Golar LNG Limited preliminary fourth quarter and financial year 2017 results

Highlights

• Golar LNG Limited ("Golar" or "the Company") reports operating income and EBITDA* in the quarter of $2.8 million and $19.4 million, respectively, compared to 3Q 2017 losses of $22.9 million and $5.5 million, respectively.
• Golar LNG Partners L.P. ("Golar Partners" or "the Partnership") issues first 50% of Incentive Distribution Right reset Earn-Out Units to Golar.
• FLNG Hilli Episeyo arrives on site in Cameroon, hooks up to mooring, tenders Notice of Readiness and commences commissioning.
• Shipping market recovery gathers momentum.

Subsequent Events

• Golar Partners secures a 15-year contract for one of its two available FSRUs.
• Initiate process of mobilizing LNG carrier Gandria from layup.

Financial Review

Business Performance

* EBITDA is defined as operating income (loss) before interest, tax, depreciation and amortization. EBITDA is a non-GAAP financial measure. A non-GAAP financial measure is generally defined by the Securities and Exchange Commission as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. We have presented EBITDA as we believe it provides useful information to investors because it is a basis upon which we measure our operations and efficiency. EBITDA is not a measure of our financial performance under U.S. GAAP and should not be construed as an alternative to net income (loss) or other financial measures presented in accordance with U.S. GAAP.

Golar reports today 4Q 2017 operating income of $2.8 million compared to a 3Q 2017 loss of $22.9 million. Further improvements in vessel utilization, hire rates, improving round-trip economics and expiry on November 1, 2017 of the obligation to charter in the Golar Grand from Golar Partners all contributed to an $18.8 million increase in total revenue net of voyage expenses, from $19.3 million in 3Q 2017 to $38.1 million in 4Q 2017.

Vessel operating expenses increased $3.2 million to $17.1 million in 4Q 2017. Most of the increase is due to repairs, maintenance and crew expenses together with costs associated with reactivating the Gandria from layup.

Additional employment, legal and professional costs and Mark II FEED study expenses caused administrative expenses to increase by $5.8 million, from $11.0 million in 3Q 2017 to $16.8 million in 4Q 2017.

Liquefaction services revenue in respect of the FLNG Hilli Episeyo will be recognized after customer acceptance of the vessel. A derivative asset of $79.6 million, representing the fair value of the estimated discounted cash flows of payments due as a result of the Brent crude price moving above the contractual floor of $60.00 per barrel over the contract term, was recognized in December 2017 on commencement of commissioning. The derivative asset is adjusted to fair value at each balance date and, on December 31, 2017, the value of this asset increased to $94.7 million. This resulted in the recognition of an unrealized fair value gain of $15.1 million under other operating income in the income statement. Movements in the price of Brent crude will cause the derivative asset and resulting fair value movements to fluctuate.

Net Income Summary

In 4Q 2017, the Company generated net income of $3.8 million. Notable contributors to the $47.7 million increase in 4Q 2017 are summarized as follows:

• Interest expense decreased by $7.2 million to $6.2 million. The decrease is mainly attributable to deemed interest capitalized in respect of Hilli Episeyo in 4Q 2017.
• Other financial items reported 4Q 2017 income of $24.1 million. This non-cash income was derived from a mark-to-market gain on the three million Total Return Swap ("TRS") shares following a $7.20 quarter-on-quarter increase in the Company's share price and further increases in swap rates resulting in mark-to-market interest rate swap gains.
• The $6.3 million 4Q 2017 equity in net losses of affiliates is primarily comprised of the following:
  • a $6.3 million loss in respect of Golar's 50% share in Golar Power Ltd ("Golar Power");
  • a $2.9 million loss in respect of Golar's 51% share in OneLNG S.A. ("OneLNG"); and
  • income of $2.5 million in respect of Golar's stake in Golar Partners.

Golar's $7.4 million 4Q 2017 share of net earnings in the Partnership is offset by amortization, principally of the fair value gain on deconsolidation of Golar Partners, currently equivalent to $4.9 million. Cash distributions received from the Partnership are in line with prior quarters.

Commercial Review

LNG Shipping

The LNG shipping market continued to tighten as a result of 2017 demand increasing 11% (as a function of higher volumes and longer voyages) contrasting with shipping supply increasing by only 5%. Strong LNG import demand from China, Korea and India together with rising coal and oil prices helped absorb cargoes and push the LNG spot price higher. Faster than expected coal-to-gas switching saw China demand grow by 48% to overtake South Korea as the second largest market for LNG imports. By year end the JKM price was $11.2/mmbtu, NBP was $6.9 and Henry Hub was $2.9. This price differential created a good export opportunity for US gas into the Asian market, placing further upward pressure on ton miles: 69% of 4Q 2017 US volumes went to Asia compared to 48% in 4Q 2016. TFDE carrier spot rates increased from around $45kpd at the beginning of the quarter to three year highs of around $80-85kpd (plus round trip economics) at year end. A dramatic reduction in prompt available vessels also resulted in improving rates and utilization for steam turbine vessels. In response, the Company reactivated the ST carrier Golar Viking, which entered the spot market during February 2018.

