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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

Commission file number 001- 35123

 

GOLAR LNG PARTNERS LP

(Exact name of Registrant as specified in its charter)

Republic of the Marshall Islands

(Jurisdiction of incorporation or organization)

Par-la-Ville Place 14 Par-la-Ville Road Hamilton, HM 08, Bermuda

(Address of principal executive offices)

Graham Robjohns Par-la-Ville Place 14 Par-la-Ville Road Hamilton, HM 08, Bermuda Telephone:  +1 (441) 295-4705 Facsimile:  +1 (441) 295-3494

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class		Name of each exchange on which registered
Common units representing limited partner interests		Nasdaq Global Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

	23,127,254 Common Units representing limited partner interests
	15,949,831 Subordinated Units representing limited partner interests

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes    x No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes    x No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes    o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes    o No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17    o Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes    x No

 

 

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GOLAR LNG PARTNERS LP

 

INDEX TO REPORT ON FORM 20-F

 

Part I		1
Item 1.	Identity of Directors, Senior Management and Advisers	1
Item 2.	Offer Statistics and Expected Timetable	1
Item 3.	Key Information	1
A.	Selected Financial Data	1
B.	Capitalization and Indebtedness	3
C.	Reasons for the Offer and Use of Proceeds	3
D.	Risk Factors	3
Item 4.	Information on the Partnership	29
A.	History and Development of the Partnership	29
B.	Business Overview	30
C.	Organizational Structure	58
D.	Property, Plants and Equipment	58
Item 4A.	Unresolved Staff Comments	58
Item 5.	Operating and Financial Review and Prospects	58
A.	Operating Results	65
B.	Liquidity and Capital Resources	71
C.	Research and Development	84
D.	Trend Information	84
E.	Off-Balance Sheet Arrangements	84
F.	Tabular Disclosure of Contractual Obligations	85
G.	Safe Harbor	85
Item 6.	Directors, Senior Management and Employees	86
A.	Directors and Senior Management	86
B.	Compensation	88
C.	Board Practices	88
D.	Employees	90
E.	Unit Ownership	90
Item 7.	Major Unitholders and Related Party Transactions	90
A.	Major Unitholders	90
B.	Related Party Transactions	91
C.	Interests of Experts and Counsel	103
Item 8.	Financial Information	103
A.	Consolidated Statements and Other Financial Information	103
B.	Significant Changes	105
Item 9.	The Offer and Listing	105
Item 10.	Additional Information	106
A.	Share Capital	106
B.	Memorandum and Articles of Association	106
C.	Material Contracts	106
D.	Exchange Controls	108
E.	Taxation	108
F.	Dividends and Paying Agents	114
G.	Statements by Experts	114
H.	Documents on Display	114
I.	Subsidiary Information	114
Item 11.	Quantitative and Qualitative Disclosures About Market Risk	114
Item 12.	Description of Securities Other than Equity Securities	115
Part II		116
Item 13.	Defaults, Dividend Arrearages and Delinquencies	116
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	116
Item 15.	Controls and Procedures	116

 

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Item 16.	[Reserved]	116
Item 16A.	Audit Committee Financial Expert	116
Item 16B.	Code of Ethics	116
Item 16C.	Principal Accountant Fees and Services	117
Item 16D.	Exemptions from the Listing Standards for Audit Committees	117
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	117
Item 16F.	Change in Registrants’ Certifying Accountant	117
Item 16G.	Corporate Governance	118
Item 16H.	Mine Safety Disclosure	118
Part III		119
Item 17.	Financial Statements	119
Item 18.	Financial Statements	119
Item 19.	Exhibits	119
SIGNATURES		121

 

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Presentation of Information in this Annual Report

 

This Annual Report on Form 20-F for the year ended December 31, 2011, or the Annual Report, should be read in conjunction with the consolidated and combined financial statements and accompanying notes included in this report. Unless the context otherwise requires, references in this Annual Report to “Golar LNG Partners LP,” “Golar LNG Partners,” the “Partnership,” “we,” “our,” “us” or similar terms refer to Golar LNG Partners LP, a Marshall Islands limited partnership, or any one or more of its subsidiaries, or to all of such entities, and, for periods prior to our initial public offering on April 13, 2011, our Combined Entity.  References to our “Combined Entity” refer to the subsidiaries of Golar LNG Limited that had interests in the vessels in our initial fleet prior to our initial public offering.   References in this Annual Report to “our general partner” refer to Golar GP LLC, the general partner of the Partnership.  References in this Annual Report to “Golar” refer, depending on the context, to Golar LNG Limited (NasdaqGS: GLNG) and to any one or more of its direct and indirect subsidiaries, including Golar LNG Energy Limited or Golar Energy and to Golar Management Limited (or Golar Management).  References in this Annual Report to Golar Wilhelmsen refer to Golar Wilhelmsen AS, a company that is jointly controlled by both Golar and Wilhelmsen Ship Management (Norway) AS.

 

References in this Annual Report to our “initial fleet” refer to the Golar Winter, the Golar Spirit, the Golar Mazo and the Methane Princess, all of which were contributed to us at or prior to our initial public offering.  References to our “Dropdown Predecessor” refer to Golar Freeze, which we acquired subsequent to our initial public offering. In this Annual Report, we refer to the vessels in our initial fleet and the Golar Freeze, collectively, as our current fleet.

 

Cautionary Statement Regarding Forward Looking Statements

 

This Annual Report contains certain forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act) concerning future events and our operations, performance and financial condition, including, in particular, the likelihood of our success in developing and expanding our business.  Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “projects,” “forecasts,” “will,” “may,” “potential,” “should,” and similar expressions are forward-looking statements.  These forward-looking statements reflect management’s current views only as of the date of this Annual Report and are not intended to give any assurance as to future results.  As a result, unitholders are cautioned not to rely on any forward-looking statements.

 

Forward-looking statements appear in a number of places in this Annual Report and include statements with respect to, among other things:

 

·                   FSRU and LNG market trends, including charter rates, factors affecting supply and demand, and opportunities for the profitable operations of FSRUs and LNG carriers;

 

·                   our and Golar’s ability to retrofit vessels as FSRUs and the timing of the delivery and acceptance of any such retrofitted vessels, including with respect to the Nusantara Regas Satu (formerly named Khannur );

 

·                   our anticipated growth strategies;

 

·                   the effect of the worldwide economic slowdown;

 

·                   turmoil in the global financial markets;

 

·                   fluctuations in currencies and interest rates;

 

·                   general market conditions, including fluctuations in charter hire rates and vessel values;

 

·                   changes in our operating expenses, including drydocking and insurance costs and bunker prices;

 

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·                   forecasts of our ability to make cash distributions on the units or any increases in our cash distributions;

 

·                   our future financial condition or results of operations and our future revenues and expenses;

 

·                   the repayment of debt and settling of interest rate swaps;

 

·                   our ability to make additional borrowings and to access debt and equity markets;

 

·                   planned capital expenditures and availability of capital resources to fund capital expenditures;

 

·                   our ability to maintain long-term relationships with major LNG traders;

 

·                   our ability to leverage Golar’s relationships and reputation in the shipping industry;

 

·                   our ability to realize the expected benefits from acquisitions;

 

·                   our ability to purchase vessels from Golar in the future, including the Nusantara Regas Satu ;

 

·                   our continued ability to enter into long-term time charters, including charters for floating storage and regasification projects;

 

·                   our ability to maximize the use of our vessels, including the re-deployment or disposition of vessels no longer under long-term time charter;

 

·                   timely purchases and deliveries of newbuilding vessels;

 

·                   future purchase prices of newbuildings and secondhand vessels;

 

·                   our ability to compete successfully for future chartering and newbuilding opportunities;

 

·                   acceptance of a vessel by its charterer;

 

·                   termination dates and extensions of charters;

 

·                   the expected cost of, and our ability to comply with, governmental regulations, maritime self-regulatory organization standards, as well as standard regulations imposed by our charterers applicable to our business;

 

·                   availability of skilled labor, vessel crews and management;

 

·                   our anticipated incremental general and administrative expenses as a publicly traded limited partnership and our fees and expenses payable under the fleet management agreements and the management and administrative services agreement;

 

·                   the anticipated taxation of our partnership and distributions to our unitholders;

 

·                   estimated future maintenance and replacement capital expenditures;

 

·                   our ability to retain key employees;

 

·                   customers’ increasing emphasis on environmental and safety concerns;

 

·                   potential liability from any pending or future litigation;

 

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·                   potential disruption of shipping routes due to accidents, political events, piracy or acts by terrorists;

 

·                   future sales of our common units in the public market;

 

·                   our business strategy and other plans and objectives for future operations; and

 

·                   other factors detailed in this Annual Report and from time to time in our periodic reports.

 

Forward-looking statements in this Annual Report are estimates reflecting the judgment of senior management and involve known and unknown risks and uncertainties.  These forward-looking statements are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties and contingencies, many of which are beyond our control.  Actual results may differ materially from those expressed or implied by such forward-looking statements.  Accordingly, these forward-looking statements should be considered in light of various important factors, including those set forth in this Annual Report under the heading “Item 3—Key Information—Risk Factors.”

 

We do not intend to revise any forward-looking statements in order to reflect any change in our expectations or events or circumstances that may subsequently arise.  We make no prediction or statement about the performance of our common units.  The various disclosures included in this Annual Report and in our other filings made with the Securities and Exchange Commission (or the SEC) that attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations should be carefully reviewed and considered.

 

 

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PART I

 

Item 1.                                    Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2.                                    Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3.                                    Key Information

 

A.             Selected Financial Data

 

The following table presents, in each case for the periods and as of the dates indicated, our selected consolidated and combined financial and operating data, which includes, for periods prior to the completion of our initial public offering (“IPO”), on April 13, 2011, certain subsidiaries of Golar that had interests in the vessels in our initial fleet, the Golar Winter , the Golar Spirit , the Methane Princess and the Golar Mazo .  The transfers and contributions of the subsidiaries that had interests in the vessels in our initial fleet were deemed to be a reorganization of entities under common control.  As a result, these transactions have been recorded by the Partnership at Golar’s historical book values.

 

In addition, in October 2011, we acquired from Golar interests in subsidiaries that own and operate the FSRU, the Golar Freeze . This transaction was also deemed to be a reorganization of entities under common control. As a result, our financial statements have been retroactively adjusted to include the results of the Golar Freeze . The periods retroactively adjusted include all periods that we and the Golar Freeze were both under the common control of Golar. As a result, the consolidated and combined statements of operations of Golar LNG Partners for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 reflect the results of operations of the Golar Freeze , referred to herein as the Dropdown Predecessor, as if we had acquired the Golar Freeze when the vessel began operations under the ownership of Golar.

 

The consolidated and combined financial data of Golar LNG Partners as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 are derived from the audited consolidated and combined financial statements of Golar LNG Partners, prepared in accordance with U.S. GAAP, which are included elsewhere in this Annual Report.

 

The following financial data should be read in conjunction with “Item 5—Operating and Financial Review and Prospects” and our historical consolidated and combined financial statements and the notes thereto included elsewhere in this Annual Report.

 

Our financial position, results of operations and cash flows could differ from those that would have resulted if we operated autonomously or as an entity independent of Golar in the periods prior to our IPO for which historical financial data are presented below, and such data may not be indicative of our future operating results or financial performance.

 

		Year Ended December 31,
		2011			2010			2009			2008			2007
		(in thousands except fleet data and per day data)
Income Statement Data:
Total operating revenues		$	203,725		$	182,540		$	126,634		$	115,039		$	104,418
Vessel operating expenses(1)		33,069			32,505			29,762			24,398			22,023
Voyage expenses(2)		238			1,950			4,909			6,364			3,253
Administrative expenses		5,203			5,591			5,040			6,134			7,025
Depreciation and amortization		35,634			33,068			28,238			24,924			26,233
Impairment of long-term assets		—			1,500			1,500			109			2,345
Gain on sale of long-term assets		—			—			—			(430		)	—
Total operating expenses		74,144			74,614			69,449			61,499			60,879
Operating income		129,581			107,926			57,185			53,540			43,539

 

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		Year Ended December 31,
		2011			2010			2009			2008			2007
		(in thousands except fleet data and per day data)
Interest income		$	1,547		$	3,388		$	7,173		$	25,470		$	31,191
Interest expense		(19,880		)	(17,952		)	(27,306		)	(49,482		)	(62,096		)
Other financial items, net		$	(20,115	)	$	(20,629	)	$	16,764		$	(49,869	)	$	(6,002	)
Income (loss) before income taxes and non-controlling interest		91,133			72,733			53,816			(20,341		)	6,632
Income taxes		$	(1,609	)	$	(1,122	)	$	(1,640	)	$	751		$	933
Income (loss) before non-controlling interest		89,524			71,611			52,176			(19,590		)	7,565
Non-controlling interest		$	(9,863	)	$	(9,250	)	$	(9,012	)	$	(6,705	)	$	(6,547	)
Net income (loss) attributable to Golar LNG Partners owners		$	79,661		$	62,361		$	43,164		$	(26,295	)	$	1,018
Balance Sheet Data (at end of period):
Cash and cash equivalents		$	45,962		$	44,100		$	27,869		$	24,643		$	20,671
Restricted cash and short-term investments(3)		24,512			21,815			29,405			30,883			37,719
Long-term restricted cash(3)		140,262			140,970			348,883			330,121			491,123
Vessels, net		481,882			505,039			181,029			184,425			190,532
Vessels under capital lease, net(4)		371,173			383,695			705,409			584,989			473,836
Total assets		1,075,495			1,135,893			1,313,235			1,183,053			1,263,924
Current portion of long-term debt		49,906			47,390			72,819			39,906			45,150
Current portion of obligations under capital leases		3,240			3,113			3,837			2,606			3,393
Long-term debt		572,978			400,574			329,814			367,633			356,373
Long-term obligations under capital leases(4)		264,840			268,380			494,717			450,487			616,601
Non-controlling interest(5)		62,934			55,470			49,340			41,688			36,983
Owner’s and Dropdown Predecessor equity(6)		—			219,790			263,001			141,828			130,484
Partner’s capital		32,069			—			—			—			—
Cash Flow Data:
Net cash provided by operating activities		$	150,303		$	82,330		$	61,832		$	16,620		$	37,662
Net cash (used in) provided by investing activities		(3,544		)	170,941			(123,730		)	(66,972		)	(46,821		)
Net cash (used in) provided by financing activities		(144,897		)	(237,040		)	65,124			54,324			19,856
Fleet Data:
Number of vessels at end of period(7)		5			5			5			5			5
Average number of vessels during period(7)		5			5			5			5			5
Average age of vessels		18			17			16			15			14
Total calendar days for fleet		1,825			1,825			1,825			1,830			1,825
Total operating days for fleet(8)		1,818			1,690			1,412			1,541			1,424
Other Financial Data:
Average daily time charter equivalent earnings (TCE)(9)		111,500			106,858			83,488			70,522			60,110
Average daily vessel operating expenses(10)		18,120			17,811			16,308			13,332			12,067

 

(1)                         Vessel operating expenses are the direct costs associated with operating a vessel, including crew wages, vessel supplies, routine repairs, maintenance, insurance, lubricating oils and management fees.

(2)                         All of our vessels have been operated under time charters during the periods presented.  Under a time charter, the charterer pays substantially all of the vessel voyage expenses, which are primarily fuel and port charges.  However, we may incur voyage related expenses when positioning or repositioning vessels before or after the period of a time charter, during periods of commercial waiting time or while off-hire during a period of drydocking.

(3)                         Restricted cash and short-term investments consist of bank deposits, which may only be used to settle the Golar Mazo and the Golar Freeze loans or lease payments in respect of the Golar Spirit or the Golar Freeze (prior to December 2010) and the Methane Princess .

(4)                         During the periods presented, the Golar Spirit , the Golar Freeze , the Golar Winter and the Methane Princess were subject to lease financing arrangements, which are classified as capital leases.  Under the arrangements for the Golar Spirit, the Golar Freeze and the Methane Princess , we borrowed under term loans and deposited the proceeds into restricted cash accounts.  Concurrently therewith, we entered into capital leases for the vessels, and the vessels were recorded as assets on our balance sheet.  These restricted cash deposits, plus the interest earned on the deposits, approximate the remaining amounts we owe under the capital lease arrangements.  Where movements in interest rates result in a surplus, this is released to working capital.  Similarly, where a deficit arises, this is funded through working capital.  In these instances, we consider payments under our capital leases to be funded through our restricted cash deposits, and our continuing obligation is the repayment of the term loans.  During December 2010, the outstanding lease liabilities on the Golar Spirit and the Golar Freeze were repaid from the associated restricted cash deposits.  Under U.S. GAAP, we record both the obligations under the capital leases and the term loans as liabilities, and both the restricted cash deposits and our vessels under capital leases as assets.  This accounting treatment has the effect of increasing both our assets and liabilities by the amount of restricted cash deposits relating to the corresponding capital lease obligations.  As of December 31, 2011, our total assets included restricted cash deposits of $164.8 million and our total debt was gross of restricted cash deposits of the same amount.

(5)                         Non-controlling interest refers to a 40% interest in the Golar Mazo owned by Chinese Petroleum Corporation.

 

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(6)                         The Partnership’s balance sheet as at December 31, 2010 has been retroactively adjusted to include the assets and liabilities relating to the Golar Freeze .  Equity relating to the Golar Freeze for periods prior to the acquisition of the Golar Freeze by the Partnership (on October 19, 2011), when the Golar Freeze was owned and operated by Golar, are referred to as the Dropdown Predecessor equity.

(7)                         In each of the periods presented, we held (or are deemed to have held) a 60% ownership interest in the Golar Mazo and a 100% interest in our four other vessels.

(8)                         The operating days for our fleet is the total number of days in a given period that the vessels were in our possession less the total number of days off-hire.  We define days off-hire as days lost to, among other things, operational deficiencies, drydocking for repairs, maintenance or inspection, equipment breakdowns, special surveys and vessel upgrades, delays due to accidents, crewing strikes, certain vessel detentions or similar problems, or our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew, or during periods of commercial waiting time during which we do not earn charter hire.

(9)                         Non-GAAP Financial Measures

 

TCE.  It is standard industry practice to measure the revenue performance of a vessel in terms of average daily TCE.  For time charters, this is calculated by dividing total operating revenue less voyage expenses by the number of calendar days minus days for scheduled off-hire.  Where we are paid a fee to position or reposition a vessel before or after a time charter, this additional revenue, less voyage expenses, is included in the calculation of net time charter revenues.  The following table reconciles our total operating revenues to average daily TCE.

 

		Year Ended December 31,
		2011			2010			2009			2008			2007
		(in thousands, except average daily TCE)
Total operating revenues		$	203,725		$	182,540		$	126,634		$	115,039		$	104,418
Voyage expenses		(238		)	(1,950		)	(4,909		)	(6,364		)	(3,253		)
		$	203,487		$	180,590		$	121,725		$	108,675		$	101,165
Calendar days less scheduled off-hire days		1,825			1,690			1,458			1,541			1,683
Average daily TCE (in $)		$	111,500		$	106,858		$	83,488		$	70,522		$	60,110

 

(10)                   We calculate average daily vessel operating expenses by dividing vessel operating expenses by the number of calendar days.

 

B.             Capitalization and Indebtedness

 

Not applicable.

