Golar LNG (GLNG) - 2022 Q4 - Annual Report

PART I Key Information This section outlines significant risks to Golar LNG's business, including FLNG project profitability, funding, financing, operations, and industry challenges Risk Factors The company identifies risks across FLNG projects, financing, operations, industry, common shares, and tax liabilities - FLNG Gimi Project Risk: The 20-year LOA with BP for FLNG Gimi is critical, with an estimated $4.3 billion in total Adjusted EBITDA backlog (Golar's share is 70%). Delays in project infrastructure delivery could result in substantial damages and postpone the realization of this backlog[28][29] - FLNG Hilli Operational Risk: A production shortfall in 2022 resulted in a $35.8 million non-current contract liability. While an agreement is in principle to compensate for this through overproduction in 2023, failure to execute the formal amendment could defer settlement to 2026, impacting cash flow[30] - Future Projects Risk: The company's ability to complete the conversion of a Mark II FLNG design is contingent on obtaining additional funding. Cost overruns or failure to secure an attractive deployment contract could materially impact business prospects and financial condition[37][38] - Financing Risk: The company is exposed to interest rate volatility due to the transition from LIBOR to SOFR. Most financing agreements are secured by vessels and contain restrictive covenants that could limit business activities and shareholder distributions[48][50][51] - Industry and Regulatory Risk: Operations are subject to extensive and changing laws, particularly concerning climate change and greenhouse gas emissions. These regulations could increase operating costs and influence demand for the company's services[82][83] Information on the Company Golar LNG transitioned to FLNG operations, divesting legacy assets to focus on its FLNG Hilli and Gimi fleet, while developing new Mark II projects History and Development of the Company The company strategically shifted from LNG shipping to FLNG operations, divesting assets in 2021-2022 to simplify its business and fund new FLNG growth - Completed the disposal of investments in Golar Partners and Hygo to NFE in April 2021 for a net consideration of $876.3 million, resulting in a gain of $574.9 million[113] - Completed the disposal of most of its LNG carriers and the FSRU Golar Tundra between March and June 2022 for a net consideration of $697.8 million, realizing a gain of $113.2 million[113] - Sold a significant portion of its NFE shares in 2022 and early 2023, raising over $670 million in aggregate consideration. The remaining NFE shares were used in March 2023 to acquire NFE's interest in Hilli LLC[113] - Fully divested its holdings in CoolCo by February 2023, raising a total net consideration of approximately $153.7 million[114] Business Overview Golar's strategy focuses on FLNG operations, managing FLNG Hilli and Gimi, developing new Mark II projects, and adhering to stringent regulations Asset Overview as of March 17, 2023 | Vessel Name | Year of Delivery/Acceptance | Capacity (Cubic Meters) | Type | Ownership | Counterparty | Current Contract Expiration | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | FLNG Hilli | 2017 | 125,000 | FLNG Moss | 94.6% common units | Perenco/SNH | 2026 | | Gimi | Conversion in progress | 125,000 | FLNG Moss | 70% | BP | 20 years from COD | | Gandria | 1977 | 126,000 | Moss | 100% | In lay-up | Not applicable | | Golar Arctic | 2003 | 140,000 | LNG carrier Membrane | 100% | Asian Shipping Company | 2023 | - FLNG Hilli's capacity utilization was increased to 1.4 million tons per annum (mtpa) from January 2022 through July 2026. However, it underproduced in 2022 (96.5% of contracted capacity), resulting in a $35.8 million contract liability to be settled in 2026[123] - The FLNG Gimi conversion project for BP's GTA Project is 92.5% technically complete as of March 17, 2023. The vessel is designed to produce approximately 2.7 mtpa under a 20-year contract[124][125] - The board of directors approved up to $328.5 million in capital expenditure for a future Mark II FLNG conversion (3.5 mtpa capacity). The company has secured an option to acquire a suitable LNG carrier for this project[131] Operating and Financial Review and Prospects This section analyzes Golar's financial condition and operating results, covering segment performance, liquidity, capital resources, and critical accounting estimates