Steady rates and charter activity into the new year were supported by strong underlying demand for LNG that helped sustain firm Asian prices and prolong arbitrage opportunities through to mid-February 2018. More recently, there has been a seasonal softening of rates for TFDEs to around $65kpd and corresponding reductions in utilization.

Over the course of 2018, liquefaction trains with a nameplate capacity of approximately 35mtpa are expected to commence and ramp up production. Approximately 55 carrier deliveries are currently scheduled for 2018. A further 33 mtpa of new production is expected to commence in 2019 and 24 mtpa in 2020. Against this, 30 newbuild vessels are expected to deliver in 2019 whilst 10 carriers are currently scheduled to deliver in 2020. Independent shipping research firms estimate that the current market looks to be structurally short by 30-35 vessels over the next 2-3 years.

Golar Partners (affiliate)

On October 31, 2017, the Partnership closed a 5.52 million $25.0 per unit 8.75% Series A Preferred Unit offering raising net proceeds of $133.0 million. Trading from an At-The-Market facility established in September 2017 was also initiated during the quarter. To date, this facility has generated net proceeds to the Partnership of $17.8 million on the sale of 779,165 common and General Partner units. Collectively, these two facilities are expected to fund a significant portion of the Partnership's potential acquisition of the remaining 50% of Hilli Episeyo's contracted capacity.

On January 19, 2018 the Partnership executed a 15-year charter with an energy and logistics company for the provision of an FSRU in the Atlantic Basin. The Partnership can nominate either of its two available FSRUs to service the contract provided that the nominated unit satisfies certain technical specifications ahead of project start-up, expected in the fourth quarter of 2018. The capital element of the charter rate will vary according to demand for regasification throughput, but includes a cap and a floor that is expected to generate annual operating income before depreciation and amortization of between approximately $18 and $22 million.   The charter includes an option after 3 years for the charterer to terminate the contract and seek an alternative regasification solution, but only in the event that certain throughput targets have not been met. Additionally, Golar Partners will have a matching right to provide such alternative solution. The charter also includes a 5-year extension option.

The Partnership is working on a number of other requirements compatible with the remaining FSRU as well as a conversion opportunity for one of its available carriers.

FLNG

FLNG Hilli Episeyo arrived in Cameroon in late November 2017. Customs clearance, positioning, mooring hook-up and connection to the riser and umbilicals followed shortly thereafter. In early December 2017, a Notice of Readiness, which triggers the commissioning process, was tendered to Perenco and SNH. A ship-to-ship transfer of cool down LNG with the Golar Bear was completed in mid-December 2017, followed by the introduction of feed gas from the onshore processing plant. Full commissioning of the gas treatment systems is now substantially complete and they are running satisfactorily. Commissioning of the refrigerant trains continued through to February 2018 and first LNG production is expected to commence in the coming days. Although Golar reiterates the importance of taking the time it needs to safely commission the vessel, at this time final commissioning, followed by acceptance testing, remains on track for mid-April 2018. Vessel acceptance will trigger the final drawdown against the $960 million CSSCL facility.

Commissioning hire at a reduced toll rate began to accrue from January 4, 2018: $9.8 million has now been received in respect of January 2018 and a further $11.1 million will shortly be billed in respect of February 2018.

OneLNG (51/49 Golar/Schlumberger upstream joint venture)

Financing for the Fortuna project remains outstanding despite an approved Umbrella Agreement, a preferred off-taker, and EPC and EPCIC contracts for midstream and upstream infrastructure all being in place. Whilst Hilli Episeyo's imminent proof of concept should assist current financing discussions, market leading economic returns give Golar the confidence that financing can be achieved. As a result, the Company is in the process of moving the Gandria from layup for positioning to Singapore's Keppel Shipyard.

Other OneLNG projects are also making good progress and there is a high degree of confidence that further projects will be advanced this year.

Golar Power (50/50 Golar/Stonepeak Infrastructure Partners downstream joint venture)

Construction of the Sergipe power project continues to plan. A full financing package for the project remains on track to close within 1Q 2018. Civil and earthworks are complete and power plant infrastructure modules have started to arrive on site. The FSRU Golar Nanook remains on track for a September 2018 delivery and will be required on site in 1Q 2019 ahead of project commissioning. Required modifications to the FSRU will result in an all-in delivered cost of approximately $285 million. Golar Power will be compensated for the cost of these modifications by a higher daily rate that is expected to increase the 25-year annual EBITDA from $39 million to $41 million. Financing discussions for the FSRU are at an advanced stage.