 

C.             Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.             Risk Factors

 

Some of the following risks relate principally to the industry in which we operate and to our business in general.  Other risks relate principally to the securities market and to ownership of our common units.  The occurrence of any of the events described in this section could significantly and negatively affect our business, financial condition, operating results or cash available for distributions or the trading price of our common units.

 

Risks Inherent in Our Business

 

We will be required to make substantial capital expenditures to expand the size of our fleet.  Depending on whether we finance our expenditures through cash from operations or by issuing debt or equity securities, our ability to make cash distributions may be diminished, our financial leverage could increase or our unitholders could be diluted.

 

We will be required to make substantial capital expenditures to expand the size of our fleet.  We may be required to make significant installment payments for retrofitting of LNG carriers to FSRUs and acquisitions of LNG carriers and FSRU’s.  We and Golar regularly evaluate and pursue opportunities to provide floating LNG storage and regasification services and LNG transportation for new or expanding LNG projects.  Upon our expected purchase of the Nusantara Regas Satu , or if we choose to purchase any other FSRUs or LNG carriers (either from Golar or independently), we plan to finance the cost either through cash from operations, borrowings or debt or equity financings.

 

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Use of cash from operations to expand our fleet will reduce cash available for distribution to unitholders.  Our ability to obtain bank financing or to access the capital markets may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions, changes in the LNG industry and contingencies and uncertainties that are beyond our control.  Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, results of operations and financial condition and on our ability to make cash distributions.  Even if we are successful in obtaining necessary funds, the terms of any debt financings could limit our ability to pay cash distributions to unitholders.  In addition, incurring additional debt may significantly increase our interest expense and financial leverage, and issuing additional equity securities may result in significant unitholder dilution and would increase the aggregate amount of cash required to pay the minimum quarterly distribution to unitholders, which could have a material adverse effect on our ability to make cash distributions.

 

We have no ability to borrow additional amounts under our revolving credit facility.  If we are unable to obtain additional financing, we may be unable to meet our obligations as they come due, enhance our existing business, complete acquisitions, respond to competitive pressures or otherwise execute our growth strategy.

 

Other than our $20 million undrawn sponsor credit facility with Golar, we have no other available borrowing capacity as of April 20, 2012.  We have no ability to borrow additional amounts under our Golar LNG Partners revolving credit facility.  Therefore, we will be required to obtain additional financing in order to fund the expansion of our fleet beyond its current size.

 

We plan to finance our future acquisitions through cash from operations, borrowings or debt or equity financings.  Use of cash from operations to expand our fleet will reduce cash available for distribution to unitholders.  Our ability to obtain bank financing or to access the capital markets may be limited by our financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from, among other things, general economic conditions, changes in the LNG industry and contingencies and uncertainties that are beyond our control.  Our failure to obtain the funds for future capital expenditures could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

 

Even if we are successful in obtaining necessary funds, the terms of any debt financings could limit our ability to pay cash distributions to unitholders.  In addition, incurring additional debt may increase our interest expense and financial leverage, and issuing additional equity securities may result in unitholder dilution and would increase the aggregate amount of cash required to pay the minimum quarterly distribution to unitholders, which could have a material adverse effect on our ability to make cash distributions.

 

We depend on certain affiliates of Golar, including Golar Management and Golar Wilhelmsen, to assist us in operating and expanding our business and providing interim financing for certain vessel acquisitions.

 

Our ability to enter into new charters and expand our customer relationships will depend largely on our ability to leverage our relationship with Golar and its reputation and relationships in the shipping industry.  If Golar suffers material damage to its reputation or relationships, it may harm our ability to:

 

·               renew existing charters upon their expiration;

 

·               obtain new charters;

 

·               successfully interact with shipyards;

 

·               obtain financing on commercially acceptable terms;

 

·               maintain access to capital under the sponsor credit facility; or

 

·               maintain satisfactory relationships with suppliers and other third parties.

 

Golar is also incurring all costs for the construction and delivery of certain newbuildings. We will have the option to purchase from Golar all of their newbuildings upon delivery of the newbuildings and entry into long term

 

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charters. If Golar fails to make construction payments for these newbuildings, we could lose the ability to purchase these vessels as a result of such default, which could harm our business and reduce our ability to make cash distributions.

 

In addition, each vessel in our fleet is subject to management agreements pursuant to which certain commercial and technical management services are provided by certain affiliates of Golar, including Golar Management and Golar Wilhelmsen.  Pursuant to these agreements, these entities provide significant commercial and technical management services for our fleet.  In addition, pursuant to a management and administrative services agreement between us and Golar Management, Golar Management provides us with significant management, administrative, financial and other support services.  Our operational success and ability to execute our growth strategy depends significantly upon the satisfactory performance of these services.  Our business will be harmed if our service providers fail to perform these services satisfactorily, if they cancel their agreements with us or if they stop providing these services to us.  Please read “Item 7—Major Unitholders and Related Party Transactions—Related Party Transactions.”

 

We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses to enable us to pay the minimum quarterly distribution on our common units and subordinated units.

 

We may not have sufficient cash from operations to pay the minimum quarterly distribution of $0.3850 per unit on our common units and subordinated units.  The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from our operations, which may fluctuate from quarter to quarter based on the risks described in this section, including, among other things:

 

·                   the rates we obtain from our charters;

 

·                   the level of our operating costs, such as the cost of crews and insurance;

 

·                   the continued availability of natural gas production, liquefaction and regasification facilities;

 

·                   demand for LNG;

 

·                   supply of LNG carriers;

 

·                   prevailing global and regional economic and political conditions;

 

·                   currency exchange rate fluctuations; and

 

·                   the effect of governmental regulations and maritime self-regulatory organization standards on the conduct of our business.

 

In addition, the actual amount of cash available for distribution to our unitholders will depend on other factors, including:

 

·                   the level of capital expenditures we make, including for maintaining or replacing vessels, building new vessels, acquiring existing vessels and complying with regulations;

 

·                   the number of unscheduled off-hire days for our fleet and the timing of, and number of days required for, scheduled drydocking of our vessels;

 

·                   our debt service requirements and restrictions on distributions contained in our debt instruments;

 

·                   the level of debt we will incur to fund future acquisitions, including if we exercise our option to purchase the Nusantara Regas Satu from Golar;

 

·                   fluctuations in interest rates;

 

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·                   fluctuations in our working capital needs;

 

·                   variable tax rates;

 

·                   our ability to make, and the level of, working capital borrowings; and

 

·                   the amount of any cash reserves established by our board of directors.

 

The amount of cash we generate from our operations may differ materially from our profit or loss for the period, which will be affected by non-cash items.  As a result of this and the other factors mentioned above, we may make cash distributions during periods when we record losses and may not make cash distributions during periods when we record net income.

 

We must make substantial capital expenditures to maintain and replace the operating capacity of our fleet, which will reduce our cash available for distribution.  In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted.

 

We must make substantial capital expenditures to maintain and replace, over the long-term, the operating capacity of our fleet.  Maintenance and replacement capital expenditures include capital expenditures associated with drydocking a vessel, modifying an existing vessel, acquiring a new vessel or otherwise replacing current vessels at the end of their useful lives to the extent these expenditures are incurred to maintain or replace the operating capacity of our fleet.  These expenditures could vary significantly from period to period and could increase as a result of changes in:

 

·                   the cost of labor and materials;

 

·                   customer requirements;

 

·                   fleet size;

 

·                   the cost of replacement vessels;

 

·                   length of charters;

 

·                   governmental regulations and maritime self-regulatory organization standards relating to safety, security or the environment; and

 

·                   competitive standards.

 

Our partnership agreement requires our board of directors to deduct estimated maintenance and replacement capital expenditures, instead of actual maintenance and replacement capital expenditures, from operating surplus each quarter in an effort to reduce fluctuations in operating surplus as a result of significant variations in actual maintenance and replacement capital expenditures each quarter.  The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change by our conflicts committee at least once a year.  In years when estimated maintenance and replacement capital expenditures are higher than actual maintenance and replacement capital expenditures, the amount of cash available for distribution to unitholders will be lower than if actual maintenance and replacement capital expenditures were deducted from operating surplus.  If our board of directors underestimates the appropriate level of estimated maintenance and replacement capital expenditures, we may have less cash available for distribution in periods when actual capital expenditures exceed our previous estimates.

 

Specifically, we have agreed to make certain modifications to the Golar Winter as a result of Petrobras’s decision to relocate the Golar Winter , from Rio de Janeiro to Bahia.  We expect to enter into an agreement with Golar, under which Golar will undertake the modification work, which began with the ordering of long lead items together in the first quarter of 2012 and is expected to be completed by the third quarter of 2013.  We currently

 

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expect the cost of these modifications together with drydocking costs to be approximately $25 million, which we expect to fund with a combination of cash and undrawn credit facilities or future debt or equity transactions.

 

We may be unable to make or realize expected benefits from acquisitions, including our potential future acquisition of the Nusantara Regas Satu, which could have an adverse effect on our expected plans for growth.

 

Our growth strategy includes selectively acquiring FSRUs and LNG carriers that are operating under long-term, stable cash flow generating time charters.  For instance, in October 2011, we completed the acquisition of the Golar Freeze from Golar for a purchase price of $330 million.  Under the omnibus agreement that we entered into in connection with our initial public offering, we have the right to purchase the Nusantara Regas Satu from Golar after completion of the vessel’s retrofitting and acceptance by its charterer, which is expected to occur in 2012, at a price equal to its fair market value, as determined pursuant to the omnibus agreement.  We may not exercise our option to acquire the Nusantara Regas Satu if such price is an amount that is greater than what we are able or willing to pay.  We will not be obligated to purchase the Nusantara Regas Satu at the determined price, and, accordingly, we may not complete the purchase if, among other things, the acquisition of such vessel would not be accretive to our cash available for distribution or if our view of the market for FSRUs changes.  If we are unable to purchase the Nusantara Regas Satu , our expected future business, financial condition and results of operations may be adversely affected.

 

Furthermore, any acquisition of a vessel or business may not be profitable to us at or after the time we acquire it and may not generate cash flow sufficient to justify our investment.  In addition, our acquisition growth strategy exposes us to risks that may harm our business, financial condition and operating results, including risks that we may:

 

·                   fail to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;

 

·                   be unable to hire, train or retain qualified shore and seafaring personnel to manage and operate our growing business and fleet;

 

·                   decrease our liquidity by using a significant portion of our available cash or borrowing capacity to finance acquisitions;

 

·                   significantly increase our interest expense or financial leverage if we incur additional debt to finance acquisitions;

 

·                   incur or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired; or

 

·                   incur other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.

 

Unlike newbuildings, existing vessels typically do not carry warranties as to their condition.  While we generally inspect existing vessels prior to purchase, such an inspection would normally not provide us with as much knowledge of a vessel’s condition as we would possess if it had been built for us and operated by us during its life.  Repairs and maintenance costs for existing vessels are difficult to predict and may be substantially higher than for vessels we have operated since they were built.  These costs could decrease our cash flow and reduce our liquidity and could have an adverse effect on our expected plans for growth.

 

The required drydocking of our vessels could be more expensive and time consuming than we anticipate, which could adversely affect our cash available for distribution.

 

The drydocking of our vessels requires significant capital expenditures and results in loss of revenue while our vessels are off-hire.  Any significant increase in the number of days of off-hire due to such drydocking or in the costs of any repairs could have a material adverse effect on our ability to pay distributions to our unitholders.  Although we do not anticipate that more than one of our vessels will be out of service at any given time, we may

 

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underestimate the time required to drydock any of our vessels or unanticipated problems may arise.  If more than one of our vessels is required to be out of service at the same time, if a vessel is drydocked longer than expected or if the cost of repairs during drydocking is greater than budgeted, our cash available for distribution could be adversely affected.

 

Our growth depends on continued growth in demand for LNG, FSRUs and LNG carriers.

 

Our growth strategy focuses on expansion in the floating storage and regasification sector and the LNG shipping sector.  While global LNG demand has continued to rise, the rate of its growth has fluctuated due to several reasons, including the global economic crisis and the continued increase in natural gas production from unconventional sources in regions such as North America.  Accordingly, our growth depends on continued growth in world and regional demand for LNG, FSRUs and LNG carriers, which could be negatively affected by a number of factors, including:

 

·                   increases in the cost of natural gas derived from LNG relative to the cost of natural gas generally;

 

·                   increases in the production levels of low-cost natural gas in domestic natural gas consuming markets, which could further depress prices for natural gas in those markets and make LNG uneconomical;

 

·                   decreases in the cost, or increases in the demand for, conventional land-based regasification systems, which could occur if providers or users of regasification services seek greater economies of scale than FSRUs can provide or if the economic, regulatory or political challenges associated with land-based activities improve;

 

·                   further development of, or decreases in the cost of, alternative technologies for vessel-based LNG regasification;

 

·                   increases in the production of natural gas in areas linked by pipelines to consuming areas, the extension of existing, or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-natural gas pipelines to natural gas pipelines in those markets;

 

·                   decreases in the consumption of natural gas due to increases in its price relative to other energy sources or other factors making consumption of natural gas less attractive;

 

·                   availability of new, alternative energy sources, including compressed natural gas; and

 

·                   negative global or regional economic or political conditions, particularly in LNG consuming regions, which could reduce energy consumption or its growth.

 

Reduced demand for LNG, FSRUs or LNG carriers would have a material adverse effect on our future growth and could harm our business, results of operations and financial condition.

 

We have only five vessels in our fleet.  Any limitation on the availability or operation of those vessels could have a material adverse effect on our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders.

 

Our current fleet currently consists of three FSRUs and two LNG carriers.  If any of our FSRUs or LNG carriers are unable to generate revenues as a result of off-hire time, our results of operations and financial condition could be materially adversely affected.

 

The charters relating to our FSRUs and LNG carriers permit the charterer to terminate the charter in the event that the vessel is off-hire for any extended period.  The charters also allow each charterer to terminate the charter upon the occurrence of specified defaults by us.  The termination of any of our charters could have a material adverse effect on our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders if we are unable to re-charter such vessel for an extended period of time.  For further details regarding termination of our charters, please read “Item 4—Information on the Partnership—Business Overview—FSRU Charters” and “—LNG Carrier Charters.”

 

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We currently derive all of our revenue from four customers.  The loss of any of these customers would result in a significant loss of revenues and cash flow, if for an extended period of time, we are not able to re-charter a vessel to another customer.

 

We have derived, and believe that we will continue to derive, all of our revenues and cash flow from a limited number of customers.  For the year ended December 31, 2011, BG Group PLC (or BG Group) accounted for 12%, PT Pertamina (PERSERO) (or Pertamina) accounted for 19%, Dubai Supply Authority accounted for 23% and Petrobras accounted for 46% of our total revenues, respectively.  All of our charters have fixed terms, but might nevertheless be lost in the event of unanticipated developments such as a customer’s breach.

 

We could also lose a customer or the benefits of a charter if:

 

·                   the customer fails to make charter payments because of its financial inability, disagreements with us or otherwise;

 

·                   the customer exercises its right to terminate the charter in certain circumstances, such as:

 

·                   loss of the vessel or damage to it beyond repair;

 

·                   defaults of our obligations under the charter, including prolonged periods of off-hire;

 

·                   in the event of war or hostilities that would significantly disrupt the free trade of the vessel;

 

·                   requisition by any governmental authority; or

 

·                   with respect to the Golar Spirit , the Golar Winter and the Golar Freeze , upon six months’ written notice at any time after the fifth anniversary of the commencement of the related charter upon payment of a termination fee;

 

·                   a prolonged force majeure event affecting the customer, including damage to or destruction of relevant production facilities, war or political unrest prevents us from performing services for that customer.

 

If we lose any of our charters and are unable to re-deploy the related vessel on terms as favorable to us as our current charters for an extended period of time, we will not receive any revenues from that vessel, but we may be required to pay expenses necessary to maintain the vessel in proper operating condition.  The loss of any of our customers, charters or vessels, or a decline in payments under any of our charters, could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to our unitholders, if we are not able to re-charter a vessel to another customer for an extended period of time.

 

Our debt levels may limit our flexibility in obtaining additional financing, pursuing other business opportunities and paying distributions to unitholders.

 

As of December 31, 2011, we had a total consolidated debt (including capitalized lease obligations, net of restricted cash, and including indebtedness outstanding under our credit facilities) of approximately $726 million. In addition, we have the ability to incur additional debt.  Our level of debt could have important consequences to us, including the following:

 

·                   our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other purposes may be limited or such financing may not be available on favorable terms;

 

·                   we will need a substantial portion of our cash flow to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and distributions to unitholders;

 

·                   our debt level will make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the economy generally; and

 

·                   our debt level may limit our flexibility in responding to changing business and economic conditions.

 

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Our ability to service our debt will depend upon, among other things, our future financial and operating performance, which will be affected by prevailing economic conditions and financial, business, regulatory and other factors, some of which are beyond our control.  If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection.  We may not be able to effect any of these remedies on satisfactory terms, or at all.

 

Our financing arrangements are secured by our vessels and contain operating and financial restrictions and other covenants that may restrict our business and financing activities as well as our ability to make cash distributions to our unitholders.

 

The operating and financial restrictions and covenants in our financing arrangements, including the Golar LNG Partners credit facility, our lease agreements and any future financing agreements, such as the Golar Freeze credit facility, could adversely affect our ability to finance future operations or capital needs or to engage, expand or pursue our business activities.  For example, subject to certain exceptions, the Golar LNG Partners credit facility, which is secured by a first priority charge over the Methane Princess and the Golar Spirit and a second priority charge over the Golar Mazo , requires the prior written consent of our lenders or otherwise restricts our and our subsidiaries’ ability to, among other things:

 

·                   merge or consolidate with any other person;

 

·                   make certain capital expenditures;

 

·                   pay distributions to our unitholders;

 

·                   terminate or materially amend certain of our charters;

 

·                   enter into any other line of business;

 

·                   make any acquisitions;

 

·                   incur additional indebtedness or grant any liens to secure any of our existing or future indebtedness;

 

·                   enter into any sale-leaseback transactions; or

 

·                   enter into any transactions with our affiliates.

 

In addition, the Golar LNG Partners credit facility prohibits us from paying distributions to our unitholders if we are not in compliance with certain financial covenants or upon the occurrence of an event of default.  The agreements governing our other financing arrangements, including the sponsor credit facility, the loan facility with respect to the Golar Mazo (or the Mazo credit facility), the $108 million credit facility that we assumed in connection with our acquisition of the Golar Freeze (or the Golar Freeze Facility), the $222 million loan from Golar that we entered into in connection with our acquisition of the Golar Freeze (or the Golar Freeze vendor loan), and our lease agreements also contain operating and financial restrictions and covenants.  For more information, regarding our financial arrangements, please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowing Activities—Long-Term Debt” and “—Capital Lease Obligations.”

 

Our ability to comply with covenants and restrictions contained in our financing arrangements may be affected by events beyond our control, including prevailing economic, financial and industry conditions.  If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired.  If restrictions, covenants, ratios or tests in our debt instruments are breached, a significant portion of the obligations may become immediately due and payable, and the lenders’ commitment to make further loans may terminate.  We may not have, or be able to obtain, sufficient funds to make these accelerated payments.  In addition, obligations under our financing arrangements are secured by certain of our vessels and guaranteed by our subsidiaries holding the interests in our vessels, and if we are unable to repay debt under our financing arrangements, the lenders or lessors could seek to foreclose on those assets.

