F-1/A 1 c67840_f1a.htm FORM F-1/A 3B2 EDGAR HTML -- c67840_f1a.htm

As filed with the Securities and Exchange Commission on March 16, 2012

Registration Statement No. 333-179034



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


AMENDMENT NO. 4
TO

F
ORM F-1
REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933


GasLog Ltd.
(Exact name of Registrant as specified in its charter)

 

 

 

 

 

Bermuda
(State or Other Jurisdiction of
Incorporation or Organization)

 

4400
(Primary Standard Industrial
Classification Code Number)

 

N/A
(I.R.S. Employer
Identification No.)

c/o GasLog Monaco S.A.M.
Gildo Pastor Center
7 Rue du Gabian
MC 98000, Monaco
+377 97 97 51 15

(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)


CT Corporation System
111 Eighth Avenue
New York, New York 10011
(212) 590-9338

(Name and Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)


 

 

 

William P. Rogers, Jr., Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
(212) 474-1000

(telephone number)

(212) 474-3700

(facsimile number)

 

Stephen P. Farrell, Esq.
Finnbarr D. Murphy, Esq.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178
(212) 309-6050

(telephone number)

(212) 309-6001

(facsimile number)


Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.


If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. £

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. £

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

 

 

 

 

Title of Each Class of
Securities to be Registered

 

Amount to
be Registered (1)

 

Proposed
Maximum
Offering Price
Per Security (2)

 

Proposed Maximum
Aggregate Offering
Price (1) (2)

 

Amount of
Registration Fee (3)

 

Common Shares, par value $0.01 per share

 

 

27,025,000

   

$

 

18.00

   

$

 

486,450,000

   

$

 

55,747

 

 

 

(1)

 

 

 

Includes shares to be sold upon exercise of the underwriters’ option to purchase additional shares.

(2)

 

 

 

Estimated solely for the purposes of calculating the registration fee pursuant to Rule 457(a) under the Securities Act.

 

(3)

 

 

 

$40,110 of this amount has already been paid; $15,637 is being paid with this amendment.


The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

(Subject to Completion) Issued March 16, 2012

PROSPECTUS

23,500,000 Common Shares

GasLog Ltd.


GasLog Ltd. is offering its common shares. This is our initial public offering and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $16.00 and $18.00 per share.


Our common shares have been approved for listing on the New York Stock Exchange under the symbol “GLOG”.

Concurrently with the public offering of common shares pursuant to this prospectus, we are also selling approximately $3.7 million of our common shares through a private placement to certain of our directors and officers, at the public offering price.


Investing in our common shares involves risks. See “Risk Factors” beginning on page 15.


PRICE $   PER SHARE


 

 

 

 

 

 

 

Per Share

 

Total

Public Offering Price

 

 

$

 

 

 

 

 

$

 

 

 

Underwriting Discounts and Commissions

 

 

$

 

 

 

$

 

Proceeds to Company

 

 

$

 

 

 

$

 

GasLog Ltd. has granted the underwriters the right to purchase up to an additional 3,525,000 shares.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares to purchasers on  , 2012.


 

 

 

Goldman, Sachs & Co.

 

Citigroup

J.P. Morgan

 

UBS Investment Bank


 

 

 

Dahlman Rose & Company

 

DNB Markets

Evercore Partners

Pareto Securities

 

SEB Enskilda

 , 2012


GasLog Savannah

GasLog Singapore


TABLE OF CONTENTS

 

 

 

 

 

Page

PROSPECTUS SUMMARY

 

 

 

1

 

RISK FACTORS

 

 

 

15

 

FORWARD-LOOKING STATEMENTS

 

 

 

40

 

DIVIDEND POLICY

 

 

 

42

 

USE OF PROCEEDS

 

 

 

43

 

CAPITALIZATION

 

 

 

44

 

DILUTION

 

 

 

45

 

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

 

 

 

46

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

48

 

THE LNG SHIPPING INDUSTRY

 

 

 

77

 

BUSINESS

 

 

 

95

 

MANAGEMENT

 

 

 

116

 

