessels and, we
believe, the only shipping company dedicated exclusively to LNG transportation.
Our objective is to provide safe, reliable and efficient LNG transportation
services to our customers and to use this as the foundation to fulfil our vision
of becoming an industry leader in LNG transportation services and of expansion
into other profitable areas of the LNG supply chain. Our strategy is therefore
to grow, expand and diversify our LNG shipping operations, concentrating on our
existing customers while offering the same high level of service to selected new
customers.
In respect of our shipping operations we intend to build on our
relationships with existing customers and continue to develop relationships with
those who require a shipping partner for whom LNG transportation is the core
business. We aim to earn higher margins through maintaining strong service-based
relationships combined with flexible and innovative LNG shipping solutions. We
believe our customers will have the confidence to place their 'shipping risk'
with us on the basis that our core business is safe and reliable ship operation,
while theirs is the profitable sale or purchase of LNG.
In furtherance of our strategy to enhance our core margins we are
actively seeking opportunities to invest upstream and downstream in the LNG
supply chain, where our shipping assets and our 30 years of industry experience
can add value. We believe we can achieve this aim while at the same time
diversifying our sources of income from LNG and thereby strengthen the Company.
We are investing in both established LNG operations and technologies as
well as newly developing technologies, such as offshore liquefaction and
regasification operations. We continue to focus on floating energy solutions and
the provision of the associated shipping services as a major area for business
development and are in various stages of investigation, discussion and
commitment with respect to several prospective projects.
Specific projects we are actively pursuing include the following:
o We have been working on an Offshore Regasification project near
Livorno, Italy. A government decree approving the project was issued
on February 23, 2006 and in November 2006 we acquired a 20% share in
the project development company. If it is successful it is expected
that the project will use the Golar Frost as a floating terminal by
installing regasification equipment on board the vessel and
permanently mooring her off the coast of Italy.
o We have a 16.2% shareholding in TORP Technology AS, or TORP, which
holds the rights to the "Hiload LNG Re-gasification Technology"
developed by Remora Technology AS. TORP has applied for a permit to
build an offshore LNG regasification terminal, to be located 60
miles off the Alabama coast.
o We have been awarded contracts to convert Golar Spirit and Golar
Winter into FSRUs. Both FSRUs will be chartered by Petrobras for ten
year periods, with options to extend for a further five years. We
are actively looking at several other project opportunities, which
include the provision of technical marine and LNG expertise for
other technically innovative projects.
o During the first quarter of 2006, we signed an agreement with LNGL,
an Australian publicly listed company, to subscribe for 23 million
of its shares. As a result we are LNGL's largest shareholder with a
19.6% holding. LNGL is a company focused on acting as a link between
previously discovered but uncommercial gas reserves and potential
new energy markets. Aside from our anticipation that our investment
will increase in value, we will also aim to tender for any shipping
requirements LNGL might require in the future.
Our Strategic position and competitive strengths.
We believe we have established ourselves as a leading independent owner
and operator of LNG ships. Listed below are what we believe to be our key
competitive strengths:
o Operational excellence: We are an experienced and professional
provider of LNG shipping that places value on operating to the
highest industry standards of safety, reliability and environmental
performance.
o Customer relationships: Our success is directly linked to the
service and value we deliver to our customers. Our customers and
partners include some of the biggest participants in the LNG market:
BG Group, Pertamina, Royal Dutch Shell (Shell) and Chinese Petroleum
Corporation.
o Secure cash flow: Six of our existing twelve ships are on long-term
charters, which, provides us with a relatively secure and stable
cash flow and provides the financial platform for us to grow and
expand.
o LNG shipping experience: We have 30 years of experience of operating
LNG ships and with the subcontracting of our crewing activities to
three internationally recognized third party ship managers in
February 2005 we have access to a large pool of experienced LNG
crew.
o Technical and Commercial experience and expertise: With our existing
assets, extensive experience and significant technical and
commercial expertise we are able to quickly take advantage of market
opportunities as they arise and offer innovative solutions to our
customers' needs.
Customers
We have long-term customer relationships with three large participants
in the LNG industry, and most of our revenues have been derived from these three
customers, namely BG Group and its subsidiaries, Royal Dutch Shell and its
subsidiaries and Pertamina, the state-owned oil and gas company of Indonesia.
We and our predecessors have had charters with Pertamina since 1989. Our
revenues from Pertamina were $61.9 million in 2006, $63.7 million in 2005 and
$65.6 million in 2004. This constitutes 26.2%, 37.3% and 40.1% of our revenues
for those years, respectively. Pertamina currently charters one vessel from us.
BG has chartered LNG carriers from us and our predecessors since 2000. Our
revenue from BG was $87.3 million in 2006, $87.5 million in 2005 and $82.2
million in 2004, constituting 36.9%, 51.2% and 50.3% of our revenues for those
years respectively. BG currently charters five vessels from us.
We have continued to develop relationships with other major players in
the LNG world. The charter of three of our vessels to Shell on five-year
charters on a market related basis, is a significant extension of our
relationship base and an important strategic link with Shell, who are the
longest standing and largest operators in the LNG market. Our revenue from Shell
was $43.6 million in 2006, $nil in 2005 and $nil in 2004 , constituting 18.4% of
our revenues for 2006. Other commercial relationships we have developed include
those with other customers Total, Suez, RasGas (Qatar), Petronet (India),
Sonatrach (Algeria) and MISC (Malaysia).
Competition
While the majority 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.
While we believe that we are the only independent LNG carrier owner and
operator that focus solely on LNG, other independent shipping companies also own
and operate LNG carriers and have new vessels under construction. These
companies include Bergesen DY ASA (Norway), Exmar S.A. (Belgium) and Teekay LNG
Partners, L.P. Three Japanese ship owning groups, Mitsui O.S.K. Lines, Nippon
Yusen Kaisha and K Line, all of whom used to provide LNG shipping services
exclusively to Japanese LNG companies, are now aggressively moving into the
western markets. New competitors have also recently entered the market and
include Maran Navigation of Greece, A P Moller of Denmark, Teekay Shipping of
Canada, Overseas Shipholding Group of USA and Pronav ship management, and all
have shown significant intent to compete in the LNG shipping market. There are
other owners who may also attempt to participate in the LNG market if possible.
In addition to independent LNG operators, some of the major oil and gas
producers, including Royal Dutch Shell, BP Amoco, and BG who own LNG carriers
and are reported to have contracted for the construction of new LNG carriers.
As discussed above we are considering strategic opportunities in other
areas of the LNG industry. To the extent we do expand into new businesses, there
can be no assurance that we will be able to compete successfully in those areas.
Our new businesses may involve competitive factors that differ from those in the
carriage of LNG and may include participants that have greater financial
strength and capital resources than us.
Our Fleet
Current Fleet
We currently lease eight LNG carriers under long-term leases, we own
three vessels and we have a 60% interest in another LNG carrier through a joint
arrangement with the Chinese Petroleum Corporation, the Taiwanese state oil and
gas company. One of our vessels serves routes between Indonesia and Taiwan and
South Korea, while five are involved in the transportation of LNG from
facilities in the Middle East, North Africa and Trinidad to ports principally in
the United States and Europe but also Japan. Three of our vessels are currently
operating on short-term charters. In December 2005, we signed three five-year
charter agreements with Shell and on January 2006, the Grandis commenced the
first of these charters followed by the Gracilis in March 2006 and the Granosa
in June 2006 upon its delivery.
The following table lists the LNG carriers in our current fleet:
Year of Capacity, Current Current Charter
Vessel Name Delivery cbm. Charterer Expiration
----------- -------- ---- --------- ----------
Hilli 1975 125,000 BG 2011
Gimi 1976 125,000 BG 2010
Golar Freeze 1977 125,000 BG 2008
Khannur 1977 125,000 BG 2009
Golar Spirit 1981 128,000 Short-term charters 2007
Golar Mazo(1) 2000 135,000 Pertamina 2017
Methane Princess 2003 138,000 BG 2024
Golar Winter 2004 138,000 Short-term charters 2007
Golar Frost 2004 137,000 Short-term charters 2007
Gracilis 2005 140,000 Shell 2011
Grandis 2006 145,700 Shell 2011
Granosa 2006 145,700 Shell 2011
----------
1 We own a 60% interest in the Golar Mazo with the remaining 40% owned by
Chinese Petroleum Corporation.
Our current trading fleet represents approximately 5% of the worldwide
fleet by number of vessels.
Newbuildings
We have entered into newbuilding contracts for the delivery of seven LNG
carriers since the beginning of 2001, six of which have already been delivered,
the seventh newbuilding was expected to be delivered in June 2007. However, in
February 2007, we entered into an agreement to sell this newbuilding, hull 2244,
for gross consideration of $92.5 million, realizing a profit of $41 million. The
sale was completed in March 2007.
The selection of and investment in newbuildings is a key strategic
decision for us. We believe that our experience in the shipping industry has
equipped our senior management with the ability 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
Six 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.
Pertamina Charters. The Golar Mazo is 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. In
addition, during 2006 the Golar Spirit was employed on a 20-year time charter
with Pertamina, this charter came to an end in November 2006. Pertamina has
options to extend the Golar Mazo charter for two additional periods of five
years each.
Under the Pertamina charter, the operating and drydocking costs of the
Golar Mazo are borne by Pertamina on a cost pass-through basis. Pertamina also
pay for hire of the vessel 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 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. BG determines the trading routes of these vessels. The
Golar Freeze commenced a five-year charter with BG on March 31, 2003. The
charter for the Khannur expires in the third quarter of 2009, the charter for
the Gimi expires in the fourth quarter of 2010 and the charter for the Hilli
expires in the first quarter of 2011. The charter for the Methane Princess
commenced in February 2004 and 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 off-hire periods, may
result from, among other causes, mechanical breakdown or other accidents, 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.
Shell Charters. Shell Tankers UK Ltd currently charters three of our
vessels on five-year charters. The rates we earn from these charters are market
related, and therefore variable. As with all our other charters we may suffer
periods of off-hire when the vessel is unable to transport cargo, however there
is also the possibility of periods when we will not receive charter hire, in the
event that Shell have no requirement for a given vessel, in a given period and
cannot sub-charter it to a third party. Although this structure effectively
leaves the company open to market risk we believe that our utilisation rate
(i.e. the number of days for which we are paid hire in any given period) may be
improved. Shell's international gas and LNG trading structures afford
significantly more opportunity to create and sustain ongoing vessel utilisation
than is available to a stand-alone shipping company.
The five-year charter periods on the respective vessels commenced in
January 2006 (Grandis), March 2006 (Gracilis) and June 2006 (Granosa), and are
thus scheduled to terminate in 2011. However, Shell has termination rights
throughout the charter period.
We have also appointed Shell Transport and Shipping Company, or STASCO
as our third party managers for these three vessels.
Charter Renewal Options
Pertamina Charters. Pertamina has the option to extend the charter of
the Golar Mazo for up to ten 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.
BG Charters. With the exception of the Golar Freeze charter, each of the
BG charters, including the charter for the Methane Princess, is subject to
outstanding options on the part of BG to extend those charters for two,
five-year periods. The hire rates for Gimi and Hilli will be increased from
January 1, 2010 onwards and thereafter subject to adjustments based on
escalation of 3% per annum of the operating costs of the vessel.
Golar Management (UK) Limited and Ship Management
Subsidiaries of Golar Management (UK) Limited, or Golar Management, a
wholly owned subsidiary of ours, operate eight of our vessels under long-term
leases. Golar Management, which has offices in London, also provides commercial,
operational and technical support and supervision and accounting and treasury
services to us.
Prior to February 2005, Golar Management provided all services related
to the management of our vessels other than some of our crewing activities.
Since February 2005, Golar Management has subcontracted to three internationally
recognized third party ship management companies day-to-day vessel management
activities including routine maintenance and repairs; arranging supply of stores
and equipment; ensuring compliance with applicable regulations, including
licensing and certification requirements and engagement and provision of
qualified crews. Ultimate responsibility for the management of our vessels,
however, remains with Golar Management.
Our three third party ship managers are Thome Ship Management
(Singapore), Barber Ship Management (Oslo) and STASCO (London). Our decision to
employ third party managers was driven by our need to secure long-term high
quality seafaring workforce for a growing fleet. We recognized that external
ship management companies have access to larger pools of officers that can be
trained to become LNG officers. With the expansion of the global LNG fleet, a
shortage of well-qualified officers is considered a significant threat to
operators in this shipping segment. Our decision was also influenced by our
requirement to improve our technical teams geographic coverage, given our fleet
trade worldwide, and to be able to take advantage of economies and efficiencies
of scale afforded by these managers.
Ship Maintenance
We are focused on operating and maintaining our LNG carriers to the
highest safety and industry standards and at the same time maximizing revenue
from each vessel. It is our policy to have our crews perform planned maintenance
on our vessels while underway, to reduce time required for repairs during
drydocking. This will reduce the overall off-hire period required for dockings
and repairs. Since we generally do not earn hire from a vessel while it is in
drydock we believe that the additional revenue earned from reduced off-hire
periods outweighs the expense of the additional crewmembers or subcontractors.
An upgrading program to refurbish and modernize our 1970s built
liquefied natural gas carriers was largely completed with the drydocking of
Khannur in March 2005. The Hilli, Gimi, Khannur and Golar Freeze have now all
been fitted with, among other things, modern cargo monitoring and control
equipment. In addition these vessels are undergoing a ballast tank re-coating
program while in service. The completion of the ballast tank refurbishing
program has been delayed somewhat but we expect it will be completed by end of
2007, for two vessels, with the remaining two expected to be completed mid to
end of 2008.
We anticipate that the upgrading program will allow us to operate each
of these vessels to their 40th anniversary. We believe that the capital
expenditure of this program will result in lower maintenance costs and improved
performance in the future. We also believe this program will help us maintain
our proven safety record and ability to meet customer expectations. Indeed,
performance has improved significantly over the last three years, mainly due to
the reduction in technical problems and unplanned off-hire.
Insurance
The operation of any vessel, including LNG carriers, has inherent risks.
These risks include mechanical failure, personal injury, collision, property
loss, vessel or cargo loss or damage and business interruption due to political
circumstances in foreign countries or hostilities. In addition, there is always
an inherent possibility of marine disaster, including explosion, spills and
other environmental mishaps, and the liabilities arising from owning and
operating vessels in international trade.
We believe that our present insurance coverage is adequate to protect us
against the accident related risks involved in the conduct of our business and
that we maintain appropriate levels of environmental damage and pollution
insurance coverage consistent with standard industry practice. However, not all
risks can be insured, and there can be no guarantee that any specific claim will
be paid, or that we will always be able to obtain adequate insurance coverage at
reasonable rates.
We have obtained hull and machinery insurance on all our vessels against
marine and war risks, which include the risks of damage to our vessels, salvage
or towing costs, and also insure against actual or constructive total loss of
any of our vessels. However, our insurance policies contain deductible amounts
for which we will be responsible. We have also arranged additional total loss
coverage for each vessel. This coverage, which is called hull interest and
freight interest coverage, provides us additional coverage in the event of the
total loss of a vessel.
We have also obtained loss of hire insurance to protect us against loss
of income in the event one of our vessels cannot be employed due to damage that
is covered under the terms of our hull and machinery insurance. Under our loss
of hire policies, our insurer will pay us the daily rate agreed in respect of
each vessel for each day, in excess of a certain number of deductible days, for
the time that the vessel is out of service as a result of damage, for a maximum
of 240 days. The number of deductible days varies from 14 days for the new ships
to 30 days for the older ships, depending on the type of damage; machinery or
hull damage.
Protection and indemnity insurance, which covers our third-party legal
liabilities in connection with our shipping activities, is provided by a mutual
protection and indemnity association, or P&I club. This includes third-party
liability and other expenses related to the injury or death of crew members,
passengers and other third-party persons, loss or damage to cargo, claims
arising from collisions with other vessels or from contact with jetties or
wharves and other damage to other third-party property, including pollution
arising from oil or other substances, and other related costs, including wreck
removal. Subject to the capping discussed below, our coverage, except for
pollution, is unlimited.
Our current protection and indemnity insurance coverage for pollution is
$1 billion per vessel per incident. The thirteen P&I clubs that comprise the
International Group of Protection and Indemnity Clubs insure approximately 90%
of the world's commercial tonnage and have entered into a pooling agreement to
reinsure each association's liabilities. Each P&I club has capped its exposure
in this pooling agreement so that the maximum claim covered by the pool and its
reinsurance would be approximately $5.45 billion per accident or occurrence. We
are a member of Gard and Skuld P&I Clubs. As a member of these P&I clubs, we are
subject to a call for additional premiums based on the clubs' claims record, as
well as the claims record of all other members of the P&I clubs comprising the
International Group. However, our P&I clubs have reinsured the risk of
additional premium calls to limit our additional exposure. This reinsurance is
subject to a cap, and there is the risk that the full amount of the additional
call would not be covered by this reinsurance.
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.
All our third party Ship Managers are 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. Our Ship Managers each hold a Document
of Compliance for operation of Gas Carriers.
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 prescribing the design and construction standards of vessels
involved in such carriage. Compliance with the IGC must be evidenced by a
Certificate of Fitness for the Carriage of Liquefied Gases of Bulk. Each of our
vessels is in compliance with the IGC and each of our newbuilding contracts
requires that the vessel receive certification that it is in compliance with
applicable regulations before it is delivered. Non-compliance with the IGC or
other applicable IMO regulations, may subject a shipowner or a bareboat
charterer to increased liability, may lead to decreases in available insurance
coverage for affected vessels and may result in the denial of access to, or
detention in, some ports.
The IMO also promulgates ongoing amendments to the international
convention for the Safety of Life at Sea 1974 and its protocol of 1988,
otherwise known as SOLAS. This provides rules for the construction of ships and
regulations for their operation with respect to safety issues. It requires the
provision of lifeboats and other life-saving appliances, requires the use of the
Global Maritime Distress and Safety System which is an international radio
equipment and watchkeeping standard, afloat and at shore stations, and relates
to the Treaty on the Standards of Training and Certification of Watchkeeping
Officers, or STCW, also promulgated by IMO. Flag states, which have ratified the
Convention and the Treaty generally, employ the classification societies, which
have incorporated SOLAS and STCW requirements into their class rules, to
undertake surveys to confirm compliance.
In the wake of increased worldwide security concerns IMO has issued "The
International Security Code for Ports and Ships" (ISPS). The objective of the
ISPS, which came into effect on July 1, 2004, is to detect security threats and
take preventive measures against security incidents affecting ships or port
facilities. Our Ship Managers have developed Security Plans, appointed and
trained Ship and Office Security Officers and all ships have been certified to
meet the new ISPS Code.
MARPOL 73/78 Annex VI "Regulations for the prevention of Air Pollution"
entered into force on May 19, 2005, and applies to all ships, fixed and floating
drilling rigs and other floating platforms. The certification requirements
depend on size of the vessel and time of periodical classification survey. Ships
weighing more than 400 gross tons and engaged in international voyages involving
countries that have ratified the conventions, or ships flying the flag of those
countries, are required to have an International Air Pollution Certificate (IAPP
Certificate). This certificate must be on board at delivery for a ship
constructed (keel laid) after May 19, 2005. For ships constructed prior to this
date, the IAPP certificate must be onboard at the first scheduled dry-docking
after May 19, 2005, but no later than May 19, 2008. As of the current date, all
our ships delivered or dry-docked since May 19, 2005, have all been issued with
IAPP Certificates.
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 and Coast Guard Maritime Transportation Act of 2006 (H.R. 889) limit
the liability of responsible parties for vessels other than crude oil tankers to
the greater of $950 per gross ton or $800,000 per vessel. These limits of
liability do not apply, however, where the incident is caused by violation of
applicable U.S. federal safety, construction or operating regulations, or by the
responsible party's gross negligence or wilful misconduct. These limits likewise
do not apply if the responsible party fails or refuses to report the incident or
to cooperate and assist in connection with the substance removal activities.
This limit is subject to possible adjustment for inflation. OPA specifically
permits individual states to impose their own liability regimes with regard to
oil pollution incidents occurring within their boundaries, and some states have
enacted legislation providing for unlimited liability for discharge of
pollutants within their waters. In some cases, states, which have enacted their
own legislation, have not yet issued implementing regulations defining
shipowners' responsibilities under these laws.
CERCLA, which also applies to owners and operators of vessels, contains
a similar liability regime and provides for cleanup, removal and natural
resource damages. Liability under CERCLA is limited to the greater of $300 per
gross ton or $5 million. As with OPA, these limits of liability do not apply
where the incident is caused by violation of applicable U.S. federal safety,
construction or operating regulations, or by the responsible party's gross
negligence or wilful misconduct or if the responsible party fails or refuses to
report the incident or to cooperate and assist in connection with the substance
removal activities. OPA and CERCLA each preserve the right to recover damages
under existing law, including maritime tort law. We anticipate that we will be
in compliance with OPA, CERCLA and all applicable state regulations in the ports
where our vessels will call.
OPA requires owners and operators of vessels to establish and maintain
with the U.S. Coast Guard evidence of financial responsibility sufficient to
meet the limit of their potential strict liability under OPA. 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.
Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a
variety of initiatives intended to enhance vessel security. In December 2002,
amendments to SOLAS created a new chapter of the convention dealing specifically
with maritime security. The new chapter became effective in July 2004 and
imposes various detailed security obligations on vessels and port authorities,
most of which are contained in the International Ship and Port Facility Security
Code, or the ISPS Code. The ISPS Code is designed to protect ports and
international shipping against terrorism. After July 1, 2004, to trade
internationally, a vessel must attain an International Ship Security Certificate
from a recognized security organization approved by the vessel's flag state.
Among the various requirements are:
o on-board installation of ship security alert systems, which do not
sound on the vessel but only alerts the authorities on shore;
o the development of vessel security plans;
o ship identification number to be permanently marked on a vessel's
hull;
o a continuous synopsis record kept onboard showing a vessel's history
including, the name of the ship and of the state whose flag the ship
is entitled to fly, the date on which the ship was registered with
that state, the ship's identification number, the port at which the
ship is registered and the name of the registered owner(s) and their
registered address; and
o compliance with flag state security certification requirements.
We have implemented the various security measures addressed by SOLAS and
the ISPS Code, and our fleet is in compliance with applicable security
requirements.
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. Vessels are drydocked at least once during a
five-year class cycle for inspection of the underwater parts and for repairs
related to inspections. If any defects are found, the classification surveyor
will issue a "recommendation" which must be rectified by the shipowner within
prescribed time limits. The classification society also undertakes on request of
the flag state other surveys and checks that are required by the regulations and
requirements of that flag state. These surveys are subject to agreements made in
each individual case and/or to the regulations of the country concerned.
Most insurance underwriters make it a condition for insurance coverage
that a vessel be certified as "in class" by a classification society, which is a
member of the International Association of Classification Societies. All of our
vessels have been certified as being "in class". The Golar Mazo is certified by
Lloyds Register, and our other vessels are each certified by Det norske Veritas,
both are members of the International Association of Classification Societies.
In-House Inspections
The ship managers carry out inspections of the ships on a regular basis;
both at sea and while the vessels are in port, while we carry out inspection and
ship audits to verify conformity with managers' reports. 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.
C. Organizational Structure
As is customary in the shipping industry, we own, lease and operate our
vessels, and our newbuildings while under construction, through separate
subsidiaries. With the exception of the Golar Mazo, the Golar Frost, Gracilis
and the Granosa, we lease our vessels from lessors, who are all subsidiaries of
UK Banks. We own the Golar Mazo in a joint arrangement with the Chinese
Petroleum Corporation in which we own 60% and Chinese Petroleum owns the
remaining 40% of the vessel owning company.
The table below lists each of our significant subsidiaries, the
subsidiaries' purpose, or the vessel it owns, leases or operates, and its
country of incorporation as at June 29, 2007. Unless otherwise indicated, we own
100% of each subsidiary.
Subsidiary Jurisdiction of Incorporation Purpose
---------- ----------------------------- -------
Golar Gas Holding Company Inc. Republic of Marshall Islands Holding Company and leases
four vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Republic of Marshall Islands 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 Marshall Islands Leases Methane Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns Gracilis
Golar LNG 2220 Corporation Republic of Marshall Islands Leases Golar Winter
Golar LNG 2234 Corporation Republic of Liberia Owns Granosa
Golar LNG 2244 Corporation Republic of Liberia Owned newbuilding Hull 2244
Golar LNG 2226 Corporation Republic of Marshall Islands Leases Grandis
Golar International Ltd. Republic of Liberia Vessel management
Gotaas-Larsen International Ltd. Republic of Liberia Vessel management
Golar Management Limited Bermuda Management company
Golar Maritime Limited Bermuda Management company
Golar Management (UK) Limited United Kingdom Management company
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 and leases Golar Spirit
Golar 2215 (UK) Limited United Kingdom Operates Methane Princess
Golar Winter (UK) Limited United Kingdom Operates Golar Winter
Golar 2226 (UK) Limited United Kingdom Operates Grandis
Golar FSRU 1 Corporation Republic of Marshall Islands Contracted for the conversion of a
vessel to a FSRU
Golar Offshore Toscana Limited Cyprus Holds investment in associate, OLT
Offshore LNG Toscana S.p.A.
Golar Energy Limited Cyprus Holds licence for the construction
of a floating power station for the
generation of electricity.
D. Property, Plant and Equipment
The Company's Vessels
The following table sets forth the fleet that we operate:
Current
Year of Capacity, Current Charter
Vessel Name Delivery cbm. Flag Charterer Expiration
----------- -------- ---- ---- --------- ----------
Hilli 1975 125,000 UK BG 2011
Gimi 1976 125,000 UK BG 2010
Golar Freeze 1977 125,000 UK BG 2008
Khannur 1977 125,000 UK BG 2009
Golar Spirit 1981 128,000 MI Short-term charters 2007
Golar Mazo 2000 135,000 LIB Pertamina 2017
Methane Princess 2003 138,000 UK BG 2024
Golar Winter 2004 138,000 UK Short-term charters 2007
Golar Frost 2004 137,000 LIB Short-term charters 2007
Gracilis 2005 140,000 MI Shell 2011
Grandis 2006 145,700 IOM Shell 2011
Granosa 2006 145,700 MI Shell 2011
Key to Flags:
LIB - Liberian, UK - United Kingdom, MI - Marshall Islands, IOM - Isle of Man
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.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Overview and Background
The following discussion of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes, and the other financial information included elsewhere in this
document. Our financial statements have been prepared in accordance with U.S.
GAAP. This discussion includes forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from those
contained in the forward-looking statements.
Current Business
Our activities are currently focused on the chartering of our LNG
carriers and the development of LNG supply chain projects and potential
investments, in particular offshore regasification terminals. Six of our twelve
vessels are on fixed long-term charters, which provide us with stable and
predictable cash flows for the majority of our business.
The following table sets out our current long-term charters, and their
expirations:
Approximate Annual Current Charter Charterers Renewal
Vessel Name Charter Hire Expiration Option Periods
----------- ------------ ---------- --------------
Golar Mazo (1) $31 million / year 2017 Five years plus five years
Khannur $15.3 million / year 2009 Five years plus five years
Golar Freeze $19.6 million / year 2008 None
Gimi $15.3 million / year 2010 Five years plus five years
Hilli $15.3 million / year 2011 Five years plus five years
Methane Princess $24.3 million / year 2024 Five years plus five years
----------
(1) On a wholly owned basis and excluding operating cost recovery from charterer
(see below).
The long-term contract for the Golar Mazo is a time charter but the
economic terms are analogous to a bareboat contract, under which the vessel is
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.
During 2006, three of our vessels, the Golar Winter, the Golar Frost and
the Golar Spirit (following the end of its long-term charter with Pertamina in
November 2006), operated on short-term charters in the spot market.
In December of 2005, we entered into five-year time charters with Shell
in respect of three of our vessels. The five-year charter periods on the
respective vessels commenced in January 2006 (Grandis), March 2006 (Gracilis)
and June 2006 (Granosa). The charter rates in respect of these vessels are
market related and therefore variable. In the event that Shell does not employ
the vessels for their own use, they will market the vessels for use by third
parties. If Shell cannot find employment for these ships there could be periods
where the vessels have commercial waiting time and do not earn revenues. The
charter party agreements contain termination rights for Shell.
Vessels may operate under different charter arrangements including time
charters, voyage charters and bareboat charters, although time charters are most
common within the LNG shipping industry. A time charter is a contract for the
use of a vessel for a specific period of time at a specified daily rate,
although they may also include fees to position the vessel prior to the charter
period commencing or to reposition the vessel after the charter period. Under a
time charter, the charterer pays substantially all of the vessel voyage costs
during the charter period, which consist primarily of fuel and port charges. A
bareboat charter is also a contract for the use of a vessel for a specific
period of time at a specified daily rate but the charterer pays the vessel
operating costs as well as voyage costs. Operating costs include crew wages,
vessel supplies, routine repairs, maintenance, lubricating oils and insurance. A
voyage charter is generally for a specific voyage but the charterer does not pay
the voyage costs. We define charters for a period of less than one year as
short-term, charters for a period of between one and four years as medium-term
and charters for a period of more than four years as long-term.
The following table sets out the employment of the LNG carriers now
owned and/or operated by us during the period 2002 to 2006.
Vessel Name 2002 to 2006
----------- ------------
Golar Mazo Long-term time charter to Pertamina commenced on
delivery in January 2000.
Golar Spirit Long-term time charter to Pertamina, which ended in
November 2006. Thereafter on a short-term charter.
Khannur Long-term time charter with BG from December 2000.
Golar Freeze Medium-term time charter with BG from November 2000 and
long-term time charter with BG from March 2003.
Gimi Short-term charters until start of long-term time
charter with BG in May 2001
Hilli Long-term time charter with BG from September 2000
Methane Princess Delivered in August 2003. Short-term charters until
start of long-term time charter with BG in February 2004.
Golar Winter Delivered in April 2004. Short-term charters during 2004
and within Exmar pooling arrangement in 2005.
Short-term charters during 2006. Periods of commercial
waiting time between charters.
Golar Frost Delivered in June 2004. Short-term charters during 2004
and within Exmar pooling arrangement in 2005. Short-term
charters during 2006. Periods of commercial waiting
time between charters.
Gracilis Delivered in January 2005. Short-term charters and part
of Exmar pooling arrangement in 2005. Periods of
commercial waiting time between charters. Charter with
Shell (market rate) from March 2006.
Grandis Commenced charter with Shell (market rate) on delivery
in January 2006.
Granosa Commenced charter with Shell (market rate) on delivery
in June 2006.
During 2003 and 2004, we acquired, through market purchases, 21% of the
shares in the Korean shipping company Korea Line, which is listed on the Seoul
Stock Exchange. Between April and June 2007, we sold our entire interest in
Korea Line for total proceeds of approximately $173 million.
During November 2006, agreement was reached with OLT Energy Toscana
S.p.A to acquire 20% of the shares in the Livorno LNG regas terminal (OLT
Offshore LNG Toscana S.p.A). Included in the deal is an intention between the
parties to sell the LNG carrier Golar Frost to the project (see below for
further detail).
During April 2007, Golar was awarded by Petrobras, contracts to employ
Golar Winter and Golar Spirit as floating storage and regasification (FSRU)
vessels. The contract award was the outcome of a competitive tender process.
Both time charters are for a period of ten years with an option to extend for up
to a further five years. The total value of the contracted revenues are expected
to amount to approximately $860 million for both vessels for the ten year
initial period, assuming anticipated off-hire time. The contracts contain
purchase options for Petrobras after the second anniversary of the delivery date
of the vessel and the right for Petrobras to terminate the contracts after five
years, upon payment of a termination fee. Employment of Golar Spirit is expected
to commence during the second quarter of 2008 and the Golar Winter is expected
to commence in the second quarter of 2009. Both vessels will need to undergo
extensive modifications at shipyards, principally to install regasification
capability, before going on hire in Brazil. In December 2005, we signed a
contract with Keppel Shipyard Limited of Singapore for the conversion of an
existing LNG carrier into an FSRU and this contract and work done to date is to
be used for the Golar Spirit modification work. Contracts for modification work
for the Golar Winter will be entered into in due course.
Possible Future LNG Industry Business Activities
We currently have two vessels not committed to current contracts, but
they are all either contracted or intended for conversion to FSRUs. We plan to
find short-term charters for these vessels in the period up until they are
scheduled to enter the shipyard for conversion. Rates payable in this market may
be uncertain and volatile. The supply and demand balance for LNG carriers is
also uncertain. In the period from 2004 and as noted above, the excess supply of
vessels over demand has negatively impacted our results. During the first part
of 2006 and again in the fourth quarter of 2006 utilisation and rates in the
spot market were improved from 2005. During the latter part of 2006 charter
rates were relatively strong, but have weakened somewhat in 2007 and we cannot
be sure of the future development. The earnings from our vessels on charter to
Shell will also be impacted by the development of charter rates and demand in
the spot market. These factors could also influence the results of operations
from spot market activities and the Shell charters beyond 2007.
All future possible LNG activities are also dependant on our
management's decisions regarding the utilization of our assets and structuring
of the company. 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. Our management is
currently considering various ways to maximise the value of our assets and
projects under development. Options under consideration include, among others,
transferring assets and/or projects to a separate entity, which may then seek a
separate public listing.
Since June 2002, we have been working with the Italian offshore and
contracting company Saipem S.p.A with regard to the joint marketing and
development of Floating Storage and Regasification Units, or FSRUs. 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. Saipem provide the engineering design and technical expertise while we
contribute by identifying suitable LNG carriers as well as providing maritime
expertise.
The first project identified as a potential user of a FSRU terminal was
in Italy off the coast of Livorno and since 2002 we have been working with
Saipem and Cross Energy S.R.L. on this project. In February 2006, the project
company OLT-O was advised that the government decree approving the terminal had
been granted. Local Italian energy utility Iride S.A. (formerly known as Amga)
and Spanish energy utility Endesa are supporting the project and have taken an
ownership interest in OLT-O. In November 2006 Golar LNG acquired 20% of shares
in OLT-O, at a cost of $5 million. The project has made good progress and OLT-O
is currently in the process of reviewing a proposal for the EPCIC (Engineering,
Procurement, Construction, Installation and Commissioning) of the FSRU and
export system. The ultimate size of our investment has yet to be determined. The
permitting process for this project has been based on the Golar Frost and the
vessel will therefore be sold into the project if the project is successful.
Again in conjunction with Saipem S.p.A we have been developing a
floating power generating plant (FPGP). The concept is based on the conversion
of an existing LNG carrier by installing combined cycle gas turbine generators
capable of producing around 240 megawatts of power, which is carried ashore via
sub-sea cables. Although at an early stage of development we see this as a
logical extension of the floating regasification and storage projects, as noted
above, that we have been working on. The project has reached a significant
milestone in 2007 with the regulatory authorities, CERA, awarding Golar Energy
Ltd (a Cyprus based subsidiary of ours) a licence to construct and operate the
240 MW FPGP located some 4 miles off the coast of Cyprus at Vassilikos and a
licence to operate and produce electricity. Still pending is the licence to
import, store and use the liquefied natural gas (LNG) required to fuel the FPGP.
As there is still considerable development work to be completed it is
anticipated that the FID (Final Investment Decision) will not be taken during
2007 and the ultimate size of our potential investment has yet to be determined.
In January 2005, we announced that we had signed a heads of agreement
with Remora Technology to invest $3 million in TORP Technology and acquired an
option to use 33.4% of the capacity of TORP's offshore regasification terminal.
TORP Technology holds the rights to the HiLoad LNG Re-gasification and is
planning to build an offshore LNG regasification terminal, which could be
operational within 24 - 36 months from a final investment decision. The HiLoad
LNG Re-gasification unit is a floating L-shaped terminal that docks onto the LNG
carrier using the patented friction based attachment system (rubber suction
cups) creating no relative motion between the carrier and the terminal. The
HiLoad LNG Re-gasification unit is equipped with standard regasification
equipment (LNG loading arms, pumps and vaporizers) and can accommodate any LNG
carrier. The terminal uses seawater for heating the LNG, saving fuel costs. In
February 2005, in accordance with the heads of agreement we invested $3 million
into TORP Technology in a share issue. We currently hold a 16.2% interest in
TORP Technology. On January 12, 2006, TORP Technology filed an application for a
permit to build an offshore LNG regasification terminal, to be located 60 miles
off the Alabama coast. In addition to work on the permitting process with the
U.S Coast Guard, work is now underway marketing the terminal with the aim of
securing long-term user agreements. The ultimate size of our potential
investment has yet to be determined.
In December 2005, we signed a shareholders' agreement with The Egyptian
Natural Gas Holding Company and HK Petroleum Services in respect of the setting
up of a jointly owned company named Egyptian Company for Gas Services S.A.E., or
ECGS for the development of hydrocarbon business and in particular LNG related
business. We have expensed a total of $1 million as at December 31, 2006, in
connection with this project as fees for the development of the framework for
the project, the shareholders' agreement and the setting up of the Company.
Further fees of $1 million will be payable if and when the project company
concludes a material commercial business transaction. ECGS was incorporated in
November 2006 and will have an issued share capital of $10 million. Of this
amount 10% was paid in March 2006. Payment of the remaining value shall be made
within three years at dates to be decided by ECGS's Board of Directors. We have
50% of the voting rights and a 45% economic interest in ECGS, but would take 50%
of ECGS's losses. The ultimate size of our potential investment has yet to be
determined.
In April 2006, we signed an agreement with LNGL, an Australian publicly
listed company, to subscribe for 23 million of its shares in two tranches, at
A$0.50 cents per share. We purchased the first tranche of 13.95 million shares
in May 2006, at a cost of $5.1 million and the second tranche in June 2006, at a
cost of $3.5 million. We currently hold a 19.6% interest in LNGL. LNGL is a
company focused on developing LNG liquefaction projects acting as a link between
previously discovered but uncommercial gas reserves and potential new energy
markets. Aside from the anticipation that our investment as a shareholder in the
company will increase in value, we will also aim to participate when judged
appropriate at the project level, as a possible buyer of LNG and a provider of
shipping requirements LNGL might require in the future.
In April 2007, we signed a memorandum of understanding with a major oil
company to develop a FSRU project based on the conversion of the Golar Freeze.
It is expected a decision will be taken on the future of this project before the
end of 2007.
Factors Affecting Our Results
The principal factors that are likely to affect, or have affected and
are expected to continue to affect, our business are:
o The employment of our vessels, daily charter rates and the number of
unscheduled off-hire days
o Non-utilization for vessels not subject to fixed rate charters
o Vessel operating expenses
o The gain or loss on sale of assets
o Administrative expenses including pension and share option expense
o Useful lives of our fleet and the related depreciation and
amortization expense
o Net financial expenses including mark-to-market charges for interest
rate, foreign currency and equity swaps and interest rates and
foreign exchange gains or losses that arise on the translation of
our lease obligations and the cash deposits that secure them
o Equity in net earnings of investees and any gain or loss on sale
o The success or failure of the LNG infrastructure projects that we
are working on or may work on in the future
The impact of these factors is discussed in more detail below.
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. Six of our currently trading vessels are
fixed on long-term time charters with either fixed or predictable hire rates.
Three of our vessels are on charters with market related rates and a further
three are currently trading in the spot or short-term market. Market rates can
vary dramatically and are difficult to predict from one charter to the next.
The number of days that our vessels earn hire substantially influences
our results. Our vessels may be out of service, that is, off-hire, for three
main reasons: scheduled drydocking or special survey or maintenance, which we
refer to as scheduled off-hire; days spent waiting for a charter, which we refer
to as commercial waiting time and unscheduled repairs or maintenance, which we
refer to as unscheduled off-hire. Generally, for vessels that are under a time
charter, hire is paid for each day that a vessel is available for service.
However, one of our long-term charters provides for an allowance of a specified
number of days every two to three years that our vessel may be in drydock, the
vessel will only be off-hire 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 rateably over the period of the
voyage, earned and dividing by the number of days in the period less scheduled
off-hire. We attempt to minimize unscheduled off-hire by conducting a program of
continual maintenance for our vessels.
In January and June 2006, we took delivery of the Grandis and Granosa
respectively. On delivery both vessels commenced five-year charters with Shell.
Gracilis commenced a five-year charter with Shell in March 2006. The Shell
charter rates are variable in accordance with the market and are not therefore
predictable and also effectively liable to periods of commercial waiting time.
The Golar Frost, the Golar Winter and the Golar Spirit (following the end of its
long-term charter with Pertamina in November 2006) currently remain on the spot
market. The spot market is unpredictable and therefore these and the Shell
vessels will be subject to variable charter rates and commercial waiting time.