 

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                As of December 31, 2011, we were in compliance with all the covenants under our various debt agreements, with the exception of our consolidated net worth covenant under our Golar LNG Partners credit facility. In respect of this facility, we received a waiver in March 2012 effective December 31, 2011. Please read “Item 13 — Defaults, dividend arrearages and delinquencies” for further detail.

 

Growth of the LNG market may be limited by many factors, including infrastructure constraints and community and political group resistance to new LNG infrastructure over concerns about the environment, safety and terrorism.

 

A complete LNG project includes production, liquefaction, regasification, storage and distribution facilities and LNG carriers.  Existing LNG projects and infrastructure are limited, and new or expanded LNG projects are highly complex and capital intensive, with new projects often costing several billion dollars.  Many factors could negatively affect continued development of LNG infrastructure and related alternatives, including floating storage and regasification, or disrupt the supply of LNG, including:

 

·                   increases in interest rates or other events that may affect the availability of sufficient financing for LNG projects on commercially reasonable terms;

 

·                   decreases in the price of LNG, which might decrease the expected returns relating to investments in LNG projects;

 

·                   the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities;

 

·                   local community resistance to proposed or existing LNG facilities based on safety, environmental or security concerns;

 

·                   any significant explosion, spill or similar incident involving an LNG facility, FSRU or LNG carrier; and

 

·                   labor or political unrest affecting existing or proposed areas of LNG production and regasification.

 

We expect that, as a result of the factors discussed above, some of the proposals to expand existing or develop new LNG liquefaction and regasification facilities may be abandoned or significantly delayed.  If the LNG supply chain is disrupted or does not continue to grow, or if a significant LNG explosion, spill or similar incident occurs, it could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

 

Our growth depends on our ability to expand relationships with existing customers and obtain new customers, for which we will face substantial competition.

 

One of our principal objectives is to enter into additional long-term, FSRU and LNG carrier time charters.  The process of obtaining long-term charters for FSRUs and LNG carriers is highly competitive and generally involves an intensive screening process and competitive bids, and often extends for several months.  We believe FSRU and LNG carrier time charters are awarded based upon bid price as well as a variety of factors relating to the vessel operator, including:

 

·                   LNG shipping and FSRU experience, technical ability and reputation for operation of highly specialized vessels;

 

·                   shipping industry relationships and reputation for customer service and safety;

 

·                   quality and experience of seafaring crew;

 

·                   financial stability and the ability to finance FSRUs and LNG carriers at competitive rates;

 

·                   relationships with shipyards and construction management experience; and

 

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·                   willingness to accept operational risks pursuant to the charter.

 

We expect substantial competition for providing floating storage and regasification services and marine transportation services for potential LNG projects from a number of experienced companies, including state-sponsored entities and major energy companies.  Many of these competitors have significantly greater financial resources and larger and more versatile fleets than do we or Golar.  We anticipate that an increasing number of marine transportation companies—including many with strong reputations and extensive resources and experience—will enter the FSRU market and LNG transportation market.  This increased competition may cause greater price competition for time charters.  As a result of these factors, we may be unable to expand our relationships with existing customers or to obtain new customers on a profitable basis, if at all, which would have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions.

 

We may have more difficulty entering into long-term time charters in the future if an active short-term or spot LNG shipping market continues to develop.

 

One of our principal strategies is to enter into additional long-term FSRU and LNG carrier time charters of five years or more.  Most shipping requirements for new LNG projects continue to be provided on a long-term basis, though the level of spot voyages and short-term time charters of less than 12 months in duration has grown in the past few years.

 

If an active spot or short-term market continues to develop, we may have increased difficulty entering into long-term time charters upon expiration or early termination of our current charters or for any vessels that we acquire in the future, and, as a result, our cash flow may be less stable.  In addition, an active short-term or spot LNG market may require us to enter into charters based on changing market prices, as opposed to contracts based on a fixed rate, which could result in a decrease in our cash flow in periods when the market price for shipping LNG is depressed or insufficient funds are available to cover our financing costs for related vessels.

 

Hire rates for FSRUs and LNG carriers are not readily available and may fluctuate substantially.  If rates are lower when we are seeking a new charter, our earnings and ability to make distributions to our unitholders may decline.

 

Hire rates for FSRUs and LNG carriers are not readily available and may fluctuate over time as a result of changes in the supply-demand balance relating to current and future FSRU and LNG carrier capacity.  This supply-demand relationship largely depends on a number of factors outside our control.  The LNG market is closely connected to world natural gas prices and energy markets, which we cannot predict.  A substantial or extended decline in natural gas prices could adversely affect our ability to recharter our vessels at acceptable rates or to acquire and profitably operate new FSRUs or LNG carriers.  Our ability from time to time to charter or re-charter any vessel at attractive rates will depend on, among other things, the prevailing economic conditions in the LNG industry.  Hire rates for newbuilding FSRUs and LNG carriers are correlated with their purchase price.  Hire rates at a time when we may be seeking a new charter may be lower than the hire rates at which our vessels are currently chartered.  If rates are lower when we are seeking a new charter, our earnings and ability to make distributions to our unitholders may decline.

 

Vessel values may fluctuate substantially and, if these values are lower at a time when we are attempting to dispose of vessels, we may incur a loss.

 

Vessel values for LNG carriers can fluctuate substantially over time due to a number of different factors, including:

 

·                   prevailing economic conditions in the natural gas and energy markets;

 

·                   a substantial or extended decline in demand for LNG;

 

·                   increases in the supply of vessel capacity;

 

·                   the size and age of a vessel; and

 

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·                   the cost of retrofitting or modifying existing vessels, as a result of technological advances in vessel design or equipment, changes in applicable environmental or other regulations or standards, customer requirements or otherwise.

 

As our vessels age, the expenses associated with maintaining and operating them are expected to increase, which could have an adverse effect on our business and operations if we do not maintain sufficient cash reserves for maintenance and replacement capital expenditures.  Moreover, the cost of a replacement vessel would be significant.

 

If a charter terminates, we may be unable to re-deploy the affected vessels at attractive rates and, rather than continue to incur costs to maintain and finance them, we may seek to dispose of them.  Our inability to dispose of vessels at a reasonable value could result in a loss on their sale and adversely affect our ability to purchase a replacement vessel, results of operations and financial condition and ability to make distributions to unitholders.

 

Our insurance may be insufficient to cover losses that may occur to our property or result from our operations.

 

The operation of FSRUs and LNG carriers is inherently risky.  Although we carry protection and indemnity insurance consistent with industry standards, all risks may not be adequately insured against, and any particular claim may not be paid.  Any claims covered by insurance would be subject to deductibles, and since it is possible that a large number of claims may be brought, the aggregate amount of these deductibles could be material.  Certain of our insurance coverage is maintained through mutual protection and indemnity associations, and as a member of such associations we may be required to make additional payments over and above budgeted premiums if member claims exceed association reserves.

 

We may be unable to procure adequate insurance coverage at commercially reasonable rates in the future.  For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution.  A marine disaster could exceed our insurance coverage, which could harm our business, financial condition and operating results.  Any uninsured or underinsured loss could harm our business and financial condition.  In addition, our insurance may be voidable by the insurers as a result of certain of our actions, such as our ships failing to maintain certification with applicable maritime self-regulatory organizations.

 

Changes in the insurance markets attributable to terrorist attacks or piracy may also make certain types of insurance more difficult for us to obtain.  In addition, upon renewal or expiration of our current policies, the insurance that may be available to us may be significantly more expensive than our existing coverage.

 

We may be subject to increased premium payments, or calls, if the value of our claim records, the claim records of our fleet managers, and/or the claim records of other members of the protection and indemnity associations through which we receive insurance coverage for tort liability (including pollution-related liability) significantly exceed projected claims. In addition, our protection and indemnity associations may not have enough resources to cover claims made against them. Our payment of these calls could result in significant expense to us, which could have a material adverse effect on our business, results of operations, cash flows, financial condition and ability to pay distributions.

 

An increase in operating expenses or drydocking costs could materially and adversely affect our financial performance.

 

Our operating expenses and drydock capital expenditures depend on a variety of factors including crew costs, provisions, deck and engine stores and spares, lubricating oil, insurance, maintenance and repairs and shipyard costs, many of which are beyond our control and affect the entire shipping industry.  Also, while we do not bear the cost of fuel (bunkers) under our time charters, fuel is a significant expense in our operations when our vessels are, for example, moving to or from dry-dock or when off-hire.  The price and supply of fuel is unpredictable and fluctuates based on events outside our control, including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil-producing countries and regions, regional production patterns and environmental concerns.  These may increase vessel operating and drydocking costs further.  If costs continue to rise, they could materially and adversely affect our results of operations.

 

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An increased shortage of qualified officers and crew could have an adverse effect on our business and financial condition.

 

FSRUs and LNG carriers require a technically skilled officer staff with specialized training.  As the world FSRU fleet and LNG carrier fleet continue to grow, the demand for technically skilled officers and crew has been increasing, which has led to a shortfall of such personnel.  Increases in our historical vessel operating expenses have been attributable primarily to the rising costs of recruiting and retaining officers for our fleet.  In addition, our FSRUs require an additional engineer, deck officer and cargo officer.  Furthermore, each key officer crewing an FSRU must receive specialized training related to the operation and maintenance of the regasification equipment.  If Golar Management or Golar Wilhelmsen are unable to employ technically skilled staff and crew, they will not be able to adequately staff our vessels.  A material decrease in the supply of technically skilled officers or an inability of Golar Management or Golar Wilhelmsen to attract and retain such qualified officers could impair our ability to operate or increase the cost of crewing our vessels, which would materially adversely affect our business, financial condition and results of operations and significantly reduce our ability to make distributions to our unitholders.

 

In addition, the Golar Spirit and the Golar Winter are employed by Petrobras in Brazil.  As a result, we are required to hire a certain portion of Brazilian personnel to crew these vessels in accordance with Brazilian law.  Any inability to attract and retain qualified Brazilian crew members could adversely affect our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders.

 

We may be unable to attract and retain key management personnel in the LNG industry, which may negatively impact the effectiveness of our management and our results of operation.

 

Our success depends to a significant extent upon the abilities and the efforts of our senior executives.  While we believe that we have an experienced management team, the loss or unavailability of one or more of our senior executives for any extended period of time could have an adverse effect on our business and results of operations.

 

Exposure to currency exchange rate fluctuations will result in fluctuations in our cash flows and operating results.

 

Historically our revenue has been generated in U.S. Dollars, but we incur capital, operating and administrative expenses in multiple currencies, including, among others, the Euro, the Brazilian Real and the British Pound.  If the U.S. Dollar weakens significantly, we would be required to convert more U.S. Dollars to other currencies to satisfy our obligations, which would cause us to have less cash available for distribution.  Under the charters and OSAs for the Golar Spirit and Golar Winter , we generate a portion of our revenues in Brazilian Reais.  We incur some operating expenses in Brazilian Reais but also have to convert Brazilian Reais into other currencies in order to pay the remaining operating expenses.  If the Brazilian Real weakens significantly, we may not have sufficient Brazilian Reais to convert to other currencies to satisfy our obligations in respect of the operating expenses related to these charters, which would cause us to have less cash available for distribution.  In addition, although the majority of our British Pound capital lease obligations are hedged by British Pound cash deposits securing the lease obligations or currency swaps, these are not perfect hedges.  Although it would not affect our cash flows, a significant strengthening of the U.S. Dollar could result in an increase in our financial expenses and could materially affect our financial results under U.S. GAAP.

 

Because we report our operating results in U.S. Dollars, changes in the value of the U.S. Dollar also result in fluctuations in our reported revenues and earnings.  In addition, under U.S. GAAP, all foreign currency-denominated monetary assets and liabilities such as cash and cash equivalents, accounts receivable, restricted cash, accounts payable, long-term debt and capital lease obligations are revalued and reported based on the prevailing exchange rate at the end of the reporting period.  This revaluation may cause us to report significant non-monetary foreign currency exchange gains and losses in certain periods.

 

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Two of our vessels are financed by UK tax leases.  In the event of any adverse tax changes or a successful challenge by the UK Revenue authorities with regard to the initial tax basis of the transactions or in the event of an early termination of a lease, we may be required to make additional payments to the UK vessel lessors, which could adversely affect our earnings and financial position.

 

Two of our vessels are currently financed by UK tax leases.  In the event of any adverse tax changes to legislation affecting the tax treatment of the leases for the UK vessel lessors or a successful challenge by the UK Revenue authorities to the tax assumptions on which the transactions were based, or in the event that we terminate one or more of our UK tax leases before their expiration, we would be required to return all or a portion of, or in certain circumstances significantly more than, the upfront cash benefits that we have received or that have accrued over time, together with fees that were financed in connection with our lease financing transactions, or post additional security or make additional payments to the UK vessel lessors.  Golar has agreed to indemnify us against these increased costs (with respect to the Methane Princess lease but not with respect to the Golar Winter lease), but any default by Golar would not limit our obligations under these leases.  Any additional payments could adversely affect our earnings and financial position.  For more information on the UK tax leases, please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources—Borrowing Activities—Capital Lease Obligations.”

 

The economic downturn may affect our customers’ ability to charter our vessels and pay for our services and may adversely affect our business and results of operations.

 

The economic downturn in the global financial markets may lead to a decline in our customers’ operations or ability to pay for our services, which could result in decreased demand for our vessels and services.  Our customers’ inability to pay could also result in their default on our current charters.  The decline in the amount of services requested by our customers or their default on our charters with them could have a material adverse effect on our business, financial condition and results of operations.  We cannot determine whether the difficult conditions in the economy and the financial markets will improve or worsen in the near future.

 

We currently operate primarily outside the United States, which could expose us to political, governmental and economic instability that could harm our operations.

 

Because most of our operations are currently conducted outside of the United States, they may be affected by economic, political and governmental conditions in the countries where we are engaged in business or where our vessels are registered.  Any disruption caused by these factors could harm our business.  In particular, we derive a substantial portion of our revenues from shipping LNG from politically unstable regions.  Past political conflicts in these regions, particularly in the Arabian Gulf, Brazil and Indonesia, have included attacks on ships, mining of waterways and other efforts to disrupt shipping in the area.  In addition to acts of terrorism, vessels trading in these and other regions have also been subject, in limited instances, to piracy.  Future hostilities or other political instability in the Arabian Gulf, Brazil and Indonesia where we operate or may operate could have a material adverse effect on the growth of our business, results of operations and financial condition and our ability to make cash distributions.  In addition, tariffs, trade embargoes and other economic sanctions by Brazil, the United States or other countries against countries in the Middle East, Southeast Asia or elsewhere as a result of terrorist attacks, hostilities or otherwise may limit trading activities with those countries, which could also harm our business and ability to make cash distributions.

 

We may not be able to redeploy our FSRUs on terms as favorable as our or Golar’s current FSRU charter arrangements or at all.

 

The market for FSRUs is growing rapidly but is relatively small in comparison to the LNG carrier market. In the event that any of the applicable charters are terminated, we may be unable to recharter the Golar Spirit , the Golar Winter, or the Golar Freeze , as FSRUs for an extended period of time.  While we may be able to employ these vessels as traditional LNG carriers, the hire rates and/or other charter terms may not be as favorable to us as our charters on the Golar Spirit and the Golar Winter with Petrobras and the charter on the Golar Freeze with Dubai Supply Authority (or DUSUP) if we acquire additional FSRUs, including the Nusantara Regas Satu which is chartered to Nusantara Regas and they are not, as a result of contract termination or otherwise, subject to a long-term profitable contract, we may be required to bid for projects at unattractive rates in order to reduce our losses relating to the vessels.

 

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Due to our lack of diversification, adverse developments in our LNG transportation or storage and regasification businesses could reduce our ability to make distributions to our unitholders.

 

We rely exclusively on the cash flow generated from our FSRUs and LNG carriers.  Due to our lack of diversification, an adverse development in the LNG transportation industry or the LNG storage and regasification industry could have a significantly greater impact on our financial condition and results of operations than if we maintained more diverse assets or lines of businesses.

 

The shareholders’ agreement with Chinese Petroleum Corporation with respect to the Golar Mazo contains provisions that may limit our ability to sell or transfer our interest in the Golar Mazo, which could have a material adverse effect on our cash flows and affect our ability to make distributions to our unitholders.

 

We have a 60% interest in the joint venture that owns the Golar Mazo , which enables us to control the joint venture subject to certain negative controls held by Chinese Petroleum Corporation (or CPC), who holds the remaining 40% interest in the Golar Mazo .  Under the shareholders’ agreement, no party may sell, assign, mortgage, or otherwise transfer its rights, interests or obligations under the agreement without the prior written consent of the other party.  If we determine that the sale or transfer of our interest in the Golar Mazo is in our best interest, we must provide CPC notice of our intent to sell or transfer our interest and grant CPC a right of first refusal to purchase our interest.  If CPC does not accept the offer within 60 days after we notify CPC, we will be free to sell or transfer our interest to a third party.  Any delay in the sale or transfer of our interest in the Golar Mazo or restrictions in our ability to manage the joint venture could have a material adverse effect on our cash flows and affect our ability to make distributions to our unitholders.

 

Risks Related to Our Industry:

 

The operation of FSRUs and LNG carriers is inherently risky, and an incident involving significant loss of life or environmental consequences affecting any of our vessels could harm our reputation and business.

 

Our vessels and their cargoes are at risk of being damaged or lost because of events such as:

 

·                   marine disasters;

 

·                   piracy;

 

·                   environmental accidents;

 

·                   bad weather;

 

·                   mechanical failures;

 

·                   grounding, fire, explosions and collisions;

 

·                   human error; and

 

·                   war and terrorism.

 

An accident involving any of our vessels could result in any of the following:

 

·                   death or injury to persons, loss of property or environmental damage;

 

·                   delays in the delivery of cargo;

 

·                   loss of revenues from or termination of charter contracts;

 

·                   governmental fines, penalties or restrictions on conducting business;

 

·                   higher insurance rates; and

 

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·                   damage to our reputation and customer relationships generally.

 

Any of these results could have a material adverse effect on our business, financial condition and operating results.  If our vessels suffer damage, they may need to be repaired.  The costs of vessel repairs are unpredictable and can be substantial.  We may have to pay repair costs that our insurance policies do not cover.  The loss of earnings while these vessels are being repaired, as well as the actual cost of these repairs, would decrease our results of operations.  If any of our vessels is involved in an accident with the potential risk of environmental consequences, the resulting media coverage could have a material adverse effect on our business, our results of operations and cash flows, weaken our financial condition and negatively affect our ability to make distributions to unitholders.

 

A renewal of the global financial crisis could negatively impact our business.

 

Although there are signs that the economic recession has abated in some countries, there is still considerable instability in the world economy and in the economies of countries such as Greece, Spain, Portugal and Italy that could initiate a new economic downturn and result in a tightening in the credit markets, a low level of liquidity in financial markets, and volatility in credit and equity markets.  A renewal of the financial crisis that affected the banking system and the financial markets over the past three years may negatively impact our business and financial condition in ways that we cannot predict.  In addition, the uncertainty about current and future global economic conditions caused by a renewed financial crisis may cause our customers and governments to defer projects in response to tighter credit, decreased cash availability and declining customer confidence which may negatively impact the demand for our services.  A tightening of the credit markets may further negatively impact our operations by affecting the solvency of our suppliers or customers which could lead to disruptions in delivery of supplies such as equipment for conversions, cost increases for supplies, accelerated payments to suppliers, customer bad debts or reduced revenues.