Operating Results Golar reported increased net income and Adjusted EBITDA in 2022, driven by unrealized gains and FLNG segment performance, with results from divested assets presented as discontinued operations Consolidated Net Income to Adjusted EBITDA Reconciliation | (in thousands of $) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net income/(loss) | 939,057 | 560,615 | (167,930) | | Net loss/(income) from discontinued operations | 76,450 | (625,389) | 142,912 | | Depreciation and amortization | 51,712 | 55,362 | 55,940 | | Impairment of long-term assets | 76,155 | — | — | | Unrealized (gain)/loss on oil and gas derivative instruments, net | (288,977) | (179,891) | 45,100 | | Realized and unrealized (gains)/losses on our investment in listed equity securities | (400,966) | 295,777 | — | | Other adjustments (taxes, interest, etc.) | (25,951) | (79,158) | (19,559) | | Adjusted EBITDA | 362,980 | 182,178 | 162,139 | - An impairment charge of $76.2 million was recognized on the LNG carrier Golar Arctic in May 2022, triggered by an agreement for its future sale to Snam following conversion to an FSRU[211] - Unrealized gains on oil and gas derivative instruments totaled $289.0 million in 2022, driven by volatility in TTF gas prices and Brent crude oil price curves affecting the valuation of FLNG Hilli's commodity-linked earnings[213] - The FLNG segment's Adjusted EBITDA increased significantly to $366.9 million in 2022 from $190.6 million in 2021, primarily due to a $207.2 million increase in realized gains on oil and gas derivative instruments[240][245] Liquidity and Capital Resources Golar funds capital-intensive projects through debt, leasing, operations, and asset sales, holding over $1 billion in cash as of December 2022, with significant cash flows from operations - As of December 31, 2022, the company held $1,012.9 million in cash, cash equivalents, and short-term deposits, of which $134.0 million was restricted[267] Summary of Cash Flows (in thousands of $) | Cash Flow Activity | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by continuing operations | 279,054 | 120,381 | 53,656 | | Net cash provided by/(used in) investing activities | 498,423 | (193,424) | (107,323) | | Net cash (used in)/provided by financing activities | (533,363) | 51,798 | (76,735) | | Net increase/(decrease) in cash | 674,959 | 112,366 | (117,869) | Contractual Obligations as of December 31, 2022 (in millions of $) | Obligation Type | Total Obligation | Due in 2023 | Due in 2024 – 2025 | Due in 2026 – 2027 | Due Thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Gross long-term and short-term debt | 715.9 | 7.3 | 261.1 | 116.7 | 330.8 | | Capital lease obligations | 646.5 | 66.0 | 132.0 | 132.0 | 316.5 | | Interest commitments | 235.3 | 17.9 | 96.1 | 61.3 | 60.0 | | FLNG Gimi Capital Expenditure | 525.5 | 385.8 | 139.7 | — | — | | Mark II FLNG Capital Expenditure | 292.7 | 121.0 | 171.7 | — | — | | Total | 2,465.4 | 619.0 | 829.1 | 310.0 | 707.3 | Critical Accounting Estimates Management identifies critical accounting estimates involving significant judgment, including revenue recognition, vessel impairment assessments, and the estimation of volatile vessel market values - Revenue recognition requires significant judgment in determining performance obligations, measuring progress over time, and estimating variable consideration like over/underproduction amounts[293] - Vessel impairment is assessed when events indicate the carrying value may not be recoverable. The 2022 impairment of the Golar Arctic was triggered by the agreement to sell the vessel, which changed its recovery basis from 'use' to 'sale'. Fair value was determined using broker valuations[295][297] - Estimates of vessel market values are based on third-party ship broker valuations and are crucial for impairment assessments and compliance with loan covenants. These values are inherently volatile and involve considerable judgment[300] Directors, Senior Management and Employees This section details Golar's leadership, including board members and executive officers, their compensation, board committee structures, and employee numbers - The Board of Directors is chaired by Tor Olav Trøim, founder of Magni Partners. The executive team is led by CEO Karl Fredrik Staubo and CFO Eduardo Maranhão[303][312] - For the year ended December 31, 2022, aggregate cash compensation for directors and executive officers was $3.6 million, with an additional $0.1 million for pension and