In the first quarter of 2007, total commercial waiting time in respect of the
spot and Shell vessels was 159 days. However, in March 2007, the Gracilis
commenced a three-year sub-charter at a fixed rate, as part of the Shell charter
arrangement. As mentioned earlier under 'Possible Future Activities' the Golar
Spirit is scheduled to enter the shipyard for conversion into a FSRU, in October
2007, with delivery during the second quarter of 2008, in connection with its
Petrobras charter. Golar Winter is also scheduled to enter a shipyard in October
2008, with delivery and commencement of charter during the second quarter of
2009.
Voyage expenses are primarily expenses such as fuel and port charges,
which are paid by us under voyage charters. Under time charters our customers
pay for such voyage expenses. However, we may incur voyage related expenses when
positioning or repositioning vessels before or after the period of a time
charter. Accordingly voyage expenses will vary depending on the number of
vessels we have operating on voyage charters. We also incur some voyage
expenses, principally a small amount of fuel costs while idle, when our vessels
are in periods of commercial waiting time, i.e. not on charter.
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. Since outsourcing our day-to-day
technical management function to third party ship managers during the first half
of 2005, this allocation of internal cost has effectively been replaced by third
party management fees. 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. Operating expenses also
include the costs associated with the pension scheme we maintain for some of our
seafarers (the Marine Scheme). Although this scheme is now closed to new
entrants the cost of provision of this benefit will vary with the movement of
actuarial variables and the value of the pension fund assets.
Gain or loss on sale of assets refers to the disposal of our vessels. In
February 2007, we agreed the sale of our newbuilding hull 2244 to an unrelated
third party for the gross consideration of $92.5 million, realizing a
significant profit of $41 million. The cash proceeds were received in March
2007. In addition, we are currently in negotiations for the proposed sale of our
vessel, the Golar Frost into the Livorno project (see discussion under 'Possible
future activities').
Administrative expenses are composed of general corporate overhead
including personnel costs, legal and professional fees, costs associated with
project development, corporate services, public filing fees, property costs and
other general administration costs. Historically, we have incurred costs
associated with the development of various projects and we expect to incur
further costs in the future.
Included within administrative expenses are pension and share option
expenses. Pension expense refers to costs associated with the pension scheme we
maintain for some of our office-based employees (the UK Scheme). Although this
scheme is now closed to new entrants the cost of provision of this benefit will
vary with the movement of actuarial variables and the value of the pension fund
assets. Share option expense refers to the compensation cost for employee stock
options granted in 2006 and later.
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. Income derived from sale and subsequently leased assets is deferred
and amortized in proportion to the amortization of the leased assets.
Interest expense depends on the overall levels of borrowing we incur and
may significantly increase when we acquire or lease ships or on the delivery of
newbuildings. During a newbuilding construction period, interest expense
incurred is capitalized in the cost of the newbuilding. Interest expense may
also change with prevailing interest rates although interest rate swaps or other
derivative instruments may reduce the effect of these changes. Currently $135
million of debt under our Methane Princess facility has a fixed interest rate.
Furthermore, $479 million of our floating rate debt and capital lease
obligations is currently swapped to a fixed rate, and we may enter into further
interest rate swap arrangements if this is considered to be advantageous to us.
Interest income will depend on prevailing interest rates and the level of our
cash deposits and restricted cash deposits.
Other financial items comprise financing fee arrangement costs,
amortization of deferred financing costs, market valuation adjustments for
interest rate, currency and equity swap derivatives and foreign exchange
gains/losses. The market valuation adjustment for our interest rate and currency
swap derivatives may have a significant impact on our results of operations and
financial position although it does not impact our liquidity. Foreign exchange
gains and losses, which were minimal prior to 2003 as our activities are
primarily denominated in US dollars, have since increased principally due to the
lease finance transactions that we entered into during 2003 and 2004, which are
all denominated in British Pounds.
Foreign exchange gains or losses arise due to the retranslation of our
capital lease obligations and the cash deposits securing those obligations. Any
gain or loss represents an unrealized gain and will arise over time as a result
of exchange rate movements. Our liquidity position will only be affected to the
extent that we choose or are required to withdraw monies from or pay additional
monies into the deposits securing our capital lease obligations or if the leases
are terminated. We have also entered into a currency swap of our lease
obligation in respect of the Golar Winter. The lease is denominated in British
Pounds (GBP) but is not fully hedged by a GBP cash deposit. We have therefore
swapped our obligation to pay rentals in GBP for an obligation to pay USD at a
fixed rate of exchange.
Equity in net earnings of investees mainly refers to our interest in
Korea Line Corporation (Korea Line). The remainder relates to our investments in
start-up companies in LNGL, OLT-O and EPSC, which are not expected to have a
significant impact on our earnings in the immediate future or until investment
decisions are taken in respect of the projects they are involved in.
Korea Line is a Korean Shipping company listed on the Korean Stock
Exchange. As of December 31, 2003, we had an interest of 10% in Korea Line and
initially accounted for the investment as an investment "available for sale".
From June 2004 through to December 31, 2006, we had an interest of 21%. As a
result of the increase in our level of ownership, which has given us the ability
to exercise significant influence over Korea Line, we changed to the equity
method of accounting for the investment. In April 2007, we disposed of 1.1
million shares in Korea Line for consideration of $77.9 million, bringing our
interest down to 10%. Accordingly, as of the date of disposal of our interest in
Korea Line we will no longer equity account for our share of Korea Line's net
earnings, although we will recognize dividends received in our income statement.
Between May and June 2007, we disposed of the balance of our Korea Line shares
for net consideration of approximately $95 million. In 2006, Korea Line
contributed $17.4 million to our net income.
Since many of the above key items are directly related to the number of
LNG carriers we own or lease and their financing, the acquisition or divestment
of additional vessels and entry into additional newbuilding contracts would
cause corresponding changes in our results.
A number of factors could substantially affect the results of operations
of our core long-term charter LNG shipping business as well as the future
expansion of any spot market business or the projects we are developing. These
factors include the pricing and level of demand and supply for natural gas and
specifically LNG. Other uncertainties that could also substantially affect these
results include changes in the number of new LNG importing countries and regions
and availability of surplus LNG from projects around the world, as well as
structural LNG market changes allowing greater flexibility and enhanced
competition with other energy sources.
Inflation
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. One of our vessel's charter is based on operating cost pass through
and 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 has and will continue to put inflationary pressure on
crew costs. Only the vessel on full cost pass through charters would be
protected from any crew cost increases.
Results of Operations
Our results for the years ended December 31, 2006, 2005 and 2004 were
affected by several key factors:
o the delivery of five newbuildings, the Golar Winter in April 2004,
the Golar Frost in June 2004, the Gracilis in January 2005, the
Grandis in January 2006 and the Granosa in June 2006;
o our vessels not on long-term charters affected by commercial waiting
time;
o lease finance arrangements that we entered into during 2004 and
2005;
o equity accounting of our acquisition of equity securities in Korea
Line;
o the movement in mark-to-market valuations of our derivative
instruments;
o share options expense on options granted in 2006; and
o restructuring expenses and project expenses.
The impact of these factors is discussed in more detail below.
Year ended December 31, 2006, compared with the year ended December 31, 2005
Operating revenues and net revenues
In accordance with U.S. GAAP, we report gross operating revenues in our
statement of operations and include voyage expenses among our operating
expenses. However, management believes, net revenues, a non-GAAP measure,
provides more meaningful information to us about the operating revenues
generated from our various charters than gross revenues. Net revenues are also
widely used by investors and analysts in the tanker shipping industry for
comparing financial performance between companies and industry averages.
Accordingly, the discussion of revenue below focuses on net revenues.
(in thousands of $, except for average daily time charter equivalent earnings )
2006 2005 Change Change
---- ---- ------ ------
Total operating revenues 239,697 171,042 68,655 40%
Voyage expenses (9,582) (4,594) (4,988) (109%)
---------------------------------- ---------- ----------- ----------- ---------
Net revenues 230,115 166,448 63,667 38%
---------------------------------- ---------- ----------- ----------- ---------
Average daily time charter
equivalent earnings 55,700 46,200 9,500 21%
---------------------------------- ---------- ----------- ----------- ---------
The increase in net revenues from 2005 to 2006 was primarily driven by
two key factors. Firstly by additional vessels added to our fleet, generating
additional revenue, and secondly stronger earnings from the spot market, most
noticeably in the fourth quarter of 2006. The strength of the spot market was
largely as a consequence of a reduced number of available LNG vessels, as a
result of ships being used as "Floating Storage" for LNG traders seeking to take
advantage of potential gains from trading both regional and seasonal price
differentials. This reduced the number of vessels available in the spot market,
which helped increase spot rates and improved utilization. However, a decline in
rates and utilization is expected in the first half of 2007 as a result of a low
level of available spot LNG cargos and an increase in the available number of
ships following the release of vessels used for floating storage, together with
additional uncommitted tonnage joining the LNG carrier fleet in 2007.
The Grandis and the Granosa were additions to the fleet following their
delivery from the shipyards in January 2006 and June 2006 respectively. The
Gracilis was delivered in early January 2005. All three of these vessels
operated under the Shell five-year charter arrangement, which for each vessel,
commenced on the later of December 2005 or on delivery. The Golar Winter and
Golar Frost operated on the spot market throughout 2005 and 2006. The Golar
Spirit traded in the spot market following the end of its long-term charter with
Pertamina in November 2006. As mentioned earlier under 'Potential future
activities', Golar Spirit will enter the shipyard for conversion into a Floating
Storage Regasification Unit (FSRU) in October 2007, with delivery in March 2008.
Consequently this will restrict its available trading days and ability to earn
spot revenues in 2007. The available trading days from these vessels in 2006 and
2005 was therefore 2,024 and 1,455 days, respectively. Commercial waiting days
were 303 for 2006 and 612 for 2005 or 15% and 42% of available trading days for
these vessels, respectively. The total net revenues generated by these vessels
in 2006 were $107.3 million as compared to $44.2 million in 2005.
Revenues are also affected by the off-hire associated with scheduled
drydockings which incur off-hire of somewhere between 15 and 60 days depending
on the length of the required docking and the time it takes to get to the
shipyard. One drydock took place in 2005 while there were two in 2006.
Unscheduled off-hire for repairs was limited to a few days in both years.
Included within net revenues are voyage expenses. All our vessels
operated under time charters albeit that some of these were for short periods of
time. Under a time charter the charterer pays voyage costs. As soon as the time
charter finishes or when the vessel is waiting for employment (commercial
waiting time) these costs are payable by us. A significant portion of the 2006
cost was incurred against the three vessels (the Grandis, Granosa and the
Gracilis) chartered to Shell with most of the remainder being incurred by the
spot trading vessels, Golar Winter and Golar Frost. As mentioned above, the
increase in voyage expenses can be attributed to the addition of the Grandis and
Granosa to the fleet in 2006.
Vessel Operating Expenses
(in thousands of $) 2006 2005 Change Change
------------------------------------- ----------- --------- ---------- ---------
Vessel operating expenses 44,490 37,215 7,275 20%
------------------------------------- ----------- --------- ---------- ---------
Average daily vessel operating costs 10,558 10,210 348 3%
------------------------------------- ----------- --------- ---------- ---------
The increase in vessel operating expenses reflects the addition of the
Grandis and the Granosa to our fleet during 2006. Although it is generally
cheaper to operate new ships than older ships, the fall in daily operating costs
that would usually accompany a reduction in the average age of the fleet did not
materialise in 2006. This is primarily due to the rising cost of recruiting
Officers for the new ships and retaining Officers on the existing fleet. In the
years ended December 31, 2006 and 2005, the average daily operating costs of our
vessels were $10,558 and $10,210, respectively. Average daily vessel operating
costs is calculated by dividing vessel costs by the number of calendar days.
Our decision in February 2005, to reorganize our vessel management
function by outsourcing day-to-day technical functions to third party managers
has however, we believe, helped contain the rise in operating costs. At $10,558,
the 2006 average operating cost per day is $1,242 lower than the 2004
pre-outsourcing equivalent, albeit with a younger fleet in 2006. Some of this
reduction is due to savings in management related costs. Prior to the April 2005
reorganization we allocated an amount of overheads, onshore costs such as
technical and operational staff support, information technology and legal,
accounting and corporate costs attributable to vessel operations, to vessel
operating expenses. Subsequent to the reorganization we no longer allocate
overhead cost but rather incur third party management fees, which effectively
represent the cost of a similar resource. The amount of overhead we allocated to
vessel operating expenses in 2005 was $1,124 per vessel day. In 2006, the
external management fees for our vessels amounts to a cost of $583 per vessel
per day.
On a like-for-like basis, technical and insurance costs are consistent
with 2005, but crew costs have increased significantly and account for most of
the 2006 increase. With a continuing shortage of LNG Officers, upward pressure
on employment costs is expected to prevail through 2007 and beyond.
Additionally, a developing shortage of Ratings is also likely to result in pay
awards that exceed historical levels. Collectively, crew costs are anticipated
to increase between 10 and 15 percent in 2007.
Administrative & Restructuring Expenses
(in thousands of $) 2006 2005 Change Change
------------------------- ------------- ------------- ---------- -------------
Administrative expenses 13,657 12,219 1,438 12%
------------------------- ------------- ------------- ---------- -------------
Restructuring expenses - 1,344 (1,344) (100%)
------------------------- ------------- ------------- ---------- -------------
The increase in administrative expenses in 2006 was mainly due to a
charge of $2.8m (2005: $nil) relating to employee stock options, which were
granted in 2006; offset by the reduction in related project expenses. We
incurred costs amounting to $0.6 million (2005: $2.2 million) in respect of the
various projects that we are developing that we have expensed to administrative
expenses. For the year ended December 31, 2006, these mainly related to the
Cyprus FPGP project and the Livorno FSRU project.
A significant proportion of our administrative expenses are incurred in
GBP at our administrative office in London. Movements in the exchange rate of
the US dollar against GBP will therefore impact our future administrative
expenses. Consequently, the movement in the average exchange rate partly
contributed to an increase in general administrative expenses in 2006.
As noted above, the restructuring expense of $1.3 million in the prior
year related to the outsourcing of our day-to-day technical functions to third
party ship managers, which resulted in the loss of some of our staff in our
London and Bilbao offices.
Depreciation and Amortization
(in thousands of $) 2006 2005 Change Change
--------------------------------------- --------- --------- --------- ----------
Depreciation and amortization 56,822 50,991 5,831 11%
--------------------------------------- --------- --------- --------- ----------
Depreciation and amortization has increased mainly due to the addition
of the Grandis at the beginning of the year and the Granosa to the fleet mid way
through 2006 as well as an increase in drydock amortization as a result of
drydocks that took place in 2006 and 2005.
Net Financial Expenses
(in thousands of $) 2006 2005 Change Change
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest income from capital lease restricted cash deposits 36,891 32,933 3,958 12%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other interest income 3,815 2,720 1,095 40%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest Income 40,706 35,653 5,053 14%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Capital lease interest expense (50,375) (39,664) (10,711) (27%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other debt related interest expense (50,923) (42,815) (8,108) (19%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest Expense (101,298) (82,479) (18,819) 23%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Mark-to-market adjustments for interest swap derivatives 5,921 14,125 (8,204) (58%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Net foreign currency adjustments for re-translation of lease
related balances and mark-to-market adjustments for lease
related currency swap derivatives 3,187 (4,011) 7,198 179%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Mark-to-market adjustments for equity swap derivative (777) 1,313 (2,090) (159%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Natural gas forward contract 2,045 - 2,045 N/a
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other (1,940) (3,920) 1,980 51%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other Financial Items, net 8,436 7,507 929 12%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
The increase in lease deposit interest income is mainly due to our
higher lease deposits in 2006, as compared to 2005, as a result of the lease
finance we entered into in respect of the Grandis. Other interest income has
increased as a result of higher US dollar interest rates partly offset by
slightly lower average cash holdings.
Capital lease interest expense has increased as a result of higher
interest rates together with the drawdown of the final installment of the
Grandis lease (prior to delivery, interest was capitalized) on its delivery in
January 2006. Whilst the leases we entered into during 2003 had cash deposits
similar in amount to their respective lease obligation the Golar Winter lease
(entered into in 2004) and the Grandis lease deposits partially securing their
lease obligations are significantly less than the lease obligation themselves.
Therefore the addition of the Golar Winter lease and the Grandis lease has had a
bigger impact on lease interest expense than it has on lease deposit interest
income.
Debt interest has increased because of additional debt incurred during
2005 and 2006 and because of increased U.S dollar interest rates. Long-term and
short-term debt obligations were $826 million as at December 31, 2005 and $876
million as at December 31, 2006. The increase is due to the addition of the $120
million Granosa loan in June 2006; offset by debt repayments of $69 million.
Mark-to-market adjustments for interest swap derivatives resulted in a
gain of $5.9 million in 2006. This is mainly due to the increase in long-term
swap rates.
Foreign exchange gains and losses arise as a result of the retranslation
of our capital lease obligations, the cash deposits securing those obligations
and the movement in the fair value of the currency swap used to hedge the Golar
Winter lease transaction. The gain in 2006 was mainly due to the depreciation of
the US dollar against British Pounds and in 2005 the loss is mainly due to an
appreciation of the US dollar against British Pounds. Of the $3.2 million net
foreign exchange gain in 2006, a gain of $20.8 million (2005: $19.7 million
loss) arose in respect of the mark-to-market valuation of the currency swap
representing the movement in the fair value. This swap hedges the currency risk
arising from lease rentals due in respect of the Golar Winter GBP lease rental
obligation, by translating GBP payments into US dollar payments at a fixed
GBP/USD exchange rate (i.e. Golar receives GBP and pays US dollars). The gain
arose due to the depreciation of the U.S dollar against the British Pound during
the year and represents an unrealised gain. The loss on retranslation of the
lease obligation in respect of the Golar Winter lease which this swap hedges,
was $20.1 million (2005: $18.5 million gain). This loss also represents an
unrealized loss.
In October 2005, we established a twelve month facility for a Stock
Indexed Total Return Swap Programme or Equity Swap Line with the Bank of Nova
Scotia, or BNS in connection with a share buy back scheme of ours as discussed
further below under 'Liquidity and Capital Resources - Derivatives'. In October
2006 this facility was extended for a further twelve months. The mark-to-market
adjustment resulted in a loss of $0.8 million in 2006 (2005: $1.4 million gain).
In May 2007, we terminated this facility and bought back the related shares from
BNS.
In 2006, the Company entered into a forward contract, which Arcadia
Limited ("Arcadia") executed on our behalf, to hedge the natural gas commodity
price prior to entering into a charter, the rate for which was partly dependent
upon the price of natural gas. Having fixed the charter rate the contract was
terminated, resulting in us recognizing a realized gain of $2.0 million in the
period. Arcadia is indirectly controlled by the Company's chairman, John
Fredriksen.
Other items represent, amongst other things, bank charges and the
amortization of debt related expenses. The decrease in 2006 is primarily due to
the write-off of $1.8 million financing fees in 2005, as a result of the
refinancing of the Golar Gas Holdings loan in March 2005.
Minority Interest and Income Taxes
(in thousands of $) 2006 2005 Change Change
---------------------------------- --------- ---------- ---------- ---------
Minority interest 7,049 8,505 (1,456) (17%)
---------------------------------- --------- ---------- ---------- ---------
Income taxes 1,257 818 439 54%
---------------------------------- --------- ---------- ---------- ---------
Minority interest, consisting of the 40% interest in the Golar Mazo,
decreased as a result of lower net income from the Golar Mazo, our 60% owning
subsidiary company. This decrease was mainly due to a smaller gain on the
mark-to-market movement of the Golar Mazo interest swap in 2006.
Income taxes relate primarily to the taxation of our UK management
operations and also UK based vessel operating companies we established
subsequent to April 2003.
Equity in Net Earnings of Investees
(in thousands of $) 2006 2005 Change Change
----------------------------------------- --------- --------- -------- ---------
Share of net earnings in Korea Line 17,360 18,492 (1,132) (6%)
----------------------------------------- --------- --------- -------- ---------
Share of losses in other investees (371) - (371) N/a
----------------------------------------- --------- --------- -------- ---------
Equity in net earnings of investees 16,989 18,492 (1,503) (8%)
----------------------------------------- --------- --------- -------- ---------
Korea Line operates in the drybulk market, as well as operating some LNG
vessels, and charters out its own vessels as well as chartered in vessels on
short-term and long-term contracts. During the latter part of 2005 the drybulk
market weakened, having had a strong first half in 2005, and this weakness
continued into 2006. However, during 2006 and particularly during the fourth
quarter (and moving into 2007) the drybulk market has strengthened significantly
and Korea Line's fourth quarter results were good. In April 2007, we disposed of
1.1 million shares in Korea Line, for proceeds of $77.9 million. As a result, as
of the date of disposal we will no longer equity account for our share of Korea
Line's net earnings. Between May and June 2007, we disposed of the balance of
our shareholding for $95 million.
Our share of losses in other investees refers to our investments in
LNGL, OLT-O and ECGS that we are accounting for under the equity method as
discussed above under 'Possible future activities'.
Net Income
As a result of the foregoing, we earned net income of $71.7 million in
2006, increased from $34.5 million in 2005.
Year ended December 31, 2005, compared with the year ended December 31, 2004
Operating Revenues
(in thousands of $) 2005 2004 Change Change
--------------------------------- ---------- ---------- ----------- ---------
Time charter revenues 171,008 159,854 11,154 7%
Voyage charter revenues - 2,412 (2,412) (100%)
Vessel management fees 34 1,144 (1,110) (97%)
--------------------------------- ---------- ---------- ----------- ---------
Total Operating revenues 171,042 163,410 7,632 5%
--------------------------------- ---------- ---------- ----------- ---------
--------------------------------- ---------- ---------- ----------- ---------
Average time charter
equivalent earnings 46,200 54,900 (8,700) (16%)
--------------------------------- ---------- ---------- ----------- ---------
The increase in revenues from 2004 to 2005 is driven by two key factors.
Firstly by additional vessels added to the fleet generating additional revenue
and secondly, offsetting this, additional commercial waiting time incurred in
2005. The decrease in voyage charter revenues was mainly due to our ships
trading in the spot market operating under time charter contracts during 2005
rather than voyage charters. The financial year 2005 has also been affected by
the existence of the pool arrangement with Exmar.
The Golar Winter and the Golar Frost were additions to the fleet
following their delivery from the shipyards in April 2004 and June 2004
respectively. The Gracilis was delivered in early January 2005. The available
trading days from these three vessels in 2005 and 2004 was therefore 1,090 and
559 days respectively. Commercial waiting days were 612 for 2005 and 206 for
2004 or 56% and 30% of available trading days respectively for these three
vessels. In 2004 another vessel, the Methane Princess, also suffered 46 days
waiting time prior to the commencement of its long-term charter with BG Group.
The earnings of the Golar Winter, Golar Frost and the Gracilis have also
been affected in 2005 by the pool arrangement with Exmar. This arrangement
commenced in October 2004 and ended in December 2005.
The total revenues generated by the Golar Winter, Golar Frost and the
Gracilis in 2005 were $19.8 million as compared to $16.2 million in 2004.
Revenues are also affected by the offhire associated with scheduled
drydockings which incur off-hire of somewhere between 15 and 60 days depending
on the length of the required docking and the time it takes to get to the
shipyard. Two drydocks took place in 2004 while there was only one in 2005.
Unscheduled off-hire for repairs was limited to a few days in both years.
Vessel Operating Expenses
(in thousands of $) 2005 2004 Change Change
------------------------------------- --------- ---------- ---------- ---------
Vessel operating expenses 37,215 35,759 1,456 4%
------------------------------------- --------- ---------- ---------- ---------
The increase in vessel operating expenses is mainly due to the addition
of the Golar Winter and the Golar Frost to our fleet during 2004 and the
Gracilis in January 2005. However, this has been partially offset by the
reduction in average daily operating costs, which has been caused by the
reduction in the average age of the fleet. It is generally cheaper to operate
new ships than it is to operate older ships. In the years ended December 31,
2005 and 2004, the average daily operating costs of our vessels were $10,210 and
$11,800, respectively.
Our average daily operating costs have also declined as a result of the
reduction in ship management related cost. Prior to April of 2005 we allocated
an amount of overheads, onshore costs such as technical and operational staff
support, information technology and legal, accounting and corporate costs
attributable to vessel operations, to vessel operating expenses. Subsequent to
our reorganisation of our technical management function and the outsource of
day-to-day technical functions to third party managers we no longer allocate
overhead cost but rather incur third party management fees which effectively
represent the cost of a similar resource. The amount of overhead we allocated to
vessel operating expenses in 2004 was $1,124 per vessel day. In 2005 the amount
of overhead allocated in respect of the first three months of the year together
with the external management fees for the balance of the year equates to a cost
of $603 per vessel per day.
Upward pressure remains on crew and in particular insurance costs, which
were increased in 2005 on a like for like basis.
Voyage expenses
(in thousands of $) 2005 2004 Change Change
------------------------------------ --------- --------- ---------- ----------
Voyage expenses 4,594 2,561 2,033 79%
------------------------------------ --------- --------- ---------- ----------
Voyage expenses increased in 2005 as compared to 2004 even though voyage
revenues decreased by 100% from $2.4 million in 2004 to $nil in 2005. Our
vessels operated mostly under time charters during 2004 and 2005 albeit that
some of these time charters were for short periods of time. Under a time charter
the charterer pays voyage costs, mainly fuel costs, themselves. As soon as the
time charter finishes or when the vessel is waiting for employment (commercial
waiting time) these costs are payable by us. Therefore, whilst there was less
voyage charter revenue in 2005 voyage expenses were incurred for the periods of
commercial waiting, in respect of our vessels not on long-term charters, which
has meant voyage costs have actually increased. The level of voyage expenses we
incur will be largely dependent on the number of vessels we have operating on
voyage charters and the amount of commercial waiting time we have.
Administrative & Restructuring Expenses
(in thousands of $) 2005 2004 Change Change
------------------------------------- --------- ---------- --------- ----------
Administrative expenses 12,219 8,471 3,748 44%
------------------------------------- --------- ---------- --------- ----------
Restructuring expenses 1,344 - 1,344 N/a
------------------------------------- --------- ---------- --------- ----------
Administrative expenses have increased significantly in 2005. While some
of this increase was due to overall general cost increases, including additional
accounting and auditing costs associated with Sarbanes Oxley Act compliance, the
increase is mainly due to project related expenses. We incurred costs amounting
to $2.2 million in respect of the various projects that we are developing that
we have expensed to administrative expenses. These costs related in particular
to the Cyprus FPGP project, the FSRU conversion contract with Keppel and our
agreements and joint development in Egypt.
A significant proportion of our administrative expenses are incurred in
British Pounds (GBP) at our office in London. Movements in the exchange rate of
the U.S. dollar against GBP will therefore impact our future administrative
expenses. The movement in the average exchange rate was not however materially
significant between 2004 and 2005 in terms of its impact on administrative
expenses.
As noted above, since February 2005 we have employed two third party
ship managers to assist with our day-to-day fleet management activities. This
has resulted in the loss of some staff in our London and Bilbao offices and the
related restructuring cost expensed during 2005 was $1.3 million. The reduction
in staff numbers has reduced our salary costs in 2005, however, as a large part
of these costs were allocated to vessel operating expenses, because the staff in
question were part of the internal ship management function, the net impact on
administrative expenses has not been significant.
Depreciation and Amortization
(in thousands of $) 2005 2004 Change Change
--------------------------------------- --------- --------- --------- ---------
Depreciation and amortization 50,991 40,502 10,489 26%
--------------------------------------- --------- --------- --------- ---------
Depreciation and amortization has increased due to the addition of the
Golar Winter and the Golar Frost to the fleet part way through 2004 and the
Gracilis in January 2005 as well as an increase in drydock amortization as a
result of drydocks that took place in 2004 and 2005.
Net Financial Expenses
(in thousands of $) 2005 2004 Change Change
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest income from capital lease restricted cash deposits 32,933 30,509 2,424 8%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other interest income 2,720 1,370 1,350 99%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest Income 35,653 31,879 3,774 12%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Capital lease interest expense (39,664) (33,850) 5,814 17%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other debt related interest expense (42,815) (28,137) 14,678 52%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Interest Expense (82,479) (61,987) 20,492 33%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Mark-to-market adjustments for interest swap derivatives 14,125 5,581 8,544 153%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Net foreign currency adjustments for re-translation of lease
related balances and mark-to-market adjustments for lease
related currency swap derivatives (4,011) 1,496 (5,507) (368%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Mark-to-market adjustments for equity swap derivative 1,313 - 1,313 N/a
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other (3,920) (2,273) (1,647) (73%)
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
Other Financial Items, net 7,507 4,804 2,703 56%
--------------------------------------------------------------- ---------------- --------------- -------------- ----------------
The increase in lease deposit interest income is due to moderately
higher deposit balances as a result of the finance lease transaction that we
entered into in April 2004 in respect of the Golar Winter. It is also due to
moderately higher British Pound interest rates in 2005, with an average received
rate of 4.76% as compared to 4.58% in 2004; our lease deposit balances being
held in British Pounds. Other interest income has increased as a result of
higher U.S. dollar interest rates partly offset by slightly lower average cash
holdings.
Capital lease interest expense has increased due to higher interest
rates but also because of the addition of the Golar Winter lease in April 2004;
i.e. there was a full year's interest in 2005 but only 9.5 months in 2004.
The addition of the Golar Winter lease has affected both lease interest
expense and interest income. However, while the leases we entered into during
2003 had cash deposits similar in amount to their respective lease obligation
the Golar Winter lease deposit partially securing the lease obligations is
significantly less than the lease obligation itself. Therefore the addition of
the Golar Winter lease has had a bigger impact on lease interest expense than it
has on lease deposit interest income.
Debt interest has increased because of additional debt incurred during
2004 and 2005 and because of increased U.S. dollar interest rates. Long-term and
short-term debt obligations were $703 million as at December 31, 2004 and $826
million as at December 31, 2005. The increase is due to the addition of the $120
million Gracilis (previously known as the Golar Viking) loan in January 2005
together with an additional $58 million in respect of the refinancing of the
Golar Gas Holdings loan in March 2005 (as discussed further under 'Liquidity and
Capital Resources'); offset by debt repayments of $55 million, excluding the
refinancing repayment in respect of the Golar Gas Holdings loan.
Mark-to-market adjustments for interest swap derivatives have resulted
in increased gains in 2005 as compared to 2004. This is mainly due to the
increase in long-term swap rates. In addition we entered into an additional $215
million of interest rate swaps during 2005, which contributed a mark-to market
gain of $3.8 million.
Foreign exchange gains and losses arise as a result of the retranslation
of our capital lease obligations, the cash deposits securing those obligations
and the movement in the fair value of the currency swap used to hedge the Golar
Winter lease transaction. The gain in 2004 was mainly due to the depreciation of
the U.S. dollar against British Pounds and in 2005 the loss is mainly due to an
appreciation of the U.S. dollar against British Pounds. Of the $4 million net
foreign exchange loss in 2005, a loss of $19.7 million (2004: $6.7 million gain)
arose in respect of the mark-to-market valuation of the currency swap
representing the movement in the fair value. This swap hedges the currency risk
arising from lease rentals due in respect of the Golar Winter GBP lease rental
obligation, by translating GBP payments into U.S. dollar payments at a fixed
GBP/USD exchange rate (i.e. Golar receives GBP and pays U.S. dollars). The loss
arose due to the appreciation of the U.S. dollar against the British Pound
during the year. This loss represents an unrealized loss. The gain on
retranslation of the lease obligation in respect of the Golar Winter lease which
this swap hedges, was $18.5 million (2004: $7.6 million loss). This gain also
represents an unrealized gain.
In October 2005, we established a twelve month facility for a Stock
Indexed Total Return Swap Programme or Equity Swap Line with BNS in connection
with a share buy back scheme of ours as discussed further below under 'Liquidity
and Capital Resources - Derivatives'. The gain of $1.4 million represents the
mark-to-market valuation of this derivative.
Other items represent, among other things, bank charges and the
amortization of debt related expenses. The increase in 2005 is due to the write
off of $1.8 million of financing fees as a result of the refinancing of the
Golar Gas Holdings loan in March 2005.
Minority Interest and Income Taxes
(in thousands of $) 2005 2004 Change Change
---------------------------------------- -------- --------- -------- ---------
Minority interest 8,505 7,575 930 12%
---------------------------------------- -------- --------- -------- ---------
Income taxes 818 420 398 95%
---------------------------------------- -------- --------- -------- ---------
Minority interest, consisting of the 40% interest in the Golar Mazo,
increased as a result of higher net income of the Golar Mazo owning subsidiary
company. This increase was partly due to slightly improved operating results and
partly because of a greater gain on the mark-to-market movement of the Golar
Mazo interest swap in 2005. Income taxes relate to the taxation of our UK
management operations and also UK based vessel operating companies we
established subsequent to April 2003. Our income tax charge is expected to
increase as a function of the number of vessels we operate in the UK and the
profitability of the UK companies.
Equity in net earnings of investee
(in thousands of $) 2005 2004 Change Change
---------------------------------------- --------- --------- ---------- --------
Equity in net earnings of investee 18,492 13,015 5,477 42%
---------------------------------------- --------- --------- ---------- --------
During the first half of 2004, we increased our interest in Korea Line
from 10% at December 31, 2003 to 21% by June 2004. In accordance with Accounting
Principles Board Opinion No.18 "The Equity Method of Accounting for Investments
in Common Stock" we changed our accounting treatment of the investment to the
equity method of accounting to reflect our ability to exercise significant
influence over the investee subsequent to December 31, 2003. The investment had
previously been accounted for as "available for sale". The year ended December
31, 2004 was the first year in which we have included a share of earnings in
Korea Line. Korea Line operates in the drybulk market, as well as operating some
LNG vessels, and charters out its own vessels as well as chartered in vessels on
short-term and long-term contracts. During 2004 and the first half of 2005 Korea
Line capitalized on a good drybulk market and made significantly more operating
profit than in 2003. Their LNG vessels, as well as some of their other vessels,
are on long-term charters and therefore produce steady returns. During the
second half of 2005, the drybulk market has declined and charter rates have
reduced significantly and in the third quarter of 2005 they actually made a
loss. Overall the net result of Korea Line was the same in 2004 as it was in
2005 even though operating profits were higher in 2004. The reason for this is
primarily that a new shipping tax system has been introduced in Korea and so
Korea Line's tax charge in 2005 is greatly reduced from that in 2004. The reason
why our share of earnings in 2005 is higher than in 2004 when their net results
were very similar for both years is that we built up our shareholding from 10%
at the beginning of 2004 to 21% by June 2004. The fact that our percentage share
was lower for this period and that Korea Line made the majority of the year's
profit during the first half of 2004 has meant that we actually have a lower
share of net earnings in 2004 as compared to 2005.
Net Income
As a result of the foregoing, we earned net income of $34.5 million in
2005, reduced from $55.8 million in 2004.
B. Liquidity and Capital Resources
Liquidity
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 and leasing arrangements with 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 and
investment in the development of our project portfolio, funding working capital
and maintaining cash reserves against fluctuations in operating cash flows.
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, except in the case of our equity swap and a natural gas forward
contract, which is discussed further below under "Derivatives".
Revenues from our time charters are received monthly in advance.
Inventory requirements, consisting primarily of fuel, lubricating oil and spare
parts, are low due to the major cost, fuel, of these items being paid for by the
charterer under time charters. We believe our current resources are sufficient
to meet our working capital requirements for our current business; however, the
development of our project portfolio, in particular our FSRU conversion project
(in respect of initial capital outlays and loss of earnings of the vessel during
modification) will result in increased working capital requirements. The
financing of our projects is discussed further below.
We may also require additional working capital in relation to our three
vessels operating in the spot market depending on their employment and possibly
in respect of the three ships we have chartered to Shell, as these charters are
at market related rates.
At December 31, 2006, we estimated average daily cash breakeven rates
for our six vessels exposed to the spot market as approximately $42,000 per day.
These are the daily rates that these vessels must earn to cover payment of
budgeted operating costs, estimated interest costs and scheduled loan and lease
principal repayments.
In February 2007, we entered into an agreement to sell our newbuilding
hull 2244 to an unrelated third party for the gross consideration of $92.5
million. The sale proceeds were received on March 30, 2007.
Between April and May 2007, we disposed of our entire interest in Korea
Line for total consideration of approximately $173 million.
Based on our improved results in 2006 and proceeds from the sale of our
newbuilding hull 2244, in March 2007, we declared a cash dividend of $0.50 per
share representing a total cash payment of $32.8 million, paid at the end of
March 2007. In May 2007, in connection with our 2007, first quarter results, we
declared a further dividend of $0.50 per share and in June 2007, and we declared
an extraordinary dividend, of $0.75 per share following the sale of our
remaining Korea Line shares.
In May 2007, we terminated our equity swap and bought back the related
1,241,300 shares, at a net cost of $15.4 million.
The following table summarizes our cash flows from operating, investing
and financing activities:
(in millions of U.S.$)
Year Ended December 31,
2006 2005 2004
---- ---- ----
Net cash provided by operating activities 117.2 71.0 82.0
Net cash used in investing activities (269.0) (213.2) (356.1)
Net cash provided by financing activities 146.2 152.8 207.8
Net (decrease) increase in cash and cash equivalents (5.6) 10.6 (66.3)
Cash and cash equivalents at beginning of year 62.2 51.6 117.9
Cash and cash equivalents at end of year 56.6 62.2 51.6
In addition to our cash and cash equivalents noted above, as at December
31, 2006, 2005 and 2004, we had short-term restricted cash of $52.3, $49.4
million and $42.0 million, respectively, that represents balances retained on
restricted accounts in accordance with certain lease and loan requirements, and
for 2006 and 2005, certain requirements in respect of our equity swap. These
balances act as security for and over time are used to repay lease and loan
obligations. Our long-term restricted cash balances were $778.2 million, $696.3
million and $714.8 million as at December 31, 2006, 2005 and 2004 respectively.
These balances act as security for our capital lease obligations and the
majority is released over time in line with the repayment of our lease
obligations.
Cash generated from operations increased in 2006 from 2005 largely due
to the addition of two vessels (the Grandis and Granosa) to the fleet and higher
earnings from our vessels on the spot market arising from improved spot rates
and higher utilization in 2006. In 2005, cash generated from operations
decreased from 2004 principally because of the commercial waiting time incurred
by our newly delivered vessels. The Golar Winter, Golar Frost and the Gracilis
(delivered in January 2005) suffered a substantial amount of commercial waiting
time and therefore traded at a loss in 2005.
Net cash used in investing activities has principally been in respect of
our newbuilding program together with the funding of deposits to provide
security for capital lease obligations. Our investment in our newbuildings,
principally purchase installments, was $240.9 million, $140.0 million and $278.6
million for 2006, 2005 and 2004 respectively. Our deposits made to provide
security for capital lease obligations, net of withdrawals, were withdrawals of
$2.2 million in 2006 and deposits of $64.4 million and $47.2 million for 2005
and 2004, respectively. The vast majority of the funds for these deposits came
from related financing activities. We invested $21.9 million in the purchase of
equity securities in Korea Line in 2004. In 2005 we invested $3.0 million in
TORP technology. In 2006, we invested $8.6 million in LNGL, $5.0 million in
OLT-O and $0.5 million in other investments. Our other investing cash flows
relate to additions to vessels and equipment (including payments relating to the
FSRU), which amount to $16.7 million, $5.7 million and $8.2 million for 2006,
2005 and 2004 respectively.
Net cash provided by financing activities is principally generated from
funds from new debt and lease finance offset by debt repayments. As noted above
a proportion of our new debt and lease finance in 2005 and 2004 was used to make
deposits to provide security for the obligations.
In 2006, we drew down a total of $120 million in debt in relation to the
Granosa and received proceeds of $103 million in respect of lease financing
arrangements in relation to the Grandis. We made total debt repayments of $69.4
million in 2006.
In 2005, we drew down a total of $420 million, of which $120 million
related to the financing for the Gracilis and $300 million was in respect of the
refinancing of an existing loan. We also received $44.8 million in respect of
lease financing arrangements in relation to the Grandis, all of which was
invested as a pre-delivery security deposit. We made debt repayments of $297.2
million in 2006, of which $242.2 million related to the refinancing and new $300
million loan noted above. We also repurchased 50,000 of our shares during 2005
at a cost of $0.7 million.
