GLNG

Business Context and Reporting Period

Company: Golar LNG Limited
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2006
Business Overview: Golar LNG is a leading independent owner and operator of liquefied natural gas (LNG) carriers. As of December 31, 2006, the Company operated a fleet of 12 LNG vessels. The business model relies heavily on long-term time charters, with six vessels under fixed long-term agreements and three under five-year market-related charters with Shell. The remaining three vessels operated in the spot market or were transitioning to Floating Storage and Regasification Unit (FSRU) projects.

Key Financial Metrics

Note: Net Revenues are calculated as Total Operating Revenues less Voyage Expenses, a standard industry metric for LNG shipping.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 40% to $239.7 million, driven by the addition of two new vessels (Grandis and Granosa) and stronger spot market earnings in the fourth quarter of 2006.
• Profitability: Net income more than doubled to $71.7 million from $34.5 million. Operating income rose 78% to $115.1 million.
• Cost Increases: Vessel operating expenses increased 20% to $44.5 million, primarily due to the expanded fleet and rising crew costs. Net financial expenses increased to $52.2 million due to higher interest rates and increased debt levels.
• Fleet Expansion: The fleet grew from 10 to 12 vessels. The average age of the fleet decreased to 13.7 years from 15.3 years.
• Investment Income: Equity in net earnings of investees (primarily Korea Line Corporation) decreased slightly to $17.0 million from $18.5 million.

Guidance, Outlook, and Risks

Outlook and Strategic Projects

• FSRU Conversions: The Company was awarded contracts by Petrobras to convert the Golar Spirit and Golar Winter into Floating Storage and Regasification Units (FSRUs). Employment is expected to commence in Q2 2008 and Q2 2009, respectively, under 10-year charters.
• Spot Market Volatility: Management anticipates a decline in spot market rates and utilization in the first half of 2007 due to an increase in available tonnage and lower spot LNG cargo availability.
• Dividends: Following the 2006 results, the Board declared a dividend of $0.50 per share in March 2007. Subsequent dividends were declared in May and June 2007.

Key Risks

• Customer Concentration: In 2006, BG Group plc (36.9%) and Pertamina (26.1%) accounted for the majority of revenues. Loss of these contracts would significantly impact cash flow.
• Debt Covenants: Loan and lease agreements impose strict financial ratios and restrictions on dividends, additional indebtedness, and capital expenditures. Default could lead to acceleration of debt and loss of vessels.
• Interest Rate and FX Risk: A significant portion of debt is floating rate. The Company uses swaps to hedge, but a 1% increase in rates would increase interest expense by approximately $4.8 million annually. Significant exposure exists to GBP/USD fluctuations regarding UK tax leases.
• Project Execution: Delays in FSRU conversions or failure to meet performance requirements could result in contract cancellations or rate adjustments.

Investor Verification Checklist

• FSRU Project Status: Verify the progress of the Golar Spirit and Golar Winter conversions and the certainty of the Petrobras contracts.
• Debt Maturity Profile: Review the schedule of debt repayments, noting significant balloon payments due in 2008, 2010, and 2011.
• Spot Market Exposure: Assess the impact of the three vessels operating in the spot market and the three Shell vessels on variable earnings in 2007.
• Customer Renewals: Monitor the status of long-term charters with BG Group and Pertamina, specifically the Golar Freeze (expiring 2008) and Golar Spirit (transitioning to FSRU).
• Dividend Sustainability: Evaluate the Company's ability to maintain dividend payments given the high debt service requirements and potential cash flow interruptions from project development.