GLNG

Business Context and Reporting Period

Company: Golar LNG Limited (Bermuda-incorporated holding company)

Reporting Period: Fiscal year ended December 31, 2002

Business Overview: Golar LNG owns and operates a fleet of six LNG carriers, all employed under long-term time charters. The company also manages four third-party vessels and has contracts to build four new LNG carriers. The company was formed in May 2001 to acquire LNG operations from Osprey Maritime Limited and Seatankers, entities indirectly controlled by Chairman John Fredriksen, who beneficially owns 50.01% of the outstanding shares.

Key Financial Metrics (Year Ended Dec 31, 2002)

Fleet Data: 6 vessels (average age 21.4 years); Average daily time charter earnings of $59,000; Average daily vessel operating costs of $12,800.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenues increased 14% to $130.6 million, driven by higher average charter rates (up to $59,000/day from $53,600/day) and a significant reduction in offhire days (24 days in 2002 vs. 130 days in 2001).
• Profitability Surge: Net income jumped to $27.1 million from $4.4 million. This was primarily due to higher operating income and a decrease in net financial expenses.
• Financial Expenses: Net financial expenses decreased to $40.4 million from $41.6 million. While interest expense dropped 27% due to lower rates and increased capitalized interest, "Other financial items" increased to $17.9 million (from $12.4 million) due to a $16.5 million mark-to-market charge on interest rate swaps.
• Debt Levels: Total indebtedness rose to $710.3 million to fund newbuilding installments and refinancing activities.

Guidance, Outlook, Risks, and Unusual Items

Outlook and Capital Commitments

• Newbuilding Program: The company has contracts for four new LNG carriers with a total cost of approximately $658.9 million. As of the filing date, the company lacked sufficient financing for the remaining three unfinanced vessels, requiring an additional ~$278 million to meet commitments due in late 2003 and 2004.
• Financing Strategy: Management anticipates funding the newbuildings through a combination of debt, lease financing, and cash flow. In April 2003 (subsequent to year-end), the company executed a lease finance arrangement for five existing vessels, generating a net cash inflow of approximately $32.5 million and refinancing existing debt.
• Strategic Expansion: The company is exploring opportunities in LNG trading, spot charters, and vertical integration into liquefaction and regasification (e.g., a joint venture for a facility in Baja California, Mexico).

Risks and Contingencies

• Customer Concentration: Revenue is heavily concentrated; BG Group plc (52.1%) and Pertamina (46.7%) accounted for 98.8% of 2002 revenues. Loss of these charters would materially interrupt cash flow.
• Financing Risk: Failure to secure the required ~$278 million for newbuildings could result in delays, loss of progress payments, or inability to complete vessels.
• Debt Covenants: Loan agreements contain restrictive covenants, including a requirement that John Fredriksen maintain at least a 25% ownership interest. Breach could trigger default and acceleration of debt.
• Operational Risks: Risks include vessel arrest, maritime liens, insurance coverage limitations, and potential increases in operating costs (crew, insurance, security) due to geopolitical tensions.
• Taxation: The company relies on Section 883 of the U.S. Internal Revenue Code for exemption from U.S. tax on shipping income. Proposed regulations could challenge this exemption, potentially resulting in a 4% tax on U.S. source income.

Investor Verification Checklist

• Financing Status: Verify the status of the ~$278 million financing required for the three unfinanced newbuildings and the impact of the April 2003 lease finance transaction on the balance sheet.
• Customer Concentration: Assess the stability of the long-term charters with BG Group and Pertamina and the terms of renewal options.
• Derivative Accounting: Review the impact of mark-to-market adjustments on interest rate swaps on future earnings volatility.
• Ownership Structure: Confirm John Fredriksen's continued ownership stake remains above the 25% threshold required to avoid debt default.
• Subsequent Events: Review the details of the fire on newbuilding Hull 2215 and the associated delivery delay to 2004, and the compensation arrangements with the shipyard.