GLNG

Business Context and Reporting Period

Company: Golar LNG Limited
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2005
Business Overview: Golar LNG is a leading independent owner and operator of liquefied natural gas (LNG) carriers. As of December 31, 2005, the company operated a fleet of 10 vessels (increasing to 12 by June 2006) and had one newbuilding under construction. The company generates revenue primarily through long-term time charters, with significant exposure to two major customers: BG Group plc (51.2% of 2005 revenue) and Pertamina (37.2% of 2005 revenue).

Key Financial Metrics

Note: Net financial expenses increased to $39.3 million in 2005 from $25.3 million in 2004, driven by higher interest rates and increased debt levels.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 5% to $171.0 million, driven by the addition of new vessels (Golar Winter, Golar Frost, Gracilis). However, this was partially offset by significant commercial waiting time for vessels not on long-term charters.
• Profitability Decline: Net income decreased 38% to $34.5 million. This decline was primarily due to increased net financial expenses (up 55%) and higher administrative expenses (up 44%), which included $2.2 million in project development costs and $1.3 million in restructuring costs.
• Operating Costs: Vessel operating expenses rose 4% to $37.2 million due to fleet expansion, though average daily operating costs per vessel decreased from $11,800 to $10,210 due to a younger fleet average age.
• Equity Earnings: Equity in net earnings of investee (Korea Line Corporation) increased 42% to $18.5 million, reflecting a higher ownership stake (21%) and favorable tax changes in Korea.

Guidance, Outlook, and Risks

Outlook and Capital Commitments

• Newbuilding Program: The company has one newbuilding (Hull 2244) under construction, expected for delivery in June 2007. An additional $108 million in financing is required to meet delivery installments.
• FSRU Project: A contract was signed to convert an existing vessel into a Floating Storage and Regasification Unit (FSRU) at an estimated cost of $50 million. No firm employment for the FSRU has been secured as of the filing date.
• Liquidity: Management believes current facilities are sufficient to meet funding needs through June 2007, pending the securing of additional financing for the remaining newbuilding.

Key Risks and Contingencies

• Customer Concentration: Reliance on BG Group and Pertamina for 88.4% of revenue creates significant risk if these long-term charters are lost or terminated.
• Financing Covenants: Loan and lease agreements contain strict covenants, including a requirement that Chairman John Fredriksen and affiliates maintain at least 25% ownership. Breach could trigger default and vessel seizure.
• Market Volatility: Vessels on short-term charters or in the spot market (Golar Frost, Golar Winter) are exposed to fluctuating charter rates and commercial waiting time.
• Tax Lease Risks: Adverse tax rulings in the UK could require the company to return upfront cash benefits received from lease financing, potentially exceeding $41 million.

Investor Verification Checklist

• Financing Status: Verify the status of the $108 million financing required for the Hull 2244 newbuilding delivery in June 2007.
• FSRU Employment: Confirm if a commercial agreement has been secured for the $50 million FSRU conversion project.
• Customer Contracts: Review the specific termination clauses and renewal options for the BG Group and Pertamina charters, which represent the majority of cash flow.
• Derivative Exposure: Assess the impact of the equity swap with Bank of Nova Scotia and currency swaps on future earnings, particularly given the volatility in the GBP/USD exchange rate.
• Shareholder Ownership: Monitor the ownership percentage of John Fredriksen and affiliated entities to ensure compliance with the 25% minimum threshold required by debt covenants.