PRINCIPAL SHAREHOLDERS

 

 

 

123

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

 

 

125

 

DESCRIPTION OF INDEBTEDNESS

 

 

 

129

 

DESCRIPTION OF SHARE CAPITAL

 

 

 

141

 

SHARES ELIGIBLE FOR FUTURE SALE

 

 

 

147

 

BERMUDA COMPANY CONSIDERATIONS

 

 

 

149

 

TAX CONSIDERATIONS

 

 

 

152

 

EXPENSES OF ISSUANCE AND DISTRIBUTION

 

 

 

160

 

UNDERWRITING

 

 

 

161

 

LEGAL MATTERS

 

 

 

167

 

EXPERTS

 

 

 

167

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

 

 

167

 

INDUSTRY DATA

 

 

 

168

 

ENFORCEABILITY OF CIVIL LIABILITIES

 

 

 

168

 

GLOSSARY OF TERMS

 

 

 

169

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

F-1

 

You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date. Information contained on our website does not constitute part of this prospectus.

i


PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. You should carefully read this entire prospectus, including the historical financial statements and the notes to those financial statements. You should pay special attention to the “Risk Factors” section beginning on page 15 of this prospectus to determine whether an investment in our common shares is appropriate for you.

Unless otherwise indicated, references in this prospectus to “GasLog”, the “Company”, the “Group”, “we”, “our”, “us” or similar terms refer to GasLog Ltd. or any one or more of its subsidiaries or their predecessors, or to such entities collectively. References to “BG Group” refer to BG Group plc or any one or more of its subsidiaries or to such entities collectively; references to “Samsung Heavy Industries” refer to Samsung Heavy Industries Co., Ltd.; and references to “Shell” refer to Royal Dutch Shell plc or any one or more of its subsidiaries or to such entities collectively. For the definition of certain terms used in this prospectus, see the “Glossary of Terms” beginning on page 169 of this prospectus.

Unless otherwise indicated, all references to currency amounts in this prospectus are in U.S. dollars, all information in this prospectus assumes that the underwriters’ option to purchase additional shares is not exercised and all share numbers give effect to the 238-for-1 share split effected as described under “Capitalization”. The number of shares to be sold in the concurrent private placement and the number of outstanding shares after this offering assume an initial public offering price at the mid-point of the price range on the cover of this prospectus.

Business Overview

We are a growth-oriented international owner, operator and manager of liquefied natural gas (“LNG”) carriers providing support to international energy companies as part of their LNG logistics chain. Our owned fleet consists of 10 wholly owned LNG carriers, including two ships delivered to us in 2010 and eight LNG carriers to be constructed by the world’s leading LNG shipbuilder, Samsung Heavy Industries. We currently manage and operate 14 LNG carriers, which includes our owned ships, as well as 11 ships owned or leased by BG Group, a leading participant in the global energy and natural gas markets, and one additional LNG carrier in which we have a 25% interest. All of our ten owned ships are, or when delivered will be, newly-built LNG carriers equipped with the latest tri-fuel diesel electric propulsion technology, which lowers the fuel cost to charterers and environmental emissions compared to traditional steam-powered LNG carriers. We have secured multi-year time charter contracts for the two ships delivered to us in 2010 and six of our newbuilding ships on order that from December 31, 2011 provide total contracted revenue in excess of $1.2 billion during their initial terms, which expire between 2015 and 2021. Our owned fleet includes:

 

 

 

 

the GasLog Savannah, a 2010-built LNG carrier currently operating under a time charter to a subsidiary of BG Group, the initial term of which expires in 2015;

 

 

 

 

the GasLog Singapore, a 2010-built LNG carrier currently operating under a time charter to a subsidiary of BG Group, the initial term of which expires in 2016;

 

 

 

 

four LNG carriers on order at Samsung Heavy Industries in South Korea, scheduled for completion in 2013, for which time charters commencing upon delivery have been secured with a subsidiary of BG Group for initial terms of five years (two ships) and six years (two ships);

 

 

 

 

two LNG carriers on order at Samsung Heavy Industries in South Korea, scheduled for completion in 2013 (one ship) and 2014 (one ship), for which time charters commencing upon delivery have been secured with a subsidiary of Shell for initial terms of seven years; and

 

 

 

 

two LNG carriers on order at Samsung Heavy Industries in South Korea, scheduled for completion in 2014 (one ship) and 2015 (one ship), for which we are continuing to evaluate charter opportunities.