 

Terrorist attacks, piracy, increased hostilities or war could lead to further economic instability, increased costs and disruption of our business.

 

Terrorist attacks and the continuing response of the United States and others to these attacks, as well as the threat of future terrorist attacks, continue to cause uncertainty in the world’s financial markets and may affect our business, operating results, financial condition, ability to raise capital and future growth.  These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us or at all.  In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region.  Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia.  Any of these occurrences could have a material adverse impact on our business, financial condition, results of operations and ability to pay distributions.

 

In addition, LNG facilities, shipyards, vessels (including FSRUs and conventional LNG carriers), pipelines and gas fields could be targets of future terrorist attacks or piracy.  Terrorist attacks, war or other events beyond our control that adversely affect the production, storage, transportation or regasification of LNG to be shipped or processed by us could entitle our customers to terminate our charters, which would harm our cash flow and our business.  Concern that LNG facilities may be targeted for attack by terrorists has contributed to significant community and environmental resistance to the construction of a number of LNG facilities, primarily in North America.  If a terrorist incident involving an LNG facility, FSRU or LNG carrier did occur, the incident may adversely affect construction of additional LNG facilities or FSRUs or the temporary or permanent closing of various LNG facilities or FSRUs currently in operation.

 

The LNG transportation, storage and regasification industry is subject to substantial environmental and other regulations, compliance with which may significantly limit our operations or increase our expenses.

 

Our operations are materially affected by extensive and changing international, national and local environmental protection laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as the countries of our vessels’ registration, including those relating to equipping and operating FSRUs and LNG carriers, providing security and minimizing the potential for impacts to the environment from their operations.  We have incurred, and expect to continue to incur, substantial expenses in complying with these laws and regulations, including expenses for vessel

 

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modifications and changes in operating procedures.  Additional laws and regulations may be adopted that could limit our ability to do business or further increase costs, which could harm our business.  In addition, failure to comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension or termination of operations.  We may become subject to additional laws and regulations if we enter new markets or trades.

 

These requirements can affect the resale value or useful lives of our vessels, require a reduction in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports.

 

We may be unable to obtain, maintain, and/or renew permits necessary for our operations or experience delays in obtaining such permits, which could have a material effect on our operations.

 

The design, construction and operation of FSRUs and interconnecting pipelines and the transportation of LNG are subject to governmental approvals and permits. The permitting rules, and the interpretations of those rules, are complex, change frequently and are often subject to discretionary interpretations by regulators, all of which may make compliance more difficult or impractical, and may increase the length of time it takes to receive regulatory approval for offshore LNG operations.  In the future, the relevant regulatory authorities may take actions to prohibit the access of FSRUs or LNG carriers to various ports or adopt new rules and regulations applicable to FSRUs and LNG carriers that will increase the time needed to obtain necessary environmental permits.  We cannot assure unitholders that such changes would not have a material effect on our operations.

 

Our vessels operating in international waters now or, in the future, will be subject to various federal, state and local laws and regulations relating to protection of the environment.

 

Our vessels traveling in international waters are subject to various existing regulations published by the International Maritime Organization (or the IMO) as well as marine pollution and prevention requirements imposed by the MARPOL Convention.  In addition, our LNG vessels may become subject to the International Convention on Liability and Compensation for Damage in Connection with the Carriage of Hazardous and Noxious Substances by Sea, as amended by the April 2010 Protocol to the HNS Convention (or the 2010 HNS Convention), if it is entered into force.  In addition, national laws generally provide for a LNG carrier or offshore LNG facility owner or operator to bear strict liability for pollution, subject to a right to limit liability under applicable national or international regimes for limitation of liability.  However, some jurisdictions are not a party to an international regime limiting maritime pollution liability, and, therefore, a vessel owner’s or operator’s rights to limit liability for maritime pollution in such jurisdictions may be uncertain.

 

Please read “Item 4 Information on the Partnership—Business Overview—Environmental and Other Regulations- International Maritime Regulations of LNG Vessels” and “Other Regulation” below for a more detailed discussion on these topics.

 

Our vessels operating in U.S. waters now or, in the future, will be subject to various federal, state and local laws and regulations relating to protection of the environment.

 

Our vessels operating in U.S. waters now or, in the future, will be subject to various federal, state and local laws and regulations relating to protection of the environment, including the Oil Pollution Act of 1990 (OPA 90), the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (CERLA), the Clean Water Act, and the Clean Air Act.  In some cases, these laws and regulations require us to obtain governmental permits and authorizations before we may conduct certain activities.  These environmental laws and regulations may impose substantial penalties for noncompliance and substantial liabilities for pollution.  Failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties.  As with the industry generally, our operations will entail risks in these areas, and compliance with these laws and regulations, which may be subject to frequent revisions and reinterpretation, may increase our overall cost of business.

 

Please read “Item 4 Information on the Partnership—Business Overview—Environmental and Other Regulations- United States Environmental Regulation of LNG Vessels” below for a more detailed discussion of the regulations applicable to our vessels.

 

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Further changes to existing environmental legislation that is applicable to international and national maritime trade may have an adverse effect on our business.

 

We believe that the heightened environmental, quality and security concerns of insurance underwriters, regulators and charterers will generally lead to additional regulatory requirements, including enhanced risk assessment and security requirements and greater inspection and safety requirements on all LNG carriers in the marine transportation markets and offshore LNG terminals.  These requirements are likely to add incremental costs to our operations and the failure to comply with these requirements may affect the ability of our vessels to obtain and, possibly, collect on insurance or to obtain the required certificates for entry into the different ports where we operate.

 

Further legislation, or amendments to existing legislation, applicable to international and national maritime trade are expected over the coming years in areas such as ship recycling, sewage systems, emission control (including emissions of greenhouse gases), ballast treatment and handling, etc.  The United States has recently enacted legislation and regulations that require more stringent controls of air and water emissions from ocean-going vessels.  Such legislation or regulations may require additional capital expenditures or operating expenses (such as increased costs for low-sulfur fuel) in order for us to maintain our vessels’ compliance with international and/or national regulations.

 

Climate change and greenhouse gas restrictions may adversely impact our operations and markets.

 

Due to concern over the risk of climate change, a number of countries and the IMO have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from vessel emissions.  These regulatory measures may include, among others, adoption of cap and trade regimes, carbon taxes, increased efficiency standards, and incentives or mandates for renewable energy.  Also, a treaty may be adopted in the future that includes restrictions on shipping emissions.  Compliance with changes in laws and regulations relating to climate change could increase our costs of operating and maintaining our vessels and could require us to make significant financial expenditures that we cannot predict with certainty at this time.

 

Adverse effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an affect on demand for our services.  For example, increased regulation of greenhouse gases or other concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for use of alternative energy sources.  Any long-term material adverse effect on the oil and gas industry could have a significant financial and operational adverse impact on our business that we cannot predict with certainty at this time.

 

Please read “Item 4 Information on the Partnership—Business Overview—Environmental and Other Regulations—Regulation of Greenhouse Gas Emissions” below for a more detailed discussion.

 

Maritime claimants could arrest our vessels, which could interrupt our cash flow.

 

If we are in default on some kinds of obligations, such as those to our lenders, crew members, suppliers of goods and services to our vessels or shippers of cargo, these parties may be entitled to a maritime lien against one or more of our vessels.  In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings.  In a few jurisdictions, claimants could try to assert “sister ship” liability against one vessel in our fleet for claims relating to another of our vessels.  The arrest or attachment of one or more of our vessels could interrupt our cash flow and require us to pay to have the arrest lifted.  Under some of our present charters, if the vessel is arrested or detained (for as few as 14 days in the case of one of our charters) as a result of a claim against us, we may be in default of our charter and the charterer may terminate the charter.  This would negatively impact our revenues and reduce our cash available for distribution to unitholders.

 

Compliance with safety and other vessel requirements imposed by classification societies may be very costly and may adversely affect our business.

 

The hull and machinery of every large, oceangoing commercial vessel must be classed by a classification society authorized by its country of registry.  The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations of the country of registry of the vessel and the Safety of Life

 

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at Sea Convention.  The Golar Mazo is certified by Lloyds Register, and the Methane Princess , the Golar Spirit , the Golar Winter and the Golar Freeze are each certified by Det Norske Veritas.

 

As part of the certification process, a vessel must undergo annual surveys, intermediate surveys and special surveys.  In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.  Each of the vessels in our existing fleet is on a planned maintenance system approval, and as such the classification society attends onboard once every year to verify that the maintenance of the equipment onboard is done correctly.  Each of the vessels in our existing fleet is required to be qualified within its respective classification society for drydocking once every five years subject to an intermediate underwater survey done using an approved diving company in the presence of a surveyor from the classification society.

 

If any vessel does not maintain its class or fails any annual survey, intermediate survey or special survey, the vessel will be unable to trade between ports and will be unemployable.  We would lose revenue while the vessel was off-hire and incur costs of compliance.  This would negatively impact our revenues and reduce our cash available for distribution to unitholders.

 

Risks Inherent in an Investment in Us

 

Golar and its affiliates may compete with us.

 

Pursuant to the omnibus agreement, Golar and its controlled affiliates (other than us, our general partner and our subsidiaries) generally agreed not to acquire, own, operate or charter certain FSRUs and LNG carriers operating under charters of five years or more.  The omnibus agreement, however, contains significant exceptions that may allow Golar and its controlled affiliates to compete with us, which could harm our business.  Please read “Item 7—Major Unitholders and Related Party Transactions—Related Party Transactions—Omnibus Agreement—Noncompetition.”

 

Unitholders have limited voting rights, and our partnership agreement restricts the voting rights of the unitholders owning more than 4.9% of our common units.

 

Unlike the holders of common stock in a corporation, holders of common units have only limited voting rights on matters affecting our business.  We will hold a meeting of the limited partners every year to elect one or more members of our board of directors and to vote on any other matters that are properly brought before the meeting.  Common unitholders will be entitled to elect only four of the seven members of our board of directors.  The elected directors will be elected on a staggered basis and will serve for three year terms.  Our general partner in its sole discretion will appoint the remaining three directors and set the terms for which those directors will serve.  The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.  Unitholders will have no right to elect our general partner, and our general partner may not be removed except by a vote of the holders of at least 66 2 / 3 % of the outstanding common units and subordinated units, including any common units or subordinated units owned by our general partner and its affiliates, voting together as a single class.

 

Our partnership agreement further restricts unitholders’ voting rights by providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law.  The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote.  Our general partner, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

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Our general partner and its other affiliates own a significant interest in us and have conflicts of interest and limited fiduciary and contractual duties, which may permit them to favor their own interests to the detriment of our unitholders.

 

Golar owns a 63.4% limited partner interest in us and owns and controls our general partner.  All of our officers and certain of our directors are directors and/or officers of Golar or its affiliates and, as such, they have fiduciary duties to Golar that may cause them to pursue business strategies that disproportionately benefit Golar or which otherwise are not in the best interests of us or our unitholders.  Conflicts of interest may arise between Golar and its affiliates (including our general partner) on the one hand, and us and our unitholders, on the other hand.  As a result of these conflicts, our general partner and its affiliates may favor their own interests over the interests of our unitholders.  These conflicts include, among others, the following situations:

 

·                   neither our partnership agreement nor any other agreement requires our general partner or Golar or its affiliates to pursue a business strategy that favors us or utilizes our assets, and Golar’s officers and directors have a fiduciary duty to make decisions in the best interests of the shareholders of Golar, which may be contrary to our interests;

 

·                   our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner.  Specifically, our general partner will be considered to be acting in its individual capacity if it exercises its call right, pre-emptive rights, registration rights or right to make a determination to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units, general partner interest or incentive distribution rights or votes upon the dissolution of the partnership;

 

·                   our general partner and our directors have limited their liabilities and reduced their fiduciary duties under the laws of the Marshall Islands, while also restricting the remedies available to our unitholders, and, as a result of purchasing common units, unitholders are treated as having agreed to the modified standard of fiduciary duties and to certain actions that may be taken by our general partner and our directors, all as set forth in the partnership agreement;

 

·                   our general partner is entitled to reimbursement of all reasonable costs incurred by it and its affiliates for our benefit;

 

·                   our partnership agreement does not restrict us from paying our general partner or its affiliates for any services rendered to us on terms that are fair and reasonable or entering into additional contractual arrangements with any of these entities on our behalf;

 

·                   our general partner may exercise its right to call and purchase our common units if it and its affiliates own more than 80% of our common units; and

 

·                   our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of its limited call right.

 

Although a majority of our directors will over time be elected by common unitholders, our general partner will likely have substantial influence on decisions made by our board of directors.

 

Our officers face conflicts in the allocation of their time to our business.

 

Our officers, all but one of whom are directors or officers of Golar Management and perform executive officer functions for us pursuant to the management and administrative services agreement, are not required to work full-time on our affairs and also perform services for affiliates of our general partner, including Golar.  The affiliates of our general partner, including Golar, conduct substantial businesses and activities of their own in which we have

 

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no economic interest.  As a result, there could be material competition for the time and effort of our officers who also provide services to our general partner’s affiliates, which could have a material adverse effect on our business, results of operations and financial condition.  Please read “Item 6—Directors, Senior Management and Employees.”

 

Our partnership agreement limits our general partner’s and our directors’ fiduciary duties to our unitholders and restricts the remedies available to unitholders for actions taken by our general partner or our directors.

 

Our partnership agreement provides that our general partner will delegate to our board of directors the authority to oversee and direct our operations, management and policies on an exclusive basis, and such delegation will be binding on any successor general partner of the partnership.  Our partnership agreement also contains provisions that reduce the standards to which our general partner and directors would otherwise be held by Marshall Islands law.  For example, our partnership agreement:

 

·                   permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner.  Where our partnership agreement permits, our general partner may consider only the interests and factors that it desires, and in such cases it has no fiduciary duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or our unitholders.  Decisions made by our general partner in its individual capacity will be made by its sole owner, Golar.  Specifically, pursuant to our partnership agreement, our general partner will be considered to be acting in its individual capacity if it exercises its right to make a determination to receive common units in exchange for resetting the target distribution levels related to the incentive distribution rights, call right, pre-emptive rights or registration rights, consents or withholds consent to any merger or consolidation of the partnership, appoints any directors or votes for the election of any director, votes or refrains from voting on amendments to our partnership agreement that require a vote of the outstanding units, voluntarily withdraws from the partnership, transfers (to the extent permitted under our partnership agreement) or refrains from transferring its units, general partner interest or incentive distribution rights or votes upon the dissolution of the partnership;

 

·                   provides that our general partner and our directors are entitled to make other decisions in “good faith” if they reasonably believe that the decision is in our best interests;

 

·                   generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of our board of directors and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or be “fair and reasonable” to us and that, in determining whether a transaction or resolution is “fair and reasonable,” our board of directors may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us; and

 

·                   provides that neither our general partner nor our officers or our directors will be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or directors or its officers or directors or those other persons engaged in actual fraud or willful misconduct.

 

In order to become a limited partner of our partnership, a common unitholder is required to agree to be bound by the provisions in the partnership agreement, including the provisions discussed above.

 

Fees and cost reimbursements, which Golar Management determines for services provided to us, are substantial, are payable regardless of our profitability and reduce our cash available for distribution to our unitholders.

 

Pursuant to the fleet management agreements, we pay fees for services provided to us and our subsidiaries by Golar Management (a subsidiary of Golar) and certain other affiliates of Golar, including Golar Wilhelmsen, and we reimburse these entities for all expenses they incur on our behalf.  These fees and expenses include all costs and expenses incurred in providing certain commercial and technical management services to our subsidiaries.

 

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In addition, pursuant to a management and administrative services agreement Golar Management provides us with significant management, administrative, financial and other support services.  We reimburse Golar Management for its reasonable costs and expenses incurred in connection with the provision of these services.  In addition, we pay Golar Management a management fee equal to 5% of its costs and expenses incurred in connection with providing services to us.

 

For a description of the fleet management agreements and the management and administrative services agreement, please read “Item 7—Major Unitholders and Related Party Transactions.”  Fees and expenses payable pursuant to the fleet management agreements and the management and administrative services agreement are payable without regard to our financial condition or results of operations.  The payment of fees to and the reimbursement of expenses of Golar Management, Golar Wilhelmsen and certain other affiliates of Golar could adversely affect our ability to pay cash distributions to our unitholders.

 

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner, and even if public unitholders are dissatisfied, they will be unable to remove our general partner without Golar’s consent, unless Golar’s ownership interest in us is decreased; all of which could diminish the trading price of our common units.

 

Our partnership agreement contains provisions that may have the effect of discouraging a person or group from attempting to remove our current management or our general partner.

 

·                   The unitholders will be unable initially to remove our general partner without its consent because our general partner and its affiliates own sufficient units to be able to prevent its removal.  The vote of the holders of at least 66 2 / 3 % of all outstanding common and subordinated units voting together as a single class is required to remove the general partner.  Golar currently owns 64.7% of the outstanding common and subordinated units.

 

·                   If our general partner is removed without “cause” during the subordination period and units held by our general partner and Golar are not voted in favor of that removal, all remaining subordinated units will automatically convert into common units, any existing arrearages on the common units will be extinguished, and our general partner will have the right to convert its general partner interest and its incentive distribution rights (and Golar will have the right to convert its incentive distribution rights) into common units or to receive cash in exchange for those interests based on the fair market value of those interests at the time.  A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.  Any conversion of the general partner interest or incentive distribution rights would be dilutive to existing unitholders.  Furthermore, any cash payment in lieu of such conversion could be prohibitively expensive.  “Cause” is narrowly defined to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud or willful or wanton misconduct in its capacity as our general partner.  Cause does not include most cases of charges of poor business decisions, such as charges of poor management of our business by the directors appointed by our general partner, so the removal of our general partner because of the unitholders’ dissatisfaction with the general partner’s decisions in this regard would most likely result in the termination of the subordination period.

 

·                   Common unitholders will be entitled to elect only four of the seven members of our board of directors.  Our general partner in its sole discretion will appoint the remaining three directors.

 

·                   Election of the four directors elected by unitholders is staggered, meaning that the members of only one of three classes of our elected directors will be selected each year.  In addition, the directors appointed by our general partner will serve for terms determined by our general partner.

 

·                   Our partnership agreement contains provisions limiting the ability of unitholders to call meetings of unitholders, to nominate directors and to acquire information about our operations as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.

 

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·                   Unitholders’ voting rights are further restricted by the partnership agreement provision providing that if any person or group owns beneficially more than 4.9% of any class of units then outstanding, any such units owned by that person or group in excess of 4.9% may not be voted on any matter and will not be considered to be outstanding when sending notices of a meeting of unitholders, calculating required votes (except for purposes of nominating a person for election to our board), determining the presence of a quorum or for other similar purposes, unless required by law.  The voting rights of any such unitholders in excess of 4.9% will effectively be redistributed pro rata among the other common unitholders holding less than 4.9% of the voting power of all classes of units entitled to vote.  Our general partner, its affiliates and persons who acquired common units with the prior approval of our board of directors will not be subject to this 4.9% limitation except with respect to voting their common units in the election of the elected directors.

 

·                   There are no restrictions in our partnership agreement on our ability to issue equity securities.

 

The effect of these provisions may be to diminish the price at which the common units will trade.

 

The control of our general partner may be transferred to a third party without unitholder consent.

 

Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders.  In addition, our partnership agreement does not restrict the ability of the members of our general partner from transferring their respective membership interests in our general partner to a third party.