During 2004, we drew down a total of $110 million in debt in relation to
the Golar Frost and received proceeds of $163.7 million from lease financing
arrangements in relation to the Golar Winter. Repayments of debt totalled $62.3
million in 2004.
Borrowing activities
Long-Term Debt
The following is a summary of the Company's long-term debt facilities.
Refer to Note 24 to the Company's audited Consolidated Financial Statements
included herein for detail.
Mazo facility
In November 1997, Osprey, our predecessor, entered into a secured loan
facility of $214.5 million in respect of the vessel, the Golar Mazo. This
facility, which we assumed from Osprey, bears floating rate interest of LIBOR
plus a margin. The loan is repayable in bi-annual installments ending in June
2013. The debt 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.
Golar Gas Holding facility
In March 2005, we refinanced two existing loan facilities in respect of
five of our vessels with a banking consortium. This new first priority loan, or
Golar Gas Holding facility, is for an amount of $300 million. The loan accrues
floating interest at a rate per annum equal to the aggregate of LIBOR plus a
margin. The loan has a term of six years and is repayable in 24 quarterly
installments and a final balloon payment of $79.4 million payable on April 14,
2011. The loan is secured by the assignment to the lending banks of a mortgage
given to Golar Gas Holding Company Inc., a subsidiary of ours, by the lessor of
the five vessels that are part of the Five Ship Leases.
Methane Princess facility
In August 2003, we refinanced an existing loan in connection with a
lease finance arrangement in respect of the newbuilding the Methane Princess.
The new facility, which we refer to as the Methane Princess facility, is for
$180 million and is repayable in monthly installments with a final balloon
payment of $116.4 million payable in August 2015. It accrues a floating rate of
interest of LIBOR plus a margin up to the date the vessel was delivered to the
Charterer under the BG Charter and thereafter at LIBOR plus a reduced margin
determined by reference to Standard and Poors, or 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". The loan is secured by the assignment
to the lending bank of a mortgage given to us by the lessor of the Methane
Princess Lease.
Golar Frost facility
In March 2004, we entered into a secured loan facility for an amount of
$110.0 million, in respect of our newbuilding 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, with a term of four years.
It is repayable in seven semi-annual installments together with a final balloon
payment of $97.5 million due in June 2008, pursuant to the lending banks
approval of an extension of the loan for one year in June 2006. In June 2007,
the lending banks approved a further extension of one year in respect of this
facility. As noted above under 'Possible future activities' if the Livorno
project goes ahead we expect the Golar Frost to be sold into the project. The
proceeds will then be used to settle the loan obligation or the loan will be
refinanced.
Gracilis facility
In January 2005, we entered into a secured loan facility for an amount
of $120.0 million, for the purpose of financing our newbuilding, the Gracilis,
which we refer to as the Gracilis facility. The facility bears a floating rate
of interest of LIBOR plus a margin, has an initial term of five years and is
repayable in 20 quarterly installments, commencing in April 2005 and a final
balloon payment of $101 million.
Granosa facility
In April 2006, we entered into a secured loan facility for an amount of
$120.0 million, for the purpose of financing our newbuilding, the Granosa, which
we refer to as the Granosa facility. The facility bears a floating rate of
interest of LIBOR plus a margin, has an initial term of five years and is
repayable in 20 quarterly installments, commencing in May 2006 and a final
balloon payment of $92.6 million.
After these transactions, as at December 31, 2006, we had total
long-term debt outstanding of $876.4 million, compared with $825.7 million and
$703.0 million at December 31, 2005 and 2004, respectively.
The outstanding debt of $876.4 million as of December 31, 2006, was
repayable as follows:
Year ending December 31,
(in millions of U.S.$)
2007 72.6
2008 167.2
2009 73.5
2010 172.6
2011 212.1
2012 and later 178.4
-------------------------------------------------------------- -------------
876.4
============================================================== =============
The margins we pay under our current loan agreements are over and above
LIBOR at a fixed or floating rate and currently range from 0.80% to 1.5%.
Capital Lease Obligations
The following is a summary of the Company's Capital Lease Obligations.
Refer to Note 25 to the Company's audited Consolidated Financial Statements
included herein for detail.
Five ship leases
In April 2003, we entered into our first finance lease arrangement. We
sold five, 100 percent owned subsidiaries to a financial institution in the
United Kingdom (UK), which we refer to as the UK Lessor. The subsidiaries were
established in Bermuda specifically to own and operate one LNG vessel as their
sole asset. Subsequent to the sale of the five entities, we entered into 20-year
leases in respect of each of the five vessels under five separate lease
agreements, which we refer to as the Five Ship Leases. Our obligation to the UK
Lessor is primarily secured by letters of credit provided by other banks, which
are themselves secured by cash deposits. Lease rentals are payable quarterly. At
the end of each quarter the required value of the letters of credit 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, in our cash deposits securing the LC's, released as a result of the
reduction in the required LC amount are available to pay the lease rentals due
at the end of the same quarter.
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, 2006, was
$535.6 million
Methane Princess lease
In August 2003, we entered into our second finance lease arrangement. We
novated the Methane Princess newbuilding contract prior to completion of
construction and subsequently leased the vessel from the same financial
institution in the UK, which we refer to as the UK Lessor. Our obligation to the
UK Lessor is primarily secured by a letter of credit provided by another bank,
which is itself secured by a cash deposit. Lease rentals are payable quarterly.
At the end of each quarter the required value of the letter of credit to secure
the present value of rentals due under the lease will be recalculated taking
into account the rental payment due at the end of the quarter. The surplus
funds, in our cash deposits securing the LC, released as a result of the
reduction in the required LC amount are available to pay the lease rentals due
at the end of the same quarter.
The profile of the Methane Princess Lease is such that the lease
liability continues to increase until 2014 and thereafter decreases over the
period to 2034 being the primary term of the lease. The value of the deposit
used to obtain a letter of credit to secure the lease obligation as of December
31, 2006, was $185.7 million.
Golar Winter lease
In April 2004, we signed a lease agreement in respect of our newbuilding
the Golar Winter, to which we refer to as the Golar Winter Lease, with another
UK bank (the 'Lessor') for a primary period of 28 years. Under the agreement we
received an amount of $166 million. 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 deposited $39 million with the LC bank as security for the
letter of credit at the same time we entered into the lease. The effective
amount of net financing received is therefore $127 million before fees and
expenses.
The Golar Winter Lease is denominated in British pounds while its cash
deposit is denominated in USD. The value of the cash deposit used to obtain a
letter of credit to partly secure the lease obligation in respect of the Golar
Winter as of December 31, 2006, was $48.6 million. In order to hedge the
currency risk arising from the GBP lease rental obligation we have entered into
a 28 year currency swap, to swap all lease rental payments into U.S. dollars at
a fixed GBP/USD exchange rate, (i.e. Golar receives GBP and pays U.S. dollars).
Grandis lease
In April 2005, we signed a lease agreement in respect of our
newbuilding, the Grandis, to which we refer to as the Grandis Lease, with
another UK bank (the 'Grandis Lessor') for a primary period of 30 years. Under
the agreement we received an amount of $150 million of which $47 million was
received in April 2005 with the remainder received on delivery of the vessel in
January 2006. Our obligations to the lessor under the lease are secured by
(inter alia) a letter of credit provided by another UK bank. This letter of
credit is secured by a cash deposit of $45 million, which we deposited at the
same time as entering into the lease. The Grandis lease obligation and
associated cash deposit are both denominated in USD. The effective amount of net
financing is therefore $105 million, before fees and expenses.
As at December 31, 2006, the Company is committed to make minimum rental
payments under capital lease, as follows:
Year ending December 31, Five Methane Golar
ship Princess Winter Grandis
Leases Lease Lease Lease Total
------ ----- ----- ----- -----
(in thousands of U.S.$)
2007 28,423 7,400 12,501 9,294 57,618
2008 29,863 7,733 12,501 9,294 59,391
2009 31,357 8,069 12,501 9,294 61,221
2010 32,924 8,405 12,501 9,294 63,124
2011 34,571 8,746 12,501 9,294 65,112
2012 and later 773,730 365,046 256,268 239,809 1,634,853
------------------------------------------------------ ------------- --------------- -------------- ------------- --------------
Total minimum lease payments 930,868 405,399 318,773 286,279 1,941,319
Less: Imputed interest (413,158) (225,659) (151,102) (136,366) (926,285)
------------------------------------------------------ ------------- --------------- -------------- ------------- --------------
Present value of minimum lease payments 517,710 179,740 167,671 149,913 1,015,034
====================================================== ============= =============== ============== ============= ==============
For all our leases other than the Grandis lease, lease rentals include
an interest element that is accrued at a rate based upon GBP LIBOR. In relation
to the Winter Lease, we have converted our GBP LIBOR interest obligation to USD
LIBOR by entering into the cross currency swap referred to above. We receive
interest income on our restricted cash deposits at a rate based upon GBP LIBOR
for the Five Ship Leases and the Methane Princess Lease, and based upon USD
LIBOR for the Winter Lease. Our lease obligation in respect of the Grandis and
the associated cash deposit are denominated in USD. Seven of our leases are
therefore denominated in British pounds. The majority of this British pound
capital lease obligation is hedged by British pound cash deposits securing the
lease obligations or by currency swap. This is not however a perfect hedge and
so the movement in currency exchange rate between the U.S. dollar and the
British pound will affect our results (see Item 11- Foreign currency risk).
In the event of any adverse tax rate changes or rulings, or in the event
of a termination, we would be required to return all or a portion of, or in
certain circumstances significantly more than, the upfront cash benefits that we
have received, together with the fees that were financed in connection with our
lease financing transactions, post additional security or make additional
payments to our lessors which would increase the obligations noted above. The
upfront benefits we have received equates to the cash inflow we received in
connection with the six leases we entered into during 2003 (in total
approximately (pound)41 million British pounds).
Debt and lease restrictions
Our existing financing agreements (debt and leases) impose operating and
financing restrictions on us which may significantly limit or prohibit, among
other things, our ability to incur additional indebtedness, create liens, sell
capital shares of subsidiaries, make certain investments, engage in mergers and
acquisitions, purchase and sell vessels, transfer funds from subsidiary
companies to us, enter into time or consecutive voyage charters or pay dividends
without the consent of our lenders and lessors. In addition, our lenders and
lessors may accelerate the maturity of indebtedness under our financing
agreements and foreclose upon the collateral securing the indebtedness upon the
occurrence of certain events of default, including our failure to comply with
any of the covenants contained in our financing agreements. Various debt and
lease agreements of the Company contain covenants that require compliance with
certain financial ratios. Such ratios include equity ratio, working capital
ratios and earnings to net debt ratio covenants, minimum net worth covenants,
minimum value clauses, and minimum free cash restrictions in respect of our
subsidiaries and us. With regards to cash restrictions we have covenanted to
retain at least $25 million of cash and cash equivalents on a consolidated group
basis.
As of December 31, 2006, 2005 and 2004, we complied with all covenants
of our various debt and lease agreements.
In addition to mortgage security, some of our debt is also
collateralized through pledges of shares by guarantor subsidiaries of Golar.
Derivatives
We use financial instruments to reduce the risk associated with
fluctuations in interest rates. We have a portfolio of interest rate swaps that
exchange or swap floating rate interests to fixed rates, which from a financial
perspective, hedges our obligations to make payments based on floating interest
rates. We also enter into derivative instruments for trading purposes, in order
to manage our exposure to the risk of movements in the price of natural gas,
which can impact our charter rates, and to some extent for speculative purposes.
As at December 31, 2006, our interest rate swap agreements effectively fixed our
floating interest rate exposure on $479.1 million of floating rate debt. Our
swap agreements have expiry dates between 2007 and 2015 and have fixed rates of
between 3.03% and 6.43%.
As noted above (see 'Golar Winter Lease') we have entered into a
currency swap to hedge an exposure to British pounds in respect of the Golar
Winter Lease.
In October 2005, we established a twelve month facility for a Stock
Indexed Total Return Swap Programme or Equity Swap Line with BNS in connection
with a share buy back scheme of ours, whereby BNS may acquire an amount of
shares up to a maximum of 3.2 million in us during the accumulation period, and
we carry the risk of fluctuations in the share price of those acquired shares.
BNS is compensated at their cost of funding plus a margin. In October 2006, this
facility was extended by a further twelve months. As at December 31, 2006, BNS
had acquired a total of 1,070,000 Golar shares under the Programme at an average
price of $11.15. The asset of $0.8 million represents the mark-to-market
valuation of this derivative. In April 2007, BNS had acquired a further 171,300
shares at an average price of $13.35. In May 2007, we terminated this facility
and bought back the 1,241,300 underlying shares at a net cost of $14.8 million.
We enter into natural gas forward contracts and futures for trading
purposes in order to manage our exposure to the risk of movements in the spot
and future price of natural gas in particular where this could impact our
charter rates, and to some extent for speculative purposes. During 2006, the
Company entered into a forward contract, which Arcadia executed on our behalf,
to hedge the natural gas commodity price prior to entering into a charter, the
rate for which was partly dependent upon the price of natural gas. Having fixed
the charter rate the contract was terminated, resulting in us recognizing a
realized gain of $2.0 million in 2006.
Newbuilding Contracts and Capital Commitments
As at December 31, 2006, we had one newbuilding still under construction
with amounts outstanding and payable under the contract totalling approximately
$116 million, excluding financing costs, which were due in installments over the
period to June 2007. However, in February 2007, we entered into an agreement to
sell newbuilding hull 2244 to an unrelated third party and received sale
proceeds of $92.5 million in March 2007. As of June 29, 2007, we had no
newbuildings under construction.
In December 2005, we entered into a contract for the conversion of an
existing LNG carrier into a LNG FSRU; this contract is to be used to modify the
Golar Spirit.
The following table sets out as at December 31, 2006 and June 29, 2007
the estimated timing of the remaining commitments under our present contracts
noted above. Actual dates for the payment of installments may vary due to
progress of the construction/conversion.
(in millions of U.S. $) June 29, 2007 December 31, 2006
-------------------------------- ------------------- --------------------------
2007 14.1 155.1
2008 7.6 7.6
-------------------------------- ------------------- --------------------------
Total 21.7 162.7
================================ =================== ==========================
Critical Accounting Estimates
The preparation of the Company's financial statements in accordance with
U.S GAAP requires that management make estimates and assumptions affecting the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The following is a
discussion of the accounting policies applied by the Company that are considered
to involve a higher degree of judgement in their application. See Item 18 -
Financial Statements: Note 2 - Summary of Significant Accounting Policies.
Vessels and impairment
Our vessels are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. In
assessing the recoverability of our vessels' carrying amounts, we must make
assumptions regarding estimated future cash flows and estimates in respect of
residual or scrap value. We estimate those future cash flows based on the
existing service potential of our vessels, which on average for our fleet
extends over a 26-year period. We have assumed that we will be able to renew our
time charter contracts at their existing or lower rates rather than at escalated
rates, and that the costs of operating those vessels reflects our average
operating costs experienced historically. Factors we consider important which
could affect recoverability and trigger impairment include significant
underperformance relative to expected operating results and significant negative
industry or economic trends.
We follow a traditional present value approach, whereby a single set of
future cash flows is estimated. If the carrying value of a vessel were to exceed
the undiscounted future cash flows, we would write the vessel down to its fair
value, which is calculated by using a risk-adjusted rate of interest. We believe
that the carrying value of many of our vessels is below their fair value because
we allocated negative goodwill to certain vessels associated with our
acquisition from Osprey. Since inception, our vessels have not been impaired.
Time Charters
We account for time charters of vessels to our customers as operating
leases and record the customers' lease payments as time charter revenues. We
evaluate each contract to determine whether or not the time charter should be
treated as an operating or capital lease, which involves estimates about our
vessels' remaining economic useful lives, the fair value of our vessels, the
likelihood of a lessee renewal or extension, incremental borrowing rates and
other factors.
Our estimate of the remaining economic useful lives of our vessels is
based on the common life expectancy applied to similar vessels in the LNG
shipping industry. The fair value of our vessels is derived from our estimate of
expected present value, and is also benchmarked against open market values
considering the point of view of a potential buyer. The likelihood of a lessee
renewal or extension is based on current and projected demand and prices for
similar vessels, which is based on our knowledge of trends in the industry,
historic experience with customers in addition to knowledge of our customers'
requirements. The incremental borrowing rate we use to discount expected lease
payments and time charter revenues are based on the rates at the time of
entering into the agreement.
A change in our estimates might impact the evaluation of our time
charters, and require that we classify our time charters as capital leases,
which would include recording an asset similar to a loan receivable and removing
the vessel from our balance sheet. The lease payments to us would reflect a
declining revenue stream to take into account our interest carrying costs, which
would impact the timing of our revenue stream.
Capital Leases
We have sold several of our vessels to, and subsequently leased the
vessels from UK financial institutions that routinely enter into finance leasing
arrangements. We have accounted for these arrangements as capital leases. As
identified in our critical accounting policy for time charters, we make
estimates and assumptions in determining the classification of our leases. In
addition, these estimates, such as incremental borrowing rates and the fair
value or remaining economic lives of the vessels, impact the measurement of our
vessels and liabilities subject to the capital leases. Changes to our estimates
could affect the carrying value of our lease assets and liabilities, which could
impact our results of operations. To illustrate, if the incremental borrowing
rate had been lower than our initial estimate this would result in a higher
lease liability being recorded due to a lower discount rate being applied to its
future lease rental payments.
We have also recorded deferred credits in connection with some of these
lease transactions. The deferred credits represent the upfront cash inflow
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 or adverse tax ruling), the lessor will be
entitled to adjust the rentals under the relevant lease so as to maintain its
after tax position, except in limited circumstances. Any increase in rentals is
likely to affect our ability to amortize the deferred credits, increase our
interest cost and consequently could have a negative impact on our results and
operations and our liquidity.
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 23 of the notes to our Consolidated Financial Statements included in this
annual report and include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in compensation. In
accordance with U.S. GAAP, actual results that differ from our assumptions are
accumulated and amortized over future periods and therefore, generally affect
our recognized expense and recorded obligation in such future periods. We are
guided in selecting our assumptions by our independent actuaries and, while we
believe that our assumptions are appropriate, significant differences in our
actual experience or significant changes in our assumptions may materially
affect our pension obligations and our future pensions expense.
Recently Issued Accounting Standards and Securities and Exchange Commission
Rules
In February 2007, the Financial Accounting Standards Board ('FASB')
issued SFAS 159, The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB Statement No. 115, which permits
entities to measure financial instruments and certain other items at fair value.
The objective is to improve financial reporting by mitigating volatility in
reported earnings caused by measuring related assets and liabilities differently
without having to apply complex hedge accounting provisions. This Statement is
expected to expand the use of fair value measurement, which is consistent with
the Board's long-term measurement objectives for accounting for financial
instruments. It applies to Golar effective January 1, 2008. The Company is
currently evaluating the impact of FAS 159 on its consolidated results of
operations, financial position and cash flows.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. The statement does not
require new fair value measurements, but is applied to the extent that other
accounting pronouncements require or permit fair value measurements. The
statement emphasizes that fair value is a market-based measurement that should
be determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies will be required to disclose the extent
to which fair value is used to measure assets and liabilities, the inputs used
to develop the measurements, and the effect of certain of the measurements on
earnings (or changes in net assets) for the period. This Statement is effective
for Golar on January 1, 2008. The Company is currently evaluating the potential
impact of FAS 157 on its consolidated results of operations, financial position
and cash flows.
In March 2006, the FASB issued SFAS 156 an Amendment of SFAS 140, which
addresses the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, SFAS 156 addresses
recognition and measurement of separately recognized servicing assets and
liabilities, clarifies when an obligation to service financial assets should be
separately recognized, requires fair value measurement, and permits choice of
amortization or FV methods for subsequent measurement. This Statement was
effective for Golar on January 1, 2007 and did not have a significant impact on
its consolidated results of operations, financial position and cash flows.
In February 2006, the Financial Accounting Standards Board issued SFAS
155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140. SFAS 155 provides a fair value measurement option
for certain hybrid financial instruments that contain an embedded derivative
that would otherwise require bifurcation and requires that beneficial interests
in securitized financial assets be analyzed to determine whether they are
freestanding derivatives or whether they are hybrid instruments that contain
embedded derivatives requiring bifurcation. SFAS 155 also provides clarification
on specific points related to derivative accounting. SFAS 155 was effective for
Golar for the period beginning January 1, 2007, and did not have a significant
impact on its consolidated results of operations, financial position, and cash
flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes an Interpretation of FASB Statement No. 109 ('FIN
48'). FIN 48 prescribes a recognition threshold and measurement attributes for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
accounting in interim periods, disclosure, and transition. This interpretation
was effective for Golar on January 1, 2007. The adoption of FIN 48 did not have
a material impact on the Company's financial statements.
In October 2006, the FASB issued this FSP, which addresses certain
technical corrections FASB Statement No. 123(R). Specifically, it amends (a)
paragraph A240(d)(1) to exempt nonpublic entities from disclosing the aggregate
intrinsic value of outstanding fully vested share options (or share units) and
share options expected to vest, (b) paragraph A102 of Illustration 4(b) to
revise the computation of the minimum compensation cost that must be recognized
to comply with Paragraph 42 of Statement 123(R), (c) paragraph A170 of
Illustration 13(e) to indicate that at the date the illustrative awards were no
longer probable of vesting, any previously recognized compensation cost should
have been reversed, and (d) paragraph E1 to amend the definition of short-term
inducement to exclude an offer to settle an award. This FSP was effective for
Golar on January 1, 2007, and did not have a material impact on the consolidated
results of operations, financial position, and cash flows.
In October 2006, the FASB issued this FSP which amends FSP FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FASB Statement No. 123(R), to
clarify that when an instrument held by an individual that is no longer an
employee is modified or exchanged in connection with an equity restructuring or
business combination, the instrument would still be subject to the recognition
and measurement provisions of FASB Statement No. 123(R), Share-Based Payment, if
certain criteria are met. The new guidance states that a modification of an
instrument does not include an exchange or a change to the terms of an award if
that exchange or change is made only to reflect an equity restructuring or
business combination provided that (1) either there is no increase in value to
the holders of the instrument or the change in the terms of the award is not
done in contemplation of an equity restructuring or a business combination and
(2) all holders of the same class of equity instruments (for example, stock
options) are treated in a similar manner. The provisions of FSP FAS 123(R)-5
were effective for Golar on January 1, 2007, and did not impact its consolidated
results of operations, financial position, and cash flows.
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
We are committed to make rental payments under operating leases for
office premises under operating leases. The future minimum rental payments under
our non-cancellable operating leases for office premises are disclosed below in
the tabular disclosure of contractual obligations.
F. Contractual Obligations
The following table sets forth our contractual obligations for the
periods indicated as at December 31, 2006:
(in millions of U.S.$) Total Due in Due in 2008 - Due in Due
Obligation 2007 2009 2010 - 2011 Thereafter
------------------------------------------------- ------------ ------------ ---------------- ---------------- --------------
Long-Term Debt (3) 876.4 72.6 240.7 384.7 178.4
Interest commitments on long-term debt (5) 184.9 43.1 76.7 37.2 27.9
Capital Lease Obligations (1) 1,015.0 2.2 10.2 19.5 983.1
Interest commitments on capital lease 926.3 55.4 110.4 108.7 651.8
obligations
Operating Lease Obligations 0.5 0.2 0.3 - -
Purchase Obligations
FSRU conversion (4) 31.5 23.9 7.6 - -
Egyptian venture (6) 4.5 - 4.5 - -
Other Long-Term Liabilities (2) - - - - -
------------------------------------------------- ------------ ------------ ---------------- ---------------- --------------
Total 3,039.1 197.4 450.4 550.1 1,841.2
================================================= ============ ============ ================ ================ ==============
(1) In the event of any adverse tax rate changes or rulings our lease
obligations could increase significantly (see discussion above under
"Capital Lease Obligations").
(2) Our consolidated balance sheet as of December 31, 2006, includes $85 million
classified as "Other long-term liabilities" of which $60 million represents
deferred credits related to our capital lease transactions and $28 million
represents 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 26 of the Notes to Consolidated Financial
Statements for additional information regarding our other long-term
liabilities.
(3) As of December 31, 2006, taking into account the hedging effect of our
interest rate swaps, $462 million of our long-term debt and capital lease
obligations, net of restricted cash deposits, was floating rate debt which
accrued interest based on USD LIBOR, and $614 million of debt accrued
interest at a fixed interest rate.
(4) This refers to the contracted conversion costs of an existing LNG vessel
into a LNG FSRU.
(5) Our interest commitment on our long-term debt is calculated based on an
assumed average USD LIBOR of 5.25% and taking into account our various
margin rates and interest rate swaps associated with each debt.
(6) In December 2005, we signed a shareholders' agreement in connection with the
setting up of a jointly owned company to be named Egyptian Company for Gas
Services S.A.E ("ECGS"), which was to be established to develop hydrocarbon
business and in particular LNG related business in Egypt. As at December 31,
2006, we were committed to subscribe for common shares in ECGS for a further
consideration of $4,500,000 payable within three years of incorporation, at
dates to be determined by ECGS's Board of Directors.
Furthermore, as at December 31, 2006, we had a commitment to pay $1 million
to a third party, contingent upon the conclusion of a material commercial
business transaction by ECGS as consideration for work performed in
connection with the setting up and incorporation of ECGS. This liability has
been excluded from the above table, as the timing of any cash payment is
uncertain.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
Information concerning each of our directors and executive officers as
at June 29, 2007 is set forth below.
Name Age Position
---- --- --------
John Fredriksen 63 Chairman of the Board, President and Director
Tor Olav Troim 44 Deputy Chairman of the Board, Vice-President and
Director
Kate Blankenship 42 Director and Audit Committee member
Frixos Savvides 55 Director and Audit Committee member
Gary Smith 51 Chief Executive Officer of Golar Management
Graeme McDonald 50 Group Technical Director of Golar Management
Graham Robjohns 42 Chief Financial Officer of Golar Management
Charlie Peile 53 Head of Commercial of Golar Management
Jan Flatseth 63 General Manager of the Fleet of Golar Management
Georgina Sousa 57 Company Secretary
Biographical information with respect to each of our directors and executive
officers is set forth below.
John Fredriksen has served as the Chairman of the Board, President and a
director of the Company since our inception in May 2001. He has been the Chief
Executive Officer, Chairman of the Board, President and a director of Frontline
Ltd, or Frontline, since 1997. Frontline is a Bermuda based tanker owner and
operator listed on the New York Stock Exchange (NYSE), the London Stock Exchange
(LSE) and the Oslo Stock Exchange (OSE). Mr. Fredriksen has served for over nine
years as a director of Seatankers Management Co. Ltd, or Seatankers, a ship
operating company and an affiliate of the Company's principal shareholder. Mr.
Fredriksen indirectly controls World Shipholding, a Cyprus Company who is our
principal shareholder. Mr. Fredriksen has been a director of Golden Ocean Group
Limited, or Golden Ocean, a Bermuda company listed on the Oslo Stock Exchange,
since November 2004. Mr Fredriksen has served as a director and the Chairman of
SeaDrill Limited, or SeaDrill, a Bermuda company listed on the Oslo Stock
Exchange, since May 2005.
Tor Olav Troim has served as our Vice-President and a director since our
inception in May 2001 and was our Chief Executive Officer from May 2001 until
April 2006. Mr. Troim graduated as M.Sc Naval Architect from the University of
Trondheim, Norway in 1985. His careers include Portfolio Manager Equity in
Storebrand ASA (1987- 1990), and Chief Executive Officer for the Norwegian Oil
Company DNO AS (1992-1995). Since 1995 Mr. Troim has been a Director of
SeaTankers Management in Cyprus. In this capacity he has acted as Chief
Executive Officer for the public company Frontline. Mr. Troim was also the Chief
Executive Officer of Seadrill Ltd. until the recent takeover and integration of
Smedvig ASA. Mr. Troim is currently Vice Chairman of these two companies and is
a director and Chairman of Ship Finance International Limited (NYSE). In
addition he is currently a director, Vice-Chairman and Chief Executive Officer
of Knightsbridge Tankers Limited (NASDAQ) and a member of the Boards in the
public companies Golden Ocean Group Limited (OSE), Aktiv Kapital ASA (OSE) and
Marine Harvest ASA (OSE).
Kate Blankenship has served as a director since July 2003 and was Company
Secretary from our inception in 2001 until November 2005. She served as our
Chief Accounting Officer from May 2001 until May 31, 2003. She has been a
director of Frontline since August 2003 and served as Chief Accounting Officer
and Secretary of Frontline between 1994 and October 2005. Mrs. Blankenship has
been Chief Financial Officer of Knightsbridge since April 2000 and was Secretary
of Knightsbridge from December 2000 until March 2007. Mrs. Blankenship has
served as a director of Ship Finance since July 2003, Seadrill since May 2005
and Golden Ocean since November 2004. She is a member of the Institute of
Chartered Accountants in England and Wales.
Frixos Savvides joined the company as a director in August 2005. Mr. Savvides
was a founder of the audit firm PKF Savvides and Partners in Cyprus and held the
position of Managing Partner until 1999 when he became Minister of Health of the
Republic of Cyprus. He held this office until 2003. Mr. Savvides is currently a
senior independent business consultant, and holds several Board positions. Mr.
Savvides has been a director of Frontline since July 31, 2005. He is a Fellow of
the Institute of Chartered Accountants in England and Wales.
Gary Smith joined as our Chief Executive Officer in March 2006. Mr. Smith has an
extensive background in the petroleum industry. Most recently Mr. Smith worked
for STASCO (Shell Trading & Shipping Co) in London in the position of General
Manager Commercial Shipping. In this position he worked closely with all
existing Shell LNG projects and LNG trading activities and supported the
development of several new LNG projects. Mr. Smith also served as President and
Director of SIGGTO (Society of International Gas Tanker & Terminal Operators)
during the period from 2002 to 2005.
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.
Graham Robjohns has served as our Group Financial Controller since May 2001, as
our Chief Accounting Officer since June 1, 2003 and as our Chief Financial
Officer since November 2005. 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 seven 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.
Jan Flatseth joined the company in September 2006 as General Manager Fleet.
Prior to joining Golar he held the position of Assistant Technical Director and
Fleet Manager responsible for the LNG/C fleet of BW Gas. Mr. Flatseth has a
M.Sc. degree in Naval Architecture/Marine Engineering from the Norwegian
Institute of Technology. He spent 13 years at DNV and was the Head of Section
Gas and Chemical Carriers until 1982. After leaving DNV, he served in senior
management positions at Helge R. Myhre/Kvaerner Shipping from 1982 -1995. The
company was a subsidiary of the industrial group, Kvaerner, set up to own and
operate gas carriers. Mr. Flatseth remained with the company when Havtor
acquired Kvaerner Shipping and a year later when it all became part of the large
shipping group Bergesen DY ASA (BW Gas).
Georgina E. Sousa has served as Secretary of the Company and its subsidiaries
since November 30, 2005. She is currently Vice-President-Corporate Services of
Consolidated Services Limited, a Bermuda Management Company having joined the
firm in 1993 as Manager of Corporate Administration. From 1976 to 1982 she was
employed by the Bermuda law firm of Appleby, Spurling & Kempe as a Company
Secretary and from 1982 to 1993 she was employed by the Bermuda law firm of Cox
& Wilkinson as Senior Company Secretary.
B. Compensation
For the year ended December 31, 2006, we paid to our directors and
executive officers listed above (ten persons) aggregate cash compensation of
$1,858,486 and an aggregate amount of $75,895 for pension and retirement
benefits. For a description of our stock option plan please refer to "Option
Plan" below.
C. Board Practices
Our directors do not receive any benefits upon termination of their
directorships. The Board established an audit committee in July 2005, which is
responsible for overseeing the quality and integrity of our financial statements
and its accounting, auditing and financial reporting practices, our compliance
with legal and regulatory requirements, the independent auditor's
qualifications, independence and performance and our internal audit function.
Our audit committee consists of two members, Kate Blankenship and Frixos
Savvides, who are also both Company Directors. Except for an audit committee the
Board does not have any other committees.
Exemptions from certain Nasdaq corporate governance rules
Nasdaq rules permit Nasdaq to provide exemptions from the Nasdaq
corporate governance standards to a foreign issuer when those standards are
contrary to a law, rule or regulation of any public authority exercising
jurisdiction over such issuer or contrary to generally accepted business
practices in the issuer's country of domicile. In accordance with Nasdaq rules
and regulations we are relying on an exemption from certain corporate governance
standards that are contrary to law, rules regulations or generally accepted
business practices of Bermuda. The exemption, and the practices that we follow,
are described below:
o In keeping with Bermuda law and the rules of the Oslo Stock
Exchange, we are exempt from Nasdaq's requirement to maintain three
independent directors. We currently have one member of the Board of
Directors, Frixos Savvides, who is independent according to Nasdaq's
standards for independence.
o In keeping with common practices among companies listed on the Oslo
Stock Exchange, we are exempt from certain Nasdaq requirements
regarding our audit committee. The Company's management is
responsible for the proper and timely preparation of the Company's
annual reports, which are audited by independent auditors.
o In lieu of a compensation committee comprised of independent
directors, the full Board of Directors determines compensation.
o In lieu of nomination committee comprised of independent directors,
the full Board of Directors regulates nominations.
D. Employees
As of December 31, 2006, we employed approximately 20 people in our
offices in London and Oslo. We contract with independent ship managers to
manage, operate and to provide crew for our vessels. We also employ
approximately 580 seagoing employees, of which approximately 40 are employed
directly by us and 540 are employed through our independent ship managers.
E. Share ownership
The following table sets forth information as of June 29, 2007,
regarding the total amount of common shares owned by all of our officers and
directors on an individual basis.
Percentage of
Common Shares of Common Shares
Director or Officer $1.00 each Outstanding
------------------- ----------------- -----------
John Fredriksen* 30,652,000 46.75%
Tor Olav Troim - - - -
Gary Smith - - - -
Graeme McDonald - - - -
Charlie Peile 195 **
Jan Flatseth - - - -
Graham Robjohns 500 **
Kate Blankenship 5,000 **
Frixos Savvides - - - -
Georgina Sousa - - - -
----------
* 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 Holdings Limited, which is, in turn, indirectly
controlled by Mr. Fredriksen.
** Less than one %
In addition to the above shareholdings, as of June 29, 2007, Mr. Troim
has a forward contract with an obligation to buy 200,000 of our shares. The
contract, which was acquired in the open market, expires on December 3, 2007.
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 ten years from
its date of adoption.
As of June 29, 2007, 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, 2007 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
**300,000 $14.80 (1) January 2011
-------
500,000
Tor Olav Troim *100,000 $5.75 July 2011
**150,000 $14.80 (1) January 2011
-------
250,000
Frixos Savvides **75,000 $14.80 (1) January 2011
Kate Blankenship **75,000 $14.80 (1) January 2011
Charlie Peile **50,000 $14.80 (1) January 2011
Graeme McDonald **75,000 $14.80 (1) January 2011
Graham Robjohns **75,000 $14.80 (1) January 2011
Gary Smith ***200,000 $13.14 (1) June 2011
Jan Flatseth ****75,000 $13.13 (1) March 2012
----------
* These options vested in July 2002.
** These options were granted in January 2006 and vest over a period of 3
years.
*** These options were granted in June 2006 and vest over a period of 3 years.
**** These options were granted in March 2007 and vest over a period of 3 years.
(1) The exercise price of options, granted in 2006 and later, is reduced
by the value of dividends, on a per share basis. As of June 29, 2007, the
Company has declared dividends totalling $1.75 per share, of which $1.00 has
been paid.
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
beneficial ownership of the common shares with respect to (i) each person who is
known by the Company to own more than 5% of the Company's outstanding common
shares; and (ii) all directors and officers as a group as of June 29, 2007.
Information for certain holders is based on their latest filings with the SEC or
information delivered to us. The number of shares beneficially owned by each
person or entity is determined under SEC rules and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under SEC
rules a person or entity beneficially owns any shares that the person or entity
has the right to acquire as of August 29, 2007 (60 days after June 29, 2007)
through the exercise of any stock option or other right.
Common Shares
Owner Amount Per cent
----- ------ --------
World Shipholding Ltd. (1) 30,652,000 47.65%
All Directors and Officers as a group (ten persons) 31,299,362 48.18%
(1) Our Chairman, John Fredriksen, indirectly controls World Shipholding Ltd.
Our major shareholders have the same voting rights as all other holders
of our Common Shares.
The Company is not aware of any arrangements, the operation of which may
at a subsequent date result in a change in control of the Company.
As at June 20, 2007, 3,432,258 of the Company's common shares are held
by 20 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
John Fredriksen. In the year ended December 31, 2006, Seatankers provided us
with insurance administration services. In the year ended December 31, 2006,
management fees to Seatankers of $35,000 per annum were incurred by Golar. As at
December 31, 2006, no amounts were due to Seatankers in respect of these fees
incurred. In the year ended December 31, 2006, we received supplier rebates from
Seatankers of $166,929. As at December 31, 2006, no amounts were due from
Seatankers in respect of these rebates. In addition, certain amounts were
recharged at cost between both companies. As at December 31, 2006, the Company
owed $1,839 to Seatankers in respect of these recharges.
Frontline Management (Bermuda). Frontline Management is a subsidiary of
Frontline, a publicly listed company, and is indirectly controlled by John
Fredriksen. In the year ended December 31, 2006, we received supplier rebates
from Frontline of $400,530. As at December 31, 2006, an amount of $350,530 was
due from Frontline in respect of these rebates. In addition certain amounts were
recharged at cost between both the companies. As at December 31, 2006, an amount
of $176,144 was due from Frontline in respect of these recharges.
Arcadia Limited. Arcadia is indirectly controlled by John Fredriksen.
During 2006, we entered into a forward contract, which Arcadia executed on our
behalf, to hedge the natural gas commodity price prior to entering into a
charter, the rate for which was partly dependent upon the price of natural gas.
Having fixed the charter rate the contract was terminated, resulting in
recognition of a realized gain of $2,045,000 in the year ended December 31,
2006. As at December 31, 2006, no amounts were outstanding. In June 2007 we
entered into a further natural gas forward contract, which Arcadia again
executed on our behalf. The contract represents the purchase of the equivalent
of one cargo of LNG at a future date and the sale of the same quantity at a
later future date.
Faraway Maritime Limited. During the year ended December 31, 2006,
Faraway Maritime Shipping Inc., which is 60% owned by us and 40% owned by China
Petroleum Corporation, or CPC, paid dividends totalling $5.5 million.
World Shipholding Ltd. World Shipholding is indirectly controlled by
John Fredriksen. In March 2007, World Shipholding provided us with a short-term
loan of $25 million. The loan was repaid on March 30, 2007. In connection with
this loan, we paid interest of $37,000, to World Shipholding.
C. Interests of Experts and Counsel
Not applicable
ITEM 8. FINANCIAL INFORMATION.
A. Consolidated Statements and Other Financial Information
See Item 18
Legal Proceedings
There are no legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse effect on us, our financial
condition, profitability, liquidity or our results of operations. From time to
time in the future we or our subsidiaries may be subject to various legal
proceedings and claims in the ordinary course of business.
Dividend Distribution Policy
Any future dividends declared will be at the discretion of the board of
directors and will depend upon our financial condition, earnings and other
factors. Our ability to declare dividends is also regulated by Bermuda law,
which prohibits us from paying dividends if, at the time of distribution, we
will not be able to pay our liabilities as they fall due or the value of our
assets is less than the sum of our liabilities, issued share capital and share
premium.
In addition, since we are a holding company with no material assets
other than the shares of our subsidiaries through which we conduct our
operations, our ability to pay dividends will depend on our subsidiaries'
distributing to us their earnings and cash flow. Some of our loan agreements
limit or prohibit our and our subsidiaries' ability to make distributions to us
without the consent of our lenders.
On February 28, 2007, the Board declared a dividend of $0.50 per share
that was paid on March 26, 2007.
On May 23, 2007, the Board declared a further dividend of $0.50 per
share that was paid on June 19, 2007.
On June 6, 2007, the Board declared an extraordinary dividend of $0.75
per share, to be paid on or about July 3, 2007.