retirement benefits[319] - As of December 31, 2022, the company employed approximately 260 shore-based employees and consultants and 230 seafaring employees[324] - Director Tor Olav Trøim beneficially owned 3.94% of common shares, and Director Niels Stolt-Nielsen beneficially owned 2.57% as of March 17, 2023[326] Major Shareholders and Related Party Transactions This section details Golar's ownership structure, identifying major shareholders with over 5% beneficial ownership and noting that most shares are held by a nominee Major Shareholders as of March 17, 2023 | Owner | Common Shares | Percent | | :--- | :--- | :--- | | Orbis Investment Management Limited | 8,055,643 | 7.51 % | | Rubric Capital Management LP | 6,352,765 | 5.92 % | | Cobas Asset Management | 5,416,625 | 5.05 % | - As of March 17, 2023, 99.91% of the company's outstanding common shares were held by CEDE & CO., a nominee of The Depository Trust Company, on behalf of beneficial owners[335] Financial Information This section references consolidated financial statements, discusses a UK tax settlement, outlines the discretionary dividend policy, and notes the repurchase of 1.2 million shares in 2022 - In April 2022, the company settled a long-standing UK tax lease inquiry with HMRC for a payment of $66.4 million[340] - The company's dividend policy is discretionary, guided by earnings, market prospects, and capital requirements. Payouts are subject to board approval and restrictions in loan agreements[341][342] - During 2022, the company purchased 1.2 million of its treasury shares and subsequently cancelled them[344] Additional Information This section details Golar's corporate structure, Bye-laws, U.S. federal income tax considerations (Section 883 Exemption, PFIC risk), and Bermuda tax-exempt status - The company's Bye-laws require a quorum of at least two shareholders for meetings. Special meetings can be called by shareholders holding at least 10% of outstanding shares[352] - U.S. Taxation of Operating Income: The company believes its U.S. Source International Transportation Income is exempt from U.S. federal income tax under the Section 883 Exemption, as it satisfies the 'Publicly Traded Test'[378][379][381] - Passive Foreign Investment Company (PFIC) Risk: The company believes it was not a PFIC for 2022 or prior years, as it treats income from its LTA and charters as services income, not passive income. However, if classified as a PFIC, U.S. shareholders would face adverse tax consequences[397][398] - Bermuda Taxation: The company has been granted a tax-exempt status in Bermuda until March 31, 2035, meaning it currently pays no income, profits, or capital gains tax in Bermuda[410] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign currency, and commodity prices, managed with derivatives, notably for Brent oil and TTF gas prices - Interest Rate Risk: As of Dec 31, 2022, the company had $740.0 million in notional interest rate swaps, covering approximately 95.6% of its floating-rate debt. A 1% increase in floating rates would increase annual interest expense by $0.2 million[419] - Foreign Currency Risk: A 10% depreciation of the U.S. Dollar against the GBP and NOK would have increased 2022 expenses by $1.9 million and $2.4 million, respectively. A similar change against the Euro would have increased crew costs by $1.6 million[420][421] - Commodity Price Risk: The FLNG Hilli's earnings are linked to Brent oil and TTF natural gas prices. For 2022, a 10% change in the Brent price would have impacted the realized gain by $10.1 million, while a 10% change in TTF prices would have impacted the realized gain by $13.2 million[423][424] PART II Controls and Procedures This section confirms the effectiveness of Golar's disclosure controls and internal control over financial reporting as of December 31, 2022 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[430] - Management's assessment concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[434] - The independent registered public accounting firm, Ernst & Young LLP, provided an unqualified attestation report on the effectiveness of the company's internal control over financial reporting[435] Principal Accountant Fees and Services This section details fees billed by Ernst & Young LLP for 2022 and 2021, categorized into Audit, Audit-Related, Tax, and Other Fees, all pre-approved by the board Principal Accountant Fees (in thousands of $) | Fee Category | Fiscal Year 2022 | Fiscal Year 2021 | | :--- | :--- | :--- | | Audit Fees | 1,563 | 1,962 | | Audit-Related Fees | 121 | 148 | | Tax Fees | 260 | 5 | | All Other Fees | — | 72 | Purchases of Equity Securities by the Issuer and Affiliated Purchasers Under a board-approved program, the company repurchased 1.2 million common shares for $25.5 million in 2022, with all repurchased shares subsequently cancelled Share Repurchases in 2022 | Period | Total Shares Purchased | Average Price Paid per Share ($) | Total Value of Shares Purchased ($) | | :--- | :--- | :--- | :--- | | March 2022 | 368,496 | 17.80 | 6,565,840 | | June 2022 | 200,000 | 22.47 | 4,497,020 | | September 2022 | 400,000 | 23.22 | 9,294,733 | | November 2022 | 221,157 | 23.13 | 5,120,583 | | Total 2022 | 1,189,653 | | 25,478,176 | Corporate Governance As a foreign private issuer, Golar LNG follows Bermuda's corporate governance practices, exempt from certain Nasdaq requirements, with board approval for share issuances - The company follows Bermuda's corporate governance practices in lieu of certain Nasdaq requirements, such as not needing a majority-independent board[453][454] - The Audit Committee, Compensation Committee, and Nomination Committee are all composed of independent directors, although this is not strictly required under the foreign private issuer exemption[455][456][457] - Consistent with Bermuda law, the board of directors has the authority to approve share issuances without seeking prior shareholder approval[458] PART III Financial Statements This section presents Golar LNG's audited consolidated financial statements for 2020-2022, prepared under U.S. GAAP, with an unqualified opinion from Ernst & Young LLP Consolidated Financial Statements Golar LNG reported $787.8 million net income in 2022, with total assets at $4.28 billion and stockholders' equity at $2.50 billion as of December 31, 2022 Consolidated Statements of Operations Highlights (in thousands of $) | Line Item | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total operating revenues | 267,740 | 260,273 | 261,388 | | Operating income | 524,090 | 306,707 | 61,099 | | Net income/(loss) from continuing operations | 1,015,507 | (64,774) | (25,018) | | Net (loss)/income from discontinued operations | (76,450) | 625,389 | (142,912) | | Net income/(loss) attributable to stockholders | 787,773 | 413,851 | (273,557) | Consolidated Balance Sheets Highlights (in thousands of $) | Line Item | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total current assets | 1,258,506 | 925,597 | | Total assets | 4,279,560 | 4,948,295 | | Total current liabilities | (414,412) | (1,307,221) | | Total liabilities | (1,379,386) | (2,770,378) | | Total stockholders' equity | 2,500,224 | 1,730,650 | Note 14: Assets and Liabilities Held for Sale and Discontinued Operations This note details significant disposals, including 2022 CoolCo and TundraCo transactions and 2021 Golar Partners and Hygo disposals, classified as discontinued operations - The CoolCo Disposal involved the sale of eight LNG carriers and management entities. The transaction was classified as a discontinued operation on March 1, 2022, and resulted in a net loss of $204.6 million for the year[689][691][688] - The TundraCo Disposal involved the sale of the subsidiary owning the FSRU Golar Tundra to Snam on May 31, 2022. This resulted in a net income from discontinued operations of $128.1 million for the year[697][688] - The 2021 disposal of investments in Golar Partners and Hygo to NFE generated a gain on disposal of $574.9 million[703][704] Note 30: Subsequent Events This note outlines significant post-balance sheet events, including unwinding commodity swaps, full divestment of NFE and CoolCo shares, and acquiring NFE's Hilli LLC interest - In January 2023, the company unwound most of its 2023-2024 TTF-linked commodity swaps, realizing net gains of $75.8 million (for 2023) and $49.5 million (for 2024) to be received in installments[859] - In March 2023, Golar acquired NFE's 50% interest in the common units of Hilli LLC for its remaining 4.1 million NFE shares and $100 million cash, thereby fully divesting from NFE and increasing its stake in FLNG Hilli's earnings[860][865] - In February 2023, the company sold its remaining 4.5 million CoolCo shares, raising net proceeds of $55.8 million and completing its divestment[861] - As part of its FLNG growth strategy, Golar secured an option in February 2023 to acquire a 148,000 cbm LNG carrier for a future Mark II FLNG conversion[862]