In addition to our committed order book, we have options to purchase two additional LNG carriers from Samsung Heavy Industries that expire in 2012 and, as mentioned above, we have a 25% interest in

1


an additional ship, the Methane Nile Eagle, a 2007-built LNG carrier technically managed by us that is currently operating under a 20-year time charter to a subsidiary of BG Group. We have not yet decided whether we will exercise the options.

The total contract price for our eight newbuilding ships on order is approximately $1.55 billion, of which $124.4 million has been paid to date. We have entered into four loan agreements aggregating $1.13 billion to finance a portion of the contract prices of our eight newbuildings. Borrowings under these facilities will bear interest at floating rates, will be repayable over periods ranging from six to 12 years, will require us to comply with certain financial and operating covenants and will be secured by mortgages on the ships. We expect to fund the balance of the total contract price with the proceeds of this offering. In the event we decide to exercise our options to order two additional ships from Samsung, we expect to finance the costs with cash from operations and a combination of debt and equity financing.

We have structured our order book of new LNG carriers to have staggered delivery dates, facilitating a smooth integration of the ships into our fleet as well as meaningful annual growth through 2015. Upon delivery of the last of our eight contracted newbuildings in 2015, our owned fleet will have an average age of 1.9 years, making it one of the youngest in the industry.

We currently focus on multi-year time charters, as we believe that their economic terms offer us a combination of return on our investment, rate stability and re-chartering flexibility. Our current time charters have initial terms of up to seven years and include options that permit the charterers to extend the terms for successive multi-year periods under hire rate provisions that are comparable to those prevailing at the end of the expiring term. We will continue to evaluate the attractiveness of longer and shorter term chartering opportunities as the commercial characteristics of the LNG carrier industry evolve.

Our wholly owned subsidiary, GasLog LNG Services Ltd., or “GasLog LNG Services”, exclusively handles the technical management of our fleet and has been the sole technical manager of BG Group’s owned fleet of LNG carriers for over 10 years. As a result, we have had a longer presence in LNG shipping than many other independent owners of LNG carriers currently in the industry, and during that time we have established a track record for efficient, safe and reliable operation of LNG carriers.

Business Opportunities

With the global demand for natural gas increasing and LNG’s share of the international natural gas trade expanding within the sector, we believe the following attributes of the LNG industry create opportunities for us to successfully execute our business plan and expand our business:

 

 

 

 

Natural gas and LNG are strong and growing components of global energy sources. Natural gas accounted for 24% of the world’s energy consumption in 2010, and over the last two decades has been one of the world’s fastest growing energy sources, growing at twice the rate of oil consumption over the same period. We believe LNG, which accounted for 31% of overall cross-border trade of natural gas in 2010, will continue to increase its share in the mid-term future. Because of the cost and environmental advantages of natural gas relative to other energy sources, together with the increased availability of natural gas, we believe that demand for natural gas and LNG in particular will continue to grow in the future.

 

 

 

 

The demand for LNG shipping is experiencing significant growth. Disparities in the location of natural gas reserves and the nations that consume natural gas have resulted in a rise in the percentage of natural gas traded between countries as well as an increase in the portion that is being transported in the form of LNG. This is being driven by the growing distances between natural gas sources and its users, the greater flexibility and generally lower capital costs of shipping natural gas in the form of LNG, as well as the reduced environmental impact, as compared to transportation by pipeline. Additionally, price disparity between markets is becoming a feature of the LNG trade market, with a significant difference in terms of the prices that Far Eastern and American buyers are willing to pay for LNG, creating arbitrage

2


 

 

 

 

opportunities for LNG producers and traders. Planned capacity increases in liquefaction and regasification terminals are anticipated to increase export capacity significantly, requiring additional LNG carriers to support trade activity. Based on the current project pipeline of liquefaction projects that are planned or under construction, liquefaction capacity is expected to increase by 38% by 2016, requiring an additional 100 LNG carriers, compared to a global order book of 58 ships. For more details about these liquefaction projects and the current global order book, see “The LNG Shipping Industry”.