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 five most recent fiscal years
from July 12, 2001 and for the first quarter of 2007, 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 2007 NOK83.50 NOK76.25 $13.62 $12.00
Fiscal year ended December 31
2006 NOK102.00 NOK71.00 $15.29 $12.00
2005 NOK98.50 NOK66.00 $15.75 $10.31
2004 NOK125.50 NOK85.50 $18.66 $12.31
2003 NOK99.00 NOK35.00 $14.95 $5.00
2002 NOK62.00 NOK35.00 $7.75 $6.00
The following table sets forth, for each full financial quarter for the two most
recent fiscal years from January 1, 2005, 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, 2006
First quarter NOK102.00 NOK87.25 $15.29 $12.90
Second quarter NOK91.75 NOK71.00 $14.38 $12.00
Third quarter NOK93.00 NOK80.50 $14.40 $12.83
Fourth quarter NOK90.00 NOK78.25 $14.04 $12.51
OSE NASDAQ
High Low High Low
---- --- ---- ---
Fiscal year ended December 31, 2005
First quarter NOK98.50 NOK78.00 $15.75 $12.50
Second quarter NOK86.75 NOK72.00 $13.37 $11.46
Third quarter NOK93.00 NOK77.50 $14.50 $11.98
Fourth quarter NOK90.00 NOK66.00 $13.63 $10.31
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 2007 NOK111.50 NOK95.50 $18.69 $16.05
April 2007 NOK98.00 NOK81.50 $16.70 $13.02
March 2007 NOK83.00 NOK79.00 $13.62 $12.78
February 2007 NOK83.50 NOK77.50 $13.40 $12.41
January 2007 NOK82.00 NOK76.25 $12.80 $12.00
December 2006 NOK82.25 NOK78.25 $13.44 $12.58
* On May 31, 2007, the exchange rate between the Norwegian Kroner and the U.S.
dollar was NOK6.044 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. At the
2006 Annual General Meeting of the Company the shareholders voted to amend the
Company's Bye-Law 110. The purpose of this amendment was to provide for a change
to the requirements for the form and signatories to the seal of the Company.
These amendments updated the Bye-laws to conform more to current Bermuda
practice. These amended Bye-Laws of the Company as adopted by shareholders on
December 1, 2006 are filed as Exhibit 1.2 to 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% of the exercisable voting rights. The meetings
may be held at any place, in or outside of Bermuda, that is not a jurisdiction
which applies a controlled foreign company tax legislation or similar regime.
Special meetings may be called at the discretion of the board of directors and
at the request of shareholders holding at least one-tenth of all outstanding
shares entitled to vote at a meeting. Annual shareholder meetings and special
meetings must be called by not less than seven days' prior written notice
specifying the place, day and time of the meeting. The board of directors may
fix any date as the record date for determining those shareholders eligible to
receive notice of and to vote at the meeting.
Directors. Our directors are elected by a majority of the votes cast by
the shareholders in general meeting. The quorum necessary for the transaction of
the business of the board of directors may be fixed by the board but unless so
fixed, equals those individuals constituting a majority of the board of
directors who are present in person or by proxy. Executive directors serve at
the discretion of the board of directors.
The minimum number of directors comprising the board of directors at any
time shall be two. The board of directors currently consists of 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 of directors.
Subject to the provisions of the Companies Act, a director of a company
may, notwithstanding his office, be a party to or be otherwise interested in any
transaction or arrangement with that company, and may act as director, officer,
or employee of any party to a transaction in which the company is interested.
Under our Bye-laws, provided an interested director declares the nature of his
or her interest immediately thereafter at a meeting of the board of directors,
or by writing to the directors as required by the Companies Act, a director
shall not by reason of his office be held accountable for any benefit derived
from any outside office or employment. The vote of an interested director,
provided he or she has complied with the provisions of the Companies Act and our
Bye-laws with regard to disclosure of his or her interest, shall be counted for
purposes of determining the existence of a quorum.
Dividends. Holders of common shares are entitled to receive dividend and
distribution payments, pro rata based on the number of common shares held, when,
as and if declared by the board of directors, in its sole discretion. Any future
dividends declared will be at the discretion of the board of directors and will
depend upon our financial condition, earnings and other factors.
As a Bermuda exempted company, we are subject to Bermuda law relating to
the payment of dividends. We have been advised by Bermuda counsel, Appleby,
Spurling & Kempe, that we may not pay any dividends if, at the time the dividend
is declared or at the time the dividend is paid, there are reasonable grounds
for believing that, after giving effect to that payment;
o we will not be able to pay our liabilities as they fall due; or
o the realizable value of our assets, is less than an amount that is
equal to the sum of our
(a) liabilities,
(b) issued share capital, which equals the product of the par value
of each common share and the number of common shares then
outstanding, and
(c) share premium, which equals the aggregate amount of
consideration paid to us for such common shares in excess of
their par value.
In addition, since we are a holding company with no material assets, and
conduct our operations through subsidiaries, our ability to pay any dividends to
shareholders will depend on our subsidiaries' distributing to us their earnings
and cash flow. Some of our loan agreements currently limit or prohibit our
subsidiaries' ability to make distributions to us and our ability to make
distributions to our shareholders.
C. Material contracts
None
D. Exchange Controls
None
E. Taxation
The following discussion is based upon the provisions of the United
States Internal Revenue Code of 1986, as amended, or the Code, existing and
proposed United States Treasury Department regulations, administrative rulings,
pronouncements and judicial decisions, all as of the date of this Annual Report.
Taxation of Operating Income: In General
United States Taxation of our Company
Shipping income that is attributable to transportation that begins or
ends, but that does not both begin and end, in the United States will be
considered to be 50% 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% derived from sources within the United
States. We do not engage in transportation that gives rise to 100% U.S. source
income.
Shipping income attributable to transportation exclusively between
non-U.S. ports will be considered to be 100% derived from sources outside the
United States. Shipping income derived from sources outside the United States
will not be subject to U.S. federal income tax.
Unless exempt from U.S. taxation under Section 883 of the Code we will
be subject to U.S. federal income taxation, in the manner discussed below, to
the extent our shipping income is derived from sources within the United States.
Based upon our anticipated shipping operations, our vessels will be
operated in various parts of the world, including to or from U.S. ports. For the
three calendar years 2004, 2005 and 2006, the U.S. source income that we derived
from our vessels trading to U.S. ports was $22,005,000, $15,675,000 and
$13,100,000, 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 $880,000, $627,000 and $524,000, respectively.
Application of Code Section 883
We have made special U.S. tax elections in respect of all our
vessel-owning or vessel-operating subsidiaries incorporated in the United
Kingdom that are potentially subject to U.S. federal income tax on shipping
income derived from sources within the United States. The effect of such
elections is to ignore or disregard the subsidiaries for which elections have
been made as separate taxable entities.
The ensuing discussion is applicable to, and references to
"subsidiaries" shall mean, only those of our subsidiaries that are incorporated
under the laws of jurisdictions other than the United Kingdom. Under Section 883
of the Code and the final regulations promulgated thereunder, we, and each of
our subsidiaries, will be exempt from U.S. taxation on our respective U.S.
source shipping income, if both of the following conditions are met:
o we and each subsidiary are organized in a qualified foreign country
which is one that grants an equivalent exemption from tax to
corporations organized in the United States in respect of the
shipping income for which exemption is being claimed under Section
883, which we refer to as "the country of organization requirement";
and
o either
- more than 50% of the value of our stock is treated as owned,
directly or indirectly, by individuals who are "residents" of
qualified foreign countries, which we refer to as the "ownership
requirement"; or
- our stock is "primarily and regularly traded on an established
securities market" in our country of organization, another
qualified foreign country, or the United States, which we refer
to as the "publicly-traded requirement."
The U.S. Treasury Department has recognized (i) Bermuda, our country of
incorporation and (ii) the country of incorporation of each of our subsidiaries
that has earned shipping income from sources within the United States, as a
qualified foreign country. Accordingly, we and each such subsidiary satisfy the
country of organization requirement.
Due to the public nature of our shareholdings, we do not believe that we
will be able to substantiate that we satisfy the "ownership requirement".
However, as described below, we believe that we will be able to satisfy the
"publicly-traded requirement."
Our stock was "primarily traded" on the Oslo Stock Exchange, an
established securities market in a qualified foreign country, during 2006. The
final regulations provide, in pertinent part, that our stock will not be
considered to be "regularly traded" on an established securities market for any
taxable year in which 50% or more of the outstanding shares of our stock, by
vote and value, is owned, for more than half the days of the taxable year, by
persons who each own 5% or more of the vote and value of the outstanding shares
of that stock, known as the "5% override rule". The 5% override rule will not
apply, however, if in respect of each category of shipping income for which
exemption is being claimed, 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% or more of the total vote and value of our stock for more than half
the number of days during the taxable year which we refer to as the "5% override
exception".
Based on our public shareholdings for 2006, we were not subject to the
5% override rule for 2006 in respect of all U.S. source shipping income, other
than certain bareboat charters described below. Therefore, we believe that in
respect of all U.S. source shipping income, other than such bareboat charter
income, we satisfy the publicly-traded requirement and we and each of our
subsidiaries are entitled to exemption from U.S. federal income tax under
Section 883 in respect of our respective U.S.-source shipping income.
The jurisdiction of residence of one of our more than 5% shareholders
does not provide the requisite equivalent exemption to U.S. corporations for
bareboat charter income. However, the bareboat charters in which we engaged were
between wholly-owned subsidiaries of the Company. The Company believes that the
reciprocal exemption requirement for bareboat charter income was meant to apply
to bareboat charters of vessels between third parties and not to inter-company
bareboat charters. Therefore, the Company intends to take the position on its
U.S. federal income tax return that it is not subject to the 5% override rule
with respect to its bareboat charter income. The IRS or a court may disagree
with our position and deny our claim for exemption under Section 883. If the
bareboat charter income derived by the Company is not exempt from U.S. federal
income taxation, the Company would be subject to a 4% tax imposed as described
below. We estimate that the amount of such tax for 2006 would be approximately
$234,000, which we have fully provided for.
To the extent that we are subject to the 5% override rule in future
years (as a result of further changes in ownership of our shares), it may be
difficult for us to establish that we qualify for the 5% override exception. If
we were not eligible for the exemption under Section 883, our U.S.-source
shipping income would be subject to U.S. federal income tax as described in more
detail below.
Taxation in Absence of Internal Revenue Code Section 883
To the extent the benefits of Section 883 are unavailable with respect
to any item of U.S. source income earned by us or by our subsidiaries, such
U.S.-source shipping income would be subject to a 4% 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% of the shipping income earned by us or
our subsidiaries would be derived from U.S. sources, the maximum effective rate
of U.S. federal income tax on such shipping income would never exceed 2 percent.
For the calendar year 2006, we and our subsidiaries would be subject to tax
under Code Section 887 in the aggregate amount of $524,000.
Gain on Sale of Vessels
If we and our subsidiaries qualify for exemption from tax under Section
883 in respect of our respective U.S. source shipping income, the gain on the
sale of any vessel earning such U.S. source income should likewise be exempt
from tax under Section 883. If we and our subsidiaries are unable to qualify for
exemption from tax under Section 883, the owner and seller of such vessel may be
considered to be engaged in the conduct of a U.S. trade or business. As a
result, any U.S. source gain on the sale of a vessel may be partly or wholly
subject to U.S. federal income tax as "effectively connected" income at a
combined rate of up to 54.5%. However, to the extent circumstances permit, we
intend to structure sales of our vessels in such a manner, including effecting
the sale and delivery of vessels outside of the United States, so as to not give
rise to U.S. source gain.
U.S. Taxation of U.S. Holders
The term "U.S. holder" means a beneficial owner of our common shares
that is a U.S. citizen or resident, U.S. corporation or other U.S. entity
taxable as a corporation, an estate, the income of which is subject to U.S.
federal income taxation regardless of its source, or a trust if a court within
the U.S. is able to exercise primary jurisdiction over the administration of the
trust and one or more U.S. persons have the authority to control all substantial
decisions of the trust and owns our common shares as a capital asset, generally,
for investment purposes.
If a partnership holds our common shares, the tax treatment of a partner
will generally depend upon the status of the partner and upon the activities of
the partnership. If you are a partner in a partnership holding our common
shares, you are encouraged to consult your tax advisor.
Distributions
Any distributions made by us with respect to our common shares to a U.S.
holder will generally constitute dividends, to the extent of our current or
accumulated earnings and profits, as determined under U.S. federal income tax
principles. We expect that dividends paid by us to a non-corporate U.S. holder
will be eligible for preferential U.S. federal income tax rates (through 2010)
provided that the U.S. non-corporate holder has owned our stock for more than 60
days in the 121-day period beginning 60 days before the date on which our stock
becomes ex-dividend. However, there is no assurance that any dividends paid by
us will be eligible for these preferential rates in the hands of a non-corporate
U.S. holder. Any dividends paid by us, which are not eligible for these
preferential rates will be taxed as ordinary income to a non-corporate U.S.
holder.
Distributions in excess of our earnings and profits will be treated
first as a non-taxable return of capital to the extent of the U.S. holder's tax
basis in his common shares on a dollar-for-dollar basis and thereafter as
capital gain.
Sale, Exchange or other Disposition of Our Common Shares
Subject to the discussion below under "Passive Foreign Investment
Company," a U.S. holder generally will recognize taxable gain or loss upon a
sale, exchange or other disposition of our common shares in an amount equal to
the difference between the amount realized by the U.S. holder from such sale,
exchange or other disposition and the U.S. holder's tax basis in the common
shares. Such gain or loss will be treated as long-term capital gain or loss if
the U.S. holder's holding period in our stock is greater than one year at the
time of the sale, exchange or other disposition. A U.S. holder's ability to
deduct capital losses is subject to certain limitations.
Passive Foreign Investment Company
Notwithstanding the above rules regarding distributions and
dispositions, special rules may apply to some U.S. holders (or to the direct or
indirect beneficial owners of some non-U.S. holders) if we are treated as a
"passive foreign investment company" for United States federal income tax
purposes. We will be a "passive foreign investment company" if either:
o at least 75% of our gross income in a taxable year is passive
income; or
o at least 50% of our assets in a taxable year (averaged over the year
and generally determined based upon value) are held for the
production of, or produce, passive income.
For purposes of determining whether we are a passive foreign investment
company, we will be treated as earning and owning the income and assets,
respectively, of any of our subsidiary corporations in which we own 25% or more
of the value of the subsidiary's stock. To date, our subsidiaries and we have
derived most of our income from time and voyage charters, and we expect to
continue to do so. This income should be treated as services income, which is
not passive income for passive foreign investment company purposes.
On the basis of the above, we believe that we are not currently a
passive foreign investment company and do not expect to be a passive foreign
investment company in the foreseeable future. However, there can be no assurance
that we will not become a passive foreign investment company in any year.
If we become a passive foreign investment company (and regardless of
whether we remain a passive foreign investment company), each U.S. holder who is
treated as owning our shares during any period in which we are so classified,
for purposes of the passive foreign investment company rules would be liable to
pay tax, at the then highest applicable income tax rates on ordinary income,
plus interest, upon certain excess distributions and upon disposition of our
shares including, under certain circumstances, a disposition pursuant to an
otherwise tax free reorganization, as if the distribution or gain had been
recognized ratably over the U.S. holder's entire holding period of our shares.
An excess distribution generally includes dividends or other distributions
received from a passive foreign investment company in any taxable year of a U.S.
holder to the extent that the amount of those distributions exceeds 125% of the
average distributions made by the passive foreign investment company during a
specified base period. The tax at ordinary rates and interest would not be
imposed if the U.S. holder makes a mark-to-market election, as discussed below.
Furthermore, any distributions paid by us to a U.S. non-corporate holder would
not be eligible for the preferential federal income tax rates described above
under "Distributions."
In some circumstances, shareholder in a passive foreign investment
company may avoid the unfavorable consequences of the passive foreign investment
company rules by making a qualified electing fund election. However, a U.S.
holder cannot make a qualified electing fund election with respect to us unless
we comply with certain reporting requirements and we do not intend to provide
the required information.
If we become a passive foreign investment company and, provided that, as
is currently the case, our shares are regularly traded on a "qualified
exchange," a U.S. holder may make a mark-to-market election with respect to our
shares. Under the election, any excess of the fair market value of the shares at
the close of any tax year over the U.S. holder's adjusted basis in the shares is
included in the U.S. holder's income as ordinary income. In addition, the
excess, if any, of the U.S. holder's adjusted basis at the close of any taxable
year over fair market value is deductible in an amount equal to the lesser of
the amount of the excess or the net mark-to-market gains on the shares that the
U.S. holder included in income in previous years. If a U.S. holder makes a
mark-to-market election after the beginning of its holding period, the U.S.
holder does not avoid the interest charge rule discussed above with respect to
the inclusion of ordinary income attributable to periods before the election.
Backup Withholding and Information Reporting
In general, dividend payments, or other taxable distributions, made
within the U.S. to you will be subject to information reporting requirements.
Such payments will also be subject to "backup withholding" if you are a
non-corporate U.S. holder and you:
o fail to provide an accurate taxpayer identification number;
o are notified by the Internal Revenue Service that you have failed to
report all interest or dividends required to be shown on your
federal income tax returns; or
o in certain circumstances, fail to comply with applicable
certification requirements.
Backup withholding is not an additional tax. Rather you generally may
obtain a refund of any amounts withheld under backup withholding rules that
exceed your income tax liability by filing a refund claim with the U.S. Internal
Revenue Service, provided that the required information is furnished to the
Internal Revenue Service.
F. Dividends and Paying Agents
Not Applicable
G. Statements by Experts
Not Applicable
H. Documents on display
Our Registration Statement effective became effective on November 29,
2002, and we are now subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements we will
file reports and other information with the SEC. These materials, including this
document and the accompanying exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 100 Fifth Street,
N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling 1 (800) SEC-0330, and you may
obtain copies at prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. 20549. The SEC maintains
a website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
I. Subsidiary Information
Not Applicable
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rate and
foreign currency exchange risks and equity price risk. We enter into a variety
of derivative instruments and contracts to maintain the desired level of
exposure arising from these risks. We also enter into derivative instruments for
trading purposes, in order to manage our exposure to the risk of movements in
the price of natural gas, when this risk specifically impacts our charter rate
and to some extent for speculative purposes. During 2006, we entered into a
natural gas forward contract, to hedge the natural gas commodity price prior to
entering into a charter, the rate for which was partly dependent upon the price
of natural gas. Having fixed the charter rate, the contract was terminated in
2006. We had no such contracts outstanding as at December 31, 2006.
Since adoption of FAS 133, certain economic hedge relationships no
longer qualify for hedge accounting due to the extensive documentation and
strict criteria of the standard. Our policy is to hedge our exposure to risks,
where possible, within boundaries deemed appropriate by management
A discussion of our accounting policies for derivative financial
instruments is included in Note 2 to our Consolidated Financial Statements.
Further information on our exposure to market risk is included in Note 28 to the
Consolidated Financial Statements.
The following analyses provide quantitative information regarding our
exposure to foreign currency exchange rate risk, interest rate risk, and equity
price risk. There are certain shortcomings inherent in the sensitivity analyses
presented, primarily due to the assumption that exchange rates change in a
parallel fashion and that interest rates change instantaneously.
Interest rate risk. A significant portion of our long-term debt and
capital lease obligations is subject to adverse movements in interest rates. Our
interest rate risk management policy permits economic hedge relationships in
order to reduce the risk associated with adverse fluctuations in interest rates.
We use interest rate swaps and fixed rate debt to manage the exposure to adverse
movements in interest rates. Interest rate swaps are used to convert floating
rate debt obligations to a fixed rate in order to achieve an overall desired
position of fixed and floating rate debt. Credit exposures are monitored on a
counterparty basis, with all new transactions subject to senior management
approval.
As of December 31, 2006 and 2005, the notional amount of the interest
rate swaps outstanding in respect of our debt and net capital lease obligation
was $479.1 million and $494.5 million, respectively and the amount of debt with
a fixed rate of interest was $135 million in 2006 and 2005. The principal of the
loans and net capital lease obligations outstanding as of December 31, 2006 and
2005 was $1,076.4 million and $907.7 million, respectively. Based on our
floating rate debt at December 31, 2006, a one-percentage point increase in the
floating interest rate would increase interest expense by $4.8 million per
annum. For disclosure of the fair value of the derivatives and debt obligations
outstanding as of December 31, 2006 and 2005, see Note 28 to the Financial
Statements.
Foreign currency risk. Except in the course of our vessel leases, the
majority of our transactions, assets and liabilities are denominated in U.S.
dollars, our functional currency. Periodically, we may be exposed to foreign
currency exchange fluctuations as a result of expenses paid by certain
subsidiaries in currencies other than U.S. dollars, such as British pounds, in
relation to our administrative office in the UK, operating expenses incurred in
a variety of foreign currencies and Singapore dollars, among others, in respect
of our FSRU conversion contract. Based on our ongoing GBP expenses for 2006, a
10% depreciation of the US Dollar against GBP would increase our expenses by
approximately $1.0 million.
We are exposed to some extent in respect of the lease transactions we
entered into during the year ended December 31, 2003, which are both denominated
in GBP, although these are hedged by the GBP cash deposits that secure these
obligations. We use cash from the deposits to make payments in respect of our
leases. Gains or losses that we incur are unrealized unless we choose or are
required to withdraw monies from or pay additional monies into the deposits
securing our capital lease obligations. Among other things, movements in
interest rates give rise to a requirement for us to make adjustments to the
amount of GBP cash deposits. Based on these lease obligations and related cash
deposits as at December 31, 2006, a 10% appreciation in the U.S. Dollar against
GBP would give rise to an increase in our financial expenses of approximately
$3.0 million.
In April 2004, we entered into a lease arrangement in respect of the
Golar Winter (as noted above), the obligation in respect of which is also
denominated in GBP. However, the cash deposit, which secures the letter of
credit, which is used to secure the lease obligation, is significantly less than
the lease obligation itself. We refer to this as a 'funded' lease. We are
therefore exposed to currency movements on the difference between the lease
obligation and the cash deposit, approximately $119 million as at December 31,
2006. In order to hedge this exposure we entered into a currency swap with a
bank, which is also our lessor, to exchange our GBP payment obligations into
U.S. dollar payment obligations. We could be exposed to a currency fluctuation
risk if we terminated this lease.
Equity swap risk. As a result of our equity swap (see Liquidity and
Capital resources - Derivatives) we were effectively exposed to the movement in
our share price in respect of 1,070,000 of our shares as at December 31, 2006.
In May 2007, we terminated this facility.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt securities
Not Applicable
B. Warrants and rights
Not Applicable
C. Other securities
Not Applicable
D. American depository shares
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) Disclosure Controls and Procedures
Management assessed the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15(e) of the
Securities Exchange Act of 1934, as of the end of the period covered by this
annual report as of December 31, 2006. Based upon that evaluation, The Principal
Executive Officer and Principal Financial Officer concluded that the Company's
disclosure controls and procedures are effective as of the evaluation date.
Management conducted the evaluation of the effectiveness of the internal
controls over financial reporting using the control criteria framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
published in its report entitled Internal Control-Integrated Framework.
Our management with the participation of our Principal Executive Officer
and Principal Financial Officer assessed the effectiveness of the design and
operation of the Company's internal controls over financial reporting pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934, as of December 31, 2006.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Company's internal controls over financial
reporting are effective as of December 31, 2006.
(b) Management's annual report on internal controls over financial reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f)
promulgated under the Securities Exchange Act of 1934.
Internal control over financial reporting is defined in Rule 13a-15(f)
or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers and effected by the Company's board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that;
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of Company's management and directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may deteriorate.
Management conducted the evaluation of the effectiveness of the internal
controls over financial reporting using the control criteria framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
published in its report entitled Internal Control-Integrated Framework.
Our management with the participation of our Principal Executive Officer
and Principal Financial Officer assessed the effectiveness of the design and
operation of the Company's internal controls over financial reporting pursuant
to Rule 13a-15 of the Securities Exchange Act of 1934, as of December 31, 2006.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Company's internal controls over financial
reporting are effective as of December 31, 2006.
This annual report does not include an attestation report of the
Company's current registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to attestation by
the Company's current registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
(c) Changes in internal control over financial reporting
No changes in the Company's internal control over financial reporting
occurred during the period covered by this annual report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
controls over financial reporting.
Inherent Limitations on Effectiveness of Controls
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree or compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and our Chief
Financial Officer, does not expect that our disclosure controls or our internal
control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. Our disclosure controls and procedures are designed to provide reasonable
assurance of achieving their objectives. The design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that misstatements due to error or fraud will not
occur or that all control issues and instances of fraud, if any, within the
Company have been detected. These inherent limitations include the realities
that judgments in decision-making can be faulty and that breakdowns can occur
because of simple error or mistake. Controls can also be circumvented by the
individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions or deterioration
in the degree of compliance with policies or procedures.
This annual report does not include an attestation report of the
Company's current registered public accounting firm regarding internal control
over financial reporting. Management's report was not subject to attestation by
the Company's current registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
(d) Attestation report of the registered public accounting firm
Not Applicable
ITEM 16. RESERVED
ITEM 16 A. AUDIT COMMITTEE FINANCIAL EXPERT
The Board has determined that Kate Blankenship, a director, qualifies as
an audit committee financial expert and is independent, in accordance with SEC
Rule 10a-3 pursuant to Section 10A of the Exchange Act.
ITEM 16 B. CODE OF ETHICS.
The Company has adopted a Code of Ethics, filed as Exhibit 11.1 to this
Annual Report that applies to all employees. Furthermore, a copy of our Code of
Ethics can be found on our website (www.golarlng.com).
ITEM 16 C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The following table sets forth, for the two most recent fiscal years,
the aggregate fees billed for professional services rendered by the principal
accountant for the audit of the Company's annual financial statements and
services provided by the principal accountant in connection with statutory and
regulatory filings or engagements for the two most recent fiscal years.
Fiscal year ended December 31, 2006 $1,825,863
Fiscal year ended December 31, 2005 $1,876,775
(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, 2006 $109,542
Fiscal year ended December 31, 2005 $0
(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, 2006 $0
Fiscal year ended December 31, 2005 $0
(d) All Other Fees
For the fiscal years ended December 31, 2006 and 2005, 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 2006 were
approved by the Board pursuant to the pre-approval policy.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not Applicable
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In October 2005, the Board of the Company approved a share buyback
scheme and in connection with this established a twelve month facility for a
Stock Indexed Total Return Swap Programme or Equity Swap Line with BNS, whereby
the latter may acquire an amount of shares up to a maximum of 3.2 million in the
Company during the accumulation period, and the Company carries the risk of
fluctuations in the share price of those acquired shares. BNS is compensated at
their cost of funding plus a margin. In October 2006, this facility was extended
for a further twelve months. As at December 31, 2006, BNS had acquired a total
of 1,070,000 Golar shares under the Programme at an average price of $11.15. In
April 2007, BNS had acquired a further 171,300 shares, bringing the total
acquired to 1,241,300 shares at an average price of $12.28. In May 2007, we
terminated this facility and bought back the shares, at a net cost of $15.4
million, with the intention of cancelling the shares.
ITEM 17. FINANCIAL STATEMENTS
Not Applicable
ITEM 18. FINANCIAL STATEMENTS
We specifically incorporate by reference in response to this item the
report of the independent registered public accounting firm, the consolidated
financial statements and the notes to the consolidated financial statements
appearing on pages F-1 through F-42.
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual report:
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. 00050113, or the Original Registration Statement.
1.2 Amended Bye-Laws of Golar LNG Limited dated December 1, 2006.
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* Golar LNG Limited Stock Option Plan, incorporated by reference to
Exhibit 4.6 of the Company's Original Registration Statement.
4.2* 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.
4.3* Five Ship Leases Agreement, between Golar Gas Holding Company, Inc.
and Sovereign Finance Plc, dated April 8, 2003, incorporated by
reference to Exhibit 4.5 of the Company's Annual report on Form 20-F
for fiscal year ended December 31, 2005.
4.4* Loan Agreement, between Golar Gas Holding Company, Inc. and Citibank
N.A, Nordea Bank Norge ASA, Den norske Bank ASA and Fortis Bank
(Nederland) N.V, dated March 21, 2005, incorporated by reference to
Exhibit 4.6 of the Company's Annual Report on Form 20-F for the fiscal
year ended December 31, 2005.
8.1 Golar LNG Limited subsidiaries
11.1* Golar LNG Limited Code of Ethics.
12.1 Certification of the Principal Executive Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
12.2 Certification of the Principal Financial Officer under Section 302 of
the Sarbanes-Oxley Act of 2002.
13.1 Certification under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Executive Officer.
13.2 Certification under Section 906 of the Sarbanes-Oxley act of 2002 of
the Principal Financial Officer.
15.1 Korea Line Corporation financial statements provided pursuant to
Regulation S-X, Rule 3-09.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Golar LNG Limited
----------------------------
(Registrant)
Date July 2, 2007 By: /s/ Graham Robjohns
-----------------------
Graham Robjohns
Principal Financial and
Accounting Officer
GOLAR LNG LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm....................F-2
Audited Consolidated Statements of Operations for the years
ended December 31, 2006, 2005 and 2004 ....................................F-3
Audited Consolidated Statements of Comprehensive Income for
the years ended December 31, 2006, 2005 and 2004...........................F-4
Audited Consolidated Balance Sheets as of December 31, 2006
and 2005...................................................................F-5
Audited Consolidated Statements of Cash Flows for the years
ended December 31, 2006, 2005 and 2004 ....................................F-6
Audited Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2006, 2005 and
2004 .....................................................................F-7
Notes to Consolidated Financial Statements.................................F-8
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Golar LNG Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of Golar LNG Limited and its subsidiaries (the "Company") at December
31, 2006 and 2005, and the results of their operations and their cash flows for
the years ended December 31, 2006, 2005, and 2004 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
changed the manner in which it accounts for share based compensation on adoption
of FAS 123R, Share-Based Payment, effective January 1, 2006, and defined benefit
pension plans on adoption of FAS 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, effective December 31, 2006.
/s / PricewaterhouseCoopers LLP
West London, United Kingdom
July 2, 2007
Golar LNG Limited
Consolidated Statements of Operations for the years ended December 31, 2006,
2005 and 2004
(in thousands of $, except per share data)
Note 2006 2005 2004
Operating revenues
Time charter revenues 239,697 171,008 159,854
Voyage charter revenues - - 2,412
Vessel management fees - 34 1,144
-----------------------------------------------------------------------------------------------------------
Total operating revenues 239,697 171,042 163,410
-----------------------------------------------------------------------------------------------------------
Operating expenses
Vessel operating expenses 44,490 37,215 35,759
Voyage expenses 9,582 4,594 2,561
Administrative expenses 13,657 12,219 8,471
Restructuring expenses 6 - 1,344 -
Depreciation and amortization 56,822 50,991 40,502
-----------------------------------------------------------------------------------------------------------
Total operating expenses 124,551 106,363 87,293
-----------------------------------------------------------------------------------------------------------
Operating income 115,146 64,679 76,117
-----------------------------------------------------------------------------------------------------------
Financial income (expenses)
Interest income 40,706 35,653 31,879
Interest expense (101,298) (82,479) (61,987)
Other financial items, net 7 8,436 7,507 4,804
-----------------------------------------------------------------------------------------------------------
Net financial expenses (52,156) (39,319) (25,304)
-----------------------------------------------------------------------------------------------------------
Income before equity in net earnings of investee,
income taxes and minority interest 62,990 25,360 50,813
-----------------------------------------------------------------------------------------------------------
Minority interest in net income of subsidiaries (7,049) (8,505) (7,575)
Income taxes 8 (1,257) (818) (420)
Equity in net earnings of investees 11 16,989 18,492 13,015
-----------------------------------------------------------------------------------------------------------
Net income 71,673 34,529 55,833
===========================================================================================================
Earnings per share 9
Basic $1.09 $0.53 $0.85
Diluted $1.05 $0.50 $0.84
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Comprehensive Income for the years ended December
31, 2006, 2005, and 2004
(in thousands of $)
Note 2006 2005 2004
Net income 71,673 34,529 55,833
Other comprehensive (loss) income, net of tax:
Recognition of minimum pension liability 23 77 (2,211) 6,235
Unrealized (losses) gains on marketable (88) 133 -
securities held by investee
-----------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income (11) (2,078) 6,235
===========================================================================================================
-----------------------------------------------------------------------------------------------------------
Comprehensive income 71,662 32,451 62,068
===========================================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Balance Sheets as of December 31, 2006 and 2005
(in thousands of $)
Note 2006 2005
ASSETS
Current Assets
Cash and cash equivalents 56,616 62,227
Restricted cash and short-term investments 19 52,287 49,448
Trade accounts receivable 12 4,175 351
Other receivables, prepaid expenses and accrued income 13 15,084 12,573
Amounts due from related parties 14 778 17
Inventories 3,392 4,974
------------------------------------------------------------------------------------------------------------
Total current assets 132,332 129,590
Restricted cash 19 778,220 696,308
Equity in net assets of non-consolidated investees 11 97,255 65,950
Newbuildings 15 49,713 111,565
Vessels and equipment, net 16 669,639 533,008
Vessels under capital leases, net 17 796,186 676,036
Deferred charges 18 9,307 7,629
Other non-current assets 20 33,537 10,609
------------------------------------------------------------------------------------------------------------
Total assets 2,566,189 2,230,695
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt 24 72,587 67,564
Current portion of obligations under capital leases 25 5,269 2,466
Trade accounts payable 7,209 1,165
Accrued expenses 21 29,275 20,605
Amounts due to related parties 253 886
Other current liabilities 22 13,764 31,307
------------------------------------------------------------------------------------------------------------
Total current liabilities 128,357 123,993
Long-term liabilities
Long-term debt 24 803,771 758,183
Obligations under capital leases 25 1,009,765 801,500
Other long-term liabilities 26 84,816 84,878
------------------------------------------------------------------------------------------------------------
Total liabilities 2,026,709 1,768,554
------------------------------------------------------------------------------------------------------------
Commitments and contingencies (See Note 31)
Minority interest 32,436 27,587
------------------------------------------------------------------------------------------------------------
Stockholders' equity
Share capital 65,562,000 common shares of $1.00 each issued and
outstanding 27 65,562 65,562
Additional paid-in capital 214,011 210,532
Accumulated other comprehensive income (8,477) (5,815)
Retained earnings 235,948 164,275
------------------------------------------------------------------------------------------------------------
Total stockholders' equity 507,044 434,554
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity 2,566,189 2,230,695
============================================================================================================
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Cash Flows for the years ended December 31, 2006,
2005 and 2004
(in thousands of $)
Note 2006 2005 2004
Operating activities
Net income 71,673 34,529 55,833
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 56,822 50,991 40,502
Amortization of deferred charges 1,644 3,035 1,270
Undistributed earnings of non-consolidated investees (15,809) (16,948) (12,844)
Compensation cost related to stock options 2,790 - -
Income attributable to minority interests 7,049 8,505 7,575
Unrealized foreign exchange losses (gains) 17,644 (15,709) 5,161
Drydocking expenditure (5,864) (9,373) (13,299)
Trade accounts receivable (3,824) 221 916
Inventories 1,465 (1,571) (353)
Prepaid expenses, accrued income and other assets (12,234) 4,823 (2,201)
Amount due from/to related companies (1,394) 789 (340)
Trade accounts payable 6,057 (1,775) (2,166)
Accrued expenses 3,668 7,505 (16)
Interest element included in long-term lease 5,067 7,351 6,321
obligations
Other current liabilities (17,535) (1,347) (4,331)
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 117,219 71,026 82,028
----------------------------------------------------------------------------------------------------------
Investing activities
Additions to newbuildings 15 (240,906) (140,028) (278,560)
Additions to vessels and equipment (16,673) (5,700) (8,232)
Long-term restricted cash 5,064 (56,953) (37,515)
Investment in unlisted investments 20 - (3,000) -
Investment in associated companies 11 (15,887) - (21,948)
Proceeds from sale of investments in associated
companies 2,248 - -
Restricted cash and short-term investments (2,839) (7,495) (9,858)
----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (268,993) (213,176) (356,113)
----------------------------------------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 24 120,000 420,000 110,000
Proceeds from long-term capital lease obligations 25 102,983 44,800 163,715
Repayments of long-term capital lease obligations (3,860) (3,004) (894)
Repayments of long-term debt (69,390) (297,206) (62,281)
Financing costs paid (1,370) (3,944) (2,740)
Dividends paid to minority shareholders 29 (2,200) (7,200) -
Payments to repurchase equity 27 - (667) -
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 146,163 152,779 207,800
----------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (5,611) 10,629 (66,285)
Cash and cash equivalents at beginning of period 62,227 51,598 117,883
Cash and cash equivalents at end of period 56,616 62,227 51,598
==========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest paid, net of capitalized interest 65,068 35,643 34,592
Income taxes paid 865 568 356
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 2006, 2005 and 2004
(in thousands of $, except number of shares)
Note Share Additional Accumulated Retained Total
Capital Paid in Other Earnings Stockholders'
Capital Comprehensive Equity
Income
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 65,612 208,878 (9,972) 74,283 338,801
Net income - - - 55,833 55,833
Other comprehensive gain - - 6,235 - 6,235
Equity in gain on disposal of
treasury shares by investee - 1,901 - - 1,901
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 65,612 210,779 (3,737) 130,116 402,770
Net income - - - 34,529 34,529
Other comprehensive loss - - (2,078) - (2,078)
Repurchase of ordinary shares (50) (247) - (370) (667)
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2005 65,562 210,532 (5,815) 164,275 434,554
------------------------------------------------------------------------------------------------------------
Net income - - - 71,673 71,673
Grant of share options 27 - 1,725 - - 1,725
Equity in gain on disposal of
treasury shares by investee - 1,754 - - 1,754
Other comprehensive loss - - (11) - (11)
Adjustments to initially apply FAS 23 - - (2,651) - (2,651)
158
------------------------------------------------------------------------------------------------------------
Balance at December 31, 2006 65,562 214,011 (8,477) 235,948 507,044
------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Golar LNG Limited
Notes to Consolidated Financial Statements
1. GENERAL
Golar LNG Limited (the "Company" or "Golar") was incorporated in Hamilton,
Bermuda on May 10, 2001 for the purpose of acquiring the liquefied natural gas
("LNG") shipping interests of Osprey Maritime Limited ("Osprey") and of
Seatankers Management Co. Ltd ("Seatankers"), which were controlled by Mr. John
Fredriksen. Mr. Fredriksen is a Director, the Chairman and President of Golar.
As of December 31, 2006, World Shipholding Limited, a company indirectly
controlled by Mr. John Fredriksen owned 46.75 per cent (2005: 46.75 per cent) of
Golar.
As of December 31, 2006, the Company operated a fleet of twelve (December 31,
2005: ten) LNG carriers, six of which are under long-term charter contracts.
Additionally, as of December 31, 2006, the Company was building one new LNG
carrier. Since December 31, 2006, this newbuilding has been sold. The Company
currently leases eight (December 31, 2006: eight) of its vessels under long-term
lease agreements and has a 100 per cent ownership interest in three vessels
(December 31, 2006: three) and a 60 per cent ownership interest in one (December
31, 2006: one) other vessel, the Golar Mazo.
2. ACCOUNTING POLICIES
Basis of accounting
The financial statements are prepared in accordance with accounting principles
generally accepted in the United States. Investments in companies in which the
Company directly or indirectly holds more than 50 per cent of the voting control
are consolidated in the financial statements, as well as certain variable
interest entities in which the Company is deemed to be subject to a majority of
the risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. All inter-company
balances and transactions are eliminated.
Investments in companies in which the Company holds between 20 per cent and 50
per cent of an ownership interest, and over which the Company exercises
significant influence, are accounted for using the equity method. The Company
records its investments in equity-method investees on the consolidated balance
sheets as "Equity in net assets of non-consolidated investees" and its share of
the investees' earnings or losses in the consolidated statements of operations
as "Equity in net earnings of investees". The difference, if any, between the
purchase price and the book value of the Company's investments in equity method
investees is included in the accompanying consolidated balance sheets in "Equity
in net assets of non-consolidated investees". Gains and losses arising on
disposal of the Company's investments in its equity-method investees, but where
the Company continues to exercise significant influence are recorded in the line
"Equity in net earnings of investees".
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.
Revenue and expense recognition
Revenues include minimum lease payments under time charters, income from voyage
charters, fees for repositioning vessels as well as the reimbursement of certain
vessel operating and drydocking costs.
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.
Repositioning fees received in respect of time charters are recognized at the
end of the charter when the fee is fixed and determinable. However, where there
is a fixed amount specified in the charter, which is not dependent upon
redelivery location, the fee will be recognized evenly over the term of the
charter.
