FRO

Frontline Plc - Form 20-F Summary (Fiscal Year Ended Dec 31, 2001)

Business Context and Reporting Period

Frontline Ltd. is a Bermuda-based shipping company primarily engaged in the ownership and operation of oil tankers (VLCCs and Suezmaxes) and dry bulk carriers. The reporting period covers the fiscal year ended December 31, 2001. The company operates a modern fleet with an average tanker age of 6.4 years. In 2001, the company expanded its fleet through the acquisition of Mosvold Shipping Limited and the delivery of several newbuildings, while also selling older vessels.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net operating revenues increased 8% to $647.3 million, driven by the full-year consolidation of the Golden Ocean acquisition, partially offset by lower average daily earnings in the tanker market.
• Profitability: Net income rose 22% to $382.7 million. This increase was significantly aided by a one-time credit of $32.3 million resulting from a change in accounting policy for drydocking costs (shifting from accrual to "expense as incurred").
• Operating Expenses: Vessel operating expenses increased 37% to $121.5 million, primarily due to the inclusion of Golden Ocean for the full year and drydocking activities for Suezmax OBO carriers.
• Market Conditions: Spot market rates declined in 2001 compared to 2000. VLCC rates averaged $40,800/day (down from $46,300), and Suezmax rates averaged $30,700/day (down from $35,500).
• Debt Reduction: Total long-term debt decreased by approximately $152 million due to principal repayments and lower interest rates.

Guidance, Outlook, Risks, and Unusual Items

• Going Concern Warning: The independent auditor for the subsidiary Golden Ocean Group Limited issued a report expressing "substantial doubt" about its ability to continue as a going concern. This stems from a $48.1 million loan default by a Golden Ocean subsidiary (Golden Stream Corporation) due March 30, 2002. While management is renegotiating terms, a default could trigger cross-defaults on other loans.
• Accounting Change: The $32.3 million credit to income in 2001 is an unusual item resulting from the change in drydocking accounting policy. Without this, net income would have been lower.
• Legal Contingency: The company received an adverse tax ruling from the Swedish Administrative Court of Appeal regarding a dispute with ICB, resulting in a potential liability of approximately $8.5 million (SEK 90 million). The company is appealing.
• Market Risks: The company faces significant exposure to cyclical tanker rates, bunker fuel price volatility, and environmental regulations (IMO phase-out of single-hull tankers). There is also exposure to foreign currency fluctuations, particularly the Japanese Yen, as some debt and charters are Yen-denominated.
• Strategic Shift: In May 2002, the company announced it would leave the "Tankers Pool" to bring commercial operations of its VLCCs in-house.

Investor Verification Checklist

• Golden Ocean Liquidity: Verify the status of the $48.1 million loan default and the outcome of renegotiations with Griffin Shipping Inc. to assess the risk of cross-defaults.
• Accounting Policy Impact: Review the pro-forma financials excluding the $32.3 million drydocking accounting change to understand core operational profitability.
• Swedish Tax Appeal: Monitor the outcome of the appeal regarding the $8.5 million Swedish tax liability.
• Debt Covenants: Confirm continued compliance with debt covenants, particularly given the liquidity stress at the Golden Ocean subsidiary.
• Spot Rate Exposure: Assess the impact of declining spot rates on future earnings, given the company's significant exposure to the spot market.