 

Substantial future sales of our common units in the public market could cause the price of our common units to fall.

 

We have granted registration rights to Golar and certain of its affiliates.  These unitholders have the right, subject to some conditions, to require us to file registration statements covering any of our common, subordinated or other equity securities owned by them or to include those securities in registration statements that we may file for ourselves or other unitholders.  Golar owns 9,327,254 common units and 15,949,831 subordinated units and 100% of the incentive distribution rights (directly and through its ownership of our general partner).  Following their registration and sale under the applicable registration statement, those securities will become freely tradable.  By exercising their registration rights and selling a large number of common units or other securities, these unitholders could cause the price of our common units to decline.

 

Our general partner, as the holder of a majority of the incentive distribution rights, may elect to cause us to issue additional common units to it and Golar in connection with a resetting of the target distribution levels related to our general partner’s and Golar’s incentive distribution rights without the approval of the conflicts committee of our board of directors or holders of our common units and subordinated units.  This may result in lower distributions to holders of our common units in certain situations.

 

Our general partner, as the initial holder of a majority of the incentive distribution rights, has the right, at a time when there are no subordinated units outstanding and our general partner and Golar have received incentive distributions at the highest level to which they are entitled (48%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election.  Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”), and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount.

 

In connection with resetting these target distribution levels, our general partner and Golar will be entitled to receive a number of common units equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to our general partner and Golar on the incentive distribution rights in the prior two quarters.  We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that our general partner could exercise this reset

 

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election at a time when it is experiencing, or may be expected to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued our common units, rather than retain the right to receive incentive distributions based on the initial target distribution levels.  As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued additional common units to our general partner in connection with resetting the target distribution levels related to our general partner’s and Golar’s incentive distribution rights.

 

We may issue additional equity securities, including securities senior to the common units, without the approval of our unitholders, which would dilute our current unitholders’ ownership interests.

 

We may, without the approval of our unitholders, issue an unlimited number of additional units or other equity securities.  In addition, we may issue an unlimited number of units that are senior to the common units in right of distribution, liquidation and voting.  The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:

 

·                   our unitholders’ proportionate ownership interest in us will decrease;

 

·                   the amount of cash available for distribution on each unit may decrease;

 

·                   because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;

 

·                   the relative voting strength of each previously outstanding unit may be diminished; and

 

·                   the market price of the common units may decline.

 

Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.

 

During the subordination period, which we define elsewhere in this Annual Report, the common units will have the right to receive distributions of available cash from operating surplus in an amount equal to the minimum quarterly distribution of $0.3850 per unit, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units.  Distribution arrearages do not accrue on the subordinated units.  The purpose of the subordinated units is to increase the likelihood that during the subordination period there will be available cash from operating surplus to be distributed on the common units.  Upon the expiration of the subordination period, the subordinated units will convert into common units and will then participate pro rata with other common units in distributions of available cash.  See “Item 8—Financial Information—Our Cash Distribution Policy.”

 

In establishing cash reserves, our board of directors may reduce the amount of cash available for distribution to our unitholders.

 

Our partnership agreement requires our general partner to deduct from operating surplus cash reserves that it determines are necessary to fund our future operating expenditures.  These reserves also will affect the amount of cash available for distribution to our unitholders.  Our board of directors may establish reserves for distributions on the subordinated units, but only if those reserves will not prevent us from distributing the full minimum quarterly distribution, plus any arrearages, on the common units for the following four quarters.  As described above in “—Risks Inherent in Our Business—We must make substantial capital expenditures to maintain and replace the operating capacity of our fleet, which will reduce our cash available for distribution.  In addition, each quarter we are required to deduct estimated maintenance and replacement capital expenditures from operating surplus, which may result in less cash available to unitholders than if actual maintenance and replacement capital expenditures were deducted,” our partnership agreement requires our board of directors each quarter to deduct from operating surplus estimated maintenance and replacement capital expenditures, as opposed to actual maintenance and replacement capital expenditures, which could reduce the amount of available cash for distribution.  The amount of estimated maintenance and replacement capital expenditures deducted from operating surplus is subject to review and change

 

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by our board of directors at least once a year, provided that any change must be approved by the conflicts committee of our board of directors.

 

Our general partner has a limited call right that may require unitholders to sell their common units at an undesirable time or price.

 

If at any time our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than the then-current market price of our common units.  Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon the exercise of this limited call right.  As a result, unitholders may be required to sell their common units at an undesirable time or price and may not receive any return on their investment.  Unitholders may also incur a tax liability upon a sale of units.

 

Golar, which owns and controls our general partner, currently owns 40.3% of our common units.  At the end of the subordination period, assuming we do not issue any additional common units and the conversion of our subordinated units into common units, Golar will own 64.7% of our common units.

 

Unitholders may not have limited liability if a court finds that unitholder action constitutes control of our business.

 

As a limited partner in a partnership organized under the laws of the Marshall Islands, a unitholder could be held liable for our obligations to the same extent as a general partner if a unitholder participates in the “control” of our business.  Our general partner generally has unlimited liability for the obligations of the partnership, such as its debts and environmental liabilities, except for those contractual obligations of the partnership that are expressly made without recourse to our general partner.  In addition, the limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some jurisdictions in which we do business.

 

We can borrow money to pay distributions, which would reduce the amount of credit available to operate our business.

 

Our partnership agreement allows us to make working capital borrowings to pay distributions.  Accordingly, if we have available borrowing capacity, we can make distributions on all our units even though cash generated by our operations may not be sufficient to pay such distributions.  Any working capital borrowings by us to make distributions will reduce the amount of working capital borrowings we can make for operating our business.  For more information, please read “Item 5—Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

Increases in interest rates may cause the market price of our common units to decline.

 

An increase in interest rates may cause a corresponding decline in demand for equity investments in general, and in particular for yield-based equity investments such as our common units.  Any such increase in interest rates or reduction in demand for our common units resulting from other relatively more attractive investment opportunities may cause the trading price of our common units to decline.

 

Unitholders may have liability to repay distributions.

 

Under some circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them.  Under the Marshall Islands Limited Partnership Act (or the Marshall Islands Act), we may not make a distribution to unitholders if the distribution would cause our liabilities to exceed the fair value of our assets.  Marshall Islands law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Marshall Islands law will be liable to the limited partnership for the distribution amount.  Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the assignee at the time it became a limited partner and for unknown obligations if the liabilities could be determined

 

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from the partnership agreement.  Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.

 

We have been organized as a limited partnership under the laws of the Republic of the Marshall Islands, which does not have a well developed body of partnership law.

 

Our partnership affairs are governed by our partnership agreement and by the Marshall Islands Act.  The provisions of the Marshall Islands Act resemble provisions of the limited partnership laws of a number of states in the United States, most notably Delaware.  The Marshall Islands Act also provides that it is to be applied and construed to make it uniform with the Delaware Revised Uniform Partnership Act and, so long as it does not conflict with the Marshall Islands Act or decisions of the Marshall Islands courts, interpreted according to the non-statutory law (or case law) of the State of Delaware.  There have been, however, few, if any, court cases in the Marshall Islands interpreting the Marshall Islands Act, in contrast to Delaware, which has a fairly well-developed body of case law interpreting its limited partnership statute.  Accordingly, we cannot predict whether Marshall Islands courts would reach the same conclusions as the courts in Delaware.  For example, the rights of our unitholders and the fiduciary responsibilities of our general partner under Marshall Islands law are not as clearly established as under judicial precedent in existence in Delaware.  As a result, unitholders may have more difficulty in protecting their interests in the face of actions by our general partner and its officers and directors than would unitholders of a similarly organized limited partnership in the United States.

 

Because we are organized under the laws of the Marshall Islands, it may be difficult to serve us with legal process or enforce judgments against us, our directors or our management.

 

We are organized under the laws of the Marshall Islands, and substantially all of our assets are located outside of the United States.  In addition, our general partner is a Marshall Islands limited liability company, and our directors and officers generally are or will be non-residents of the United States, and all or a substantial portion of the assets of these non-residents are located outside the United States.  As a result, it may be difficult or impossible for a unitholder to bring an action against us or against these individuals in the United States if such unitholder believes that its rights have been infringed under securities laws or otherwise.  Even if a unitholder is successful in bringing an action of this kind, the laws of the Marshall Islands and of other jurisdictions may prevent or restrict such unitholder from enforcing a judgment against our assets or the assets of our general partner or our directors or officers.

 

Tax Risks

 

In addition to the following risk factors, read “Item 4—Information on the Partnership—Taxation of the Partnership,” “Item 10—Additional Information—Taxation—Material U.S. Federal Income Tax Considerations” and “—Non-United States Tax Considerations” for a more complete discussion of the expected material U.S. federal and non-U.S. income tax considerations relating to us and the ownership and disposition of our common units. Read “Item 3—Key Information—Risk Factors—Risks Inherent in Our Business” for a discussion on risks relating to UK tax leases.

 

U.S. tax authorities could treat us as a “passive foreign investment company,” which would have adverse U.S. federal income tax consequences to U.S. unitholders.

 

A non-U.S. entity treated as a corporation for U.S. federal income tax purposes will be treated as a “passive foreign investment company” (or PFIC) for U.S. federal income tax purposes if at least 75.0% of its gross income for any taxable year consists of “passive income” or at least 50.0% of the average value of its assets produce, or are held for the production of, “passive income.”  For purposes of these tests, “passive income” includes dividends, interest, gains from the sale or exchange of investment property, and rents and royalties other than rents and royalties that are received from unrelated parties in connection with the active conduct of a trade or business.  For purposes of these tests, income derived from the performance of services does not constitute “passive income.”  U.S. shareholders of a PFIC are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC, and the gain, if any, they derive from the sale or other disposition of their interests in the PFIC.

 

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Based on our current and projected method of operation, we believe that we were not a PFIC for our 2011 taxable year, and we expect that we will not be treated as a PFIC for any future taxable year.  We believe that (1) more than 25.0% of the income we earn from our present time chartering activity and more than 50.0% of the assets engaged in generating such income should not be treated as passive income or assets, respectively, and (2) so long as income from our time charters that we believe should not be treated as passive income (and any other income that does not constitute passive income) exceeds 25.0% of our gross income for each taxable year after our initial taxable year and the value of our vessels contracted under such time charters (and any other assets that we believe does not constitute passive assets) exceeds 50.0% of the average value of all of our assets for each taxable year after our initial taxable year, we should not be a PFIC for any year.  This is based on certain representations and projections regarding our assets, income and charters, and its validity is conditioned on the accuracy of such representations and projections.

 

The conclusions that we have reached are not free from doubt and the U.S. Internal Revenue Service (or the IRS) or a court could disagree with this position.  In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to each taxable year, we cannot assure unitholders that the nature of our operations will not change in the future and that we will not become a PFIC in any taxable year.  If the IRS were to find that we are or have been a PFIC for any taxable year (and regardless of whether we remain a PFIC for subsequent taxable years), our U.S. unitholders would face adverse U.S. federal income tax consequences.  Please read “Item 10—Additional Information—Taxation—Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. federal income tax consequences to U.S. unitholders if we are treated as a PFIC.

 

The preferential tax rates applicable to qualified dividend income are temporary, and the enactment of previously proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for the preferential rate.

 

Certain of our distributions may be treated as qualified dividend income eligible for preferential rates of U.S. federal income tax to U.S. individual unitholders (and certain other U.S. unitholders).  In the absence of legislation extending the term for these preferential tax rates, all dividends received by such taxpayers in taxable years beginning on January 1, 2013 or later will be taxed at graduated tax rates applicable to ordinary income.  Please read “Item 10—Additional Information—Taxation—Material U.S. Federal Income Tax Considerations—U.S. Federal Income Taxation of U.S. Holders—Distributions.”

 

We may have to pay tax on U.S. source income, which would reduce our cash flow.

 

Under the Code, 50.0% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves, that is attributable to transportation that either begins or ends, but that does not both begin and end, in the United States is characterized as U.S. source shipping income.  U.S. source shipping income generally is subject to a 4.0% U.S. federal income tax without allowance for deduction unless the corporation qualifies for exemption from tax under Section 883 of the Code and the regulations promulgated thereunder.

 

We believe that we and each of our subsidiaries will qualify for this statutory tax exemption for the foreseeable future, and we will take this position for U.S. federal income tax return reporting purposes.  However, there are factual circumstances, including some that may be beyond our control, that could cause us to lose the benefit of this tax exemption.  In addition, our position that we qualify for this exemption is based upon legal authorities that do not expressly contemplate an organizational structure such as ours; specifically, although we have elected to be treated as a corporation for U.S. federal income tax purposes, we are organized as a limited partnership under Marshall Islands law.  Therefore, we can give no assurance that the IRS will not take a different position regarding our qualification, or the qualification of any of our subsidiaries, for this tax exemption.

 

If we or our subsidiaries are not entitled to this exemption under Section 883 for any taxable year, we or our subsidiaries generally would be subject to a 4.0% U.S. federal gross income tax on our U.S. source shipping income for such year.  Our failure to qualify for the exemption under Section 883 could have a negative effect on our business and would result in decreased earnings available for distribution to our unitholders.  Please read “Item 4—Information on the Partnership—Taxation of the Partnership—The Section 883 Exemption” for a more detailed discussion of the rules relating to qualification for the exemption under Section 883 and the consequences of failing to qualify for such an exemption.

 

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Unitholders may be subject to income tax in one or more non-U.S. jurisdictions, including the United Kingdom, as a result of owning our common units if, under the laws of any such jurisdiction, we are considered to be carrying on business there.  Such laws may require unitholders to file a tax return with, and pay taxes to, those jurisdictions.

 

We intend to conduct our affairs and cause or influence each of our subsidiaries to operate its business in a manner that minimizes income taxes imposed upon us and our subsidiaries and that may be imposed upon a unitholder as a result of owning our common units.  However, because we are organized as a partnership, there is a risk in some jurisdictions, including the United Kingdom, that our activities or the activities of our subsidiaries may be attributed to our unitholders for tax purposes if, under the laws of such jurisdiction, we are considered to be carrying on business there.  If a unitholder is subject to tax in any such jurisdiction, such unitholder may be required to file a tax return with, and to pay tax in, that jurisdiction based on such unitholder’s allocable share of our income.  We may be required to reduce distributions to a unitholders on account of any tax withholding obligations imposed upon us by that jurisdiction in respect of such allocation to such unitholder.  The United States may not allow a tax credit for any foreign income taxes that a unitholder directly or indirectly incurs by virtue of an investment in us.

 

We believe we can conduct our affairs in a manner that does not result in our unitholders being considered to be carrying on business in the United Kingdom solely as a consequence of the acquisition, ownership, disposition or redemption of our common units.  However, the question of whether either we or any of our subsidiaries will be treated as carrying on business in any jurisdiction, including the United Kingdom, will be largely a question of fact to be determined through an analysis of contractual arrangements, including the fleet management agreements that our subsidiaries have entered into with Golar Management, certain other subsidiaries of Golar and certain third-party vessel managers and the management and administrative service agreement that we have entered into with Golar Management, as well as through an analysis of the manner in which we conduct business or operations, all of which may change over time.  Furthermore, the laws of the United Kingdom or any other jurisdiction may also change, which could cause that jurisdiction’s taxing authorities to determine that we are carrying on business in such jurisdiction and that we or our unitholders are subject to its taxation laws.  In addition to the potential for taxation of our unitholders, any additional taxes imposed on us or any of our subsidiaries will reduce our cash available for distribution.

 

Item 4.                                  Information on the Partnership

 

A.             History and Development of the Partnership

 

We are a publicly traded limited partnership formed as a wholly owned subsidiary of Golar LNG Limited (NASDAQ: GLNG), a leading independent owner and operator of Floating Storage Regasification Units (“FSRUs”) and LNG carriers, to own and operate FSRUs and LNG carriers under long-term charters. Upon our formation, Golar contributed to us a 100% interest in certain subsidiaries which owned a 60% interest in the Golar Mazo and which leased the Golar Spirit and the Methane Princess .  In April 2011, we completed our IPO of 13.8 million common units.  In connection with our IPO, Golar transferred to us a 100% interest in the subsidiary which leases the Golar Winter and the legal title to the Golar Spirit .  In this Annual Report, we refer to the four vessels that were contributed to us in connection with our formation and our IPO as our initial fleet.  In October 2011, we completed the acquisition of 100% interests in subsidiaries that own and operate the FSRU, the Golar Freeze from Golar for a purchase price of approximately $330 million less assumed bank debt of $108 million.  In this Annual Report, we refer to the vessels in our initial fleet and the Golar Freeze , collectively, as our current fleet.  As of April 20, 2012, we have a fleet of three FSRUs and two LNG carriers.

 

We are incorporated under the laws of the Marshall Islands and maintain our principal executive headquarters at Par-La-Ville Place, 14 Par-la-Ville Road, Hamilton, HM08, Bermuda. Our telephone number at that address is +1 (441) 295-4705. Our principal administrative offices are located at 13th Floor, One America Square, 17 Crosswall, London EC3N 2LB, United Kingdom.

 

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B.             Business Overview

 

General

 

Our business is to own and operate FSRUs and LNG carriers under long-term time charters (which we define as charters with terms of five or more years).  Our primary business objective is to increase quarterly distributions per unit over time by growing our business through accretive acquisitions of FSRUs and LNG carriers and by chartering our vessels pursuant to long-term charters with high quality customers that generate long-term stable cash flows.  The vessels in our current fleet are chartered to BG Group, Pertamina, Petrobras and Dubai Supply Authority under long-term time charters that had an average remaining term of 9 years as of March 31, 2012. Since our IPO in April 2011, we have increased our quarterly distribution from $0.385 per unit paid on a prorated basis for the period from the closing of our IPO through June 30, 2011, to $0.43 per unit for the quarter ended December 31, 2011.

 

We intend to leverage the relationships, expertise and reputation of Golar, a leading independent owner and operator of FSRUs and LNG carriers, to pursue potential growth opportunities and to attract and retain high-quality, creditworthy customers.  As of April 20, 2012, Golar owned our 2.0% general partner interest, all of our incentive distribution rights and a 63.4% limited partner interest in us.  Golar intends to utilize us as its primary growth vehicle to pursue the acquisition of long-term stable cash flow generating FSRUs and LNG carriers.

 

Business Strategies

 

Our primary business objective is to increase quarterly distributions per unit over time by executing the following strategies:

 

·                   Pursue strategic and accretive acquisitions of FSRUs and LNG carriers. We believe our affiliation with Golar positions us to pursue a broader array of growth opportunities, including strategic and accretive acquisitions from Golar, with Golar or from third parties.

 

·                   Compete for long-term charter contracts for FSRUs and LNG carriers when attractive opportunities arise.   We intend to participate in competitive tender processes and engage in negotiated transactions with potential charterers for both FSRUs and LNG carriers when attractive opportunities arise by leveraging the strength of the industry expertise of Golar and the Fredriksen Group, as well as our publicly traded partnership status.

 

·                   Manage our fleet and our customer relationships to provide a stable base of cash flows and superior operating performance.   We intend to manage the stability of cash flows in our fleet by actively seeking the extension or renewal of existing charters, entering into new long-term charters with current customers and identifying potential business opportunities with new high-quality charterers.

 

We can provide no assurance, however, that we will be able to implement our business strategies described above.  For further discussion of the risks that we face, please read “Item 3 —Key Information—Risk Factors”.