Revenues under voyage charters and single voyage time charters, where there is
an associated repositioning fee, are recognized ratably over the duration of the
voyage and on a discharge-to-discharge basis where there are multiple voyages.
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. Under voyage charters, expenses unique to a particular voyage
such as fuel expenses and port charges are paid by the Company and have been
recorded as voyage expenses within operating expenses. Under time charters, such
voyage expenses 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 related expenses, principally fuel, may also be incurred when positioning
or repositioning the vessel before or after the period of time charter and
during periods when the vessel is not under charter or is offhire, for example
when the vessel is undergoing repairs. These expenses are recognized as
incurred.
Revenues generated from management fees are recorded ratably over the term of
the contract as service is provided.
Revenue includes amounts receivable from loss of hire insurance, which is
recognized on an accrual basis, to the value of $nil, $223,000 and $nil for the
years ended December 31, 2006, 2005 and 2004, respectively.
Vessel operating expenses, which are recognized when incurred, include crewing,
repairs and maintenance, insurance, stores, lube oils and communication
expenses. Prior to the Company's reorganization of its technical management
function and the outsource of day-to-day technical functions to third party ship
managers in 2005, vessel operating expenses included an allocation of
administrative overheads that related to vessel operating activity which
included certain technical and operational support staff for the vessels,
information technology, legal, accounting, and corporate costs. These costs were
allocated based on internal cost studies, which management believes are
reasonable estimates. Since outsourcing the Company's day-to-day technical
management function to third party ship managers during the first half of 2005,
this allocation of internal cost has effectively been replaced by third party
management fees. For the years ended December 31, 2006, 2005 and 2004, $nil,
$720,000 and $3,252,750 had been allocated to vessel operating costs,
respectively
Revenues and voyage expenses of the vessels operating in pool arrangements are
pooled and the resulting net pool revenues are allocated to the pool
participants according to an agreed formula. The formula used to allocate net
pool revenues allocates revenues to pool participants on the basis of the number
of days a vessel operates in the pool. The same revenue and expenses principles
stated above are applied in determining the pool's net pool revenues. The pool
arrangements require the participants to pay and account for voyage expenses,
and distribute pool revenues to the participants such that the participants'
resulting net pool revenues are equal to net pool revenues calculated according
to the agreed formula. The Company accounts for pool revenues allocated by these
pools as "Time charter revenues" in its statement of operations. The Company was
party to a pool arrangement with Exmar Marine NV, which commenced in October
2004 and ended in December 2005. The Company's share of the pool revenues for
the year ended December 31, 2005 was approximately $12 million. The Company was
not party to any pool arrangement during 2006.
Cash and cash equivalents
The Company considers all demand and time deposits and highly liquid investments
with original maturities of three months or less to be equivalent to cash.
Restricted cash and short-term investments
Restricted cash and short-term investments consist of bank deposits, which may
only be used to settle certain pre-arranged loan or lease payments and deposits
made in accordance with its contractual arrangements under the Equity Swap Line
facility (See note 27). 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.
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
installments, 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.
Refurbishments costs incurred during the period are capitalized as part of
vessels and equipment and depreciated over the vessels' remaining useful
economic lives. Refurbishment costs are costs that appreciably increase the
capacity, or improve the efficiency or safety of vessels and equipment. Also,
included in vessels and equipment are drydocking expenditures which are
capitalized when incurred and amortized over the period until the next
anticipated drydocking, which is generally between two and five years. For
vessels that are newly built or acquired, the consideration paid is allocated
between drydocking and other vessels costs to reflect the different useful lives
of the component assets.
Useful lives applied in depreciation are as follows:
Vessels 40 years
Deferred drydocking expenditure two to five years
Office equipment and fittings three to six years
Vessels and equipment under capital lease
The Company leases certain vessels under agreements that are classified as
capital leases. Depreciation of vessels under capital lease is included within
depreciation and amortization expense in the statement of operations. Vessels
under capital lease are depreciated on a straight-line basis over the vessels'
remaining economic useful lives, based on a useful life of 40 years.
Refurbishment costs incurred during the period are capitalized as part of
vessels and equipment under capital leases and depreciated over the vessels'
remaining useful economic lives. Refurbishment costs are costs that appreciably
increase the capacity, or improve the efficiency or safety 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 FAS 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 in the statement of
operations
Unlisted investments
Unlisted investments in which the Company holds less than a 20 per cent interest
and in which it does not have the ability to exercise significant influence over
the investee are initially recorded at cost and reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. The Company records these investments within Other
Non-Current assets in the consolidated balance sheet.
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. In addition from time
to time the Company enters into foreign currency swap contracts to reduce risk
from foreign currency fluctuations.
Hedge accounting is used to account for these swaps only when certain hedging
criteria are met. The Company applies FAS 133, "Accounting for Derivatives and
Hedging Activities", which requires an entity to recognize all derivatives as
either assets or liabilities on the balance sheet and measure these instruments
at fair value. Changes in the fair value of derivatives are recorded each period
in current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. In order to qualify for hedge accounting under FAS 133,
certain criteria and detailed documentation requirements must be met. As the
Company's current interest rate swap and foreign currency swap contracts do not
meet the criteria for hedge accounting, changes in their fair value are recorded
each period in current earnings. Where the fair value of an interest rate or
foreign currency swap agreement is a net liability, the derivative instrument is
classified as a current liability. Where the fair value of an interest rate swap
or foreign currency swap agreement is a net asset, the derivative instrument is
classified as a non-current asset, except if the current portion is a liability,
in which case the current portion is presented as a current liability.
In October 2005, the Company established a twelve month facility for a Stock
Indexed Total Return Swap Programme or Equity Swap Line (See note 27) whereby
the counter party may acquire an amount of up to 3.2 million shares in the
Company, and the Company carries the risk of fluctuations in the share price of
those acquired shares. In October 2006, this facility was extended for a further
12 months. The fair value of the Equity Swap is recognized as an asset or
liability with the change in fair values recognized in the statement of
operations.
The Company enters into natural gas commodity price forward contracts and
futures in order to hedge its exposure to the risk of the movement in the price
of natural gas effecting charter rates and in some circumstances for speculative
purposes. These contracts involve entering into a contract to buy natural gas at
a future date and sell the same quantity of natural gas at another future date.
The Company's position is the spread between the two prices.
Other than for natural gas contracts the Company does not enter into derivative
contracts for speculative or trading purposes.
Foreign currencies
The Company's functional currency is the U.S. dollar as all revenues are
received in U.S. dollars and a majority of the Company's expenditures are
made in U.S. dollars. The Company's reporting currency is 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
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R, "Share-Based Payment" ("FAS 123R"),
which is a revision of Statement of Financial Accounting Standards No. 123 ("FAS
123"), "Accounting for Stock-Based Compensation".
FAS 123R eliminates accounting for stock-based compensation transactions using
the intrinsic value method prescribed in Accounting Principles Board Opinion No.
25 ("APB 25") "Accounting for Stock Issued to Employees", and requires instead
that such transactions be accounted for using a fair-value based method. The
Company has elected to adopt the provisions of FAS 123R, effective January 1,
2006, under the modified prospective transition method. However, for the years
ending December 31, 2005 and 2004, there is no difference between compensation
cost calculated and accounted for under the intrinsic method and that under the
fair value method, since as of December 31, 2003, all of the Company's stock
options granted prior to January 1, 2006, had fully vested.
With the adoption of FAS 123R, the Company has elected to amortize stock-based
compensation for awards granted on or after the adoption of FAS 123R on January
1, 2006, on a straight-line basis over the requisite service (vesting) period
for the entire award.
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
In September 2006, the Financial Accounting Standards Board issued Statement
of Financial Accounting No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans", ("FAS 158"), an amendment of
Statement No. 87, 88, 106 and 132(R).
The Company adopted the provisions of FAS 158 on December 31, 2006. FAS 158
requires full recognition of the funded status of defined benefit pension plans
to be included within a Company's balance sheet. Prior to the adoption of FAS
158, the Company accounted for its defined benefit pension plans in accordance
with FAS 87 "Employers' Accounting for Pensions". Under FAS 87, only part of the
deficit of plan obligations over plan assets would be recognized, with the
remainder of the unrecognized actuarial losses spread over the employees'
remaining service lives. This resulted in a minimum liability being recognized
equal to the amount by which the accumulated benefit obligation exceeded the
fair value of the plan assets.
The measurement provisions of FAS 87 continue to be applied with the pension
liability calculated using the projected unit credit method. The adoption of FAS
158 has had no impact on the net periodic benefit cost recognized in the
statement of operations for the years ending December 31, 2006, 2005 and 2004.
The incremental effect of applying FAS 158 to the Company's balance sheet is
illustrated in note 23.
Defined contribution pension costs represents the contributions payable to the
scheme in respect of the accounting period.
Capital Leases
Leased vessels have been accounted for as capital leases in accordance with FAS
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 economic useful lives of
the vessels. Interest expense is calculated at a constant rate over the term of
the lease.
Income Taxes
Income taxes are based on income before taxes. Deferred tax assets and
liabilities are recognized principally for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.
3. SUBSIDIARIES AND INVESTMENTS
The following table lists the Company's principal subsidiaries and their purpose
as at December 31, 2006. Unless otherwise indicated, we own 100 per cent of each
subsidiary.
Name Jurisdiction of Purpose
Incorporation
Golar Gas Holding Company Inc. Marshall Islands Holding Company and leases four
vessels
Golar Maritime (Asia) Inc. Republic of Liberia Holding Company
Gotaas-Larsen Shipping Corporation Marshall Islands Holding Company
Oxbow Holdings Inc. British Virgin Islands Holding Company
Faraway Maritime Shipping Inc. (60% Republic of Liberia Owns Golar Mazo
ownership)
Golar LNG 2215 Corporation Marshall Islands Leases Methane Princess
Golar LNG 1444 Corporation Republic of Liberia Owns Golar Frost
Golar LNG 1460 Corporation Republic of Liberia Owns Gracilis
(previously known as the Golar
Viking)
Golar LNG 2220 Corporation Marshall Islands Leases Golar Winter
Golar LNG 2234 Corporation Republic of Liberia Owns Granosa
Golar LNG 2244 Corporation Republic of Liberia Owned newbuilding Hull 2244
Golar LNG 2226 Corporation Marshall Islands Leases Grandis
Golar International Ltd. Republic of Liberia 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 and leases Golar Spirit
Golar Winter (UK) Limited United Kingdom Operates Golar Winter
Golar 2215 (UK) Limited United Kingdom Operates Methane Princess
Golar 2226 (UK) Limited United Kingdom Operates Grandis
Golar FSRU 1 Corporation Marshall Islands Contracted for the conversion of a
vessel to a Floating Storage
Regasification Unit ("FSRU")
Golar Offshore Toscana Limited Cyprus Holds investment in associate, OLT
Offshore LNG Toscana S.p.A
4. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In February 2007, the Financial Accounting Standards Board (`FASB') issued SFAS
159, The Fair Value Option for Financial Assets and Financial
Liabilities--including an amendment of FASB Statement No. 115 ("FAS 115"), which
permits entities to measure financial instruments and certain other items at
fair value. The objective is to improve financial reporting by mitigating
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement, which is consistent with the Board's long-term measurement
objectives for accounting for financial instruments. It applies to Golar
effective January 1, 2008. The Company is currently evaluating the impact of FAS
159 on its consolidated results of operations, financial position and cash
flows.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The statement does not require new
fair value measurements, but is applied to the extent that other accounting
pronouncements require or permit fair value measurements. The statement
emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies will be required to disclose the extent
to which fair value is used to measure assets and liabilities, the inputs used
to develop the measurements, and the effect of certain of the measurements on
earnings (or changes in net assets) for the period. This Statement is effective
for Golar on January 1, 2008. The Company is currently evaluating the potential
impact on its consolidated results of operations, financial position and cash
flows.
In March 2006, the FASB issued SFAS 156--an Amendment of SFAS 140, which
addresses the accounting for servicing assets and liabilities, such as those
common with mortgage securitization activities. Specifically, SFAS 156 addresses
recognition and measurement of separately recognized servicing assets and
liabilities, clarifies when an obligation to service financial assets should be
separately recognized, requires FV measurement, and permits choice of
amortization or fair value methods for subsequent measurement. This Statement
was effective for Golar on January 1, 2007, and did not have a significant
impact on its consolidated results of operations, financial position and cash
flows.
In February 2006, the Financial Accounting Standards Board issued SFAS 155,
Accounting for Certain Hybrid Financial Instruments, an amendment of FASB
Statements No. 133 and 140 ("SFAS 155"). SFAS 155 provides a fair value
measurement option for certain hybrid financial instruments that contain an
embedded derivative that would otherwise require bifurcation and requires that
beneficial interests in securitized financial assets be analyzed to determine
whether they are freestanding derivatives or whether they are hybrid instruments
that contain embedded derivatives requiring bifurcation. SFAS 155 also provides
clarification on specific points related to derivative accounting. SFAS 155 was
effective for the Company beginning January 1, 2007, and did not have a
significant impact on its consolidated results of operations, financial
position, and cash flows.
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109 (`FIN
48'). FIN 48 prescribes a recognition threshold and measurement attributes for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
accounting in interim periods, disclosure, and transition. This interpretation
was effective for Golar on January 1, 2007. The adoption of FIN 48 did not have
a material impact on the Company's financial statements.
In October 2006, the FASB issued this FSP, which addresses certain technical
corrections FASB Statement No. 123(R). Specifically, it amends (a) paragraph
A240(d)(1) to exempt nonpublic entities from disclosing the aggregate intrinsic
value of outstanding fully vested share options (or share units) and share
options expected to vest, (b) paragraph A102 of Illustration 4(b) to revise the
computation of the minimum compensation cost that must be recognized to comply
with Paragraph 42 of Statement 123(R), (c) paragraph A170 of Illustration 13(e)
to indicate that at the date the illustrative awards were no longer probable of
vesting, any previously recognized compensation cost should have been reversed,
and (d) paragraph E1 to amend the definition of short-term inducement to exclude
an offer to settle an award. This FSP was effective for Golar on January 1,
2007, and did not have a material impact on its consolidated results of
operations, financial position, and cash flows.
In October 2006, the FASB issued this FSP which amends FSP FAS 123(R)-1,
Classification and Measurement of Freestanding Financial Instruments Originally
Issued in Exchange for Employee Services under FASB Statement No. 123(R), to
clarify that when an instrument held by an individual that is no longer an
employee is modified or exchanged in connection with an equity restructuring or
business combination, the instrument would still be subject to the recognition
and measurement provisions of FASB Statement No. 123(R), Share-Based Payment, if
certain criteria are met. The new guidance states that a modification of an
instrument does not include an exchange or a change to the terms of an award if
that exchange or change is made only to reflect an equity restructuring or
business combination provided that (1) either there is no increase in value to
the holders of the instrument or the change in the terms of the award is not
done in contemplation of an equity restructuring or a business combination and
(2) all holders of the same class of equity instruments (for example, stock
options) are treated in a similar manner. The provisions of FSP FAS 123(R)-5
were effective for Golar on January 1, 2007, and did not impact its consolidated
results of operations, financial position, and cash flows.
5. SEGMENTAL INFORMATION
The Company has not presented segmental information as it considers it operates
in one reportable segment, the LNG carrier market. During 2006, 2005 and 2004,
the vast majority of the Company's fleet operated under time charters and in
particular with three charterers, Pertamina, BG Group plc and Shell. In time
charters, the charterer, not the Company, controls the choice of which routes
the Company's vessel will serve. These routes can be worldwide. Accordingly, the
Company's management, including the chief operating decision makers, does not
evaluate the Company's performance either according to customer or geographical
region.
Revenues in each of the years ended December 31, 2006, 2005 and 2004 from
Pertamina, the state-owned oil and gas company of Indonesia, BG Group plc,
headquartered in the United Kingdom and Shell, were $61.9 million, $87.3 million
and $43.6 million; $63.7 million, $87.5 million and $nil; and $65.6 million,
$82.2 million and $nil respectively.
6. RESTRUCTURING EXPENSES
Restructuring expenses of $1.3 million in the year ended December 31, 2005,
consisted of employment severance costs for management and administrative
employees in London amounting to $1.0 million and $0.3 million in respect of
Bilbao. These costs were incurred in connection with the reorganization of the
Company's technical fleet operations. The Company entered into management
contracts with two established third party ship managers in Singapore and Oslo
to assist with the day-to-day operations of the Company's eleven LNG carriers.
In association with the restructuring, 30 Golar employees were made redundant.
The total cost of $1.3 million was charged to the statement of operations in
2005 ($nil in 2006) with no remaining provision as of December 31, 2005.
7. OTHER FINANCIAL ITEMS, NET
(in thousands of $) 2006 2005 2004
Amortization of deferred financing costs (1,644) (3,080) (1,273)
Financing arrangement fees and other costs (1,106) (703) (818)
Mark-to-market adjustment for interest rate
derivatives (See note 28) 5,921 14,125 5,581
Mark-to-market adjustment for foreign currency
derivatives (See note 28) 20,831 (19,720) -
6,656
Mark-to-market adjustment for equity swap
derivatives (See note 28) (777) 1,313 -
Natural gas forward contract (See note 29) 2,045 - -
Foreign exchange (loss) gain on capital lease
obligations and related restricted cash (17,644) 15,709 (5,160)
Foreign exchange gain (loss) on operations 810 (137) (182)
----------------------------------------------------------------------------------------------------------
8,436 7,507 4,804
==========================================================================================================
Amortization of deferred financing costs includes an amount of $1.8 million for
the year ended December 31, 2005. This represents the write-off of deferred
financing charges as a result of the refinancing of the Golar Gas Holdings loan
in March 2005 (See note 24).
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. 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, except in the case of certain intra group income during 2006 for which a
provision of $234,000 has been made.
A reconciliation between the income tax expense resulting from applying either
the U.S. Federal or Bermudan 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.
United Kingdom
Current taxation of $1,023,000, $818,000 and $420,000 for the years ended
December 31, 2006, 2005 and 2004 respectively relates to taxation of the
operations of the Company's United Kingdom subsidiaries. Taxable revenues in the
UK are generated by UK subsidiary companies of Golar and are comprised of
management fees received from Golar group companies as well as revenues from the
operation of eight of Golar's vessels. These vessels are sub-leased from other
non-UK Golar companies, which in turn are leased from financial institutions.
The statutory tax rate in the UK is currently 30%. The Company records deferred
income taxes to reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The Company recorded deferred tax
assets of $128,000 and $147,000 at December 31, 2006 and 2005, respectively
which have been classified as non-current and included within other long-term
assets (See note 20). These assets relate to differences for depreciation and
pension liabilities.
Other jurisdictions
No tax has been levied on income derived from the Company's subsidiaries
registered in Liberia, the Marshall Islands and the British Virgin Islands.
Deferred income tax assets are summarized as follows:
(in thousands of $) 2006 2005
Deferred tax assets, gross 682 677
Valuation allowances (554) (530)
-----------------------------------------------------------------------------------------------------------
Deferred tax assets, net 128 147
===========================================================================================================
The valuation allowances on deferred tax assets increased by $24,000 (2005:
$12,000 decrease). In future periods, depending upon the financial results,
managements' estimate of the amount of the deferred tax assets considered
realizable may change, and hence the valuation allowances may increase or
decrease.
9. EARNINGS PER SHARE
Basic earnings per share for the year ended December 31, 2006 is calculated with
reference to the weighted average number of common shares outstanding during the
year. The computation of diluted EPS for the years ended December 31, 2006, 2005
and 2004, assumes the conversion of potentially dilutive instruments.
The components of the numerator for the calculation of basic and diluted EPS are
as follows:
(in thousands of $) 2006 2005 2004
Net income available to stockholders - basic 71,673 34,529 55,833
Dilutive effect of investee's convertible bonds
and bonds with stock warrants (2,365) (1,726) (394)
----------------------------------------------------------------------------------------------------------
69,308 32,803 55,439
==========================================================================================================
The components of the denominator for the calculation of basic EPS and diluted
EPS are as follows:
(in thousands) 2006 2005 2004
Basic earnings per share:
Weighted average number of common shares
outstanding 65,562 65,568 65,612
==========================================================================================================
Diluted earnings per share:
Weighted average number of common shares
outstanding 65,562 65,568 65,612
Effect of dilutive share options 173 165 185
----------------------------------------------------------------------------------------------------------
Common stock and common stock equivalents 65,735 65,733 65,797
==========================================================================================================
Earnings per share are as follows:
2006 2005 2004
Basic $1.09 $0.53 $0.85
Diluted $1.05 $0.50 $0.84
10. OPERATING LEASES
Rental income
The minimum contractual future revenues to be received on time charters as of
December 31, 2006, were as follows:
Year ending December 31, Total
(in thousands of $)
2007 161,252
2008 126,576
2009 116,481
2010 90,268
2011 59,528
2012 and later 478,340
-------------------------------------------------------------------------------
Total 1,032,445
===============================================================================
The long-term contracts for one of the Company's vessels is a time charter but
the economic terms are analogous to a bareboat contract, under which the vessel
is 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, 2006 were $1,383 million and $216 million, respectively and at
December 31, 2005 were $1,040 million and $164 million, respectively.
Rental expense
The Company is committed to making 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 $)
2007 208
2008 215
2009 110
-------------------------------------------------------------------------------
Total minimum lease payments 533
===============================================================================
Total rental expense, net of provision, for operating leases was $84,000
(income), $305,000 and $1,431,000 for the years ended December 31, 2006, 2005
and 2004, respectively. Rental expense for the year ended December 31, 2006
includes a credit amount of $380,000, being the release of a provision,
following the settlement in July 2006 of a service charge dispute in connection
with former office space that the Company no longer occupies.
In addition, total sublease income was $nil, $nil and $1,103,000 for the years
ended December 31, 2006, 2005 and 2004, respectively. The sublease income
related to a sublease arrangement in respect of former office space that the
Company no longer occupied. The lease and the sublease ended in November 2004.
11. EQUITY IN NET ASSETS OF NON-CONSOLIDATED INVESTEES
At December 31, 2006, the Company has the following participation in investments
that are recorded using the equity method:
2006 2005
Korea line Corporation 21.09% 21.09%
Liquefied Natural Gas Limited 19.65% -
OLT Offshore LNG Toscana S.p.A 20.00% -
Egyptian Company for Gas Services S.A.E 50.00% -
The market values at December 31, 2006, of the Company's investment in Korea
Line Corporation ("KLC") and Liquefied Natural Gas Limited ("LNGL"), based on
quoted market prices, were $113.9 million and $11.1 million, respectively.
Quoted market prices for OLT Offshore LNG Toscana S.p.A ("OLT-O") and the
Egyptian Company for Gas Services S.A.E ("ECGS") are not available because
shares in OLT-O and ECGS are not publicly traded.
The carrying amounts of the Company's investments in KLC, LNGL, OLT-O and ECGS
at December 31, 2006 and 2005 are as follows:
(in thousands of $) 2006 2005
KLC 83,547 65,950
LNGL 8,242 -
OLT-O 4,966 -
ECGS 500
--------------------------------------------------------------------------------
Equity in net assets of non-consolidated investees 97,255 65,950
================================================================================
The components of equity in net assets of non-consolidated investees are as
follows:
(in thousands of $) 2006 2005
Cost 48,785 34,124
Equity in net earnings of investees 47,665 31,507
Share of other reserves movement in investees 3,700 2,034
Less dividends received (2,895) (1,715)
--------------------------------------------------------------------------------
Equity in net assets of non-consolidated investees 97,255 65,950
================================================================================
KLC is a shipping company listed on the Korean stock exchange. As at December
31, 2003, the Company's investment in KLC amounted to 9.94% of the investee's
issued share capital, which had been acquired at a cost of $12,176,000 following
a series of step acquisitions during the fourth quarter of 2003. At March 31,
2004, following additional purchases of common shares in KLC, at a cost of
$11,351,000, the Company's interest increased by 5.77% to 15.71%. By May 2004,
after further purchases of common shares in KLC, at a cost of $10,597,000, the
Company's interest had increased by 5.38% to 21.09%. The excess of the fair
value of the Company's share of net assets acquired over consideration paid,
amounted to $11,276,000 and has been allocated as a pro rata reduction to the
fair value of the investee's long lived assets. As at December 31, 2006, the
Company held a 21.09% interest in KLC.
For the years ended December 31, 2006 and 2005, the Company's additional paid in
capital includes the Company's share of KLC's gain on disposal of KLC's treasury
shares to third parties of $1,754,000 and $nil, respectively.
For the years ended December 31, 2006, 2005 and 2004, KLC had outstanding
convertible securities and warrants that, if in the aggregate were converted and
exercised, would have reduced the Company's interest in KLC, as at December 31,
2006, to 18.4% (2005: 18.4%). If the Company did not have the ability to
exercise significant influence over KLC and as a result did not account for the
investment using the equity method then the Company's share of net earnings of
KLC of $17.3 million, $18.5 million and $13.0 million for the years ended
December 31, 2006, 2005 and 2004, respectively, would not have been recognized.
However, dividends received from KLC of $1,180,000, $1,544,000 and $171,000 for
the years ended December 31, 2006, 2005 and 2004, respectively would be
recognized in the statement of operations. As of June 6, 2007, the Company had
disposed of its entire interest in KLC (See note 32).
In April 2006, the Company signed an agreement with LNGL, an Australian publicly
listed company, to subscribe for 23 million of its shares in two tranches, at
A$0.50 cents per share. The Company purchased the first tranche of 13.95 million
shares in May 2006, at a cost of $5.1 million, and the second tranche in June
2006, at a cost of $3.5 million. The consideration paid in excess of the fair
value of the Company's share of net assets acquired, amounted to $7,457,000 and
has been recognized as goodwill. As at December 31, 2006, the Company held a
19.65% interest in LNGL. LNGL is a company focused on acting as a link between
previously discovered but uncommercial gas reserves and potential new energy
markets. The Company has adopted the equity method for accounting for its 19.65%
investment in LNGL on the basis that it considers it has significant influence
as demonstrated by its Board representation and position as LNGL's largest
shareholder.
In November 2006, the Company acquired a 20% interest in OLT-O at a cost of $5
million. OLT-O is an Italian incorporated unlisted company, which is involved in
the construction, development, operation and maintenance of a Floating Storage
Regasification Unit ("FSRU") terminal to be situated off the Livorno cost of
Italy. The consideration paid in excess of the fair value of the Company's share
of net assets acquired, amounted to $1,762,000 and has been recognized as
goodwill.
In March 2006, the Company acquired 500,000 common shares in ECGS at a
subscription price of $1 per share. This represents a 50 per cent interest in
the voting rights of ECGS. ECGS is a newly incorporated unlisted company, which
has been set up to develop hydrocarbon business and in particular LNG related
business in Egypt. ECGS is jointly owned and operated together with other third
parties. Therefore the Company has adopted the equity method of accounting for
its 50% investment in ECGS, as it considers it has joint significant influence.
12. TRADE ACCOUNTS RECEIVABLE
As at December 31, 2006, trade accounts receivable are presented net of
allowances for doubtful accounts. For the years ending December 31, 2006 and
2005, the provision for doubtful debts amounted to $4,000 and $18,000,
respectively.
13. OTHER RECEIVABLES, PREPAID EXPENSES AND ACCRUED INCOME
(in thousands of $) 2006 2005
Other receivables 4,233 3,279
Mark-to-market equity swaps valuation (See note 28) - 1,313
Prepaid expenses 1,273 845
Accrued interest income 9,578 7,136
--------------------------------------------------------------------------------
15,084 12,573
================================================================================
Other receivables at December 31, 2006, includes the net amount receivable of
$24,000 (2005: $404,000) under the Company's loss of hire insurance policy
relating to a period of off-hire in respect of one vessel due to required
repairs. Other receivables as at December 31, 2006, also includes the net amount
receivable of $371,000 (2005: $297,000) under the Company's hull and machinery
insurance policy relating to repair costs incurred by the Company for one
vessel. Insurance claim receivables are recognized when the facts and
circumstances support the legal recovery of a previously incurred loss and
management believes it is probable that the claims will be recovered.
14. DUE FROM RELATED COMPANIES
Amounts due from related companies as at December 31, 2006 and 2005 of $778,000
and $17,000, respectively, represent the recharge of expenses and rebates and
seconded staff costs.
15. NEWBUILDINGS
(in thousands of $) 2006 2005
Purchase price installments 46,209 103,603
Interest and other costs capitalized 3,504 7,962
--------------------------------------------------------------------------------
49,713 111,565
================================================================================
The amount of interest capitalized in relation to newbuildings was $2,505,000
and $4,410,000 for the years ended December 31, 2006 and 2005, respectively.
The Company took delivery of two newbuildings during the year ended December 31,
2006, the Grandis and the Granosa, which were delivered to the Company on
January 1, 2006 and June 16, 2006, respectively. The total cost of the Granosa
of $153,766,000 has been transferred to vessels and equipment, respectively (See
note 16). The total cost of the Grandis of $151,366,000 has been transferred to
vessels under capital leases (See note 17).
In March 2007, the Company disposed of its remaining newbuilding (See note 32).
16. VESSELS AND EQUIPMENT, NET
(in thousands of $) 2006 2005
Cost 726,105 572,252
Accumulated depreciation (56,466) (39,244)
--------------------------------------------------------------------------------
Net book value 669,639 533,008
================================================================================
As of December 31, 2006, Golar owned four vessels (2005: three).
Drydocking costs of $7,942,000 and $5,042,000 are included in the cost amounts
above as of December 31, 2006 and 2005, respectively. Accumulated amortization
of those costs as of December 31, 2006 and 2005 were $3,954,000 and $1,981,000,
respectively.
Included in the above amounts, as at December 31, 2006 and 2005 is equipment
with a net book value of $71,000 and $96,000, respectively.
Depreciation and amortization expense for the years ended December 31, 2006,
2005 and 2004 was $17,230,000, $14,890,000, and $8,526,000, respectively.
As at December 31, 2006 and 2005, vessels with a net book value of $669,491,000
and $532,912,000 respectively were pledged as security for certain debt
facilities (See note 24).
17. VESSELS UNDER CAPITAL LEASES, NET
(in thousands of $) 2006 2005
Cost 963,387 812,695
Accumulated depreciation and amortization (167,201) (136,659)
--------------------------------------------------------------------------------
Net book value 796,186 676,036
================================================================================
As of December 31, 2006, Golar operated eight (2005: seven) vessels under
capital leases. These leases are in respect of two refinancing transactions
undertaken during 2003, a lease financing transaction during 2004 and another in
2005.
Drydocking costs of $34,737,000 and $35,428,000 are included in the cost amounts
above as of December 31, 2006 and 2005 respectively. Accumulated amortization of
those costs at December 31, 2006 and 2005 were $19,784,000 and $21,506,000,
respectively.
Depreciation and amortization expense for vessels under capital leases for the
years ended December 31, 2006, 2005 and 2004 was $43,439,000, $39,801,000 and
$35,942,000, respectively.
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 $) 2006 2005
Debt arrangement fees and other deferred financing charges 13,136 9,814
Accumulated amortization (3,829) (2,185)
--------------------------------------------------------------------------------
9,307 7,629
================================================================================
Amortization expense of deferred charges, for the years ended December 31, 2006,
2005 and 2004 was $1,644,000, $3,080,000 and $1,273,000.
19. RESTRICTED CASH AND INVESTMENTS
The Company's short-term and long-term restricted cash and investment balances
in respect of its debt and lease obligations and equity swap facility are as
follows:
(in thousands of $) 2006 2005
Total security lease deposits for lease obligations 815,025 721,971
Restricted cash relating to the Mazo facility 12,183 11,308
Restricted cash relating to the Equity swap facility 3,299 12,477
--------------------------------------------------------------------------------
830,507 745,756
================================================================================
As at December 31, 2006, the value of deposits used to obtain letters of credit
to secure the obligations for the lease arrangements described in note 25 was
$815.0 million (2005: $722.0 million). These security deposits are referred to
in these financial statements as restricted cash and earn interest based upon
GBP LIBOR for the Five Ship Leases and the Methane Princess Lease and based upon
USD LIBOR for both the Golar Winter and Grandis Lease. The Company's restricted
cash balances in respect of its lease obligations are as follows:
(in thousands of $) 2006 2005
Five Ship Leases security deposits 535,758 470,156
Methane Princess Lease security deposits 185,688 161,505
Golar Winter Lease security deposits 48,571 45,302
Grandis Lease security deposits 45,008 45,008
--------------------------------------------------------------------------------
Total security deposits for lease obligations 815,025 721,971
Included in short-term restricted cash and short-term
investments (36,805) (25,663)
--------------------------------------------------------------------------------
Long-term restricted cash 778,220 696,308
================================================================================
The analysis of short-term restricted cash and short-term investments at
December 31, 2006 and 2005 is as follows:
(in thousands of $) 2006 2005
Short-term lease security deposits 36,805 25,663
Restricted cash and short-term investments relating
to the Mazo 12,183 11,308
facility (See note 24)
Restricted cash relating to the Equity swap facility
(See note 27) 3,299 12,477
--------------------------------------------------------------------------------
Short-term restricted cash and short-term investments 52,287 49,448
================================================================================
20. OTHER NON-CURRENT ASSETS
(in thousands of $) 2006 2005
Deferred tax asset (See note 8) 128 147
Other investments 3,000 3,000
Mark-to-market foreign currency swaps valuation
(See note 28) 7,767 -
Mark-to-market interest rate swaps valuation
(See note 28) 8,892 5,886
Mark-to-market equity swap valuation (See note 28) 536 -
Other long-term assets 13,214 1,576
--------------------------------------------------------------------------------
33,537 10,609
================================================================================
Other investments relate to the Company's $3,000,000 investment in TORP
Technology AS ("TORP Technology"), which was acquired in February 2005. TORP
Technology is a Norwegian registered unlisted company, which is involved in the
construction of an offshore regasification terminal in the US Gulf of Mexico. As
at December 31, 2006, the Company's investment in TORP Technology amounted to a
16.1% equity interest in the investee's issued share capital. The Company did
not estimate the fair value of this investment because there have been no
identified events or changes in circumstances that would have a significant
adverse effect on its fair value.
Other long-term assets relate to advances of $13,214,000 (2005: $1,576,000) paid
to Keppel Shipyard Limited for equipment in respect of the conversion of an
existing LNG vessel into a LNG Floating Storage Regasification Unit (See note
30).
21. ACCRUED EXPENSES
(in thousands of $) 2006 2005
Vessel operating and drydocking expenses 6,535 2,820
Administrative expenses 3,948 2,627
Interest expense 17,734 14,086
Provision for financing arrangement fees and other costs 97 485
Provision for tax 961 587
--------------------------------------------------------------------------------
29,275 20,605
================================================================================
22. OTHER CURRENT LIABILITIES
(in thousands of $) 2006 2005
Deferred drydocking and operating cost revenue 4,858 5,162
Marked-to-market interest rate swaps valuation
(See note 28) 4,160 7,075
Marked-to-market foreign currency swaps valuation
(See note 28) - 13,064
Other provisions - 25
Deferred credits from capital lease transactions
(See note 26) 3,964 3,964
Other creditors 782 2,017
--------------------------------------------------------------------------------
13,764 31,307
================================================================================
23. PENSIONS
The Company adopted the provisions of FAS 158 on December 31, 2006. FAS 158
requires full recognition of the funded status of defined benefit pension plans
to be included within a Company's balance sheet. Prior to the adoption of FAS
158, only part of the deficit of plan obligations over plan assets would be
recognized, with the remainder of the unrecognized actuarial losses spread over
the employees' remaining service lives.
The adoption of FAS 158 has had no impact on the net periodic benefit cost
recognized in the statement of operations for the years ending December 31, 2006
and 2005.
Defined contribution scheme
The Company operates a defined contribution scheme. The pension cost for the
period represents contributions payable by the Company to the scheme. The charge
to net income for the year ended December 31, 2006, 2005 and 2004 was $250,000,
$262,000 and $156,000, respectively.
Defined benefit schemes
The Company has two defined benefit pension plans both of which are closed to
new entrants but which still cover certain employees of the Company. Benefits
are based on the employee's years of service and compensation. Net periodic
pension plan costs are determined using the Projected Unit Credit Cost method.
The Company's plans are funded by the Company in conformity with the funding
requirements of the applicable government regulations. Plan assets consist of
both fixed income and equity funds managed by professional fund managers.
The Company uses a measurement date of December 31 for its pension plans.
The components of net periodic benefit costs are as follows:
(in thousands of $) 2006 2005 2004
Service cost 469 652 1,186
Interest cost 2,602 2,624 3,102
Expected return on plan assets (1,525) (1,457) (1,706)
Recognized actuarial loss 492 326 827
--------------------------------------------------------------------------------
Net periodic benefit cost 2,038 2,145 3,409
================================================================================
The estimated net loss for the defined benefit pension plans that will be
amortized from accumulated other comprehensive income into net periodic pension
benefit cost during the year ending December 31, 2007 is $568,000.
The change in benefit obligation and plan assets and reconciliation of funded
status as of December 31 are as follows:
(in thousands of $) 2006 2005
Reconciliation of benefit obligation:
Benefit obligation at January 1 49,082 47,904
Service cost 469 652
Interest cost 2,602 2,624
Actuarial loss 2,186 3,130
Foreign currency exchange rate changes 1,317 (1,051)
Benefit payments (3,533) (4,153)
Curtailment effect - (24)
--------------------------------------------------------------------------------
Benefit obligation at December 31 52,123 49,082
================================================================================
The accumulated benefit obligation at December 31, 2006 and 2005 was $49.5
million and $47.8 million, respectively.
(in thousands of $) 2006 2005
Reconciliation of fair value of plan assets:
Fair value of plan assets at January 1 22,487 24,058
Actual return on plan assets 2,240 1,797
Employer contributions 1,689 1,598
Foreign currency exchange rate changes 1,071 (813)
Benefit payments (3,533) (4,153)
--------------------------------------------------------------------------------
Fair value of plan assets at December 31 23,954 22,487
================================================================================
Funded status at end of year (1) (28,169) (26,595)
Unrecognized actuarial loss - 7,224
--------------------------------------------------------------------------------
Net amount recognized (28,169) (19,371)
================================================================================
Employer contributions and benefits paid under the pension plans include
$1,689,000 and $1,598,000 paid from employer assets during the year ended
December 31, 2006 and 2005, respectively.
(1) The Company's plans are composed of two plans that are both under funded at
December 31, 2006 and December 31, 2005.
The details of these plans are as follows:
December 31, 2006 December 31, 2005
UK Marine Total UK Marine Total
(in thousands of $) scheme scheme scheme scheme
Accumulated benefit obligation (10,937) (38,535) (49,472) (9,149) (38,657) (47,806)
-----------------------------------------------------------------------------------------------------------
Projected benefit obligation (11,105) (41,018) (52,123) (9,315) (39,767) (49,082)
Fair value of plan assets 9,258 14,696 23,954 7,381 15,106 22,487
-----------------------------------------------------------------------------------------------------------
Funded status at end of year (1,847) (26,322) (28,169) (1,934) (24,661) (26,595)
===========================================================================================================
The amounts recognized in the Company's balance sheet prior to adoption of FAS
158 consist of:
(in thousands of $) 2006 2005
Accrued benefit liability (25,518) (25,319)
Accumulated other comprehensive income 5,871 5,948
--------------------------------------------------------------------------------
Net amount recognized prior to adoption of FAS 158 (19,647) (19,371)
================================================================================
Non-current liability (28,169) (19,371)
--------------------------------------------------------------------------------
Net amount recognized following adoption of FAS 158 (28,169) (19,371)
================================================================================
The amounts recognized in accumulated other comprehensive income consist of:
(in thousands of $) 2006 2005
Net actuarial loss 8,522 5,948
--------------------------------------------------------------------------------
The incremental effect of applying FAS 158 on individual line items in the
Company's balance sheet at December 31, 2006, is as follows:
Before application
of FAS 158 and
after additional Incremental
minimum pension effect of After
liability adopting Application
(in thousands of $) adjustment FAS 158 of FAS 158
Pension liability 25,518 2,651 28,169
Accumulated other comprehensive income 5,826 2,651 8,477
Total stockholders' equity 504,393 2,651 507,044
The asset allocation for the Company's Marine scheme at December 31, 2006 and
2005, and the target allocation for 2007, by asset category follows:
Marine scheme Target allocation
2007 (%) 2006 (%) 2005 (%)
Equity 30 - 65 43 39
Bonds 10 - 50 15 25
Other 20 - 40 28 34
Cash - 14 2
--------------------------------------------------------------------------------
Total 100 100 100
================================================================================
The asset allocation for the Company's UK scheme at December 31, 2006 and 2005,
and the target allocation for 2007, by asset category follows:
UK scheme Target allocation
2007 (%) 2006 (%) 2005 (%)
Equity 80 76 80
Bonds 20 19 20
Cash - 5 -
--------------------------------------------------------------------------------
Total 100 100 100
================================================================================
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 schemes
during the year ended December 31, 2007, as follows:
(in thousands of $) UK scheme Marine scheme
Employer contributions 427 1,800
================================================================================
The Company is expected to make the following pension disbursements as follows:
(in thousands of $) UK scheme Marine scheme
2007 220 3,000
2008 220 3,100
2009 400 3,100
2010 540 3,200
2011 490 3,100
2012-2016 2,360 17,900
--------------------------------------------------------------------------------
The weighted average assumptions used to determine the benefit obligation for
the Company's plans at December 31 are as follows:
2006 2005
Discount rate 5.6% 5.4%
Rate of compensation increase 4.5% 3.7%
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:
2006 2005
Discount rate 5.4% 5.7%
Expected return on plan assets 6.8% 6.4%
Rate of compensation increase 3.7% 2.8%
The overall expected long-term rate of return on assets assumption used to
determine the net periodic benefit cost for the Company's plans for the years
ending December 31, 2006 and 2005 is based on the weighted average of various
returns on assets using the asset allocation as at the beginning of 2006 and
2005. For equities and other asset classes, the Company has applied an equity
risk premium over ten year governmental bonds.