 

 

 

 

A limited newbuilding order book and high barriers to entry should restrict the supply of new LNG carriers. The order book of LNG carriers represents only 17% of current LNG carrier fleet capacity as of December 31, 2011, with only modest increases expected in 2012, 2013 and 2014, respectively. We also believe that significant barriers to entry exist in the LNG shipping sector, given the large capital requirements, the limited availability of financing, the limited availability of qualified ship personnel and the need for a high degree of technical management capabilities. The industry is also known to have a demanding customer base that requires the highest quality operating standards. Finally, we believe the limited construction capacity at high-quality shipyards and the long lead-time required for the construction of LNG carriers should also restrict the supply of new LNG carriers in the near-term.

 

 

 

 

Stringent customer certification standards favor experienced, high-quality operators. Energy companies have established increasingly high operational, safety and financial standards that independent owners of LNG carriers generally must meet in order to qualify for employment in their programs. As we have managed LNG carriers for BG Group for over 10 years and our technical management operations have also been vetted by four other major energy companies, we believe that these rigorous and comprehensive certification standards will enhance our ability to compete for new customers and charters relative to less qualified and less experienced ship operators.

 

 

 

 

Increasing ownership of the global LNG carrier fleet by independent owners. Independent owners have increased their share of the global LNG carrier fleet from approximately 25.8% in 2001, to 31.2% as of January 2012. Orders by independent owners represent 72.4% of the current global order book. We believe private and state-owned energy companies will continue to seek high-quality independent owners for their growing LNG shipping requirements in the future, driven in part by large capital requirements and a recognition that LNG ship-owning and operation are outside of their core areas of expertise.

 

 

 

 

Strong preference for modern ships equipped with the latest tri-fuel diesel electric technology. Today 71% of the global LNG carrier fleet is equipped with steam turbine propulsion, while approximately 90% of the LNG carriers currently on order will have diesel electric propulsion. We believe that most charterers prefer the newer diesel electric propulsion technology because it offers significantly lower fuel consumption and emissions as compared with steam-powered ships. Based on average prices for heavy fuel oil in Singapore during 2011, tri-fuel diesel electric propulsion offers estimated savings of over 30%, or approximately $33,040 to $41,300 per day, for a ship operating on fuel oil at a speed of 19.5 knots in laden condition, compared to conventional steam turbine propulsion. As all of the LNG carriers in our owned fleet are modern ships with tri-fuel diesel electric propulsion, we believe we are well positioned to benefit from this trend.

We can provide no assurance, however, that the industry dynamics described above will continue or that we will be able to capitalize on these opportunities. Please read “Risk Factors” and “The LNG Shipping Industry”.

Our Competitive Strengths

We believe that our future business prospects are well supported by the following factors:

 

 

 

 

Significant built-in growth through fleet expansion. Our fleet of wholly owned LNG carriers will grow from its current position of two to 10 ships by the first quarter of 2015, all of which we

3


 

 

 

 

expect to be employed on multi-year time charters. Our order book represents one of the largest in the LNG shipping industry at a time when ship capacity is constrained and demand is expected to increase.

 

 

 

 

Predictable and high-growth cash flow profile through secured charter contracts. Our multi-year time charters vary in duration and have staggered ending dates, with initial terms that expire between 2015 and 2021. We believe our revenue and cash flow profile should exhibit meaningful growth and be relatively predictable once our newbuildings are delivered commencing in 2013. However, we expect that for 2012 our profit will be significantly lower than in 2011, although on a percentage basis the decline in our Adjusted EBITDA is expected to be substantially less. See “Summary Consolidated Financial and Other Data” for a discussion of Adjusted EBITDA. Our contracted revenues are supported by the protections inherent in our charters, including review provisions and cost pass-through provisions.