 

The Natural Gas Industry

 

Predominately used to generate electricity and as a heating source, natural gas is one of the “big three” fossil fuels that make up the vast majority of world energy consumption.  As a cleaner burning fuel than both oil and coal, natural gas has become an increasingly attractive fuel source in the last decade.  As more emphasis is placed on reducing carbon emissions, Organization for Economic Cooperation and Development (or OECD) nations have come to view natural gas as a way of reducing their environmental footprint, particularly for electricity where natural gas-fired facilities have been gradually replacing oil, coal and older natural gas-fired plants.

 

Natural gas is an abundant fuel source, with the EIA estimating that, as of January 1, 2011, worldwide proved natural gas reserves were 6,675 Tcf (189,014 bcm).  Almost three-quarters of the world’s natural gas reserves are located in the Middle East and Eurasia.  Russia, Iran and Qatar accounted for 54% of the world’s natural gas reserves as of January 1, 2011, and the United States is the fifth largest holder of natural gas reserves at 4.1% of the

 

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world’s reserves.

 

The EIA predicts a substantial increase in the production of “unconventional” natural gas, including tight gas, shale gas and coalbed methane.  Although reserves of unconventional natural gas are unknown, the EIA predicts a substantial increase in natural gas supplies from unconventional formations in the future, especially from the United States but also from Canada, France, Poland, Turkey, Ukraine, South Africa, Morocco, Chile, Mexico, China, Australia, Libya, Algeria, Argentina and Brazil.  Shale gas production has been particularly prolific increasing by over 5 billion cubic feet (or Bcf) per day since the beginning of 2007.  This increase largely results from recent advances in horizontal drilling and hydraulic fracturing technologies, especially in the U.S.  These technologies have made it possible to exploit the U.S.’s vast shale gas resources.  Rising estimates of shale gas resources have helped to increase estimates of the total U.S. natural gas reserves by almost 50% over the past decade.  The EIA expects shale gas to comprise 47% of U.S. natural gas production in 2035.

 

The reduced rate of growth in LNG demand in the U.S. is expected to be at least partly offset by increased demand for LNG in other nations, especially non-OECD countries.

 

Liquefied Natural Gas

 

Overview

 

The need to transport natural gas over long distances across oceans led to the development of the international LNG trade.  The first shipments were made on a trial basis in 1959 between the United States and the United Kingdom, while 1964 saw the start of the first commercial-scale LNG project to ship LNG from Algeria to the United Kingdom.  LNG shipping provides a cost-effective and safe means for transporting natural gas overseas. The LNG is transported overseas in specially built tanks on double-hulled ships to a receiving terminal, where it is offloaded and stored in heavily insulated tanks.  In regasification facilities at the receiving terminal, the LNG is returned to its gaseous state (or regasified) and then shipped by pipeline for distribution to natural gas customers.

 

The LNG supply chain involves the following components:

 

Gas Field Production and Pipeline:   Natural gas is produced and transported via pipeline to natural gas liquefaction facilities located along the coast of the producing country.

 

Liquefaction Plant and Storage:   Natural gas is cooled to a temperature of minus 260 degrees Fahrenheit, transforming the gas into a liquid, which reduces its volume to approximately 1/600th of its volume in a gaseous state.  The reduced volume facilitates economical storage and transportation by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet their demand for natural gas.

 

Shipping:   LNG is loaded onto specially designed, double-hulled LNG carriers and transported overseas from the liquefaction facility to the receiving terminal.

 

Regasification:   At the regasification facility (either onshore or aboard specialized LNG carriers), the LNG is returned to its gaseous state, or regasified.

 

Storage, Distribution and Marketing:   Once regasified, the natural gas is stored in specially designed facilities or transported to natural gas consumers and end-use markets via pipelines.

 

According to Wood Mackenzie LNG liquefaction capacity was 175 million tones per annum in 2007, this increased to 242 million tonnes per annum by 2011 and is expected to increase to approximately 280 millions tonnes by 2015.

 

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The LNG Carrier Fleet

 

As of end March 2012, the world LNG carrier fleet consisted of 367 LNG carriers (including FSRUs and Regasification Vessels and 8 vessels currently in Lay-up).  By end March 2012, there were orders for 79 new LNG carriers (including 6 FSRUs, 1 small vessel with a capacity of 15,600m3 and 2 production units), with the bulk of ordered vessels not expected to deliver until 2013-2014.

 

While there are a number of different types of LNG vessels and “containment systems”, there are two dominant containment systems in use today:

 

·                                           The Moss system was developed in the 1970s and uses free standing insulated spherical tanks supported at the equator by a continuous cylindrical skirt.  In this system, the tank and the hull of the vessel are two separate structures.

 

·                                           The Membrane system uses insulation built directly into the hull of the vessel, along with a membrane covering inside the tanks to maintain their integrity.  In this system, the ship’s hull directly supports the pressure of the LNG cargo.

 

Of the vessels currently trading and on order, approximately 72% employ the membrane containment system, 26% employ the Moss system and the remaining 2% employ other systems.  Of the newbuilds, vessels on order that have employed the membrane containment system, have done so primarily because it most efficiently utilizes the entire volume of a ship’s hull. The construction period for an LNG carrier is approximately 28-34 months.

 

Propulsion systems also differ. Historically most ships were built with steam turbine propulsion whereas most current newbuilds have been ordered with more efficient tri-fuel diesel electric engines. Most LNG carriers can use the natural boil off of gas from LNG to power the vessel.

 

Seasonality

 

Historically, LNG trade, and therefore charter rates, increased in the winter months and eased in the summer months as demand for LNG in the Northern Hemisphere rose in colder weather and fell in warmer weather.  The tanker industry in general has become less dependent on the seasonal transport of LNG than a decade ago as new uses for LNG have developed, spreading consumption more evenly over the year.  There is a higher seasonal demand during the summer months due to energy requirements for air conditioning in some markets and a pronounced higher seasonal demand during the winter months for heating in other markets.

 

Floating LNG Regasification

 

Floating LNG Storage and Regasification Vessels

 

Floating LNG regasification vessels are commonly known as FSRUs. The FSRU regasification process involves the vaporization of LNG and injection of the resultant natural gas directly into one or more pipelines. In order to regasify LNG, FSRUs are equipped with vaporizer systems that can operate in the open-loop mode, the closed-loop mode or in both modes. In the open-loop mode, seawater is pumped through the system to provide the heat necessary to convert the LNG to the vapor phase. In the closed-loop system, a natural gas-fired boiler is used to heat water circulated in a closed-loop through the vaporizer and a steam heater to convert the LNG to the vapor phase. In general, FSRUs can be divided into four subcategories:

 

·                   FSRUs that are permanently located offshore;

 

·                   FSRUs that are permanently alongside (with LNG transfer being either directly ship to ship or over a jetty);

 

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·                   shuttle carriers that regasify and discharge their cargos offshore (sometimes referred to as energy bridge); and

 

·                   shuttle carriers that regasify and discharge their cargos alongside.

 

Golar’s and the Partnership’s business model to date has been focused on FSRUs that are permanently offshore or alongside and focused on continuous regasification service.

 

Demand for Floating LNG Regasification Facilities

 

The long-term outlook for global natural gas supply and demand has stimulated growth in LNG production and trade, which is expected to drive a necessary expansion of regasification infrastructure. While worldwide regasification exceeds worldwide liquefaction capacity, a large portion of the existing global regasification capacity is concentrated in a few markets such as Japan, Korea and the U.S. Gulf Coast. There remains a significant demand for regasification infrastructure in growing economies in Asia, Middle-East and Central/South America. We believe that the advantages of FSRUs compared to onshore facilities make them highly competitive in these markets.

 

Floating LNG regasification projects first emerged as a solution to the difficulties and protracted nature of obtaining permission to build shore-based LNG reception facilities (especially along the North American coasts). Due to their offshore location, floating facilities are less likely than onshore facilities to be met with resistance in local communities, which is especially important in the case of a facility that is intended to serve a highly populated area where there is a high demand for natural gas. As a result, it is typically easier and faster for FSRUs to obtain necessary permits than for comparable onshore facilities. More recently, cost and time have become the main drivers behind the growing interest in the various types of floating LNG regasification projects.

 

In addition, the flexibility afforded by floating LNG regasification facilities provide an advantage over onshore facilities. A floating regasification vessel can load, store and regasify LNG before delivering the natural gas to market. It can be operated partially as a conventional trading ship that transports and regasifies its own cargo, or as a mother-ship that processes supplies received by way of ship-to-ship transfers. FSRUs can also be moved to (and operated at) a different location if required, which is particularly beneficial in markets where demand for LNG is seasonal. Additionally, FSRUs offer quicker access to LNG supply for markets that lack onshore regasification infrastructure.  The FSRU can be a substitute for a land based terminal and remain a fixed and permanent facility over the long term but can also complement land based regasification by providing storage and regasification to a market while the longer lead time land based terminal is being constructed.

 

Floating LNG Regasification Vessel Fleet Size and Ownership

 

Compared to onshore terminals, the floating LNG regasification industry is fairly young. There are only a limited number of companies, including Golar as well as Exmar, Excelerate Energy, and Hoegh LNG that are operating FSRU terminals for LNG importers around the world. In this regard, Golar was the first company to enter into an agreement for the long-term employment of an FSRU based on the conversion of an existing LNG carrier.

 

As of February 2012, there are 13 FSRU vessels in existence with an additional 8 FSRUs under construction.

 

FSRUs can have some potential disadvantages. While FSRUs can have comparable ability to offload cargo from LNG carriers relative to land based terminals, land based terminals typically have greater storage capacity which can facilitate faster cargo offload in a situation when storage tanks are partially full. Land based terminals are also potentially better suited for large gas send out capacity requirements in excess of the capacity of the largest FSRUs.

 

Competition — LNG Carriers and FSRUs

 

While the majority of the existing world LNG carrier fleet is employed on long-term charters, there is competition for the employment of vessels whose charters are expiring and for the employment of vessels which are not dedicated to a long-term contract.  Competition for mid- and long-term LNG charters is based primarily on

 

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price, vessel availability, size, age and condition of the vessel, relationships with LNG carrier users and the quality, LNG experience and reputation of the operator.  In addition, vessels may operate in the emerging LNG carrier spot market that covers short-term charters of one year or less. Recent market developments have seen a considerable tightening in the supply/demand balance leading to a sharp increase in employment and hire rates.

 

Together with Golar we believe that we are one of the world’s largest independent LNG carrier and FSRU owner and operators.

 

We compete with other independent shipping companies who also own and operate LNG carriers.  While there are some barriers to entry, including the cost of an LNG carrier and expertise, new entrants have entered the market over the last five years.

 

In addition to independent LNG operators, some of the major oil and gas producers, including Royal Dutch Shell, BP, and BG own LNG carriers and have in the recent past contracted for the construction of new LNG carriers.  National gas and shipping companies also have large fleets of LNG vessels that have expanded and will likely continue to expand.  These include Malaysian International Shipping Company, or MISC, National Gas Shipping Company located in Abu Dhabi and Qatar Gas Transport Company, or Nakilat.

 

FSRUs are in an early stage of their commercial development and thus there is less competition in that market than in the more mature commercial market of LNG carriers.  There are currently a very limited number of FSRU owner / operators, in addition to us, made up of Excelerate Energy, an Exmar/Teekay joint venture, and Hoegh LNG.

 

Our Fleet and Customers

 

Our current fleet consists of:

 

·                   a 100% interest in the Golar Spirit , an FSRU retrofitted in 2007 from an LNG carrier built in 1981 that is currently operating under a time charter that expires in 2018 with Petrobras, the majority state-owned oil and gas company of Brazil;

 

·                   a 100% interest in the Golar Winter , an FSRU retrofitted in 2008 from an LNG carrier built in 2004 that is currently operating under a time charter that expires in 2024 with Petrobras;

 

·                   a 100% interest in the Golar Freeze , an FSRU retrofitted in 2010 from an LNG carrier built in 1977 that is currently operating under a time charter that expires in 2020 with DUSUP, the exclusive purchaser of natural gas in Dubai.

 

·                   a 100% interest in the Methane Princess , an LNG carrier built in 2003 that is currently operating under a time charter that expires in 2024 with BG Group; and

 

·                   a 60% interest in the Golar Mazo , an LNG carrier built in 2000 that is currently operating under a time charter that expires in 2017 with Pertamina, the state-owned oil and gas company of Indonesia.

 

We intend to leverage our relationship with Golar to make additional accretive acquisitions of FSRUs and LNG carriers with long-term charters from Golar and third parties.  For example, pursuant to the omnibus agreement, we have the right to purchase from Golar the Nusantara Regas Satu , an LNG carrier built in 1977, following the completion of its FSRU retrofitting and acceptance by its charterer, which is expected to occur in the second quarter of 2012.  The Nusantara Regas Satu is expected to operate under an 11-year time charter with Nusantara Regas for the West Java LNG project in Indonesia.  Nusantara Regas is a joint venture that is 60% owned by Pertamina and 40% owned by the Indonesian distribution firm PT Perusahaan Gas Negara.

 

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FSRUs

 

The following table provides information about the three FSRUs in our current fleet:

 

FSRU Vessel		Capacity (cbm)		Offtake Capacity (Bcf/d)		Year of Delivery		Post-Retrofit Charter Commencement		Our Interest		Charterer		Charter Expiration		Charter Extension Option Periods
Golar Spirit		128,000		0.25		1981		July 2008		100	%	Petrobras		2018		Three years plus two years
Golar Winter		138,000		0.50		2004		September 2009		100	%	Petrobras		2024		none
Golar Freeze		125,000		0.48		1977		May 2010		100	%	DUSUP		2020		Terms extending up to 2025(1)
Total Capacity		391,000		1.23

 

(1)                         DUSUP has the option to extend the charter for two extension periods of two years and two years.  DUSUP has an option to extend the initial term or either of the extension periods by one year.

 

Golar Spirit.  The Golar Spirit utilizes a closed-loop regasification system.  The Golar Spirit is operating under a 10-year time charter to Petrobras, which is the largest energy company in Brazil with an integrated structure consisting of oil and oil by-product exploration, production, refining, marketing, and transportation.

 

Petrobras currently operates the Golar Spirit in northeastern Brazil at the port of Pecem, where it is moored at a jetty in sheltered waters behind a breakwater, delivering regasified LNG through a hard arm connection directly into a pipeline that services base load power generating assets.  The Golar Spirit has the ability to operate as a traditional LNG carrier.

 

The Golar Spirit was built in 1981.  Given that the Golar Spirit is principally operated in a stationary location and given the non-corrosive nature of LNG, we believe that its useful post-retrofit service life will be extended by ten years in excess of its initial 40-year useful life.

 

Golar Winter.  The Golar Winter was delivered to Golar LNG in 2004. The Golar Winter is currently operating under a 10-year time charter to Petrobras.  In January 2012, we agreed to make certain modifications to the Golar Winter in return for an increase in the charter rate and an extension in the contract term by five years.

 

The Golar Winter utilizes a regasification system able to operate in both open- and closed-loop modes.  From the time that it commenced service as an FSRU, the Golar Winter was operated at an island jetty in Guanabara Bay outside Rio de Janeiro where it was moored at a jetty in sheltered waters behind a breakwater, delivering regasified LNG through a hard arm connection directly into a pipeline that services base load power generating assets.  In January 2012, Petrobras elected to move the Golar Winter from Rio de Janeiro to Bahia, requiring certain modifications, including the addition of LNG loading arms.  The Partnership has agreed to make these modifications in return for an increase in the charter rate and an extension in the contract term by 5 years. The Golar Winter is employed by Petrobras as an FSRU to service peak load power requirements.

 

Golar Freeze .  The Golar Freeze was delivered to Golar in 1977 and Golar operated the vessel as an LNG carrier until commencement of its retrofitting.  The Golar Freeze completed its retrofitting in May 2010 and is currently operating as an FSRU under a time charter with DUSUP, the exclusive purchaser of natural gas in Dubai, that expires in 2020.

 

The Golar Freeze is permanently moored alongside a purpose built jetty within the existing Jebel Ali port.  The Golar Freeze is capable of storing and delivering regasified LNG to DUSUP for further delivery into the Dubai gas network.

 

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The Golar Freeze was built in 1977.  Given that the Golar Freeze is principally operated in a stationary location and given the non-corrosive nature of LNG, we believe that its useful post-retrofit service life will be extended by ten years in excess of its initial 40-year useful life.

 

Our Option to Purchase the Nusantara Regas Satu.  Under the omnibus agreement, we have the right to purchase the Nusantara Regas Satu from Golar upon the completion of the vessel’s retrofitting and acceptance by its charterer at a price equal to its fair market value.  The fair market value of the Nusantara Regas Satu will be determined through negotiations with Golar or, if we and Golar are unable to agree as to the fair market value of the Nusantara Regas Satu , by a mutually acceptable investment banking firm, ship broker or other expert advisor in accordance with the omnibus agreement.  The fair market value of the Nusantara Regas Satu , as finally determined, may be an amount that is greater than what we are able or willing to pay.  We will not be obligated to purchase the Nusantara Regas Satu at the determined price, and, accordingly, we may not complete the purchase of the Nusantara Regas Satu .

 

The Nusantara Regas Satu was delivered to Golar in 1977.  The Nusantara Regas Satu has a capacity of 125,000 cbm and will have a maximum offtake capacity of 0.5 Bcf per day.  Golar operated the Nusantara Regas Satu as an LNG carrier prior to its retrofitting into an FSRU.  Following completion of the vessel’s retrofitting and acceptance by its charterer, which is expected to be in the second quarter of 2012, the Nusantara Regas Satu is expected to operate under an 11-year time charter with Nusantara Regas for the West Java FSRU Project.

 

LNG Carriers

 

The following table provides additional information about our two LNG carriers:

 

LNG Carrier		Capacity (cbm)		Year of Delivery		Our Interest		Charterer		Current Charter Expiration		Charter Extension Option Periods
Golar Mazo		135,000		2000		60	%(1)	Pertamina		2017		Five years plus five years
Methane Princess		138,000		2003		100	%	BG Group		2024		Five years plus five years
Total Capacity		273,000

 

(1)                        Chinese Petroleum Corporation holds the remaining 40% interest in the Golar Mazo .

 

As of March 31, 2012, our LNG carriers had an average age of 10 years, compared to the world LNG carrier fleet average age of approximately 11 years.  LNG carriers are generally expected to have a lifespan of approximately 40 years.  The Golar Mazo has a Moss containment system, while the Methane Princess has a membrane-type cargo containment system.  Our charterers are able to use our LNG carriers worldwide or to sublet the vessels to third parties.

 

Golar Mazo.  The Golar Mazo is currently chartered to Pertamina.  Founded in 1960, Pertamina is the state-owned oil and gas company in Indonesia and one of the world’s largest producers and exporters of LNG.

 

Methane Princess.  The Methane Princess is currently chartered to BG Group.  BG Group engages in exploration and production of gas and oil reserves, export, shipping and import of LNG, pipeline transmission and distribution of gas, and various gas-powered electricity generation projects.  BG Group operates in 23 countries on five continents.  BG Group operates in the Atlantic Basin, with liquefaction and/or regasification activities on stream or in development in Chile, Egypt, Italy, Nigeria, the United Kingdom and the United States.

 

FSRU Charters

 

We provide the services of each of the Golar Spirit and the Golar Winter to Petrobras under separate Time Charter Parties (or TCP) and Operation and Services Agreements (or OSAs).  The TCPs and OSAs are interdependent and when combined have the same effect as the time charters for our LNG carriers.  The services of the Golar Freeze are provided to DUSUP under a TCP.  If we exercise our right to purchase the Nusantara Regas Satu from Golar, we will provide the services of the Nusantara Regas Satu to Nusantara Regas under a TCP.