24. DEBT
(in thousands of $) 2006 2005
Total long-term debt due to third parties 876,358 825,747
Less: current portion of long-term debt
due to third parties (72,587) (67,564)
--------------------------------------------------------------------------------
Long-term debt 803,771 758,183
================================================================================
The outstanding debt as of December 31, 2006 is repayable as follows:
Year ending December 31,
(in thousands of $)
2007 72,587
2008 167,219
2009 73,448
2010 172,563
2011 212,144
2012 and later 178,397
--------------------------------------------------------------------------------
Total 876,358
================================================================================
The Company's debt is denominated in U.S. dollars and bears floating interest
rates except for $135 million of debt at December 31, 2006 and 2005 in respect
of the Methane Princess facility which bears fixed interest rates. The weighted
average interest rate as of December 31, 2006 and 2005 was 6.04 per cent and
4.98 per cent, respectively. The fixings in respect of the Methane Princess
facility have varying maturity dates from 2007 to 2015 and as of December 31,
2006, the weighted average fixed interest rate was 5.35 per cent (2005: 5.35 per
cent).
At December 31, 2006, the Company's debt was as follows:
(in thousands of $) Maturity date
Mazo facility 138,597 2013
Methane Princess facility 164,036 2015
Golar Gas Holding facility 240,000 2011
Golar Frost facility 102,550 2008
Gracilis facility 113,000 2010
Granosa facility 118,175 2011
--------------------------------------------------------------------------------
876,358
================================================================================
Mazo facility
The Mazo facility was assumed by the Company in May 2001 and the amount
originally drawn down under the facility totalled $214.5 million. The loan is
secured on the vessel Golar Mazo. The facility bears floating interest rate of
LIBOR plus a margin and repayments are due six monthly and commenced on June 28,
2001. The debt agreement requires that certain cash balances, representing
interest and principal repayments for defined future periods, be held by a trust
company during the period of the loan. These balances are referred to in these
financial statements as restricted cash.
Golas Gas Holding facility
In May 2001, the Company entered into a secured loan facility with a banking
consortium for an amount of $325 million and in October 2002 entered into a
secured subordinated loan facility for an amount of $60 million. These loans
were first re-financed in April 2003 and again in March 2005 when a subsidiary
of the Company, Golar Gas Holding Company Inc., entered into a refinancing
transaction with a banking consortium in respect of these loans. The new first
priority loan (the "Golar Gas Holding facility") is for an amount of $300
million. The total amount outstanding at the time of the refinancing was $242.3
million. The loan accrues floating interest at a rate per annum equal to the
aggregate of LIBOR plus a margin. The loan has a term of six years and is
repayable in 24 quarterly installments with a final balloon payment of $79.4
million due on April 14, 2011. 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 25).
Methane Princess facility
In December 2001, the Company signed a loan agreement with a bank for the
purpose of financing newbuilding hull number 2215 (Methane Princess) for an
amount of $180 million. In August 2003, prior to the delivery of the Methane
Princess the Company refinanced this facility. The new facility (the "Methane
Princess facility") was also for $180 million, with the same bank and is
repayable in monthly installments with a final balloon payment of $116.4 million
payable on August 25, 2015. The loan accrues a floating rate of interest of
LIBOR plus a margin determined by reference to Standard and Poors ("S&P") rating
of the Charterer from time to time. The margin can increase if the rating for
the Charterer at any time falls below an S&P rating of "B". As at December 31,
2006, interest on $135 million of debt in respect of the Methane Princess
facility was fixed, of which $55 million was fixed in 2002, $50 million in 2003
and $30 million in 2004. The fixings have varying maturity dates from 2007 to
2015, as of December 31, 2006 the weighted average interest rate was 5.35 per
cent (including margin). The loan is secured by the assignment to the lending
bank of a mortgage given to Golar by the lessor of the Methane Princess Lease
(See note 25).
Golar Frost facility
In June 2004 the Company signed a loan agreement with a banking consortium for
an amount of $110.0 million for the purpose of financing newbuilding hull number
1444, the Golar Frost, which is secured by a mortgage on this vessel. The
facility bears floating interest rate of LIBOR plus a margin and repayments are
due six monthly with a final balloon payment of $97.5 million payable on June
15, 2008, pursuant to an extension of the term of the loan for a period of 12
months in June 2006. In June 2007, the lending banks approved a further
extension of one year in respect of this facility. Repayments on the loan
commenced on December 15, 2004.
Gracilis (formerly known as the Golar Viking) facility
In January 2005 the Company signed a loan agreement with a bank for an amount of
$120.0 million for the purpose of financing newbuilding hull number 1460, the
Gracilis, which is secured by a mortgage on this vessel. The facility bears
floating interest rate of LIBOR plus a margin and repayments are due quarterly
with a final balloon payment of $101.0 million payable on January 6, 2010.
Repayments on the loan commenced on April 6, 2005.
Granosa facility
In April 2006 the Company signed a loan agreement with a bank for an amount of
$120.0 million for the purpose of financing newbuilding hull number 2234, the
Granosa, which is secured by a mortgage on this vessel. The facility bears
floating interest rate of LIBOR plus a margin and repayments are due quarterly
with a final balloon payment of $92.6 million payable on May 15, 2011.
Repayments on the loan commenced on September 15, 2006.
As of December 31, 2006, the margins Golar pays under its loan agreements are
over and above LIBOR at a fixed or floating rate range from 0.80 per cent to 1.5
per cent (2005: 0.80 per cent to 1.7 per cent).
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. With regards to cash restrictions Golar has covenanted to retain
at least $25 million of cash and cash equivalents on a consolidated group basis.
As of December 31, 2006 and 2005 the Company complied with the debt covenants of
its various debt agreements.
25. CAPITAL LEASES
(in thousands of $) 2006 2005
Total long-term obligations under capital leases 1,015,034 803,966
Less: current portion of obligations under
capital leases (5,269) (2,466)
--------------------------------------------------------------------------------
Long term obligations under capital leases 1,009,765 801,500
================================================================================
As at December 31, 2006, Golar operated eight (2005: seven) vessels under
capital leases. These leases are in respect of two refinancing transactions
undertaken during 2003, a lease financing transaction during 2004 and another in
2005.
The first leasing transaction, which took place in April 2003, was the sale of
five 100 per cent owned subsidiaries to a financial institution in the United
Kingdom (UK). The subsidiaries were established in Bermuda specifically to own
and operate one LNG vessel as their sole asset. Simultaneous to the sale of the
five entities, Golar leased each of the five vessels under five separate lease
agreements ("Five Ship Leases").
The second leasing transaction, which occurred in August 2003, was in relation
to the newbuilding, the Methane Princess. The Company novated the Methane
Princess newbuilding contract prior to completion of construction and leased the
vessel from the same financial institution in the UK ("The Methane Princess
Lease").
The third leasing transaction, which occurred in April 2004, was in relation to
the newbuilding, the Golar Winter. The Company novated the Golar Winter
newbuilding contract prior to completion of construction and leased the vessel
from a financial institution in the UK ("The Golar Winter Lease").
The fourth leasing transaction, which occurred in April 2005, was in relation to
hull number 2226 (Grandis). The Company novated the Grandis newbuilding contract
prior to completion of construction and leased the vessel from the same
financial institution in the UK ("The Grandis Lease").
Golar's obligations to the lessors under the Five Ship Leases and Methane
Princess Lease are primarily secured by letters of credit ("LC") provided by
other banks. Golar's obligations to the lessor of the Golar Winter Lease and
Grandis Lease are partly secured by a LC. Details of the security deposits
provided by Golar to the banks providing the LC's are given in note 19.
As at December 31, 2006, the Company is committed to make quarterly minimum
rental payments under capital leases, as follows:
Year ending December 31, Five ship Methane Golar Grandis Total
(in thousands of $) leases Princess Winter lease
lease lease
2007 28,423 7,400 12,501 9,294 57,618
2008 29,863 7,733 12,501 9,294 59,391
2009 31,357 8,069 12,501 9,294 61,221
2010 32,924 8,405 12,501 9,294 63,124
2011 34,571 8,746 12,501 9,294 65,112
2012 and later 773,730 365,046 256,268 239,809 1,634,853
--------------------------------------------------------------------------------------------------------
Total minimum lease payments 930,868 405,399 318,773 286,279 1,941,319
Less: Imputed interest (413,158) (225,659) (151,102) (136,366) (926,285)
--------------------------------------------------------------------------------------------------------
Present value of minimum lease payments 517,710 179,740 167,671 149,913 1,015,034
========================================================================================================
The profiles of the Five Ship Leases are such that the lease liability continues
to increase until 2008 and thereafter decreases over the period to 2023 being
the primary term of the leases. The interest element of the lease rentals is
accrued at a rate based upon floating British Pound (GBP) LIBOR.
The profile of the Methane Princess Lease is such that the lease liability
continues to increase until 2014 and thereafter decreases over the period to
2034 being the primary term of the lease. The interest element of the lease
rentals is accrued at a rate based upon floating British Pound (GBP) LIBOR. The
Golar Winter Lease is for a primary period of 28 years, expiring in April 2032.
The lease liability is reduced by lease rentals from inception. The interest
element of the lease rentals is accrued at a rate based upon floating rate
British Pound (GBP) LIBOR.
In common with the Five Ship Leases and the Methane Princess Lease, the Golar
Winter Lease is denominated in British Pounds. However, unlike these other
leases the cash deposits securing the lease obligations are significantly less
than the lease obligation itself. In order to hedge the currency risk arising
from re-translation of the GBP lease rental obligation into US dollars, the
Company entered into a 28 year currency swap in April 2004 to hedge all lease
rental payments under the Golar Winter Lease into US dollars at a fixed GBP/USD
exchange rate. In addition as of December 31, 2006, the Company had entered into
interest rate swaps of $115 million (2005: $115 million) to fix the interest
rate in respect of its Golar Winter lease obligations for a period ranging from
three to ten years.
The Grandis Lease is for a primary period of 30 years, expiring January 2036.
The lease liability is reduced by lease rentals from inception. The interest
element of the lease rentals is accrued at a rate based upon floating rate USD
LIBOR. In contrast to the Company's other leases the Grandis lease obligation
and the cash deposits securing the lease obligation are denominated in USD.
However, in common with the Golar Winter Lease, the cash deposits securing the
lease obligation are significantly less than the lease obligation itself. As of
December 31, 2006, the Company had entered into interest rate swaps of $105
million (2005: $105 million) to fix the interest rate in respect of its Grandis
lease obligations for a period of seven years.
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.
26. OTHER LONG-TERM LIABILITIES
(in thousands of $) 2006 2005
Pension obligations (See note 23) 28,169 25,319
Deferred credits from capital lease transactions 55,596 59,559
Share options (See note 27) 1,051 -
--------------------------------------------------------------------------------
84,816 84,878
================================================================================
Deferred credits from capital lease transactions
(in thousands of $) 2006 2005
Deferred credits from capital lease transactions 74,121 74,121
Less: Accumulated amortization (14,561) (10,598)
--------------------------------------------------------------------------------
59,560 63,523
================================================================================
Short-term (See note 22) 3,964 3,964
Long-term 55,596 59,559
--------------------------------------------------------------------------------
59,560 63,523
================================================================================
In connection with the Five Ship Leases and the Methane Princess Lease entered
into in the year ended December 31, 2003 (See note 25), the Company recorded an
amount 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 of the deferred credit 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 finance in the form of
UK leases. The deferred credits are amortized over the remaining estimated
useful economic lives of the vessels to which the leases relate on a
straight-line basis.
27. 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 partly 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 issued a further
4,000,000 common shares at a price of $13.11 per share.
In February 2005, the Company, through market purchases, acquired 50,000 common
shares at a price of NOK 85.22 ($13.34) per share, for the purpose of
cancellation. The total consideration paid amounted to $667,000. The Company
held the shares until cancellation in March 2006, which resulted in a reduction
of total issued and outstanding shares of the Company to 65,562,000. As at
December 31, 2005 and 2006, the shares were accounted for as retired stock and
accordingly the purchase price of the shares totalling $667,000 has been
deducted from shareholders' equity by reducing share capital, additional paid in
capital and retained earnings have been reduced by $50,000, $247,000 and
$370,000, respectively.
In October 2005, the Board of the Company approved a share buy back scheme and
in connection with this established a twelve month facility for a Stock Indexed
Total Return Swap Programme or Equity Swap Line with the Bank of Nova Scotia
("BNS"), whereby the latter may acquire an amount of shares up to a maximum of
3.2 million in the Company during the accumulation period, and the Company
carries the risk of fluctuations in the share price of those acquired shares.
BNS is compensated at their cost of funding plus a margin. In October 2006, this
facility was extended for a further twelve months. As at December 31, 2006, BNS
has acquired a total of 1,070,000 (2005: 600,000) Golar shares under the
Programme at an average price of $11.15. The Equity Swap Line facility agreement
requires that an amount of cash be deposited with BNS during the accumulation
period as security. As at December 31, 2006, $3.3 million was held on deposit
and is referred to in these financial statements as short-term restricted cash.
At December 31, 2006 and December 31, 2005, authorized and issued share capital
is as follows:
Authorized share capital:
(in thousands of $) 2006 2005
100,000,000 common shares of $1.00 each 100,000 100,000
===============================================================================
Issued share capital:
(in thousands of $) 2006 2005
65,562,000 (2005: 65,562,000) outstanding
issued common shares of $1.00 65,562 65,562
each
===============================================================================
Share options
The Company elected to adopt the provisions of Statement of Financial Accounting
Standards No. 123R, "Share Based Payment" ("FAS 123R"), effective January 1,
2006, under the modified prospective transition method. FAS 123R eliminates
accounting for stock-based compensation transactions using the intrinsic method,
and requires instead that such transactions be accounted for using the
fair-value based method.
Under the modified prospective method, compensation cost is recognized in
accordance with the provisions of FAS 123R for all share-based payments (i)
granted after the effective date; and (ii) granted to the employees prior to the
effective date of FAS 123R, that remain unvested on the effective date. As of
January 1, 2006, all the Company's stock options granted prior to the effective
date were all fully vested.
In July 2001, the Company's Board of Directors 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 Company's Board of Directors granted options to certain
directors and officers to acquire 400,000 shares at a subscription price of
$5.75 per share. 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.
Under the terms of the Company's employee share option scheme, which was
approved by the Company's Board of Directors in February 2002, options may be
granted to any director or eligible employee of the Company or its subsidiaries.
All options will expire on the tenth anniversary of the option's grant or at
such earlier date as the Board of Directors may from time to time prescribe. The
exercise price for the options may not be less than the average of the fair
market value of the underlying shares for the three trading days before the date
of grant. The Company authorized 2,000,000 shares to be issued under the scheme,
and the number of shares granted under the scheme may not in any ten-year period
exceed seven per cent of the issued share capital of the Company. No
consideration is payable for the grant of an option.
In January 2006, the Company granted 1,058,000 share options to certain
employees and directors of the Company and its subsidiaries, at a subscription
price of $14.80 per share. The options will vest in three equal tranches over a
three-year period from January 27, 2007 to January 27, 2009 and will expire on
the fifth anniversary of the options' grant date. In June 2006, a further
200,000 options were granted at a subscription price of $13.14 on the same
terms.
A condition of the options awarded in 2006 provides that upon voluntary
termination by an option holders' employment with the Company and its
subsidiaries, provided the first anniversary of the date of grant has elapsed, a
reduced cash settlement based on the intrinsic value will be paid. Accordingly,
for those share option awards eligible for this cash settlement feature (those
that vest after the first anniversary of grant) these have been classified as a
liability with the remainder classified as equity. Consequently, at the balance
sheet date a liability for the current fair value of these share options not
exercised is recognized in the balance sheet under other liabilities. The change
in the liability for the period is recognized in the statement of operations.
For those share options classified as equity, the grant date fair value for
these stock options not exercised is recognized in shareholders' equity in
additional paid in capital with a corresponding charge in the statement of
operations.
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model. For those option awards classified as a
liability the fair value is remeasured as at the balance sheet date. The
following weighted average assumptions used are noted in the table below. There
were no options granted in the years ending December 31, 2005 and 2004.
Liability classified At grant date
awards remeasured
at December 31, 2006
Risk free interest rate 4.7% 4.6%
Expected volatility of common stock 31.5% 34.0%
Expected dividend yield 0.0% 0.0%
Expected life of options (in years) 3.3 3.9
The assumption for expected future volatility is based primarily on an analysis
of historical volatility of the Company's common stock. The expected term of
options is derived from the vesting period of the award and represents the
period of time that options granted are expected to be outstanding. The exercise
price of options, granted in 2006 and later, is reduced by the value of
dividends, on a per share basis.
A summary of option activity as at December 31, 2006, and changes during the
year then ended is presented below:
(in thousands of $, except per share data) Shares Weighted Weighted
(In '000s) average average
exercise remaining
price contractual
term
(years)
Options outstanding at December 31, 2004 & 2005 300 $5.75
Granted during the year 1,258 $14.54
---------------------------------------------------------------------------------------------------
Options outstanding at December 31, 2006 1,558 $12.84 4.4
===================================================================================================
Options exercisable at:
December 31, 2006 300 $5.75 5.5
===================================================================================================
December 31, 2005 300 $5.75 6.5
===================================================================================================
A summary of the status of the Company's non-vested share options as of December
31, 2006, and changes during the year ended December 31, 2006, is presented
below:
(in thousands of $, except per share data) Shares Weighted
(In '000s) average
exercise price
Non-vested at January 1, 2006 - -
Granted during the year 1,258 $14.54
--------------------------------------------------------------------------------
Non-vested at December 31, 2006 1,258 $14,54
================================================================================
The weighted average grant date and current fair value of options granted as at
December 31, 2006, during 2006 was $5.11 and $3.57, respectively. No options
have been forfeited, exercised, cancelled or expired during 2006, 2005 and 2004.
Compensation cost of $2,775,000, $nil and $nil has been recognized in the
statement of operations for the years ended December 31, 2006, 2005 and 2004,
respectively, in connection with the 1,258,000 options granted in 2006. As of
December 31, 2006, the total unrecognized compensation cost related to
non-vested options of $1,712,000 (2005: $nil) is expected to be recognized over
a weighted average period of 2.1 years.
The intrinsic value of those options outstanding and exercisable as at December
31, 2006, was $2,115,000, representing $7.05 per option.
28. FINANCIAL INSTRUMENTS
Interest rate risk management
In certain situations, the Company may enter into financial instruments to
reduce the risk associated with fluctuations in interest rates. The Company has
entered into swaps that convert floating rate interest obligations to fixed
rates, which from an economic perspective hedge the interest rate exposure. The
Company does not hold or issue instruments for speculative or trading purposes.
The counterparties to such contracts are major banking and financial
institutions. Credit risk exists to the extent that the counterparties are
unable to perform under the contracts; however the Company does not anticipate
non-performance by any of its counterparties.
The Company manages its debt and capital lease portfolio with interest rate swap
agreements in U.S. dollars to achieve an overall desired position of fixed and
floating interest rates. The Company has entered into the following interest
rate swap transactions involving the payment of fixed rates in exchange for
LIBOR:
Notional Amount
Instrument December 31, December 31, Maturity Fixed Interest
2006 2005 Dates Rates
(in thousands of $)
Interest rate swaps:
Receiving floating, pay fixed 479,097 494,518 2007 - 2015 3.03% to 6.43%
At December 31, 2006, the notional principal amount of the debt and capital
lease obligations outstanding subject to such swap agreements was $479.1 million
(2005: $494.5 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. Certain capital lease obligations and
related restricted cash deposits of the Company are denominated in British
Pounds. There is a risk that currency fluctuations will have a negative effect
on the value of the Company's cash flows.
A net foreign exchange gain of $3.2 million arose in the year ended December 31,
2006 (2005: $4.0 million loss) as a result of the retranslation of the Company's
capital lease obligations and the cash deposits securing those obligations net
of the gain (2005: loss) on the currency swap referred to below. The net gain
arose due to the appreciation of the British Pound against the U.S. Dollar
during the year. This net gain represents an unrealized gain and does not
therefore materially impact the Company's liquidity. Further foreign exchange
gains or losses will arise over time in relation to Golar's capital lease
obligations as a result of exchange rate movements. Gains or losses will only be
realized to the extent that monies are, or are required to be withdrawn or paid
into the deposits securing our capital lease obligations or if the leases are
terminated.
As described in note 25, in April 2004, the Company entered into a lease
arrangement in respect of the Golar Winter, the obligation in respect of which
is denominated in GBP. In this transaction the restricted cash deposit, which
secures the letter of credit given to the lessor to secure part of Golar's
obligations to the lessor, is much less than the obligation and therefore,
unlike the Five Ship Leases and the Methane Princess Lease, does not provide a
natural hedge. In order therefore to hedge this exposure the Company entered
into a currency swap with a bank, who is also the lessor, to exchange GBP
payment obligations into U.S. dollar payment obligations as set out in the table
below. The swap hedges the full amount of the GBP lease obligation and the
restricted cash deposit is denominated in U.S dollars. The Company could be
exposed to currency risk if the lease was terminated.
Notional Amount
Instrument Fixed
December 31, December 31, Maturity GBP/USD
(in thousands) 2006 2005 Dates Currency Rate
Currency rate swaps:
Receiving in GBP (pound)77,460 (pound)82,728 2032 1.838
Pay in U.S.dollar $142,371 $152,054 2032 -
The counterparty to the foreign currency swap contract is a major banking
institution. Credit risk exists to the extent that the counterparty is unable to
perform under the contract; however the Company does not anticipate
non-performance by the counterparty.
Natural gas commodity price forward contracts
The Company may enter into natural gas commodity price forward contracts and
futures in order to manage its exposure to the risk of the movement in the price
of natural gas effecting charter rates and in some circumstances for speculative
purposes. Market risk exists to the extent that natural gas spot and future
price movements have a negative effect on the Company's cash flows and
consolidated statement of operations. As at December 31, 2006 and 2005 the
notional principal amounts subject to such contracts were $nil and $nil.
(see note 29)
Fair values
The carrying value and estimated fair value of the Company's financial
instruments at December 31, 2006 and 2005 are as follows:
2006 2006 2005 2005
Carrying Value Fair Value Carrying Value Fair Value
(in thousands of $)
Non-Derivatives:
Cash and cash equivalents 56,616 56,616 62,227 62,227
Restricted cash and short-term
investments 52,287 52,287 49,448 49,448
Long-term restricted cash 778,220 778,220 696,308 696,308
Long-term unlisted investment 3,000 N/a 3,000 N/a
Short-term debt - floating 72,587 72,587 67,564 67,564
Long-term debt - floating 668,771 668,771 623,183 623,183
Long-term debt - fixed 135,000 136,270 135,000 135,753
Long-term obligations under capital
leases 1,009,765 1,009,765 801,500 801,500
Derivatives:
Interest rate swaps liability 4,160 4,160 7,075 7,075
Interest rate swaps asset 8,892 8,892 5,886 5,886
Foreign currency swap
asset (liability) 7,767 7,767 (13,064) (13,064)
Equity swap asset 536 536 1,313 1,313
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 is
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 Company did not estimate the fair value at December 31, 2006, of its
unlisted investment in TORP Technology, in which the Company has a 16.1% equity
interest because there have been no identified events or changes in
circumstances that would have a significant adverse effect on its fair value.
The estimated fair value for floating long-term debt is considered to be equal
to the carrying value since it bears variable interest rates, which are reset on
a quarterly or six monthly basis. The estimated fair value for long-term debt
with fixed rates of interest of more than one year is estimated by obtaining
quotes for breaking the fixed rate at the year end, from the related banking
institution.
The estimated fair values of long-term lease obligations under capital leases
are considered to be equal to the carrying value since they bear interest at
rates, which are reset on a quarterly basis.
The fair value of interest rate swaps is estimated by obtaining quotes from the
related banking institution.
The fair value of currency swaps is estimated by obtaining quotes from the
related banking institution.
The fair value of equity swaps is estimated by applying an option-pricing model,
which involves discounting the future cash flows up to termination for the swap.
The mark-to-market gain or loss on Golar's interest rate, currency and equity
swaps for the period is reported in the statement of operations caption "other
financial items" (See note 7).
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash
equivalents, restricted cash and short-term investments to the extent that
substantially all of the amounts are carried with Nordea Bank of Finland PLC,
Mizuho Corporate Bank, Lloyds TSB Bank plc, The Bank of New York, Bank of
Scotland, Bank of Nova Scotia, Canadian Imperial Bank Corporation and Bayerische
Landesbank. However, the Company believes this risk is remote as these banks are
high credit quality financial institutions.
During the year ended December 31, 2006, three customers accounted for a
substantial amount of the total revenues of the company. These revenues and
associated accounts receivable are derived from its five time charters with BG
Group plc, two time charters with Pertamina and three charters with Shell.
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 Shell to be low.
During the years ended December 31, 2006, 2005 and 2004, BG Group plc and
Pertamina each accounted for more than 10% of gross revenue.
During 2004, Pertamina, BG Group plc and Shell accounted for revenues of $65.6
million, $82.2 million and $nil respectively.
During 2005, Pertamina, BG Group plc and Shell accounted for revenues of $63.7
million, $87.5 million and $nil respectively.
During 2006, Pertamina, BG Group plc and Shell accounted for revenues of $61.9
million, $87.3 million and $43.6 million respectively.
29. RELATED PARTY TRANSACTIONS
In the years ended December 31, 2006, 2005 and 2004, 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, 2006, 2005 and 2004, management fees payable to Frontline of
$nil, $90,300 and $235,200 respectively, have been incurred by Golar and have
been included within vessel operating expenses. In the years ended December 31,
2006, 2005 and 2004, the Company also received supplier rebates from Frontline
of $400,530, $203,820 and $101,793, respectively, which have been included
within vessel operating expenses. As at December 31, 2006, an amount of $350,530
was due from Frontline (2005: $nil) in respect of these fees and costs incurred.
In addition certain amounts have been recharged at cost between both the
companies. As at December 31, 2006, an amount of $176,144 was due from Frontline
(2005: $640,000 due to Frontline) in respect of these recharges. Frontline is a
publicly listed company. Its principal shareholder is Hemen Holding Limited, a
company indirectly controlled by the Company's chairman, John Fredriksen.
Seatankers Management Company Limited ("Seatankers") is indirectly controlled by
the Company's chairman, John Fredriksen. In the year ended December 31, 2006,
2005 and 2004, Seatankers has provided insurance administration services to the
Company. In the years ended December 31, 2006, 2005 and 2004, management fees
payable to Seatankers of $35,000, $35,000 and $35,000 respectively, have been
incurred by Golar and have been included within administrative expenses. In the
year ended December 31, 2006, 2005 and 2004 the Company also received supplier
rebates from Seatankers of $166,929, $62,878 and $99,893, which have been
included within vessel operating expenses. As at December 31, 2006 and 2005 no
amounts were due from Seatankers in respect of these services. In addition
certain amounts have been recharged at cost between both companies. As at
December 31, 2006 the Company owed $1,849 (2005: $229,000) to Seatankers in
respect of these recharges.
Arcadia Limited ("Arcadia") is indirectly controlled by the Company's chairman,
John Fredriksen. During 2006, the Company entered into a forward contract, which
Arcadia executed on the Company's behalf, to hedge the natural gas commodity
price prior to entering into a charter, the rate for which was partly dependent
upon the price of natural gas. Having fixed the charter rate the contract was
terminated, resulting in Golar recognizing a realized gain of $2,045,000 in the
period. The realized gain has been included within other financial items.
During the years ended December 31, 2006, 2005 and 2004, Faraway Maritime
Shipping Inc., which is 60% owned by Golar and 40% owned by China Petroleum
Corporation ("CPC"), paid dividends totalling $5.5 million, $18 million and $nil
respectively, of which 60 per cent was paid to Golar and 40 per cent was paid to
CPC.
30. CAPITAL COMMITMENTS
Newbuildings commitments
As at December 31, 2006, the Company had a contract to build one new LNG carrier
at a contract cost of $162.0 million, excluding financing costs. As at December
31, 2006, the installments for this vessel, were due to be paid as follows:
(in millions of $)
Paid in 12 months to 31 December 2004 15.4
Paid in 12 months to 31 December 2005 -
Paid in 12 months to 31 December 2006 15.4
Payable in 12 months to 31 December 2007 131.2
-------------------
162.0
===================
As discussed in note 32, subsequent to the year ended December 31, 2006, the
Company sold its newbuilding hull number 2244 for the gross consideration of
$92.5 million.
Other capital commitments
As at December 31, 2006, the Company had a contract with Keppel Shipyard for the
conversion of an existing LNG vessel into a LNG Floating Storage Regasification
Unit ("FSRU"). As at December 31, 2006, the estimated timing of the remaining
payments due to be paid is as follows:
(in millions of $)
Payable in 12 months to 31 December 2007 23.9
Payable in 12 months to 31 December 2008 7.6
--------------------------------------------------------------------------------
31.5
================================================================================
31. OTHER COMMITMENTS AND CONTINGENCIES
Assets Pledged
(in thousands of $) December 31, December 31,
2006 2005
Long-term loans secured on vessels, vessels under
capital leases and newbuildings 876,358 825,747
================================================================================
Other Contractual Commitments and contingencies
Insurance
The Company insures the legal liability risks for its shipping activities with
Gard and Skuld, both are mutual protection and indemnity associations. As a
member of a mutual association, the Company is subject to calls payable to the
associations 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.
Tax lease benefits
The benefits under lease financings are derived primarily from tax depreciation
assumed to be available to lessors as a result of their investment in the
vessels. If that tax depreciation ultimately proves not to be available to the
lessors, or is clawed back from the lessor as a result of adverse tax rate
changes or rulings, or in the event the Company terminates one or more of its
leases, the Company would be required to return all or a portion of, or in
certain circumstances significantly more than the upfront cash benefits that it
received, together with fees that were financed in connection with its lease
financing transactions, post additional security or make additional payments to
its lessors. The upfront benefits the Company has received equates to the cash
inflow received plus fees funded in connection with the six leases entered into
during 2003, in total approximately (pound)41 million British pounds. As at
December 31, 2006, the total unamortized balance of deferred credits from
capital lease transactions (See note 26) was $59.6 million. A termination of any
of these leases would realize the accrued currency gain or loss. As at December
31, 2006, this was a net accrued gain of approximately $2.4 million.
Other
In December 2005, the Company signed a shareholders' agreement in connection
with the setting up of a jointly owned company to be named Egyptian Company for
Gas Services S.A.E ("ECGS"), which was to be established to develop hydrocarbon
business and in particular LNG related business in Egypt. As at December 31,
2006, the Company was committed to subscribe for common shares in ECGS for a
total consideration of $5,000,000. An initial amount of $500,000 was paid in
March 2006, with the balance payable within three years of incorporation, at
dates to be determined by ECGS's Board of Directors.
As at December 31, 2006, the Company had a commitment to pay $1 million to a
third party, contingent upon the conclusion of a material commercial business
transaction by ECGS as consideration for work performed in connection with the
setting up and incorporation of ECGS.
32. SUBSEQUENT EVENTS
In February 2007, the Company entered into an agreement to sell newbuilding hull
2244 to an unrelated third party for the gross consideration of $92.5 million,
realizing a profit of $41 million. The proceeds were received on March 30, 2007.
As at December 31, 2006, the Company did not have a formal plan in place to sell
the newbuilding. Accordingly, as at December 31, 2006, it was not classified as
an asset held for sale (See note 15).
On February 28, 2007, the Board of Golar declared a dividend of $0.50 per share
that was paid on March 26, 2007. On May 23, 2007, the Board declared a further
dividend of $0.50 per share that was paid on June 19, 2007. On June 6, 2007, the
Board declared an extraordinary dividend of $0.75 per share that will be paid on
or about July 3, 2007.
In March 2007, the Company granted 75,000 share options to an employee of the
Company and its subsidiaries at a subscription price of $13.13 per share. The
options have been granted pursuant to the terms set forth in the Company's
existing Employee Share Option Scheme (See note 27).
Subsequent to December 31, 2006, the Bank of Nova Scotia acquired a further
171,300 shares in the Company at an average price of $13.35 under the Equity
Swap Line (See note 27). On May 30, 2007, the Company terminated its equity swap
and bought 1,241,300 shares in the Company from Bank of Nova Scotia at a net
cost of $15.4 million after taking into account the gain on the mark-to-market
of the swap of $7.4 million paid to Golar upon termination.
In April 2007, the Company sold 1.1 million shares in Korea Line, bringing its
interest down to 10%, for consideration of $77.9 million. Between May and June
2007, the Company disposed of its remaining interest in Korea Line for net
consideration of $95 million.
Korea Line Corporation
Financial Statements
December 31, 2006, 2005 and 2004
Korea Line Corporation
Index
December 31, 2006, 2005 and 2004
Page(s)
Report of Independent Registered Public Accounting Firm.................. 1
Financial Statements
Balance Sheets........................................................... 2-3
Statements of Income..................................................... 4
Statements of Appropriations of Retained Earnings........................ 5
Statements of Cash Flows................................................. 6-7
Notes to Financial Statements............................................ 8-52
PriceWaterhouseCoopers Logo
Report of Independent Registered Public Accounting Firm
To the Board of Directors of and Shareholders of
Korea Line Corporation
We have audited the accompanying balance sheets of Korea Line Corporation (the
"Company") as of December 31, 2006 and 2005, and the related statements of
income, appropriation of retained earnings and cash flows for each of the three
years in the period ended December 31, 2006, all expressed in Korean won. 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 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2006 and 2005, and the results of its operations, the changes in its retained
earnings and its cash flows for the three years in the period ended December 31,
2006, in conformity with accounting principles generally accepted in the
Republic of Korea.
Accounting principles generally accepted in the Republic of Korea vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Information relating to the nature and effect of
such differences is presented in Note 32 to the financial statements.
As discussed in Note 27 to the financial statements, under the provision of
Korean tax law enacted from 2005, the Company elected to pay income taxes by
applying tonnage tax system to its income from international shipping and
accounted for tax expense in line with the new provision in the accompanying
financial statements.