A number of other FSRU opportunities are also being pursued. Where mutually beneficial, Golar Power will work with other Golar affiliates to utilize suitably sized conversion candidates and develop opportunities. The market for low cost, mid-sized FSRUs has increased in terms of activity. One of Golar Power's available carriers has been committed for one such opportunity and clarification on this project is expected around mid-April 2018.

Financing Review

FLNG Hilli Episeyo financing

The Hilli Episeyo remains within budget. As at December 31, 2017, $1,030.0 million has been incurred ($1,177.5 million including the original vessel and capitalized interest). At year-end, $525.0 million had been drawn against the CSSCL facility and, as of today, $640.0 million has been drawn. A further $60.0 million of the pre-delivery facility is therefore available to meet remaining pre-acceptance costs over the coming weeks. Up to a further $260.0 million can be used for remaining bills and to augment liquidity after acceptance. Net of non-controlling interests and final costs, drawdown of this facility is expected to add approximately $140.0 million to Golar's 2Q 2018 liquidity and investment capacity.

Liquidity

Golar's unrestricted cash position as at December 31, 2017 was $214.9 million. An early debt repayment in respect of the Golar Tundra and an equity contribution to Golar Power collectively resulted in a cash outflow of $54.5 million during the quarter. Offsetting this was $57.2 million released from short-term restricted cash during 4Q 2017 following a 3Q 2017 agreement between Golar and the charterers of FLNG Hilli Episeyo to reduce the LC from $400 to $300 million. Of the original $400 million LC, $231.9 million, or approximately 58%, had been cash backed by Golar. After release of the $57.2 million, the cash backed share of the reduced $300 million LC remains unchanged at $174.7 million. Of this, approximately $32 million and $97 million, respectively, is expected to be released to free cash 12 months and 34 months after customer acceptance of Hilli Episeyo.

Included within the $1,384.9 million current portion of long-term debt is $833.7 million relating to lessor-owned VIE subsidiaries that Golar is required to consolidate in connection with seven sale and leaseback financed vessels. Of the balance associated with VIE financings, $341.3 million is due for refinancing by the end of 2018. Management has received indicative financing terms for this. The remaining current portion of long-term debt is predominantly comprised of the $525.0 million Hilli Episeyo CSSCL facility which will be replaced by the pre-arranged $960 million sale and leaseback facility after vessel acceptance.

Corporate and Other Matters

As at December 31, 2017, there were 101.1 million shares outstanding, including 3.0 million TRS shares that had an average price of $43.30 per share. There were also 4.0 million outstanding stock options in issue. The dividend will remain unchanged at $0.05 per share for the quarter.

Outlook

Hilli Episeyo is now a cash generating asset. Whilst slower than initially anticipated, commissioning has been relatively straightforward to date. Final commissioning is currently expected in late March 2018, with customer acceptance testing scheduled for completion in mid-April 2018. Hire will be receivable at the full rate thereafter. The 3^rd and 4^th trains and the Brent-linked cash flows attached to the 1^st and 2^nd trains represent further upside. Assuming current prices are sustained, the Brent link alone is worth around $15 million in additional annual cashflows at $65/bbl.

Our experience from Hilli Episeyo's conversion and commissioning is being applied to the Fortuna project. Proof of concept following acceptance of Hilli Episeyo is also expected to speed up and open a wider variety of financing alternatives. Some of those alternatives are being actively worked. Initiation of yard works to the Gandria should therefore be viewed as indicative of the Company's confidence in a FID being reached.

The Sergipe project is expected to be cashflow generative in 2020, ahead of Fortuna. At current exchange rates, the Company expects to record $105 million in annual EBITDA* in respect of its 25% effective interest in the power station and 50% interest in the FSRU. Options to monetize the FSRU Nanook's 65% spare capacity represent additional upside for Golar Power.

Shipping returns are expected to increase over the course of 2018 as a function of an improved supply-demand balance which can be expected to result in higher rates and utilization. This should materially improve cash generation going forward. Against this positive backdrop, the Company is investigating options to restructure its shipping business to capture more upside for shareholders from the forthcoming market recovery.

TCE rates achieved for 1Q 2018 are marginally up on 4Q 2017. Due to seasonality of the business and timing of new production coming on stream, shareholders should not expect a significant improvement in rates before 3Q 2018.

With a strong underlying LNG Carrier market, the imminent acceptance of Hilli Episeyo, solid progress on the Sergipe power project and the potential for several FLNG/FSRU projects to reach FID, Golar expects significant earnings growth over the coming years.