 

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The Golar Spirit , Golar Winter and Golar Freeze charters feature hire and off-hire provisions similar to those provisions in the charters for our LNG carriers.  The Golar Spirit and Golar Winter charters also contained provisions giving Petrobras the option to purchase the vessels from us under certain circumstances.  Following our agreement to make certain modifications to the Golar Winter in January 2012, Petrobras’ option to purchase the Golar Spirit and Golar Winter have been cancelled. The Golar Spirit , Golar Winter and Golar Freeze charters have additional requirements that the vessels are able to receive LNG from another LNG carrier within a specified time and then to discharge regasified LNG at a specified pressure and flow rate.  The following discussion describes the material terms of the Golar Spirit , Golar Winter and Golar Freeze charters.

 

Initial Term; Extensions

 

The Golar Spirit charter commenced upon acceptance by Petrobras in July 2008.  The charter has an initial term of 10 years.  Petrobras has the option to extend the charter for two extension periods of three years and two years.  Six months’ notice is required if any extension option is to be exercised by Petrobras.  If Petrobras exercises its option to extend the Golar Spirit charter beyond its initial term, the hire rate will be reduced by approximately 5.0%.

 

The Golar Winter charter commenced upon acceptance by Petrobras in September 2009.  The charter had an initial term of ten years.  Petrobras is planning to move the Golar Winter from its present site in Rio de Janeiro to Bahia and as a consequence the vessel will require certain modifications including the addition of LNG loading arms. We have agreed to make these modifications in return for an increase in the charter rate and a 5-year extension to the contract term. The vessel is due to be delivered at its new site in the third quarter of 2013 at which point the new charter rate will commence.

 

The Golar Freeze charter commenced upon acceptance by DUSUP in May 2010.  The charter has an initial term of ten years.  Under the Golar Freeze charter, DUSUP has the option to extend the charter for two extension periods of two years each and has the option to increase the length of the initial term or one of the extension periods by one year.  Six months’ notice is required if an extension option is to be exercised by DUSUP.  If DUSUP exercises its option to extend the Golar Freeze charter beyond its initial term, the fixed component of the hire rate will be reduced by approximately 64.4%.  See “—Hire Rate.”

 

Hire Rate

 

Under the TCP for the Golar Spirit and the Golar Winter , hire is payable monthly, in advance in U.S. Dollars.  The TCP provides for the capital cost component of the charter, which relates to the cost of the vessel’s purchase and is structured to meet that cost and provide a return on investor capital.  The TCP also provides for all drydocking and insurance-related costs.  The hire amount payable under the TCP was established between the parties at the time the charter was entered into and will be increased based on a specified cost-of-living index on a bi-annual basis.

 

Under the OSA for the Golar Spirit and the Golar Winter , hire is payable monthly in advance in Brazilian Reais.  The hire payable under the OSA covers the operating cost component of the charter and covers all vessel operating expenses, other than drydocking and insurance.  The hire amount payable under the OSA was established between the parties at the time the charter was entered into and will be increased based on a specified mix of cost-of-living and U.S. Dollar foreign exchange rate indices on an annual basis.

 

Under the Golar Freeze charter, hire is payable monthly, in advance in U.S. Dollars.  The hire payable under the charter consists of two components, a fixed charter hire rate and an operating cost element.  The fixed rate component will remain constant for the duration of the initial term of ten years.  If DUSUP exercises its option to extend the charter beyond its initial term, the fixed hire rate component for any such extension term will be reduced by approximately 64.4% from the initial hire rate.  The operating cost component includes all vessel operating expenses, except drydocking and certain insurance costs.  The operating cost element is reset each year in order to take cost increases into account.

 

The hire rate payable for the Golar Spirit , the Golar Winter and the Golar Freeze may be reduced if they do not perform to certain of their specifications, such as specified rates of regasification.

 

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Expenses

 

Under the Golar Spirit, Golar Freeze and Golar Winter charters, the vessel owner is responsible for FSRU operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses as well as periodic drydocking costs.  The vessel owner is also directly responsible for providing all of these items and services.  The charterer generally pays the voyage expenses, which include all expenses relating to particular voyages, including any bunker fuel expenses, LNG boil-off, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions. The charterer is responsible for providing, maintaining, repairing and operating certain facilities at the unloading port such as sufficient mooring infrastructure for LNG ships to be berthed alongside and a high pressure send-out pipeline.

 

Off-hire

 

The vessel owner is responsible for all costs when the FSRU is off-hire.  Prolonged off-hire may lead to termination of the time charter.  A vessel generally will be deemed off-hire if there is a specified time it is unavailable for use by the customer due to the factors described above under “—LNG Carrier Charters—Off-hire”. Under the OSAs for the Golar Spirit and the Golar Winter , an off-hire allowance is provided for a certain number of hours of scheduled off-hire per year.  Under the Golar Freeze charter the vessel owner is allowed a certain number of days to carry out periodic drydocking during which time the vessel will not be offhire.

 

Ship Management and Maintenance

 

Under the Golar Spirit , the Golar Winter and Golar Freeze charters, the vessel owner is responsible for the technical management of the vessels, including engagement and provision of qualified crews, maintaining the vessel, arranging supply of stores and equipment, periodic drydocking, cleaning and painting and ensuring compliance with applicable regulations, including licensing and certification requirements.  Golar Management and Golar Wilhelmsen provide these management services under the fleet management agreements.

 

We are focused on operating and maintaining our vessels to the highest safety and industry standards and at the same time maximizing revenue from each vessel.  It is our policy to have our crews perform planned maintenance on our vessels while underway, to reduce time required for repairs during drydocking.  This reduces the overall off-hire period required for dockings and repairs.  We believe that the additional revenue earned from reduced off-hire periods outweighs the expense of the additional crew members or sub-contractors.

 

During their retrofitting, the FSRUs were prepared for five years in service between drydockings.  This is in line with the policy adopted by the industry for new LNG carriers.  The Golar Spirit , the Golar Winter and the Golar Freeze will benefit from the significantly reduced loads and wear and tear associated with remaining in sheltered waters for the majority of the terms of their charters.

 

Termination

 

The Golar Spirit and Golar Winter charters will terminate automatically, or immediately upon receipt of written notice from Petrobras upon loss of the relevant vessel.  In addition, the vessel owner is generally entitled to suspend performance (but with the continuing accrual to the vessel owner’s benefit of hire payments and default interest) and/or terminate the charter if Petrobras defaults in its payment obligations under the applicable charter.  Under the Golar Spirit and the Golar Winter charters, either party may also terminate the charter for force majeure after a continuous and specified period or in the event that war or hostilities materially and adversely affect the trading of the applicable vessel.  Additionally, either party may elect to terminate either of the charters upon the occurrence of specified events of default.  Petrobras will have the right to terminate the Golar Spirit and the Golar Winter charters in the event of requisition by any governmental authority.  Petrobras has the right to terminate the charters for continuing off-hire reasons.  Petrobras also has the right to terminate the Golar Spirit and the Golar Winter charters, after the fifth and tenth anniversary, respectively, of the commencement of the applicable charter without fault upon payment of a termination fee specified in the relevant charter.  Six months’ notice is required if Petrobras wishes to exercise its right to no fault termination under either of the charters.

 

Under the Golar Freeze charter, DUSUP may terminate the agreement immediately, upon giving written notice to the owner, in the event of the loss of the vessel or in the event that the vessel is off-hire for a specified

 

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extended period.  The charterer may terminate the agreement where force majeure circumstances result in minimal receipt of gas or minimal regasification conditions that continue uninterrupted for a specified period, upon written notice to the owner.  In addition, either party may terminate the charter in the event that war or hostilities continue for a specified period of time and are likely to materially and adversely affect the operations of the vessel.  Additionally, either party may elect to terminate the charter upon the occurrence of specified events of default, after written notice.  The charterer will have the right to terminate the Golar Freeze charter in the event of requisition by any governmental authority.  The charterer also has the right to terminate the charter without fault after the fifth anniversary of the commencement of the charter upon six months prior written notice and payment of a compensatory fee.  We may terminate the agreement with immediate effect in the event that the charterer is in default of its payment obligations under the agreement after the owner has furnished notice of default to the charterer.

 

A termination of any of our FSRU charters could have a material adverse effect on our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders. However, in the event of a contract termination of any of our FSRUs charters, we believe, based on current market conditions, that we would likely be able to re-charter any of our FSRU vessels at rates not significantly dissimilar to the charter rates under our existing FSRU charters without a significant impact to our net cash flow. We cannot guarantee this outcome.

 

LNG Carrier Charters

 

We provide the LNG marine transportation services of the Golar Mazo and the Methane Princess under time charters with Pertamina and BG Group, respectively.  A time charter is a contract for the use of the vessel for a fixed period of time at a specified daily rate.  Under a time charter, the vessel owner provides crewing and other services related to the vessel’s operation, the cost of which is included in the daily rate, and the customer is responsible for substantially all of the vessel voyage costs (including fuel, port and canal fees and LNG boil-off).  The following discussion describes the material terms of our LNG carrier time charters.

 

Initial Term; Extensions

 

Golar Mazo.  The initial term of the charter with Pertamina began upon delivery of the vessel in January 2000 and will terminate during the fourth quarter of 2017.  Pertamina has the option to extend the charter of the Golar Mazo for up to 10 years by exercising the right to extend for one or two additional five-year periods.  Pertamina must provide two years’ notice of any decision to extend.  In addition, Pertamina has the right to one additional short-term extension of two to 12 months following either the initial period of the charter or an extension period upon 90 days’ notice.

 

Methane Princess.  The initial term of the Methane Princess charter with BG Group commenced in 2004 and will terminate during the first quarter of 2024.  This charter is subject to an outstanding option on the part of BG Group to extend the charter for one or two five-year periods by providing 12 months’ notice prior to the end of each period.  The Methane Princess charter provides that if BG Group exercises its option to extend the charter beyond its initial term, the hire rate for the extension period or periods will be reduced by approximately 28%.

 

Hire Rate

 

“Hire rate” refers to the basic payment from the customer for use of the vessel.

 

Golar Mazo.  The hire rate is payable monthly in advance in U.S. Dollars as specified in the charter and includes three general components:  the owner’s cost component, the operating cost component and the additional cost component.  The owner’s cost component provides for ownership costs (including construction financing) and all remunerations due to owner under the charter.  The operating cost component provides for the annual operating costs of the vessel and is subject to annual adjustment based on actual costs.  The additional cost component is comprised of reimbursement for certain costs associated with certain modifications, improvements, alterations or replacements that are required pursuant to the charter, requested by Pertamina, or that are estimated to cost more than $2 million and related to any financing we obtain at the request of Pertamina.  Pertamina also pays hire for the vessel during scheduled drydockings up to a certain number of days in each three-year period, which number is intended to correspond to the number of days that the Golar Mazo is expected to be off-hire for an ordinary, regularly scheduled drydocking.

 

Methane Princess.  The hire rate is payable monthly, in advance in U.S. Dollars as specified in the charter.  The hire rate includes two components:  a capital cost component and an operating cost component.  The capital cost component relates to the cost of the vessel’s purchase and is structured to meet that cost and to provide a profit on the services we provide as well as a return on invested capital.  The operating cost component is intended to compensate us for operating the vessel and to cover related expenses.  The amount of the operating cost component

 

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was established between the parties at the beginning of the charter and increases at a fixed percentage per annum to reflect inflation, except for insurance, which is covered at cost.  The hire rate for the Methane Princess does not include an additional cost component, and, accordingly, additional costs related to modifications, improvements, alterations or replacements that are not covered by the operating cost component will be allocated at the time such costs are incurred among us and BG Group pursuant to negotiations between us and BG Group.  As a result, we may be responsible for a portion of any such additional costs.

 

The hire rates for each of our LNG carriers may be reduced if the vessel does not perform to certain of its specifications or if we are in breach of any of our representations and warranties in the charter.  Historically, we have had no instances of hire rate reductions.

 

Expenses

 

Under our LNG carrier charters, we are responsible for vessel operating expenses, which include crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses and the cost of providing all of these items and services.  The customer generally pays the voyage expenses, which include all expenses relating to particular voyages, including any bunker fuel expenses, LNG boil-off, port fees, cargo loading and unloading expenses, canal tolls, agency fees and commissions.  A majority of the vessel operating expenses we incur with respect to our operation of the Golar Mazo are charged to Pertamina on a cost pass-through basis, as described above.

 

Off-hire

 

When the vessel is “off-hire”—or not available for service—the customer generally is not required to pay the hire rate and we are responsible for all costs.  Prolonged off-hire may lead to vessel substitution or termination of the time charter.

 

A vessel generally will be deemed off-hire if there is a specified time it is not available for the customer’s use due to, among other things:

 

·                   operational deficiencies, drydocking for repairs, maintenance or inspection, equipment breakdowns, or delays due to accidents, crewing strikes, certain vessel detentions or similar problems; or

 

·                   our failure to maintain the vessel in compliance with its specifications and contractual standards or to provide the required crew.

 

The Golar Mazo will not be considered to be off-hire for scheduled drydockings for a certain number of days in each three-year period, and therefore we will continue to receive the hire rate under the Golar Mazo charter during such period.  The number of days during which the Golar Mazo will not be considered to be off-hire is intended to correspond to the number of days that the Golar Mazo is expected to be off-hire for an ordinary, regularly scheduled drydocking.

 

Vessels are drydocked at least once during a five-year class cycle for inspection of the underwater parts and for repairs related to inspections.

 

Ship Management and Maintenance

 

Under the charters, we are responsible for the technical management of our LNG carriers, including engagement and provision of qualified crews, maintaining the vessel, arranging supply of stores and equipment, periodic drydocking, cleaning and painting and ensuring compliance with applicable regulations, including licensing and certification requirements.  Golar Management and certain other affiliates of Golar provide these management services to the vessels in our fleet through fleet management agreements with our vessel owning subsidiaries.  Golar Wilhelmsen, a jointly controlled company that is jointly owned by Golar and Wilhelmsen Ship Management (Norway) AS, provides certain technical management services to our vessels through agreements with Golar Management.

 

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We are focused on operating and maintaining our LNG carriers to the highest safety and industry standards and at the same time maximizing revenue from each vessel.  It is our policy to have our crews perform planned maintenance on our vessels while underway, to reduce time required for repairs during drydocking.  This will reduce the overall off-hire period required for dockings and repairs.  Since we generally do not earn hire from a vessel while it is in drydock (except in the case of the Golar Mazo , whose charter provides for an allowance for any regularly scheduled drydocking in a three-year period, provided that, subsequent to every two drydockings, the parties will meet to determine the allowance period for each of the two subsequent drydockings), we believe that the additional revenue earned from reduced off-hire periods outweighs the expense of the additional crewmembers or subcontractors.

 

Termination

 

Each charter party has certain termination rights which include, among other things, the automatic termination of the LNG carrier charter upon loss of the vessel.  Additionally, either party may elect to terminate the charter upon the occurrence of specified defaults or requisition by any governmental authority.  In addition, we are generally entitled to suspend performance (but with the continuing accrual to our benefit of hire payments and default interest) and terminate the charter if the customer defaults in its payment obligations.  Under the Methane Princess charter, upon a default by us, the charterer is also entitled to require the charter to be substituted by a bareboat charter between us and the charterers on terms specified in the charter.  In addition, under the Methane Princess charter, either party may also terminate the charter in the event of war in specified countries or in locations that would significantly disrupt the free trade of the vessel.  Under the Golar Mazo charter, upon a default by us, the charterer is also entitled to take possession of the vessel and operate, maintain and insure it at the charterer’s sole risk and expense.

 

A termination of any of our LNG carrier charters could have a material adverse effect on our business, results of operations and financial condition and could significantly reduce our ability to make distributions to our unitholders. However, in the event of a contract termination of any of our LNG carrier charters, we believe, based on current market conditions, that we would likely be able to re-charter any of our LNG vessels at rates not significantly dissimilar to the charter rates under our existing LNG carrier charters without a significant impact to our net cash flow. We cannot however guarantee this outcome.

 

Classification, Inspection and Maintenance

 

Every large, commercial seagoing vessel must be “classed” by a classification society.  The classification society certifies that the vessel is “in class,” signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of that particular class of vessel as laid down by that society and the applicable flag state.

 

For maintenance of the class certificate, regular and extraordinary surveys of hull, machinery, including the electrical plant and any special equipment classed, are required to be performed by the classification society, to ensure continuing compliance.  Vessels are drydocked at least once during a five-year class cycle for inspection of the underwater parts and for repairs related to inspections.  If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified by the shipowner within prescribed time limits.  The classification society also undertakes on request of the flag state other surveys and checks that are required by the regulations and requirements of that flag state.  These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

 

Most insurance underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification society, which is a member of the International Association of Classification Societies.  The Golar Mazo is certified by Lloyds Register, and the Methane Princess, the Golar Spirit , the Golar Freeze , and the Golar Winter are each certified by Det Norske Veritas.  All of our vessels have been awarded ISM certification and are currently “in class.”

 

The ship manager carries out inspections of the ships on a regular basis; both at sea and while the vessels are in port, while Golar carries out inspection and ship audits to verify conformity with the manager’s reports.  The results of these inspections, which are conducted both in port and while underway, result in a report containing recommendations for improvements to the overall condition of the vessel, maintenance, safety and crew welfare.  Based in part on these evaluations, we create and implement a program of continual maintenance and improvement for our vessels and their systems.

 

Safety, Management of Ship Operations and Administration

 

Safety is our top operational priority.  Our vessels are operated in a manner intended to protect the safety and health of our employees, the general public and the environment.  We actively manage the risks inherent in our

 

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business and are committed to eliminating incidents that threaten safety, such as groundings, fires and collisions.  We are also committed to reducing emissions and waste generation.  We have established key performance indicators to facilitate regular monitoring of our operational performance.  We set targets on an annual basis to drive continuous improvement, and we review performance indicators monthly to determine if remedial action is necessary to reach our targets.  Golar’s shore staff performs a full range of technical, commercial and business development services for us.  This staff also provides administrative support to our operations in finance, accounting and human resources.

 

Through its affiliates, Golar assists us in managing our ship operations and maintaining a technical department to monitor and audit our ship manager operations.  Our appointed ship manager, Golar Wilhelmsen Management AS ( Golar Wilhelmsen),  is working to the standard of International Standards Organization’s (or ISO) 9001 and ISO 14001, and have through Det Norske Veritas, the Norwegian classification society, and Lloyds, obtained approval of their safety management systems as being in compliance with the International Safety Management Code (or ISM Code), on behalf of the appropriate Flag State for the vessels in our current fleet, which are flagged in the Marshall Islands, UK or Liberia.  Golar Wilhelmsen, established in 2010, received its ISO 9001 certification on April 7, 2011.  Our vessels’ safety management certificates are being maintained through ongoing internal audits performed by the manager and intermediate audits performed by Det Norske Veritas or Lloyds.  To supplement our operational experience, Golar and its affiliates provide expertise in various functions critical to our operations.  This affords an efficient and cost effective operation and, pursuant to administrative services agreements with certain affiliates of Golar, access to human resources, financial and other administrative functions.  Critical ship management functions that will be provided by Golar Management through various of its offices around the world include:

 

·                   technical management, maintenance, dockings;

 

·                   crew management;

 

·                   procurement, purchasing, forwarding logistics;

 

·                   marine operations;

 

·                   vetting, oil major and terminal approvals;

 

·                   shipyard supervision;

 

·                   insurance; and

 

·                   financial services.