Seoul, Republic of Korea
June 28, 2007
Korea Line Corporation
Balance Sheets
December 31, 2006 and 2005
2006
(in millions of Korean won and thousands of US dollar) 2006 2005 (unaudited)
Assets
Current assets:
Cash and cash equivalents (Notes 4 and 19) W 8,433 W 25,084 $ 9,072
Short-term deposits (Notes 5 and 9) 30,331 39,182 32,628
Marketable securities (Note 6) 45,477 9,906 48,921
Accounts receivable - trade (Note 19) 36,553 24,509 39,321
Accounts receivable - other (Note 18) 22,136 9,479 23,812
Accrued income 204 779 219
Prepaid expenses 40,230 33,405 43,277
Inventories 19,653 17,959 21,141
Other current assets 7,512 9,767 8,082
------------ -------------- -----------
Total current assets 210,529 170,070 226,473
------------ -------------- -----------
Investment securities: (Note 7)
Available-for-sale securities 3,163 8,146 3,402
Equity securities of affiliates 30,696 18,962 33,021
Property, ships and equipment, net (Notes 8, 10, 14 and 15) 1,126,219 980,234 1,211,509
Intangible assets, net (Note 11) - 2,704 -
Long-term deposits (Note 5) 208 585 224
Guarantee deposits 3,401 2,902 3,658
Other assets (Note 19) 1,571 2,692 1,690
------------ -------------- -----------
Total assets W 1,375,787 W 1,186,295 $ 1,479,977
------------ -------------- -----------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Balance Sheets
December 31, 2006 and 2005
2006
(in millions of Korean won and thousands of US dollar) 2006 2005 (unaudited)
Liabilities and Stockholders' Equity Current liabilities:
Trade payables (Notes 19 and 23) W 38,365 W 39,119 $ 41,270
Short-term borrowings 4,000 - 4,303
Other payables 3,159 3,428 3,398
Withholdings 3,516 6,983 3,783
Accrued expenses 8,626 6,633 9,279
Dividends payable 24 19 26
Unearned income 22,376 16,953 24,071
Income taxes payable 3,762 208 4,047
Deferred income tax liabilities (Note 27) 2,752 1,228 2,960
Current portion of long-term borrowings
(Notes 12, 14 and 19) 357 2,837 384
Current portion of debentures (Note 13) 20,493 - 22,045
Current portion of long-term accounts payable
- other (Notes 15 and 19) 59,720 56,939 64,243
------------ --------- -----------
Total current liabilities 167,150 134,347 179,809
Long-term borrowings (Notes 12, 14 and 19) 1,619 23,341 1,742
Debentures (Note 13) 63,767 38,114 68,596
Long-term accounts payable - other (Notes 15, 16 and 19) 603,915 559,151 649,650
Accrued severance indemnities (Note 17) 3,702 3,674 3,982
Deferred income tax liabilities (Note 27) 8,596 6,264 9,247
Long-term advance received (Note 18) 6,311 37,558 6,789
Other long-term liabilities 6,077 237 6,537
------------ --------- -----------
Total liabilities 861,137 802,686 926,352
------------ --------- -----------
Stockholders' equity:
Common stock of W5,000 par value:
Authorized - 30,000,000 shares
Issued - 10,000,000 shares 50,000 50,000 53,787
Capital surplus (Notes 8 and 20) 50,068 45,405 53,859
Retained earnings:
Appropriated (Note 21) 292,208 213,208 314,338
Unappropriated 124,235 99,747 133,643
Capital adjustments:
Treasury stock (Note 22) (2,676) (26,225) (2,879)
Equity in capital surplus of affiliates (Note 7) 815 1,474 877
------------ --------- -----------
Total stockholders' equity 514,650 383,609 553,625
Total liabilities and stockholders' equity W 1,375,787 W 1,186,295 $ 1,479,977
------------ --------- -----------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Income
Years ended December 31, 2006, 2005 and 2004
(in millions of Korean won and thousands of US dollar) 2006 2005 2004 2006
(unaudited)
Sales W 1,150,187 W 1,109,273 W 1,150,130 $ 1,237,292
Cost of sales (Notes 23 and 25) 1,047,569 1,005,241 973,285 1,126,903
----------- ------------ ------------ ------------
Gross profit 102,618 104,032 176,845 110,389
Selling, general and administrative expenses
(Notes 23,24 and 25) 13,320 13,166 10,248 14,329
----------- ------------ ------------ ------------
Operating income 89,298 90,866 166,597 96,060
Other income
Interest income 3,228 5,523 5,721 3,472
Dividend income 617 339 77 664
Gain on foreign currency transaction 17,479 15,836 19,904 18,803
Gain on foreign currency translation 50,674 20,286 88,921 54,512
Gain on valuation of marketable securities (Note 6) 5,541 3,904 561 5,961
Gain on disposition of accounts receivable 5,988 2,027 - 6,441
Equity in earnings of affiliates (Note 7) 2,614 2,913 3,606 2,812
Gain on valuation of derivatives (Note 31) - 1,719 983 -
Gain on derivative transactions 14,166 3,166 - 15,239
Gain on disposition of property, ships and equipment 4,375 12 2 4,706
Others 1,356 1,103 979 1,459
----------- ------------ ------------ ------------
106,038 56,828 120,754 114,069
----------- ------------ ------------ ------------
Other deductions
Interest expense 47,655 32,605 25,924 51,264
Loss on foreign currency transaction 9,214 14,161 15,752 9,912
Loss on foreign currency translation 81 81 4,621 87
Loss on valuation of derivatives (note 31) 5,850 - - 6,293
Loss on derivative transactions 13,545 7,476 - 14,571
Loss on redemption of bonds (note 13) 873 - - 939
Others(note 26) 92 211 3,150 99
----------- ------------ ------------ ------------
77,310 54,534 49,447 83,165
----------- ------------ ------------ ------------
Income before income tax 118,026 93,160 237,904 126,964
Income taxes (Note 27) 7,622 7,395 37,078 8,199
----------- ------------ ------------ ------------
Net income W 110,404 W 85,765 W 200,826 $ 118,765
----------- ------------ ------------ ------------
Per share data (In won and US dollar)
Basic earnings per share of common stock (Note 28) W 11,855 W 9,125 W 21,505 $ 13
Diluted earnings per share of common stock (Note 28) 11,133 8,569 21,097 12
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Appropriation of Retained Earnings
Years Ended December 31, 2006, 2005 and 2004
(Date of appropriation: March 16, 2007, March 17, 2006 and March 18, 2005
for the years ended December 31, 2006, 2005 and 2004, respectively)
(in millions of Korean won and thousands of US dollar) 2006 2005 2004 2006
(unaudited)
Unappropriated retained earnings
Balance at beginning of year W 13,831 W 13,982 W 5,518 $ 14,878
Net income 110,404 85,765 200,826 118,765
----------- ------------ ------------ ------------
124,235 99,747 206,344 133,643
----------- ------------ ------------ ------------
Appropriation (Note 21)
Legal reserve 1,000 1,000 3,000 1,076
Reserve for improvement of financial structure - - 21,000 -
Reserve for business expansion 40,000 40,000 50,000 43,029
Reserve for business rationalization 50,000 30,000 85,000 53,787
Reserve for special depreciation - - 7,507 -
Other voluntary reserve 7,000 8,000 16,000 7,530
Cash dividends
750 won per share in 2006(note 29) 7,440 - - 8,003
750 won per share in 2005(note 29) - 6,916 - -
1,000 won per share in 2004(note 29) - - 9,855 -
----------- ------------ ------------ ------------
105,440 85,916 192,362 113,425
----------- ------------ ------------ ------------
Unappropriated retained earnings to be carried over to W 18,795 W 13,831 W 13,982 $ 20,218
subsequent year ----------- ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Statements of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
2006
(in millions of Korean won and thousands of US dollar) 2006 2005 2004 unaudited)
Cash flows from operating activities
Net income W 110,404 W 85,765 W 200,826 $ 118,765
Adjustments to reconcile net earnings to net cash
Provision for retirement and severance benefits 2,157 2,203 2,593 2,320
Depreciation 59,754 54,128 48,975 64,279
Amortization 2,704 2,704 - 2,909
Loss on redemption of bonds 873 - - 939
Bad debt expenses, net (254) (34) 418 (273)
(Gain) loss on disposition of marketable securities, net - 1 (107) -
Unrealized gain on marketable securities, net (5,541) (3,904) (561) (5,961)
Foreign currency translation, net (50,511) (20,126) (87,515) (54,336)
(Gain) loss on disposition of trade receivables (5,988) (2,027) 657 (6,441)
Gain on disposition of available-for-sale securities - (110)
Equity in earnings of affiliates (2,614) (2,913) (3,606) (2,812)
(Gain) loss on disposition of property, ship and
equipment, net (4,373) (12) 14 (4,704)
Unrealized loss (gain) on derivatives 5,850 (1,719) (983) 6,293
Others - - 1,883 -
Changes in assets and liabilities:
(Increase) decrease in accounts receivable - trade
(Increase) decrease in prepaid expenses (5,770) 4,771 (4,654) (6,207)
Decrease in deferred income tax assets (6,825) 2,232 (7,494) (7,342)
(Decrease) increase in accounts in trade payables - - 16,128 -
Increase (decrease) in income taxes payables (752) 4,020 7,478 (809)
Increase (decrease) in unearned income 1,786 (14,977) 15,184 1,921
Others, net 5,423 (16,149) 16,635 5,834
Net cash provided by operating activities (9,266) (1,304) (201) (9,967)
----------- ----------- ------------ ------------
97,057 92,549 205,670 104,408
----------- ----------- ------------ ------------
Cash flows from investing activities (note 30)
Decrease(increase) in short-term financial instruments 9,763 284 (20,347) 10,502
Proceeds from sale of marketable securities - 4 1,373 -
Purchase of marketable securities (30,030) (1,361) (5,337) (32,304)
Proceeds from sale of available-for-sale securities 5,483 23,455 16,223 5,898
Purchase of available-for-sale securities (500) - (34) (538)
Proceeds from sale of held-to-maturity securities - 20,718 - -
Purchase from sale of held-to-maturity securities - - (20,718) -
Dividends from affiliates 459 306 306 494
Disposal of property, ships and equipment 27,992 12 20 30,112
Purchase of property, ships and equipment (229,356) (104,432) (116,461) (246,725)
Purchase of intangible assets - - (5,408) -
(Decrease) increase in leasehold deposits (10) 13 12 (11)
Purchase of equity securities of affiliates (10,488) - - (11,282)
(Increase) decrease of long-term financial instruments (535) 480 (516) (576)
Increase in other assets (500) (780) 1,731 (538)
Net cash used in investing activities (227,722) (61,301) (149,156) (244,968)
Cash flows from financing activities (note 30)
Short-term borrowings 4,000 - 11,470 4,303
Proceed from long-term borrowings - - 902 -
Repayment of long-term borrowings (21,365) - - (22,983)
Issuance of bonds with stock warrants - - 20,000 -
Issuance of convertible bonds - - 19,799 -
Increase in long-term payables 169,100 114,543 92,354 181,905
Proceeds from sale of treasury stocks 29,980 - 32,570 32,250
Repayment of short-term borrowings - - (26,470) -
Repayments of current portion of long-term accounts
payables (56,940) (47,377) (66,830) (61,252)
Repayments of current portion of long-term debt (2,836) (2,682) (3,672) (3,051)
Repayment of long-term payable (14,162) (28,648) - (15,235)
Repayments of bonds payable (10,500) (7,000) (50,000) (11,295)
Decrease in other long-term liabilities (31,247) (49,082) (41,415) (33,613)
Dividends paid (6,916) (9,849) (2,404) (7,439)
Proceeds from issuance of bonds 54,900 - - 59,058
Acquisition of treasury stocks - (20,804) (20,068) -
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities 114,014 (50,899) (33,764) 122,648
--------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents (16,651) (19,651) 22,750 (17,912)
--------- --------- --------- ---------
Cash and cash equivalents
--------- --------- --------- ---------
Beginning of year 25,084 44,735 21,985 26,984
End of year W 8,433 W 25,084 W 44,735 $ 9,072
----------- ----------- ------------ ------------
The accompanying notes are an integral part of these financial statements.
Korea Line Corporation
Notes to Financial Statements December 31, 2006, 2005 and 2004
--------------------------------------------------------------
1. The Company
Korea Line Corporation (the "Company") was incorporated on December 12,
1968 under the laws of the Republic of Korea to engage in sea-borne
transportation of industrial resources vital for key industries.
The Company became a publicly traded company upon listing its common stocks
on the Korea Stock Exchange on April 23, 1992. The major stockholder of the
Company as of December 31, 2006 is Mr. Jin-bang Lee, the representative
director of the Company, and his related parties who own 24.62% of the
equity.
The Company owned 18 bulk carriers including 2 hot coil carriers and 2 LNG
carriers and participated in a consortium for 4 LNG carriers as of December
31, 2006, with total deadweight tonnage of 2,716,725 metric tons.
2. Summary of Significant Accounting Policies and Basis of Financial Statement
Presentation
Basis of Financial Statement Presentation
The Company maintains its official accounting records in Korean won and
prepares statutory financial statements in the Korean language (Hangul) in
conformity with the accounting principles generally accepted in the
Republic of Korea. Certain accounting principles applied by the Company
that conform with financial accounting standards and accounting principles
in the Republic of Korea may not conform with generally accepted accounting
principles in other countries. Accordingly, these financial statements are
intended solely for use by only those who are informed about Korean
accounting principles and practices. The accompanying financial statements
have been condensed, restructured and translated into English (with certain
expanded descriptions) from the Korean language financial statements.
Certain information attached to the Korean language financial statements,
but not required for a fair presentation of the Company's financial
position, results of operations or cash flows, is not presented in the
accompanying financial statements.
Effective January 1, 2006, the Company adopted Statements of Korea
Accounting Standards No. 18 (Interests in Joint Ventures), No. 19 (Leases)
and No. 20 (Related Party Disclosures). The adoption of these standards did
not have a significant impact on the accompanying financial statements. As
allowed by these standards, prior year balances have not been reclassified
to conform to the current year presentation.
The accompanying financial statements include only the accounts of Korea
Line Corporation, and do not consolidate the accounts of Kwangyang Marine
Co., Ltd and Korea Line (Singapore) Pte. Ltd. (see note 7).
Cash and Cash Equivalents
The Company considers short-term financial instruments with a maturity of
three months or less at the acquisition date to be cash equivalents.
Financial Instruments
Short-term deposits are instruments handled by financial institutions which
are held for short-term cash management purposes or will mature within one
year, including time deposits, installment savings deposits and restricted
bank deposits.
Allowance for Doubtful Accounts
Allowance for doubtful accounts is estimated based on an analysis of
individual accounts and past experience of collection.
Inventories
Inventories are stated at the lower of cost or net realizable value. Net
realizable value is the estimated selling price in the ordinary course of
business, less the estimated selling costs. The cost of inventories is
determined on the FIFO method. The amount of any write-down of inventories
to net realizable value due to obsolescence or excess inventory and other
losses of inventories occurring in the normal course of business are
recognized as cost of goods sold and such valuation losses are deducted
from the inventories as allowance for valuation losses.
The Company recognizes interest costs and other financial charges on
borrowings associated with inventories that require a long period in the
acquisition, construction or production as an expense in the period in
which they are incurred.
Investments in Securities
Upon acquisition, the Company classifies certain debt and equity securities
into one of the three categories: held-to-maturity, available-for-sale, or
marketable securities and such determination are reassessed at each balance
sheet date. Investments in debt securities that the Company has the
positive intent and ability to hold to maturity are classified as
held-to-maturity. Securities that are bought and held principally for the
purpose of selling them in the near term (thus held for only a short period
of time) are classified as marketable securities. Trading generally
reflects active and frequent buying and selling, and marketable securities
are generally used to generate profit on short-term differences in price.
Investments not classified as either held-to-maturity or marketable
securities are classified as available-for-sale securities.
Marketable securities are carried at fair value, with unrealized holding
gains and losses included in current income. Available-for-sale securities
are carried at fair value, with unrealized holding gains and losses
reported as a capital adjustment, net of tax. Investments in equity
securities that do not have readily determinable fair values are stated at
cost. Investments in debt securities that are classified into
held-to-maturity are reported at amortized cost at the balance sheet date
and such amortization is included in interest income.
The fair value of marketable securities is determined using quoted market
prices as of the period end. Non-marketable debt securities are recorded at
the fair values derived from the discounted cash flows by using an interest
rate deemed to approximate the market interest rate. The market interest
rate is determined by the issuers' credit rate announced by the accredited
credit rating agencies in Korea. Money market funds are recorded at the
fair value determined by the investment management companies.
Marketable securities are classified as current assets, whereas
available-for-sale securities and held-to-maturity securities are
classified as long-term investments. However, available-for-sale securities
whose maturity dates are due within one year from the balance sheet date or
whose likelihood of being disposed of within one year from the balance
sheet date is probable are classified as current assets. Likewise,
held-to-maturity securities whose maturity dates are due within one year
from the balance sheet date are classified as current assets.
A decline in market value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other-than-temporary results in a
reduction in carrying amount to fair value and the impairment loss is
charged to current results of operations.
Investment Securities under the Equity Method of Accounting
Investments in affiliated companies owned 20% or more or over which the
Company has significant management control are stated at an amount as
determined using the equity method.
Under the equity method of accounting, the Company's initial investment is
recorded at cost and is subsequently increased to reflect the Company's
share of the investee income and reduced to reflect the Company's share of
the investee losses or dividends received. Any excess in the Company's
acquisition cost over the Company's share of the investee's identifiable
net assets is considered as goodwill and amortized by the straight-line
method over the estimated useful life. The amortization of goodwill is
recorded against the equity income of affiliates. When events or
circumstances indicate that carrying amount may not be recoverable, the
Company reviews the goodwill amount for any impairment.
Under the equity method of accounting, the Company does not record its
share of loss of an affiliate company when such loss would make the
Company's investment in such entity less than zero.
Interest in Joint Ventures
Prior to 2006, the Company recorded its underlying interests (assets,
liabilities, revenues and expenses) in such joint ventures based on the
terms of the related agreement. Effective January 1, 2006, the Company
adopted SKAS No. 18, Interests in Joint Ventures. A joint venture is a
contractual agreement to establish joint control over business, assets or
entities.
In case of jointly controlled operations that involve the use of the assets
and other resources of the ventures rather than the establishment of a
corporation, partnership or financial structure that is separate from the
participants themselves, the Company recognizes the assets that it
controls, the liabilities and expenses that it incurs, and its share of the
income that it earns from the sale of goods or services by the joint
venture.
In case of jointly controlled assets that involve the joint control or
joint ownership, by the participants of one or more assets contributed or
acquired for joint venture, the Company recognize its share of the jointly
controlled asset, liabilities and expense that incurred, and income from
the sale or use of its share of the output of the joint venture, together
with its share of any expense incurred by the joint venture.
In case of jointly controlled entities that involves the establishment of a
corporation, partnership or other entity in which each participant has an
interest, the Company applies the equity method of accounting.
As the Company's previous policy is similar to the new standard, the
adoption of this standard did not have any impact on the accompanying
financial statements.
Property, Ships and Equipment
Property, ships and equipment are stated at cost, except in the case of
revaluation made in accordance with the old Assets Revaluation Law. Plant
and equipment under capital leases are stated at an amount equal to the
lower of their fair value or the present value of minimum lease payments at
inception of lease.
Depreciation is computed by the straight-line method using rates based on
useful lives of the respective assets as follows:
Useful Lives (years)
Buildings 40
Ships 10 ~ 25
Vehicles 5
Tools, Furniture and fixtures 5
The Company recognizes interest costs and other financial charges on
borrowings associated with the manufacture, purchase, or construction of
property, ships and equipment as an expense in the period in which they are
incurred.
Routine maintenance and repairs are charged to expense as incurred.
Expenditures that enhance the value or extend the useful life of the
related assets are capitalized.
The Company reviews the property, ships and equipment for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when the estimated undiscounted future net cash flows from the
use of the asset and its eventual disposal are less than its carrying
amount. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets.
Leases
Prior to 2006, the Company accounted for and classified its lease
transactions as either an operating or capital lease, depending on the
terms of the lease under Statement of Korea Accounting Standards. When a
lease was substantially non cancelable and met one or more of the criteria
listed below, the present value of future minimum lease payments was
reflected as an obligation under a capital lease.
- Ownership of the leased property shall be transferred to the lessee at
the end of the lease term without additional payment or for a contract
price.
- The lease has a bargain purchase option.
- The lease term is equal to 75% or more of the estimated economic
useful life of the leased property.
- The present value at the beginning of the lease term of the minimum
lease payments equals or exceeds 90% of the fair value of the leased
property.
Otherwise, the lease was classified as an operating lease with lease
payments expensed as incurred.
Effective January 1, 2006, the Company adopted SKAS No.19, Leases. Under
this standard, the above capital lease criteria have been amended.
Specifically, the premise of substantially non cancelable lease has been
removed and the criterion of a bargain purchase option has been modified to
include also a reasonable certainty, at the inception of the lease, that
the option will be exercised. In addition, if the leased property is
specialized to the extent that only the lessee can use it without any major
modification, it would be considered to be a capital lease. The adoption of
this standard had no impact on the accompanying financial statements.
Intangible Assets
Rights from donated assets are stated as intangible assets. Such intangible
assets are amortized using the straight-line method over a reasonable
period based on the nature of the asset.
Income Taxes
Income tax on the income for the year comprises current and deferred taxes.
Income tax is recognized in the statement of income except to the extent
that it relates to items recognized directly to equity, in which case it is
recognized in equity.
Deferred tax is provided using the asset and liability method, providing
for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for tax
purposes. The amount of deferred tax provided is based on the expected
manner of realization or settlement of the carrying amount of assets and
liabilities, using tax rates enacted or substantially enacted at the
balance sheet date.
A deferred tax asset is recognized only to the extent that it is probable
that future taxable income will be available against which the unused tax
losses and credits can be utilized. Deferred tax assets are reduced to the
extent that it is no longer probable that the related tax benefit will be
realized.
Deferred tax assets and liabilities are classified as current or
non-current based on the classification of the related asset or liability
for financial reporting or the expected reversal date of the temporary
difference for those with no related asset or liability such as loss
carryforwards and tax credit carryforwards. The deferred tax amounts are
presented as a net current asset or liability and a net non-current asset
or liability.
Deferred taxes are recognized on the temporary differences related to
unrealized gains and losses on investment securities that are reported as a
separate component of capital adjustments.
Discount on Debentures
Discount on debentures issued, which represents the difference between the
face value and issuance price of debentures, is amortized using the
effective interest method over the life of the debentures. The amount
amortized is included in interest expense.
Convertible Bonds and Bonds with Warrants
Effective January 1, 2003, the Company adopted the Statement of Korea
Accounting Standards (SKAS) No. 9, "Convertible Securities" related to
convertible bonds and bonds with stock warrants. When issuing convertible
bonds or bonds with stock warrants, the values of conversion rights or
stock warrants adjustment are credited to stockholders' equity as a capital
surplus for conversion rights or stock warrants.
When the company is obliged to pay a redemption premium to the holders of
the debentures who do not exercise their options to convert and hold the
debentures until maturity, the premium shall be added to the debentures and
deducted from conversion rights or stock warrants adjustment at the date of
issue.
The conversion rights and stock warrants adjustments are amortized over the
terms of the debentures using the effective interest rate method and the
amount amortized is recorded as interest expense.
Considerations for conversion rights or stock warrants and adjustments
shall be measured by deducting the present value of ordinary or straight
debt securities (redemption premium is included) from the gross proceeds of
the convertible bonds or bonds with stock purchase warrants received at the
date of issue. However, in the case of bonds with detachable stock
warrants, considerations for such warrants shall be computed based on the
fair values of the two core components - straight debt securities and
detachable stock warrants.
Accrued Severance Indemnities
Employees who have been with the Company for more than one year are
entitled to lump-sum payments based on current salary rates of pay and
length of service when they leave the Company. Provision has been made in
the accompanying balance sheets for the estimated liability under the plan
which would be payable if all employees left on the balance sheet date. A
portion of these benefits is covered by employees' severance indemnity
insurance where the employees have vested interest in the deposits made by
the Company with the insurance company. The deposits are, therefore,
deducted from the severance liability in the accompanying balance sheets.
Through March, 1999, under the National Pension Plan of Korea, the Company
was required to transfer a certain portion of retirement allowances for
employees to the National Pension Fund. The amount transferred will reduce
the retirement and severance benefits amount to be payable to the employees
when they leave the Company and is accordingly reflected as a reduction of
the retirement and severance benefits liability in the accompanying balance
sheets. Since April 1999, however, due to the new regulation effective
April 1999, such transfers to the National Pension Fund are no longer
required.
Foreign Currency Translation
Monetary assets and liabilities denominated in foreign currencies are
translated into Korean won at the balance sheet date, with the resulting
gains and losses recognized in current results of operations. Monetary
assets and liabilities denominated in foreign currencies are translated
into Korean won at W929.6 to US$1 (2005: W1,013.0 to US$1), the rate of
exchange on December 31, 2006 that is permitted by the Financial Accounting
Standards. Non-monetary assets and liabilities denominated in foreign
currencies, which are stated at historical cost, are translated into Korean
won at the foreign exchange rate ruling at the date of the transaction.
Derivatives
Derivative instruments are recorded either as an asset or a liability
measured principally at the fair value of rights or obligations associated
with the derivative contracts. The unrealized gain or loss from derivative
transactions is recognized in current operations.
However, for derivative instruments with the purpose of hedging the
exposure to the variability of cash flows of a forecasted transaction, the
hedge-effective portion of the derivative's gain or loss is deferred as a
capital adjustment, a component of stockholder's equity. The deferred gain
or loss will be adjusted to the related asset or liability resulted from
the forecasted transaction, or adjusted to income when the forecasted
transaction affects income statement. The ineffective portion of the gain
or loss is recognized in current operations.
Forward foreign exchange contracts, which have been made to hedge foreign
exchange receivables and payables in the future, are classified as forward
foreign exchange contracts for hedging purposes. Unrealized gain or loss on
forward foreign exchange contracts for hedging purposes are deferred as
capital adjustment. The deferred gain or loss will be credited or charged
to income when related foreign exchange receivables and payables are
settled.
Valuation of Receivables and Payables at Present Value
Receivables and payables arising from long-term installment transactions,
long-term cash loans/borrowings and other similar loan/borrowing
transactions are stated at present value. The difference between the
nominal value and present value of related receivables or payables is
amortized using the effective interest method. The amount amortized is
included in interest expense or interest income.
Dividends Payable
Dividends are recorded when approved by the board of directors and
shareholders.
Provisions, Contingent Assets and Contingent Liabilities
Provisions are recognized when all of the following are met: (1) an entity
has a present obligation as a result of a past event, (2) it is probable
that an outflow of resources embodying economic benefits will be required
to settle the obligation, and (3) a reliable estimate can be made of the
amount of the obligation.
Where the expenditure required to settle a provision is expected to be
reimbursed by another party, the reimbursement is recognized as a separate
asset when, it is virtually certain that reimbursement will be received if
the Company settles the obligation. The expense relating to a provision is
presented net of the amount recognized for a reimbursement.
Contingent liabilities, a possible obligation depending on whether some
uncertain future event occurs, or a present obligation but payment is not
probable or the amount cannot be measured reliably, are not recognized in
balance sheets but are disclosed in notes to the financial statements.
Contingent assets are disclosed where an inflow of economic benefits is
probable.
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. Voyage charter revenues and associated expenses are recognized
relatively over the duration of the voyage. 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. 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.
Prior Year Adjustments
Prior period adjustments resulting from other than fundamental errors are
charged or credited to net income for the current period. The fundamental
errors are defined as errors with such a significant effect on the
financial statements for one or more prior periods that those financial
statements can no longer be considered to have been reliable at the date of
their issue. The prior period adjustments resulting from the fundamental
errors are charged or credited to the beginning balance of retained income,
and the financial statements of the prior year are restated.
Earnings Per Share
Earnings per share are calculated by dividing net earnings by the
weighted-average number of shares of common stock outstanding during each
period.
Use of Estimates
The preparation of financial statements in accordance with accounting
principles generally accepted in the Republic of Korea requires management
to make estimates and assumptions that affect the amounts reported in the
financial statements and related notes to financial statements. Actual
results could differ from those estimates.
Reclassification of Prior Year Financial Statements
Certain accounts of financial statements as of and for the year ended
December 31, 2005 were reclassified to conform to the current year's
presentation. These reclassifications have not resulted in any change to
reported net income or stockholders' equity. Especially, interest expenses
in statements of income include the amounts that were previously classified
as amortization of discount to present value of long-term accounts payable
amounting to W44,502 million ($47,872 thousand), W28,40 1 million ($30,552
thousand) and W20,348 million ($21,889 thousand) for the years ended 2006,
2005 and 2004, respectively.
3. Basis of Translating Financial Statements
The financial statements are expressed in Korean won and, solely for the
convenience of the reader, have been translated into U.S. dollars at the
rate of W929.6 to US$1, the basic exchange rate on December 31, 2006. This
translation should not be construed as a representation that any or all of
the amounts shown could be converted into U.S. dollars at this or any other
rate.
4. Cash and Cash Equivalents
Cash and cash equivalents as of December 31, 2006 and 2005 are as follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Cash W 1 W - $ 1
Checking accounts 155 12 167
Passbook accounts 2,447 24 2,632
Time deposits 4,035 17,192 4,341
Money market deposit account 1,795 7,856 1,931
--------- ---------- ------------
W 8,433 W 25,084 $ 9,072
--------- ---------- ------------
--------- ---------- ------------
5. Restricted Deposits
Restricted deposits as of December 31, 2006 and 2005 are as follows
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Short-term deposits W 650 W 3,578 $ 699
Long-term deposits 19 19 20
------- ---------- ------------
W 669 W 3,597 $ 719
------- ---------- ------------
------- ---------- ------------
6. Marketable Securities
Marketable securities as of December 31, 2006 and 2005 are summarized as
follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Dongwon Systems W 5 W 7 $ 5
KTF 15 12 16
STX 13,777 9,887 14,821
Hanjin Shipping 31,680 - 34,079
--------- ---------- ------------
W 45,477 W 9,906 $ 48,921
--------- ---------- ------------
--------- ---------- ------------
All marketable securities are listed on the Korean Stock Exchange and
valued at year end market price resulting in a gain in valuation of W5,541
million ($5,961 thousand) in 2006.
7. Investment Securities
(a) Available-for-sale securities
i) Equity securities
2006
--------------------------------------------------------------------------
In millions of Korean won In thousands of US dollar
(unaudited)
------------------------------------------- -----------------------------
Percentage of
ownership Acquisition Book Acquisition Book
(%) Cost Value Cost Value
Korea Economic Daily - W 1 W 1 $ 1 $ 1
BMFoundry 0.50 15 15 16 16
DainFerry 4.72 149 149 160 160
Hanmi Technology Investment 1.82 340 340 366 366
Tongyeong TUG 14.50 290 290 312 312
RedfoxI 3.92 500 - 538 -
Korea Marine Fund 11.76 1,000 1,000 1,076 1,076
Korea FA Systems 29.00 125 125 134 134
Kolico Enterprise 35.00 252 252 271 271
Korea Marine Agency 9.89 202 202 217 217
Overseas Shipping Corporation 9.87 284 284 306 306
Incheon Cold Plaza 10.00 500 500 538 538
------------ ------------- ------------ -----------
W 3,658 W 3,158 $ 3,935 $ 3,397
------------ ------------- ------------ -----------
------------ ------------- ------------ -----------
Certain investments in non-marketable equity securities in which the
Company holds 20% or more interests have been recorded at costs if total
assets of each investee is less than W7,000 million ($7,530 thousand) and
the differences between the acquisition costs and the value of the
investments under the equity method are not significant.
The Company recognized impairment loss of W500 million ($538 thousand) from
investment in Redfox I in 2004.
2005
-------------------------
In millions of Korean won
-------------------------
Percentage of Acquisition Book
ownership (%) Cost Value
Korea Economic Daily - W 1 W 1
BM Foundry 0.50 15 15
Dain Ferry 4.72 149 149
Hanmi Technology Investment 1.82 340 340
Tongyeong TUG 14.50 290 290
Redfox I 3.92 500 -
Korea Marine Fund 11.76 1,000 1,000
Korea FA Systems 29.00 125 125
Kolico Enterprise 35.00 252 252
Korea Marine Agency 9.89 202 202
Overseas Shipping Corporation 9.87 284 284
-------- -------
W 3,158 W 2,658
======== =======
(ii) Debt securities
(in millions of Korean won and
thousands of US dollar)
Maturity 2006 2005 2006
(unaudited)
---- -------- ---------
Subordinated bonds (Note 18) Jan 31, 2008 W 5 W 5,488 $ 5
---- -------- ---------
---- -------- ---------
(b) Investment securities under the equity method.
Investments in affiliated companies accounted for using the equity method
for the years ended 2006, 2005 and 2004 are as follows:
2006 (In millions of Korean won)
------------------------------------------------------------------------------------
Adjustment to
------------------------------------------------
Owner Beginning Equity Ending
ship balance Capital in balance
Affiliates (%) (2006) Acquisition Dividends adjustment earnings (2006)
------------------------ --------- ----------- --------- ---------- -------- --------
Kwangyang
Marine
Co.,Ltd 58.85 W 18,962 W - W (459) W (909) W 2,614 W 20,208
Korea LNG
Trading 36.00 - 900 - - - 900
Korea Line
(Singapore) 100.00 - 9,588 - - - 9,588
---------- ----------- ---------- ---------- -------- --------
W 18,962 W 10,488 W (459) W (909) W 2,614 W 30,696
---------- ----------- ---------- ---------- -------- --------
---------- ----------- ---------- ---------- -------- --------
2006 (In thousands of US dollar) (unaudited)
------------------------------------------------------------------------------------
Adjustment to
------------------------------------------------
Owner Beginning Equity Ending
ship balance Capital in balance
Affiliates (%) (2006) Acquisition Dividends adjustment earnings (2006)
------------------------ --------- ----------- --------- ---------- -------- --------
Kwangyang
Marine
Co.,Ltd 58.85 $ 20,398 $ - $ (494) $ (978) $ 2,812 $ 21,738
Korea LNG
Trading 36.00 - 968 - - - 968
KoreaLine
(Singapore) 100.00 - 10,315 - - - 10,315
---------- ----------- ---------- ---------- -------- --------
$ 20,398 $ 11,283 $ (494) $ (978) $ 2,812 $ 33,021
---------- ----------- ---------- ---------- -------- --------
The investments in Korea LNG Trading Co., Ltd and Korea Line (Singapore)
Pte. Ltd. are recorded at cost as their financial statements are not
available yet. However, the Company's management believes taht the equity
pick up would be immaterial since the companies were newly established in
2006.
2005 (In millions of Korean won)
--------------------------------------------------------------
Adjustment to
----------------------------------------
Owner Beginning Equity Ending
ship balance Capital in balance
Affiliates (%) (2005) Dividends adjustment earnings (2005)
------------------------ --------- --------- ---------- -------- --------
Kwangyang
Marine
Co.,Ltd 58.85 W 14,903 W (306) W 1,452 W 2,913 W 18,962
--------- -------- --------- ------- --------
2004 (In millions of Korean won)
--------------------------------------------------------------
Adjustment to
----------------------------------------
Owner Beginning Equity Ending
ship balance Capital in balance
Affiliates (%) (2004) Dividends adjustment earnings (2004)
------------------------ --------- --------- ---------- -------- --------
Kwangyang
Marine
Co.,Ltd 58.85 W 11,664 W (306) W (61) W 3,606 W 14,903
--------- -------- --------- ------- --------
Details of the elimination of unrealized profits arising from inter company
transactions which have been reflected in the net income for the years
ended December 31, 2006, 2005 and 2004 are as follows.
(in millions of Korean won
and thousands of US dollar) 2006 2005 2004 2006
(unaudited)
Kwangyang Marine Co., Ltd W 109 W 109 W - $ 117
----- ----- ----- ---------
A summary of financial information of Kwangyang Marine Co., Ltd. as of and
for the years ended December 31, 2006,2005 and 2004 are as follows:
(in millions of Korean won
and thousands of US dollar) 2006 2005 2004 2006
(unaudited)
Assets W 53,621 W 60,701 W 61,326 $57,682
Liabilities 19,094 28,292 36,000 20,540
Sales 31,985 33,250 30,727 34,407
Net earnings 4,442 5,135 5,868 4,778
8. Property, Ships and Equipment
Property, ships and equipment as of December 31, 2006 and 2005 are
summarized as follows:
(in millions of Korean won
and thousands of US dollar) 2006 2005 2006
(unaudited)
Land W 34,973 W 8,406 $37,622
Buildings and structures 8,494 8,494 9,137
Ships 1,397,742 1,231,273 1,503,595
Vehicles 261 308 281
Tools and furniture 1,651 1,597 1,776
Construction-in-progress 55,025 42,397 59,192
----------- ----------- -----------
1,498,146 1,292,475 1,611,603
Less accumulated depreciation (371,927) (312,241) (400,094)
------------ ------------ -----------
W 1,126,219 W 980,234 $1,211,509
----------- ------------ ----------
The Company revalued its property, ships and equipment a number of times
before 1999 under the then Korean Assets Revaluation Law. As a result, the
Company recorded a revaluation surplus of W183,357 million ($197,243
thousand), net of revaluation tax. W148,137 million ($159,356 thousand) of
the revaluation surplus was used to offset accumulated deficit and W10,270
million ($11,048 thousand) was transferred to capital in a stock dividend
and the balance of W24,950 million ($26,840 thousand) remains in capital
surplus at December 31, 2006.
The officially declared value of lands which is used for the various
government purposes at December 31, 2006 and 2005, as announced by the
Ministry of Construction and Transportation, are W26,368 million ($28,365
thousand), and W9,304 million ($10,009 thousand), respectively. The
officially declared land value, which is used for tax assessment purposes,
is not intended to represent fair value.
9. Pledged Assets and Guarantees
As of December 31, 2006 and 2005, the following assets stated at book value
are pledged as collateral for the loans:
(in millions of Korean won and thousands
of US dollar) 2006 2005 2006
(unaudited)
Short-term deposits W 650 W 3,578 $ 699
----- ------- -----
The Company has been provided with guarantees from financial institutions
in the amount of W 2,420 million ($2,603 thousand) as of December 31, 2005
for the Company's contracts of affreightment.
10. Insured Assets
As of December 31, 2006, ships, buildings, tools, furniture and fixtures
were insured against fire damage up to W1,329,072 million ($1,429,725
thousand). In addition, the Company maintains insurance policies covering
loss and liability arising from employees' accidents and automobile
accidents.
11. Intangible Assets Intangible assets as of December 31, 2006 and 2005 are
summarized as follows:
(in millions of Korean won and thousands
of US dollar) 2006 2005 2006
(unaudited)
Rights from donated assets W - W 2,704 $ -
------ ------- ------
The Company donated a building in 2004 to Pohang Regional Maritime Affairs
and Fisheries Office and received an exemption from paying docking charges
for a period, estimated to be two years, equal to the value of the building
donated. The cost of the donated building was, therefore, recognized as an
intangible asset and amortized over two years.
12. Long-term Borrowings
Long-term borrowings as of December 31, 2006 and 2005 are summarized as
follows:
(in millions of Korean won and
thousands of US dollar) Interest rate 2006 2005 2006
per annum (unaudited)
Local currency (Korean won) debt:
Korea Citi Bank 3.7-5.5% W 1,235 W 1,292 $ 1,329
Kookmin Bank 3.7% 273 357 293
Korea Exchange Bank 3.7-5.2% 233 327 251
Woori Bank 3.5% 135 - 146
Hana Capital 5.9% 100 - 107
Foreign currency (US dollar) debt:
KDB Capital 6.9% - 24,202 -
---------- --------- ---------
1,976 26,178 2,126
Less : current portion (357) (2,837) (384)
---------- --------- ---------
W 1,619 W 23,341 $ 1,742
---------- --------- ---------
Aggregate principle maturities for the Company's long-term borrowing as of
December 31, 2006 are as follows:
Year ending December 31, In millions of Korean won In thousands of US dollar
(unaudited)
------------------------- -------------------------
2007 W 357 $ 384
2008 436 469
2009 484 521
Thereafter 699 752
--------------- ------------
W 1,976 $ 2,126
13. Debentures
Debentures issued by the Company and outstanding as of December 31, 2006
and 2005 are summarized as follows:
(a) Debentures
(in millions of Korean won and Interest rate 2006 2005 2006
thousands of US dollar) per annum (unaudited)
16th issue 5.75% W 20,000 W - $ 21,515
17th issue 5.75% 10,000 - 10,757
18th issue 5.87% 24,900 - 26,786
--------- ------ ---------
54,900 - 59,058
Less: Discount on debentures - - -
--------- ------ ---------
W 54,900 W - $ 59,058
The Company issued two debentures with face amounts of W20,000 million
($21,515 thousand) and W10,000 million ($10,757 thousand), respectively,
on May 10, 2006, which mature on May 10, 2009. The Company's 18th debenture
with a face amount of W24,900 million ($26,786 thousand) issued on December
27, 2006 expires December 27, 2009.
(b) Bonds with stock warrants
(in millions of Korean won and Interest rate 2006 2005 2006
thousands of US dollar) per annum (unaudited)
Face value 6.2% W 9,500 W 20,000 W $ 10,219
Less : Less stock warrant adjustment (633) (1,821) (681)
-------- --------- ------------
W 8,867 W 18,179 $ 9,538
-------- --------- ------------
W 2,539 W 2,539 $ 2,731
On April 13, 2004, the Company issued bonds with stock warrants with a face
amount of W20,000 million ($21,515 thousand) to Green Fire and Marine
Insurance Co. Holders of bonds with warrants are entitled to exercise the
warrants from April 13, 2006 to March 13, 2009. The exercise price varies
every quarter based on the terms of the bond and current prices. The
exercise price at the time of issue was W25,100 ($27.00) per share of
common stock, which has changed to W23,500 ($25.28) per share at December
31, 2006.
The Company redeemed W10,500 million ($11,295 thousand) of bonds with
stock warrants in 2006 which resulted in a loss on early redemption
amounting to W873 million ($939 thousand). The stock warrants are
detachable and, accordingly, remain exercisable until their maturity in
March 2009.
(c) Convertible bonds
(in millions of Korean won and Interest rate 2006
thousands of US dollar) per annum 2006 2005 (unaudited)
15th issue 4.0% W 20,000 W 20,000 $ 21,515
Guaranteed interest 886 886 953
Less: Current portion (20,493) - (22,045)
Less: Conversion rights adjustment (345) (835) (371)
Less: Discount on debentures (48) (116) (52)
--------- --------- -----------
W - W 19,935 $ -
--------- --------- -----------
Value of conversion rights W 553 W 553 $ 595
On September 6, 2004, convertible bonds were issued with a face amount of
W20,000 million ($21,515 thousand) which was bought by Hana bank. Holders
of convertible bonds are entitled to convert bonds into shares of the
Company's common stock from September 6, 2005 to September 6, 2007. The
exercise price changes every quarter based on the market price and it is
w31,045 ($33.40) per share of common stock at December 31, 2006(at the time
of issue it was w44,350 ($47.70)). In case of non-conversion, the
redemption price for the convertible bonds will include the spread, which
is the difference between the stated interest rate and the guaranteed
interest rate.
14. Leases
(a) As of December 31, 2006 and 2005, the gross amount of two ships and
related accumulated depreciation recorded under capital leases were as
follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Ships W - W 58,754 $ -
Less: accumulated depreciation - (18,034) -
--------------------------------
W - W 40,720 $ -
Depreciation charged on assets held under capital leases for the years
ended December 31, 2005 and 2004 amounted to w2,468 million ($2,655
thousand) each year. The capital lease contracts on these ships were
changed to Bareboat Charter Hire Purchase (BBCHP) contracts in 2006. As
explained in note 15, related assets remain on the Company's books as of
December 31, 2006 with a matching entry to long-term accounts payable.
(b) The charges on bare-boat charters and time charters are treated as
operating leases and expensed in proportion to related charter
periods.
15. Long-term Accounts Payable - Other
Long-term accounts payable-other as of December 31, 2006 and 2005 are
summarized as follows:
2006 2005 2006
(in millions of Korean won and Interest rate (unaudited)
thousands of US dollar) Per annum
Hyundai Libor+1.00% W 4,827 W 8,045 $ 5,193
Hyundai Libor+1.06% 314 - 338
SK Libor+0.99% 4,285 9,381 4,610
Hanjin Shipping Libor+1.06% 5,134 8,393 5,523
Horizon Maritime Libor+0.87% 278,562 326,039 299,658
Meridian Maritime Libor+1.16% 295,814 346,231 318,216
Giant Marine Shipping Libor+1.65% 2,911 9,742 3,131
Treasure Maritime Libor+1.25% 20,229 26,748 21,761
G. Alliance Maritime Libor+1.80% 12,723 15,354 13,687
Begonia Maritime Libor+1.30% 48,679 63,185 52,366
Global Navigation Libor+1.38% 32,643 38,448 35,115
Global Sea Int'l S.A Libor+0.55% 39,578 19,579 42,575
Goonzaran Maritime S.A Libor+0.60% 14,475 20,286 15,572
Bluebell Maritime S.A Libor+0.60% 18,542 25,984 19,946
Daehan Contribution
Shipping Co. Libor+1.25% 41,217 - 44,338
Daehan Contribution
Shipping Co 6.15% 17,982 - 19,344
KSF 8 Int'l S.A Libor+1.25% 6,976 - 7,504
KSF 8 Int'l S.A Libor+0.47% 37,219 - 40,038
KSF 8 Int'l S.A 6.15% 18,263 - 19,646
Union Int'l Maritime Libor+0.32% 43,288 - 46,566
Union Int'l Maritime Libor+0.25% 14,370 - 15,457
----------- ------------ -----------
958,031 917,415 1,030,584
Less : discounts to present value (294,396) (301,325) (316,691)
Less : current portion (59,720) (56,939) (64,243)
----------- ------------ -----------
W 603,915 W 559,151 $ 649,650
The Company purchases ships on long-term installments according to Bareboat
Charter Hire Purchase (BBCHP) contracts and acquires the ownership after
the last installment is paid. However, the Company books as fixed assets
the total amount of installments with a matching entry to long-term
accounts payable when the ships are delivered. When the installment is
paid, the interest portion is charged to interest expense and the principal
amount is offset against long-term payables.