 

These functions are supported by onboard and onshore systems for maintenance, inventory, purchasing and budget management.  In addition, Golar’s day-to-day focus on cost control will be applied to our operations.  To some extent, the uniform design of some of our vessels and the adoption of common equipment standards should also result in operational efficiencies, including with respect to crew training and vessel management, equipment operation and repair, and spare parts ordering.

 

Competition

 

We operate in markets that are highly competitive and based primarily on supply and demand. We compete for charters based upon price, customer relationships, operating expertise, professional reputation and size, age and condition of the vessel.

 

Competition for providing FSRUs and LNG carriers for chartering purposes comes from a number of experienced shipping companies. Some of our competitors have significantly greater financial resources than we do and can operate larger fleets and may be able to offer better charter rates. An increasing number of marine transportation companies have entered the FSRU and LNG carrier sector, including many with strong reputations and extensive resources and experience. This increased competition may cause greater price competition for time charters. While the majority of the existing world LNG carrier fleet is employed on long-term charters, there is

 

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competition for the employment of vessels whose charters are expiring and for the employment of vessels which are not dedicated to a long-term contract.

 

Competition for long-term LNG charters is based primarily on price, vessel availability, size, age and condition of the vessel, relationships with LNG carrier users, the quality of LNG carrier users and the experience and reputation of the carrier operator. In addition, vessels may operate in the emerging LNG carrier spot market that covers short-term charters of one year or less during periods of increased competition due to an oversupply of LNG carriers.

 

Seasonality

 

Our vessels primarily operate under long-term charters and are not subject to the effect of seasonal variations in demand.

 

Crewing and Staff

 

As of December 31, 2011, Golar employed (directly and through ship managers) approximately 233 seagoing staff who serve on our vessels.  Golar and its affiliates may employ additional seagoing staff to assist us as we grow.  Certain affiliates of Golar, including Golar Management and Golar Wilhelmsen, provide commercial and technical management services, including all necessary crew-related services, to our subsidiaries pursuant to the fleet management agreements.  Please read “Item 7—Major Unitholders and Related Party Transactions—Related Party Transactions—Fleet Management Agreements.”  We regard attracting and retaining motivated seagoing personnel as a top priority.  Like Golar, we offer our seafarers competitive employment packages and opportunities for personal and career development, which relates to a philosophy of promoting internally.  The officers operating our vessels are engaged on individual employment contracts, while the ship managers have entered into Collective Bargaining Agreements that cover substantially all of the seamen that operate the vessels in our current fleet, which are flagged in the Marshall Islands, UK or Liberia.  We believe our relationships with these labor unions are good.  Our commitment to training is fundamental to the development of the highest caliber of seafarers for our marine operations.  Golar’s cadet training approach is designed to balance academic learning with hands-on training at sea.  Golar has relationships with training institutions in Croatia, India, Norway, Philippines, Indonesia and the United Kingdom.  After receiving formal instruction at one of these institutions, our cadets’ training continues on board one of our vessels.  We believe that high-quality crewing and training policies will play an increasingly important role in distinguishing the preferred larger and LNG-experienced independent shipping companies from those that are newcomers to LNG and lacking in-house experienced staff and established expertise on which to base their customer service and safety operations.

 

Risk of Loss, Insurance and Risk Management

 

The operation of any vessel, including FSRUs and LNG carriers, has inherent risks.  These risks include, mechanical failure, personal injury, collision, property loss, vessel or cargo loss or damage and business interruption due to political circumstances in foreign countries or hostilities.  In addition, there is always an inherent possibility of marine disaster, including explosion, spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.  We believe that our present insurance coverage is adequate to protect us against the accident related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage consistent with standard industry practice.  However, not all risks can be insured, and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance coverage at reasonable rates.

 

We have obtained hull and machinery insurance on all our vessels against marine and war risks, which include the risks of damage to our vessels, salvage or towing costs, and also insure against actual or constructive total loss of any of our vessels.  However, our insurance policies contain deductible amounts for which we will be responsible.  We have also arranged additional total loss coverage for each vessel.  This coverage, which is called hull interest and freight interest coverage, provides us additional coverage in the event of the total loss of a vessel.

 

We have also obtained loss of hire insurance to protect us against loss of income in the event one of our vessels cannot be employed due to damage that is covered under the terms of our hull and machinery insurance.  Under our loss of hire policies, our insurer will pay us the daily rate agreed in respect of each vessel for each day, in

 

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excess of a certain number of deductible days, for the time that the vessel is out of service as a result of damage, for a maximum of 240 days.  The number of deductible days varies from 14 days to 30 days, depending on the type of damage; machinery or hull damage.

 

Protection and indemnity insurance, which covers our third party legal liabilities in connection with our shipping activities, is provided by a mutual protection and indemnity association, or P&I club.  This includes third party liability and other expenses related to the injury or death of crew members, passengers and other third party persons, loss or damage to cargo, claims arising from collisions with other vessels or from contact with jetties or wharves and other damage to other third party property, including pollution arising from oil or other substances, and other related costs, including wreck removal.  Subject to the capping discussed below, our coverage, except for pollution, is unlimited.

 

Our current protection and indemnity insurance coverage for pollution is $1 billion per vessel or FSRU per incident.  The thirteen P&I clubs that comprise the International Group of Protection and Indemnity Clubs insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement to reinsure each association’s liabilities.  Each P&I club has capped its exposure in this pooling agreement so that the maximum claim covered by the pool and its reinsurance would be approximately $5.45 billion per accident or occurrence.  We are a member of Gard and Skuld P&I Clubs.  As a member of these P&I clubs, we are subject to a call for additional premiums based on the clubs’ claims record, as well as the claims record of all other members of the P&I clubs comprising the International Group.  However, our P&I clubs have reinsured the risk of additional premium calls to limit our additional exposure.  This reinsurance is subject to a cap, and there is the risk that the full amount of the additional call would not be covered by this reinsurance.

 

The insurers providing the covers for Hull and Machinery, Hull and Cargo interests, Protection and Indemnity and Loss of Hire insurances have confirmed that they will consider the FSRUs as vessels for the purpose of providing insurance.  For the FSRUs, we have also arranged an additional “Extended Contractual Liability” of $15 million in relation to indemnification required by the charter.

 

We will use in our operations Golar’s thorough risk management program that includes, among other things, computer-aided risk analysis tools, maintenance and assessment programs, a seafarers competence training program, seafarers workshops and membership in emergency response organizations.  We expect to benefit from Golar’s commitment to safety and environmental protection as certain of its subsidiaries assist us in managing our vessel operations.  Golar Wilhelmsen, our ship manager, received its ISO 9001 in April 2011, and is certified in accordance with the IMO’s International Management Code for the Safe Operation of Ships and Pollution Prevention on a fully integrated basis.

 

Environmental and Other Regulation

 

General

 

Governmental and international agencies extensively regulate the carriage, handling, storage and regasification of LNG.  These regulations include international conventions and national, state and local laws and regulations in the countries where our vessels now or, in the future, will operate or where our vessels are registered.  We cannot predict the ultimate cost of complying with these regulations, or the impact that these regulations will have on the resale value or useful lives of our vessels.  Various governmental and quasi governmental agencies require us to obtain permits, licenses and certificates for the operation of our vessels.

 

Although we believe that we are substantially in compliance with applicable environmental laws and regulations and have all permits, licenses and certificates required for our vessels, future non-compliance or failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of our vessels.  A variety of governmental and private entities inspect our vessels on both a scheduled and unscheduled basis.  These entities, each of which may have unique requirements and each of which conducts frequent inspections, include local port authorities, such as the U.S. Coast Guard, harbor master or equivalent, classification societies, flag state, or the administration of the country of registry, charterers, terminal operators and LNG producers.  Our FSRUs are subject to inspections on an unscheduled basis and we expect, in the future, they will also be subject to inspection by the applicable governmental and private entities on a scheduled basis.

 

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Golar Wilhelmsen is operating in compliance with the International Standards Organization (or ISO) Environmental Standard for the management of the significant environmental aspects associated with the ownership and operation of a fleet of LNG carriers.  Golar Wilhelmsen received its ISO 9001 certification (quality management systems) in April 2011 and is in the process of receiving certification to the ISO 14001 Environmental Standard.  This certification requires that we and Golar Wilhelmsen commit managerial resources to act on our environmental policy through an effective management system.

 

International Maritime Regulations of LNG Vessels

 

The IMO is the United Nations’ agency that provides international regulations governing shipping and international maritime trade.  The requirements contained in the International Management Code for the Safe Operation of Ships and for Pollution Prevention (the ISM Code) promulgated by the IMO, govern our operations.  Among other requirements, the ISM Code requires the party with operational control of a vessel to develop an extensive safety management system that includes, among other things, the adoption of a policy for safety and environmental protection policy setting forth instructions and procedures for operating its vessels safely and also describing procedures for responding to emergencies.  Golar Wilhelmsen, our ship manager, holds a Document of Compliance under the ISM Code for operation of Gas Carriers that meets the standards set by the IMO.

 

Vessels that transport gas, including LNG carriers and FSRUs, are also subject to regulation under the International Gas Carrier Code (or the IGC Code) published by the IMO.  The IGC Code provides a standard for the safe carriage of LNG and certain other liquid gases by prescribing the design and construction standards of vessels involved in such carriage.  Compliance with the IGC Code must be evidenced by a Certificate of Fitness for the Carriage of Liquefied Gases in Bulk.  Each of our vessels is in compliance with the IGC Code and each of our newbuilding/conversion contracts requires that the vessel receive certification that it is in compliance with applicable regulations before it is delivered.  Non-compliance with the IGC Code or other applicable IMO regulations may subject a shipowner or a bareboat charterer to increased liability, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some ports.

 

The IMO also promulgates ongoing amendments to the international convention for the Safety of Life at Sea 1974 and its protocol of 1988, otherwise known as SOLAS.  SOLAS provides rules for the construction of and equipment required for commercial vessels and includes regulations for safe operation.  It requires the provision of lifeboats and other life-saving appliances, requires the use of the Global Maritime Distress and Safety System which is an international radio equipment and watchkeeping standard, afloat and at shore stations, and relates to the Treaty on the Standards of Training and Certification of Watchkeeping Officers (or STCW) also promulgated by the IMO.  Flag states that have ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW requirements into their class rules, to undertake surveys to confirm compliance.

 

SOLAS and other IMO regulations concerning safety, including those relating to treaties on training of shipboard personnel, lifesaving appliances, radio equipment and the global maritime distress and safety system, are applicable to our operations.  Non-compliance with these types of IMO regulations may subject us to increased liability or penalties, may lead to decreases in available insurance coverage for affected vessels and may result in the denial of access to or detention in some ports.  For example, the U.S. Coast Guard and European Union authorities have indicated that vessels not in compliance with the ISM Code are prohibited from trading in U.S. and European Union ports.

 

In the wake of increased worldwide security concerns, the IMO amended SOLAS and added the International Ship and Port Facility Security Code (or ISPS Code) as a new chapter to that convention.  The objective of the ISPS, which came into effect on July 1, 2004, is to detect security threats and take preventive measures against security incidents affecting ships or port facilities.  Golar Wilhelmsen has developed Security Plans, appointed and trained Ship and Office Security Officers and all of our vessels have been certified to meet the ISPS Code.  See “—Vessel Security Regulations” for a more detailed discussion about these requirements.

 

The IMO continues to review and introduce new regulations.  It is impossible to predict what additional regulations, if any, may be passed by the IMO and what effect, if any, such regulation may have on our operations.

 

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Air Emissions

 

The International Convention for the Prevention of Marine Pollution from Ships (or MARPOL), is the principal international convention negotiated by the IMO governing marine pollution prevention and response.  MARPOL imposes environmental standards on the shipping industry relating to oil spills, management of garbage, the handling and disposal of noxious liquids, sewage and air emissions.  MARPOL 73/78 Annex VI “Regulations for the prevention of Air Pollution” (or Annex VI) entered into force on May 19, 2005, and applies to all ships, fixed and floating drilling rigs and other floating platforms.  Annex VI sets limits on sulfur oxide and nitrogen oxide emissions from ship exhausts, emissions of volatile compounds from cargo tanks, incineration of specific substances, and prohibits deliberate emissions of ozone depleting substances.  Annex VI also includes a global cap on sulfur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions.  The certification requirements for Annex VI depend on size of the vessel and time of periodical classification survey.  Ships more than 400 gross tons and engaged in international voyages involving countries that have ratified the conventions, or ships flying the flag of those countries, are required to have an International Air Pollution Certificate (or an IAPP Certificate).  Annex VI came into force in the United States on January 8, 2009.  As of the current date, all our ships have IAPP Certificates.

 

In March 2006, the IMO amended Annex I to MARPOL, including a new regulation relating to oil fuel tank protection, which became effective August 1, 2007.  The new regulation applies to various ships delivered on or after August 1, 2010.  It includes requirements for the protected location of the fuel tanks, performance standards for accidental oil fuel outflow, a tank capacity limit and certain other maintenance, inspection and engineering standards.  IMO regulations also require owners and operators of vessels to adopt Ship Oil Pollution Emergency Plans.  Periodic training and drills for response personnel and for vessels and their crews are required.

 

On July 1, 2010, amendments proposed by the United States, Norway and other IMO member states to Annex VI to the MARPOL Convention took effect that require progressively stricter limitations on sulfur emissions from ships.  In Emission Control Areas (or ECAs), limitations on sulfur emissions require that fuels contain no more than 1% sulfur.  Beginning on January 1, 2012, fuel used to power ships may contain no more than 3.5% sulfur.  This cap will then decrease progressively until it reaches 0.5% by January 1, 2020.  The amendments all establish new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation.  The European directive 2005/33/EU, which is effective from January 1, 2010, bans the use of fuel oils containing more than 0.1% sulfur by mass by any merchant vessel while at berth in any EU country.  Our vessels have achieved compliance, where necessary, by being modified to burn gas in their boilers when alongside.  Low sulfur marine diesel oil (or LSDO) has been purchased as the only fuel for the Diesel Generators.  More specifically, the Methane Princess is trading world wide by the charterer and on this vessel the boilers have been converted to burn LSDO.  The FSRUs are arranged for burning of gas only while in port, and have not had their boilers converted for burning of LSDO.  The FSRUs (the Golar Winter , Golar Spirit, and the Golar Freeze ) are not likely to be traded to EU ports in the foreseeable future. The charterer of the Golar Mazo has selected not to perform the boiler conversion to burn LSDO. Under the TCP for this vessel the charterer will have to cover the costs for the LSDO conversion if he should choose to trade the vessel to an EU port. The Golar Mazo is engaged in carrying the charterer’s LNG from Indonesia to Taiwan.

 

Additionally, more stringent emission standards could apply in coastal areas designated as ECAs, such as the United States and Canadian coastal areas designated by the IMO’s Marine Environment Protection Committee, as discussed in “—U.S. Clean Air Act” below.  U.S. air emissions standards are now equivalent to these amended Annex VI requirements, and once these amendments become effective, we may incur costs to comply with these revised standards.  Additional or new conventions, laws and regulations may be adopted that could require the installation of expensive emission control systems.  Because our vessels are largely powered by means other than fuel oil we do not anticipate that any emission limits that may be promulgated will require us to incur any material costs for the operation of our vessels but that possibility cannot be eliminated.

 

Ballast Water Management Convention

 

The IMO has negotiated international conventions that impose liability for oil pollution in international waters and the territorial waters of the signatory to such conventions.  For example, the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments (or the BWM Convention) in February 2004.  The BWM Convention’s implementing regulations call for a phased introduction of

 

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mandatory ballast water exchange requirements (beginning in 2009), to be replaced in time with a requirement for mandatory ballast water treatment.  The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping.  Though this has not occurred to-date, the IMO has passed a resolution encouraging the ratification of the BWM Convention and calling upon those countries that have already ratified to encourage the installation of ballast water management systems on new ships.  As referenced below, the United States Coast Guard issued new ballast water management rules on March 23, 2012.  Under the requirements of the BWM Convention for units with ballast water capacity more than 5000 cubic meters that were constructed in 2011 or before, ballast water management exchange or treatment will be accepted until 2016. From 2016 (or not later than the first intermediate or renewal survey after 2016), only ballast water treatment will be accepted by the BWM Convention.  Installation of ballast water treatment systems will be needed on the Golar Mazo and Methane Princess .  As long as the FSRUs (the Golar Winter , Golar Spirit, and the Golar Freeze ) are operating as FSRUs and kept stationary they will not need installation of ballast water treatment systems. However, under their time charter party (“TCP”), Golar Spirit and Golar Winter may be required to trade as LNG carriers.  If the respective vessel charterers should choose to trade the Golar Spirit or Golar Winter internationally as LNG carriers, the vessels will have to be equipped with ballast water treatment systems and the cost of the related modifications will be split between the charterer and owner.  Given that ballast water treatment technologies are still at the developmental stage, at this time the additional costs of complying with these rules are unclear, but current estimates suggest that additional costs are not likely to be material.

 

Bunkers Convention/CLC State Certificate

 

The International Convention on Civil Liability for Bunker Oil Pollution 2001 (or the Bunker Convention) entered into force in State Parties to the Convention on November 21, 2008.  The Bunker Convention provides a liability, compensation and compulsory insurance system for the victims of oil pollution damage caused by spills of bunker oil.  The Bunker Convention requires the ship owner liable to pay compensation for pollution damage (including the cost of preventive measures) caused in the territory, including the territorial sea of a State Party, as well as its economic zone or equivalent area.  Registered owners of any sea going vessel and seaborne craft over 1,000 gross tonnage, of any type whatsoever, and registered in a State Party, or entering or leaving a port in the territory of a State Party, will be required to maintain insurance which meets the requirements of the Bunker Convention and to obtain a certificate issued by a State Party attesting that such insurance is in force.  The State issued certificate must be carried on board at all times.

 

P&I Clubs in the International Group issue the required Bunkers Convention “Blue Cards” to enable signatory states to issue certificates.  All of our vessels have received “Blue Cards” from their P&I Club and are in possession of a CLC State-issued certificate attesting that the required insurance coverage is in force.

 

The flag state, as defined by the United Nations Convention on Law of the Sea, has overall responsibility for the implementation and enforcement of international maritime regulations for all ships granted the right to fly its flag.  The “Shipping Industry Guidelines on Flag State Performance” evaluates flag states based on factors such as sufficiency of infrastructure, ratification of international maritime treaties, implementation and enforcement of international maritime regulations, supervision of surveys, casualty investigations and participation at the IMO meetings.

 

United States Environmental Regulation of LNG Vessels

 

Our vessels operating in U.S. waters now or, in the future, will be subject to various federal, state and local laws and regulations relating to protection of the environment.  In some cases, these laws and regulations require us to obtain governmental permits and authorizations before we may conduct certain activities.  These environmental laws and regulations may impose substantial penalties for noncompliance and substantial liabilities for pollution.  Failure to comply with these laws and regulations may result in substantial civil and criminal fines and penalties.  As with the industry generally, our operations will entail risks in these areas, and compliance with these laws and regulations, which may be subject to frequent revisions and reinterpretation, increases our overall cost of business.

 

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