15. Long-term Accounts Payable - Other, Continued
Aggregate principal maturities for the Company's long-term accounts payable
- other as of December 31, 2006 are summarized as follows:
In thousands of In millions of In thousands
Year ending December 31 Japan yen Korean won of US dollars
----------------------- --------- ---------- -------------
2007 (Y) 276,551 W 1,480 $ 103,765
2008 276,069 1,484 90,393
2009 275,364 1,480 85,790
Thereafter 2,400,610 31,801 684,492
------------- ---------- ----------
(Y) 3,228,594 W 36,245 $ 964,440
16. Valuation of Receivables and Payables at Present Value
Long-term accounts payable stated at present value as of December 31, 2006
and 2005 are as follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Nominal amount W 958,031 W 917,415 $ 1,030,584
Discount to present value (294,396) (301,325) (316,691)
---------- ----------- -------------
Book value including W 663,635 W 616,090 $ 713,893
current portion
The Company purchases ships on long-term installments based on Bareboat
Charter Hire Purchase (BBCHP) contracts and repays the installments over 3
to 20 years. The Company recorded sum of the principal and related interest
as long-term accounts payable and then classified the related interest as
the discount to present value of long-term accounts payable. The discount
to present value is amortized using the effective interest method over the
payment period and included in current expenses. When each installment is
paid, variances of LIBOR between inception and payment date are adjusted to
the interest expense.
17. Accrued Severance Indemnities
Changes in accrued severance indemnities during the years ended December
31, 2006 and 2005 are summarized as follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Balance at beginning of year W 7,099 W 6,212 $ 7,637
Provision for the year 2,157 2,203 2,320
Payments during the year (1,574) (1,316) (1,693)
--------- --------- ---------
Balance at end of year 7,682 7,099 8,264
Transfer to National Pension Fund (116) (125) (125)
Deposits in employees' severance
benefit insurance (3,864) (3,300) (4,157)
W 3,702 W 3,674 $ 3,982
Under the severance benefits insurance contract, payments of the Company's
accrued severance indemnities to employees are guaranteed to the extent of
the deposits held at Korea Life Insurance Co., Ltd. The deposits at Korea
Life Insurance Co., Ltd are, therefore, presented as a deduction from the
retirement and severance benefits liability.
18. Sale of Accounts Receivable
The Company has a contract of affreightment (COA) with POSCO to provide
shipping services. On July 23, 2002, the Company sold present and future
accounts receivable from POSCO during the period from June 19, 2002 to
January 31, 2008 to Korea Line Asset Securitization Specialty Limited (the
"SPC") for w128,821 million ($138,577 thousand) and recorded the associated
liability as a part of long-term advance received in the balance sheet.
Relating to this, the SPC has issued to the Company a subordinated bond of
w50,000 million ($53,787 thousand). As of December 31, 2006, the balances
of long-term advance received and the subordinated bond are w6,311 million
($6,789 thousand) and w5 million ($5 thousand), respectively. The Company's
share of the SPC's expected residual income, which will be distributed at
the time of its liquidation, is recorded as other accounts receivable in
the amount of w21,200 million ($22,806 thousand) as of December 31, 2006.
19. Assets and Liabilities Denominated in Foreign Currencies
Details of assets and liabilities denominated in foreign currencies as of
December 31, 2006 and 2005 are as follows:
2006 2005
----------------------------------- -------------------------------
Foreign Korean won Foreign Korean won
Currency Equivalent Currency Equivalent
(in thousands) (in millions) (in thousands) (in millions)
Deposits USD 6,953 W 6,464 USD 16,972 W 17,193
YEN 187 1 YEN - -
Accounts receivable USD 19,261 17,905 USD 24,788 25,110
Other receivables USD 970 902 USD 2,636 2,670
----------------- --------------- ---------------- ------------
Total USD 27,184 USD 44,396
YEN 187 W 25,272 YEN - W 44,973
Trade payables USD 25,957 W 24,130 USD 23,512 W 23,818
Long-term accounts USD 664,337 617,568 USD 582,611 590,185
payable-other including
current portion YEN 2,814,293 22,003 YEN 3,012,469 25,904
Long-term borrowings
including current portion USD - - USD 23,891 24,202
----------------- ------------- ---------------- ------------
Total USD 690,294 USD 630,014
YEN 2,814,293 W 663,701 YEN 3,012,469 W 664,109
20. Capital Surplus
Capital surplus as of December 31, 2006 and 2005 are summarized as follows:
(in millions of Korean won and thousands
of US dollar) 2006 2005 2006
(unaudited)
Additional paid in capital W 4,041 W 4,041 $ 4,347
Assets revaluation surplus (Note 8) 24,950 24,950 26,840
Gain on sale of treasury stock 17,985 13,322 19,346
Value of conversion rights 553 553 595
Value of stock warrants 2,539 2,539 2,731
W 50,068 W 45,405 $ 53,859
21. Appropriated Retained Earnings
Appropriated retained earnings as of December 31, 2006 and 2005 are
summarized as follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2006
(unaudited)
Legal reserve W 14,000 W 13,000 $ 15,060
Reserve for improvement of financial
structure 28,701 28,701 30,875
Reserve for special depreciation 7,507 7,507 8,076
Reserve for business expansion 90,000 50,000 96,816
Reserve for business rationalization 115,000 85,000 123,709
Other voluntary reserves 37,000 29,000 39,802
---------- ---------- ---------
W 292,208 W 213,208 $ 314,338
(a) Legal Reserve and Reserve for Improvement of Financial Structure
The Korean Commercial Code requires the Company to appropriate as legal
reserve an amount equal to at least 10% of cash dividends for each
accounting period until the reserve equals 50% of stated capital.
Listed companies are required to set up as reserve for financial structure
improvement an amount calculated based on a certain percentage of net gains
on sale of fixed assets, net of taxes and on net earnings until the net
worth ratio reaches 30%.
The above reserves may be used to reduce deficit or transferred to the
stated capital through free issues of shares.
(b) Reserves Set Up for Tax Purposes
The Company is also allowed to make certain deductions from taxable income
and set up reserve for special depreciation by appropriating retained
earnings. The Company also provides reserves for business expansion and
rationalization for future investments. The unused portion of the reserves
is generally added back to taxable income over three years after certain
grace periods.
22. Treasury Stock
The Company is allowed to deal in its own shares under the Korean
Securities Transaction Law to stabilize its share price in the stock
market. The Company disposed of 700,000 shares of the Company's own stock
out of its total share of 779,530 in 2006, which resulted in a gain
amounting to W6,430 million ($6,917 thousand) before related tax. The
amount was reflected in the capital surplus of the shareholders' equity
section after offsetting the tax effect of W1,768 million ($1,902
thousand). The remaining 79,530 shares at December 31, 2006, which were
recorded at a cost of W2,676 million ($2,879 thousand) will be sold
depending on market situation.
23. Related Party Transactions
(a) Significant transactions with the related parties for the years ended
December 31, 2006, 2005 and 2004 are as follows:
(in millions of Korean won and thousands of US dollar)
Related parties Transactions 2006 2005 2004 2006
(unaudited)
Kolico Enterprises Ltd. Supplies expenses W 3,883 W 3,560 W 3,768 $ 4,177
Service fees 99 221 231 106
Rental revenues 45 45 45 48
Kwangyang Marine Agency fees 120 203 176 129
Co.,Ltd. Rental revenues 6 6 3 6
Disposition of
Investment - 135 - -
Korea Marine Agency Management fees 13,907 12,553 9,688 14,960
Rental revenues 86 86 86 93
Overseas Shipping Cargo service fees 297 414 238 319
Corp. Rental revenues 5 11 15 5
Korea F.A systems Service fees 375 1,051 1,612 403
Korea Line(Singapore) Transfer of
Pte. Ltd. ships under
Construction 9,351 - - 10,059
Capital injection 9,588 - - 10,314
Korea LNG Trading Capital injection 900 - - 968
(b) Significant account balances with the related parties as of December
31, 2006 and 2005 are as follows:
(in millions of Korean won and thousands of US dollar)
Related parties Transactions 2006 2005 2006
(unaudited)
Korea F.A. systems Trade payable W - W - $ -
Korea Marine
Agency Trade payable - 320 -
Overseas Shipping
Corp. Trade payable 167 134 180
Kolico Enterprises Ltd Trade payable 1,181 715 1,270
(c) The guarantees the Company has provided for related parties as of
December 31, 2006 are as follows:
In thousands of US
Related Parties Types of guarantee dollar Guaranteed amount Lender
--------------- ------------------ ---------------------- ------
Kwangyang Marine Lease $ 834 Jeil Citi Lease
Co.,Ltd. Lease 10,402 Shinhan Bank
Kolico Enterprises Ltd Short-term borrowings 699 Hana Bank
$ 11,935
24. Selling, General and Administrative Expenses
Selling, general and administrative expenses for the years ended December
31, 2006, 2005 and 2004 are summarized as follows:
(in millions of Korean won and 2006
thousands of US dollar) 2006 2005 2004 (unaudited)
Salaries W 5,750 W 5,103 W 4,419 $ 6,185
Retirement allowance 842 875 694 906
Employee benefits 753 693 772 810
Rental expenses 71 58 65 76
Travel 245 233 247 264
Vehicle maintenance 130 146 103 140
Communication 23 21 24 25
Utility expenses 101 101 84 109
Taxes and dues 267 238 215 287
Supplies 51 46 52 55
Publication 48 54 65 52
Entertainment 256 242 223 275
Depreciation 382 387 328 411
Repairs 36 28 20 39
Advertising 45 42 147 48
Service fees 356 1,212 1,320 383
Training 24 13 22 26
Amortization 2,704 2,704 - 2,909
Bad debt expenses - - 418 -
Others 1,236 970 1,030 1,329
----------- --------- --------- ---------
W 13,320 W 13,166 W 10,248 $ 14,329
25. Value Added Information
The components of shipping costs and selling and administrative expenses
which are necessary in calculating added value for the years ended December
31, 2006, 2005 and 2004 are summarized as follows:
(in millions of Korean won and 2006 2005 2004 2006
thousands of US dollar) (unaudited)
Wages and salaries W 29,178 W 26,400 W 22,067 $ 31,389
Severance benefits 2,157 2,203 2,593 2,320
Employee welfare 753 693 772 810
Depreciation 59,754 54,128 48,975 64,279
Rent 71 58 65 76
Taxes and dues 267 238 215 287
--------- ---------- --------- ----------
W 92,180 W 83,720 W 74,687 $ 99,161
26. Employee Welfare and Contributions
The Company maintains a scholarship fund, athletic facilities, worker's
accident compensation insurance, unemployment insurance and medical
insurance for the employee welfare. The Company has spent on such employee
benefit the amount of W753 million ($810 thousand), W693 million ($745
thousand) and W772 million ($830 thousand), for the years ended December
31, 2006, 2005 and 2004 respectively.
The Company donated W88 million ($95 thousand), W208 million ($224
thousand) and W403 million ($434 thousand) to social welfare bodies for the
years ended December 31, 2006, 2005 and 2004 respectively.
27. Income Taxes
(a) The components of income tax expense for the years ended December 31,
2006, 2005 and 2004 are as follows:
(in millions of Korean won and
thousands of US dollar) 2006 2005 2004 2006
(unaudited)
Current income taxes W 5,284 W 3,033 W 19,597 $ 5,684
Deferred income taxes 2,338 4,362 17,481 2,515
-------- -------- --------- --------
W 7,622 W 7,395 W 37,078 $ 8,199
The Company offset tax effect of W250 million ($269 thousand) against
capital adjustment, a component of stockholders' equity, derived from
equity in capital adjustments of affiliates amounting to W909 million ($978
thousand) during 2006. The tax effect of W1,768 million ($1,902 thousand)
in 2006 was also offset against capital surplus derived from gain on sale
of treasury stock amounting to W6,430 million ($6,917 thousand).
(b) Under the new provision of Korean tax law enacted from 2005, the
Company elected to apply tonnage tax system over five years from 2005
to 2009 to its international shipping business. Non shipping income or
loss is still taxable under the normal corporate income tax law at the
rates of 14.3% up to w100 million and at 27.5% for net income over
w100 million.
(c) The effective tax rates, after applying new provisions from 2005 for
shipping income and after adjustments for certain differences between
the amounts reported for financial accounting and income tax purposes
were approximately 6.46%, 7.94% and 15.6% in 2006, 2005 and 2004,
respectively.
(d) Details of the additions and deductions to accounting income for 2006,
2005 and 2004 to compute taxable income are as follows: Additions :
2006
------------------------------------------------------------------
In thousands of US dollar
In millions of Korean won (unaudited)
------------------------------- ------------------------------
Temporary Permanent Temporary Permanent
Difference Difference Difference Difference
Additions:
Reserve for special depreciation W 263 W - $ 283 $ -
Dividend from affiliates 459 - 494 -
Equity in capital surplus of 909 - 978 -
affiliates
Loss on derivatives 96 - 103 -
Gain on sale of treasury stock - 6,430 - 6,917
------------ ---------- ---------- ---------
Sub total 1,727 6,430 1,858 6,917
Deductions :
Gain on marketable securities 5,541 - 5,961 -
Equity in earnings 2,614 - 2,812 -
Special depreciable asset 3,797 - 4,085 -
Equity in capital surplus of - 909 - 978
affiliates
Deduction on dividend received - 373 - 401
------------ ---------- ---------- ---------
Sub total 11,952 1,282 12,858 1,379
------------ ---------- ---------- ---------
Net W (10,225) W 5,148 $ (11,000) $ 5,538
2005
--------------------------
In millions of Korean won
--------------------------
Temporary Permanent
Difference Difference
Additions :
Reserve for special depreciation W 263 W -
Dividend from affiliates 306 -
Equity in surplus of affiliates - 1,453
Loss on derivatives 983 -
---------- ---------
Sub total 1,552 1,453
---------- ---------
Deductions :
Gain on marketable securities 3,904 -
Equity in earnings 2,913 -
Equity in surplus of affiliates 1,453 -
Gain on derivatives 32 -
Impairment loss on investment 1,400 -
---------- ---------
Sub total 9,702 -
---------- ----------
Net W (8,150) W 1,453
2004
--------------------------
In millions of Korean won
--------------------------
Temporary Permanent
Difference Difference
Additions:
Reserve for special depreciation W 263 W -
Accrued income 925 -
Equity securities of affiliates 366 -
Impairment loss from investment 1,900 -
Allowance for bad debt 368 -
Accrued severance benefits 1,690 -
Stock warrants - 2,539
Stock warrants adjustments 274 -
Conversion rights - 552
Redemption premium 886 -
Amortization of conversion rights 146 -
Gain on sale of treasury stock - 14,336
Interest expense - 21
Entertainment - 48
----------- --------------
Sub total 6,818 17,496
----------- --------------
Deductions:
Accrued income 1,002 -
Stock warrants adjustments 2,539 -
Conversion rights 1,439 -
Accrued severance benefits 417 -
Deposit for severance benefits 3,727 -
Deferred foreign currency 7,548 -
translation -
Gain on marketable securities 561 -
Equity in earnings 3,606 -
Equity in capital adjustments - 60
Gain on derivatives 983 -
Loss on marketable securities 5 -
Special depreciation 7,507 -
Reserve for special depreciation 2,215 -
----------- --------------
Sub total 31,549 60
----------- --------------
Net W (24,731) W 17,436
The differences above are for non-shipping business.
(c) Details of gross deferred income tax assets and liabilities arising
from non-shipping business as of December 31, 2006 are as follows:
In millions of Korean won
------------------------------------------------------------
Reversal of temporary Deferred tax assets
Temporary differences (liabilities)
differences -------------------- -------------------
Temporary 2007 and Non-
differences 2006 after Current Current
Investment in affiliate W 41 W - W 41 W - W 11
Impairment loss on investment 500 - 500 - 138
Dividend from affiliate 1,836 - 1,836 - 505
Gain on derivatives 63 - 63 - 17
------------ ------- ---------- --------- --------
Sub-total 2,440 - 2,440 - 671
------------ ------- ---------- --------- --------
Gain on marketable securities (10,007) (10,007) - (2,752) -
Reserve for special depreciation (876) - (876) - (241)
Special depreciation (7,507) - (7,507) - (2,064)
Special depreciable asset (9,809) - (9,809) - (2,697)
Equity in earnings of affiliate (15,507) - (15,507) - (4,265)
------------ ------- ---------- --------- --------
Sub-total (43,706) (10,007) (33,699) (2,752) (9,267)
------------ ------- ---------- --------- --------
Net amount W (41,266) W(10,007) W (31,259) W (2,752) W(8,596)
------------ ------- ---------- --------- --------
In thousands of US dollar (unaudited)
------------------------------------------------------------
Reversal of temporary Deferred tax assets
Temporary differences (liabilities)
differences -------------------- -------------------
Temporary 2007 and Non-
differences 2006 after Current Current
Investment in affiliate $ 44 $ - $ 44 $ - $ 12
Impairment loss on investment 538 - 538 - 148
Dividend from affiliate 1,975 - 1,975 - 544
Gain on derivatives 68 - 68 - 18
------------ ------- ---------- -------- --------
Sub-total 2,625 - 2,625 - 722
Gain on marketable securities (10,765) (10,765) - (2,960) -
Reserve for special depreciation (942) - (942) - (259)
Special depreciation (8,076) - (8,076) - (2,220)
Special depreciable asset (10,552) - (10,552) - (2,901)
Equity in earnings of affiliate (16,681) - (16,681) - (4,589)
------------ ------- ---------- --------- ------
Sub-total (47,016) (10,765) (36,251) (2,960) (9,969)
------------ ------- ---------- --------- ------
Net amount $ (44,391) $(10,765) $(33,626) $(2,960) $(9,247)
------------ ------- ---------- --------- ------
28. Earnings Per Share
Earnings per share are calculated as follows:
(in millions of Korean won and thousands of US dollar)
(except number of shares and earnings per share) 2006 2005 2004 2006
(unaudited)
Net income W 110,404 W 85,765 W 200,826 $ 118,765
Weighted average number of
outstanding common shares 9,312,525 9,399,235 9,338,462 9,312,525
----------- ----------- ---------- ----------
Earnings per share W 11,855 W 9,125 W 21,505$ $ 13
in won and US dollars ----------- ----------- ---------- ----------
Diluted earnings per share are calculated as follows:
(in millions of Korean won and thousands of US dollar) 2006
(except number of shares and earnings per share) 2006 2005 2004 (unaudited)
Net income W 110,404 W 85,765 W 200,826 $ 118,765
Interest expenses on BW 1,120 444 1,007 1,205
Interest expenses on CB 1,358 1,322 396 1,461
----------- ----------- ---------- ----------
Net earnings available for common 112,882 87,531 202,229 121,431
and common equivalent shares
Weighted average number of common
and common equivalent shares 10,139,572 10,214,574 9,585,673 10,139,572
----------- ----------- ---------- ----------
Diluted net earnings per share
in Korean won and US dollars W 11,133 W 8,569 W 21,097 $ 12
----------- ----------- ---------- ----------
Diluted earnings per share are calculated by dividing net income available
for common and common equivalent shares by the weighted average number of
common and common equivalent shares. The warrants and convertible bonds are
assumed to be converted when they are issued. The number of warrants is
included in common stock, in case average market value is over exercising
price, using treasury stock method.
Potentially dilutive securities as of December 31, 2006 are as follows:
Number of potentially dilutive shares
Bonds with stock warrants 851,064
Convertible bonds 644,226
29. Dividends
Dividends are generally proposed based on each year's earnings and are
declared, recorded and paid in the subsequent year. Proposed dividends for
2006, 2005 and 2004 are calculated as follows:
(in millions of Korean won and
thousands of US dollar)
(except number of shares and
earnings per share) 2006 2005 2004 2006
(unaudited)
Number of outstanding shares 9,920,470 9,220,470 9,855,190 9,920,470
Par value (in won) 5,000 5,000 5,000 5.38
Rate 15% 15% 20% 15%
Dividend 7,440 6,916 9,855 8,003
The Company's dividend payout ratios for the years ended December 31, 2006,
2005 and 2004 are shown below:
(in millions of Korean won and
thousands of US dollar)
(except number of shares and
earnings per share) 2006 2005 2004 2006
(unaudited)
Dividend 7,440 6,916 9,855 8,003
Net income 110,404 85,765 200,826 118,765
Dividend payout ratio 6.74% 8.06% 4.91% 6.74%
The Company's dividend yield ratios for the years ended December 31, 2006,
2005 and 2004 are calculated as follows:
(in millions of Korean won and
thousands of US dollar)
(except number of shares and
earnings per share) 2006 2005 2004 2006
(unaudited)
Dividend per share 750 750 1,000 0.81
Market price at balance sheet date 49,500 25,800 35,400 53.25
Dividend yield ratio 1.52% 2.91% 2.82% 1.52%
30. Cash Flow Information
Significant transactions not affecting cash flows for the years ended
December 31, 2006, 2005 and 2004, are as follows:
(in millions of Korean won
and thousands of US dollar)
(except number of shares and
earnings per share) 2006 2005 2004 2006
(unaudited)
Construction-in-progress transferred
to ship W 166,469 W 97,334 W 87,311 $ 179,076
Convertible bonds transferred
to current portion 20,493 - - 22,045
Long-term instruments transferred
to current portion 912 - - 981
Bond transferred to current portion - - 7,000 -
Long-term borrowing transferred
to current portion 357 2,815 2,703 384
Long-term payable-other transferred
to current portion 59,720 95,625 90,215 64,243
Long-term receivable transferred
to current portion 901 1,688 - 969
31. Commitments and Contingencies
(a) The Company has offered 3 checks and notes in blank in respect of
guarantees for payment and performance of contracts as of December 31,
2006.
(b) Various claims involving the Company amounted to $14,287 thousand as
of December 31, 2006, which would be covered by insurance. These
claims arose in the ordinary course of business and significant losses
are not expected to occur from them.
(c) The Company has entered into various long-term shipping contracts with
POSCO, KEPCO, Korea Gas Corporation etc. The freight charges detailed
in these contracts are generally revised every 1 or 2 years.
(d) The Company is planning to purchase 6 bulk carriers of tonnage ranging
from 49,900 to 207,000dwt, 4 chemical and 2 crude oil carriers which
will require total investment of $347.5 million and Y37.69 billion.
The Company plans to borrow $231.75 million and Y33.92 billion from a
SPC formed by Nordea Bank, Citi Bank and Korea Development Bank to
finance the project. The Company has so far paid W54,725 million
($58,869 thousand) which is currently included in construction in
progress. The ships will be delivered over a period until 2012.
(e) The Company jointly acquired 4 LNG carriers that are used by Korea Gas
Corporation to import LNG with other shipping companies. The Company
included in its fixed assets the Company's equity in the cost of the
carriers and recognized revenues and expenses arising from operations
of the carriers in proportion to the Company's interest in each
carrier.
(f) The Company has unused overdraft facilities from various banks
amounting to W25 billion at December 31, 2006.
(g) The Company has the following forward exchange contract outstanding as
of December 31, 2006:
Contract amount
------------------------------------
Settlement Date Buying(thousands) Selling(thousands) Exchange rate
--------------- ----------------- ------------------ -------------
2007.3.23 JPY 406,700 USD 3,489 JPY/USD=116.5
Valuation of the above contract at balance sheet date resulted in a
loss of W63 million ($68 thousand).
(h) The Company has Freight and Hire BCI (the Baltic Capesize Index)
forward contracts as follows:
BCI Position Unit Contract Maturity
---------------------------------------------------------------------
Sell 75,000 U$ 13.00 per M-Ton Jan,Apr,Jul,
M-Ton Oct 2007
Sell 75,000 U$ 13.00 per M-Ton
M-Ton
Sell 25,000 U$ 13.35 per M-Ton Jan 2008-
Freight Route 4 M-Ton Dec 2008
Sell 25,000 U$ 13.00 per M-Ton
M-Ton
Sell 90 day U$ 58,000 per day Jan 2007-
Mar 2007
Sell 91 day U$ 53,850 per day Apr 2007-
Average of Jun 2007
Hire Route 8-11 Buy 365 day U$ 50,750 per day
Buy 365 day U$ 25,750 per day Jan 2007-
Dec 2007
Sell 365 day U$ 30,000 per day
The above contracts were valued at December 31, 2006 resulting in a loss of
W5,787 million ($6,225 thousand).
32. GAAP Reconciliation
Reconciliation to US Generally Accepted Accounting Principles
The financial statements of the Company are prepared in accordance with
generally accepted accounting principles in the Republic of Korea ("Korean
GAAP"), which differ in certain respects from generally accepted accounting
principles in the United States of America ("US GAAP"). Application of US
GAAP would have affected the balance sheet as of December 31, 2006 and 2005
and net income for the three years in the period ended December 31, 2006
described below.
Significant Differences between Korean GAAP and US GAAP
Reconciliation of net income from Korean GAAP to US GAAP
2006 2005 2004
Net income in accordance with Korean GAAP
(in millions of Korean won) 110,404 85,765 200,826
Adjustments:
Capitalization of dry-docking expenditure (b) (3,481) (1,352) 5,840
Capitalization of interest (c) 1,591 1,364 1,674
Asset revaluation (d) 6,041 6,049 6,235
Gain on Sale-leaseback (e) 3,738 5,273 5,575
Convertible bonds (f) 188 176 56
Asset backed securitization (g) (5,712) (2,660) 846
Deferred tax (i) 15,252 22,858 (33,909)
Deferred tax on US GAAP adjustments (i) (2,841) (22,093) (5,298)
Financing cost (j) 107 370 -
Tax leases (k) 4,855 1,680 -
Change in useful economic life (l) 5,764 - -
Functional currency remeasurement (n) (48,186) (19,370) (95,094)
Others - 3 5
---------- ---------- ----------
Net income in accordance with US GAAP
---------- ---------- ----------
(in millions of Korean won) 87,720 78,063 86,756
---------- ---------- ----------
Per Share Data(in Korean won):
Basic earnings per share, as adjusted,
in accordance with U.S. GAAP 9,420 8,305 9,290
Diluted earnings per share, as adjusted,
in accordance with U.S. GAAP 8,768 7,755 9,055
Weighted-average number of shares outstanding 9,312,524 9,399,235 9,338,462
Weighted-average number of dilutive shares 826,214 814,569 278,980
---------- ---------- ----------
Weighted-average number of shares outstanding
and Weighted-average number of dilutive shares 10,138,738 10,213,804 9,617,442
---------- ---------- ----------
Reconciliation of shareholders' equity from Korean GAAP to US GAAP
2006 2005
Total shareholders' equity in accordance with 514,650 383,609
Korean GAAP (in millions of Korean won)
Adjustments:
Capitalization of dry-docking expenditure (b) 6,648 10,129
Capitalization of interest (c) 4,940 3,349
Asset revaluation (d) (77,873) (83,913)
Gain on Sale-leaseback (e) (1,908) (5,646)
Convertible bonds (f) (132) (376)
Asset backed securitization (g) (2,456) 3,256
Deferred tax (i) 15,252 -
Deferred tax on US GAAP adjustments (i) (2,105) 809
Financing cost (j) 477 370
Tax leases (k) 6,503 1,596
Change in useful economic life (l) 5,764 -
Functional currency remeasurement (n) (67,665) 9,085
Others - (1)
------------- ------------
Net assets in accordance with US GAAP
(in millions of Korean won) 402,095 322,267
------------- ------------
The adjustments noted above relate to the following differences between
Korean GAAP and US GAAP:
(a) Consolidation
Under Korean GAAP, the Company presents its primary financial statements on
a non-consolidated basis. In the non-consolidated financial statements,
investments in majority-owned subsidiaries and entities in which the
Company has the ability to exercise significant influence over the
operating and financial policies are accounted for using the equity method.
Under US GAAP, companies are required to consolidate all entities in which
they have, directly or indirectly, a controlling financial interest. There
is no impact of the above difference on the reconciliation statements
presented as these non-consolidated entities are accounted for using the
equity method under Korean GAAP and there is no GAAP difference in
application of the equity method between Korean GAAP and US GAAP.
Under US GAAP, in accordance with FIN 46-R "Consolidation of Variable
Interest Entities", certain variable interest entities (VIEs) are required
to be consolidated by a company if that company is subject to a majority of
the risk of expected loss from the VIEs' activities or entitled to receive
a majority of the entity's expected residual return, or both. The impact of
consolidating VIEs on the reconciliation statements presented are disclosed
under the headings "Asset backed securitization" and "Tax leases". The
consolidation of ships under construction-related VIEs, as described below
in note (m), has no impact on shareholders' equity, net income or earnings
per share as reported under US GAAP.
In order to disclose the impact of consolidation on the US GAAP balance
sheet of the Company, a condensed consolidated balance sheet as of December
31, 2006 and 2005 is presented below:
(in millions of Korean won) 2006 2005
Assets
Current assets 237,585 204,424
Property, ships and equipment, net 1,035,583 1,006,866
Others assets 253,207 192,232
--------- ---------
Total assets 1,526,375 1,403,522
--------- ---------
Liabilities
Current liabilities 391,849 329,480
Long-term liabilities 718,375 740,629
--------- ---------
Total liabilities 1,110,224 1,070,109
--------- ---------
Minority interests 14,056 11,146
Stockholders' equity 402,095 322,267
--------- ---------
Total liabilities and stockholders' equity 1,526,375 1,403,522
--------- ---------
(b) Capitalization of dry-docking expenditure
Under Korean GAAP, dry-docking expenditure associated with the Company's
ships is expensed as incurred. US GAAP permits the capitalization of
dry-docking expenditure when incurred and depreciated. Routine maintenance
and repairs are expensed as incurred. Accordingly, the Company has
capitalized dry-docking expenditure and depreciates them over the period
until the next anticipated dry-docking, which is generally two years.
Capitalized dry-docking expenditures for the years ended December 31, 2006,
2005 and 2004 are as follows:
(in millions of Korean won) 2006 2005 2004
Capitalized dry-docking expenditure 3,524 5,999 11,128
Amortization of capitalized
dry-docking expenditure (7,005) (7,351) (5,288)
------- ------- -------
Net income impact (3,481) (1,352) 5,840
------- ------- -------
(c) Capitalization of interest
Under Korean GAAP, effective from the period beginning after December 31,
2002, interest costs that would have been theoretically avoided had
expenditures not been made for assets which require a period of time to
prepare them for their intended use are generally expensed as incurred,
except when certain criteria are met for capitalization. The Company has
adopted this application and expensed financing costs related to capital
projects including construction of vessels.
Under US GAAP, the Company is required to capitalize the amount that would
have been theoretically avoided had expenditures not been made for assets
which require a period of time to prepare them for their intended use.
Capital projects that have had their progress halted would suspend the
capitalization of interest and would also delay the accumulation of
depreciation during the suspense period.
Interest costs capitalized for the years ended December 31, 2006, 2005 and
2004 are as follows:
(in millions of Korean won) 2006 2005 2005
Capitalized interest 2,510 1,413 1,674
Amortization of capitalized interest (919) (49) -
------ ------ ------
Net income impact 1,591 1,364 1,674
------ ------ ------
(d) Asset revaluation
Under Korean GAAP, certain fixed assets were subject to upward revaluations
in accordance with the Asset Revaluation Law, with the revaluation
increment credited to capital surplus. As a result of this revaluation,
depreciation expense on these assets was adjusted to reflect the increased
basis.
Under US GAAP, such revaluation of fixed assets is not permitted and,
accordingly, depreciation expense should be based on historical cost. This
results in a decrease in depreciation expense and increase in gains or
decrease losses on sales of the revalued assets due to reversal of the
revaluation amounts.
(e) Deferred income from operating leases
Under Korean GAAP, a gain on sale of subsequently leased assets is
recognized in full in the year of sale.
Under US GAAP, in accordance with Statement of Financial Accounting
Standard ("SFAS") 28 "Accounting for sales with leasebacks", income derived
from a gain on the sale of subsequently leased assets is deferred and
amortized in proportion to the related gross rental charged to expense over
the lease term.
(f) Convertible bonds
In September 2004, the Company issued convertible bonds with a face value
of W20,000 million won and carrying an interest rate of 4%.
Under Korean GAAP, on issuance of convertible debt a separate value for the
conversion rights is recognized and the conversion rights are recognized as
an equity item.
Under US GAAP, in accordance with Accounting Practice Bulletin ("APB") 14
"Accounting for Convertible Debt and Debt Issued with Stock Purchase
Warrants ", there is no such separation of the conversion feature and as a
result the Company has treated the debt issue entirely as debt. Thus, the
separate recognition of the conversion rights and related additional
interest expenses are reversed under US GAAP.
(g) Asset backed securitization
In order to raise more cash, in 2002, the Company assigned some of its
future account receivables, for the period from June 19, 2002 to January
31, 2008 to Korea Line Asset Securitization Specialty Limited ("KLASS"), an
entity owned by a financial institution. The Company received cash
amounting to W128,821 million and recorded the associated liability as
part of other long-term liabilities in the balance sheet. As part of the
same transaction the Company bought subordinated bonds amounting to W50,000
million from KLASS.
Under Korean GAAP, the Company does not consolidate KLASS and the liability
to KLASS is shown as a "long-term advance receipt" which is being written
off as receivables are delivered to KLASS according to the assignment
agreement. The subordinated bonds are accounted for as unlisted securities
under investments.
Under US GAAP, the Company has determined that KLASS is a variable interest
entity in which the Company has a variable interest and that the Company is
the primary beneficiary of KLASS. Accordingly, the Company has consolidated
KLASS and the material adjustments include intercompany eliminations of the
"long-term advance receipt" in KLC and the corresponding "advance payment"
in KLASS, recording of the borrowings of KLASS and recording of the income
and expenses of KLASS in the consolidated financial statements of the
Company.
(h) Stock dividends
Under Korean GAAP, stock dividends are recognized at par value.
Under US GAAP, stock dividends are recognized at fair value.
(i) Deferred tax adjustments
Under Korean GAAP, a deferred tax asset is recognized when it is probable
that sufficient taxable profit will be available against which temporary
differences may be utilized. US GAAP requires a more prescriptive approach
when evaluating whether or not a deferred tax asset will ultimately be
realized. A valuation allowance must be established for deferred tax assets
when it is more likely than not that that they will not be realized.
According to the tonnage tax system of Korean tax law, it is applied to the
Company's international shipping business. Non-shipping income or loss is
still taxable under the normal corporate income tax law at the rates of
14.3% up to W100 million and at 27.5% for net income over W100 million.
Accordingly, the deferred tax on US GAAP adjustments includes the effect on
deferred income taxes of the foregoing reconciling items relating to
non-shipping income and loss, as appropriate.
The tonnage tax law was revised and the revision was enacted on December
30, 2006. Under the revised tax law, the calculation method of income tax
based on transportation volume by ton is effective up to December 31, 2009.
Therefore, KLC reinstated the deferred tax balances that arise from the
temporary differences which will reverse after December 31, 2009.
Accordingly, the deferred tax amount in reconciliation of net income is the
effect on deferred income taxes relating to the temporary differences
arising from international shipping income which will reverse after
December 31, 2009.
(j) Financing cost
Under Korean GAAP, financing costs associated with long-term financing are
expensed when incurred.
Under US GAAP, the Company's lease financing costs are to be deferred and
amortized over the term of the lease.
(k) Tax leases
The Company has entered into several UK tax leases. Under both Korean and
US GAAP, the leases are classified as capital leases.
Under Korean GAAP, tax lease-related SPCs are not consolidated.
Under US GAAP, the Company has determined that the tax lease-related
entities are variable interest entities (VIEs) in which the Company has a
variable interest and is the primary beneficiary. The Company has
consolidated these VIEs and the material adjustments are reflected in the
headings "long-term financial instruments" and "long-term advance payments"
and the recording of the income and expenses of the VIEs in the
consolidated US GAAP financials of the Company.
Under US GAAP, the upfront cash consideration for future tax benefit
received from the UK lessor and held by the related SPC is deferred and
recognized as income over the term of the lease. However, under Korean
GAAP, the Company recognizes such tax benefit when the related cash is
transferred to KLC from the SPC because the tax lease-related SPC is not
consolidated by the Company and there is no specific guidance with respect
to the recognition of such tax benefit under Korean GAAP.
(l) Change in useful economic life
A subsidiary of the Company reduced the useful economic life of its vessels
for the sole purpose of conformity with Korean Corporate tax law. Under
Korean GAAP, this change is permissible for small and medium sized
enterprises.
Under US GAAP this change is not permissible.
(m) Ships under construction
In order to raise finance for the construction of its vessels, the Company
entered into agreements with its lenders, which involved the establishment
of Special Purpose Companies ("SPCs"). Under the arrangement the lenders
loaned monies to the SPCs. The SPCs then entered into shipbuilding
contracts with the shipyard. Since the Company also makes an investment in
such SPCs, which are deemed to be an investment in the ships under
construction, the Company recognizes all of the debt related to the ships
under construction during the construction period under US GAAP. Upon
completion of the vessel, the Company will continue to recognize the ships
as well as the related debt under the capital leases with the SPCs that
will become effective upon the delivery of the vessels. Under Korean GAAP,
the Company does not recognize any debt related to the ships under
construction for the construction period nor the consolidated SPCs for
ships under construction. The material adjustments are reflected in the
headings "property, ships and equipment" and "long-term accounts payable"
in the consolidated US GAAP financials of the Company. The impact of these
adjustments on the financials of the Company is the same as that of
consolidating the SPCs related to the ships under construction.
(n) Foreign currency translation
Under Korean GAAP, there are no special provisions for the determination
and application of functional currency. The Company reports its financial
position and results in Korean won. All foreign exchange gains and losses
are reported in net income.
Under US GAAP, in accordance with SFAS 52 "Foreign currency translation"
the Company's functional currency is the US dollar as a majority of
revenues are received in US dollars and a majority of the Company's
expenditures are made in US dollars. The Company has accordingly remeasured
all its assets, liabilities and results of operations using its functional
currency, US dollars. The resulting loss on remeasurement of W 48,186
million (2005: W 19,370 million and 2004: W 95,094 million) has been
recognized in income.
(o) Statements of Cash flow
The amortization of bond discount is included in cash flows from financing
activities on the Company's Korean GAAP cash flow statements whereas such
amortization amount is included in operating activities under US GAAP.
In order, to disclose the impact of consolidation on the US GAAP cash flows
of the Company, condensed statements of cash flows for the years ended
December 31, 2006, 2005 and 2004 are presented below:
(in millions of Korean won) 2006 2005 2004
Operating activities --------- --------- ---------
Net cash provided by operating activities 211,342 157,715 319,331
--------- --------- ---------
Investing activities --------- --------- ---------
Net cash used in investing activities (267,613) (62,108) (322,450)
--------- --------- ---------
Financing activities --------- --------- ---------
Net cash (used in) provided by financing activities 35,048 (110,724) 23,825
--------- --------- ---------
Net change in cash and cash equivalents (21,223) (15,117) 20,706
Cash and cash equivalents at beginning of period 36,271 51,388 30,682
--------- --------- ---------
Cash and cash equivalents at end of period 15,048 36,271 51,388
--------- --------- ---------
(p) Classification difference
Under Korean GAAP, certain income and expense items considered as
non-operating or extraordinary would be considered as operating items under
US GAAP. In addition, Korean GAAP does not require cash balances that are
restricted in use to be separately disclosed. Under US GAAP, such
restricted cash balances would need to be separately presented on the face
of the balance sheet. These reclassifications would have no impact on the
shareholders' equity, net income or earnings per share amounts reported
under US GAAP.