 

 

 

 

Strong credit-worthy counterparties. We have secured multi-year time charter contracts with BG Group and Shell for eight of the ten ships in our owned fleet, including six of our newbuilding ships on order. By contracting with companies that we believe are financially strong such as BG Group and Shell, we believe we have minimized our counterparty risk.

 

 

 

 

Demonstrated access to financing. We funded our two LNG carriers that were delivered in 2010, the GasLog Savannah and the GasLog Singapore, through debt financing as well as equity provided by our controlling shareholder, Ceres Shipping. We have entered into loan agreements that, together with the proceeds of this offering, will fully fund our committed order book of eight LNG carriers. We believe that being able to access financing will improve our ability to capture market opportunities.

 

 

 

 

Newly-constructed and high specification LNG carriers with most advanced tri-fuel diesel electric propulsion technology. We believe that our ships offer attractive characteristics that provide a competitive advantage in securing future charters with customers and enhance the ships’ earnings potential. Upon delivery of the last of our eight contracted newbuildings in 2015, our owned fleet will be among the youngest of any LNG shipping operator, with an average ship age of 1.9 years. The 155,000 cbm size of each of our 10 owned ships is compatible with most of the existing LNG terminals around the globe. In addition, all of our owned ships will be sister ships, which enables us to benefit from economies of scale and operating efficiencies in ship construction, crew training, crew rotation and shared spare parts. Each ship is or will be equipped with the latest tri-fuel diesel electric propulsion technology, which is equipped on only 13% of the current global LNG carrier fleet. This propulsion technology significantly reduces both fuel costs and emissions relative to steam turbine propulsion.

 

 

 

 

In-house management company with a track record for efficiency, safety and operational performance. Our owned fleet is technically managed through our wholly owned subsidiary, GasLog LNG Services. This integrated approach allows us to offer our customers high-quality performance, reliability and efficiency while maintaining a close control over operating costs. GasLog LNG Services also actively supervises our new construction projects from design to delivery. As the sole technical manager to date of BG Group’s owned LNG carrier fleet over the last 10 years and more recently managing our own ships, we have developed significant experience and know-how in the operation of LNG carriers. We provide comprehensive onboard training for our officers and crews and we have recorded only four lost time injuries in nearly 15 million exposure hours. We believe that existing and prospective customers will seek to engage with our company for their chartering needs as a result of the combination of our safety track record, strong technical capabilities and reputation for high operating standards.

 

 

 

 

Experienced leadership team with extensive relationships in the LNG shipping sector. Our leadership team and ship personnel have managed and operated LNG carriers since 2001. During this time, we believe we have established a track record in the industry for operational excellence and acquired significant experience in the operation and ownership of high-specification LNG carriers. Our senior executives have an average of 17 years of shipping experience, a substantial

4


 

 

 

 

portion of which has been in the LNG sector. In addition, under the leadership of our chairman and chief executive officer, we have developed an extensive network of relationships with major energy companies, leading LNG shipyards, global financial institutions and other key participants throughout the shipping industry. We believe all these factors will collectively enhance our ability to attract new LNG business opportunities and implement our growth strategy.

We can provide no assurance, however, that we will be able to utilize our strengths described above. Please read “Risk Factors” and “The LNG Shipping Industry”.

Our Business Strategies

Our primary business objective is to build upon our strengths with a view to maximizing value for our shareholders by executing the following strategies:

 

 

 

 

Capitalize on growing demand for LNG shipping. We plan to take delivery of our eight newbuilding ships over the next few years, the earnings of which will position us financially to meet the growing demand for LNG shipping. We believe our industry reputation and relationships position us well to further expand our owned fleet to the extent that such capacity additions are accretive to returns.

 

 

 

 

Pursue a multi-year chartering strategy. Consistent with our focus on multi-year charters, we have secured time charters for the two ships delivered to us in 2010 and six of our eight newbuilding LNG carriers with five to seven year initial terms and staggered maturities. We believe that this strategy offers us a combination of return on our investment, rate stability, cash-flow visibility and re-chartering flexibility. We plan to continue to pursue multi-year time charters for our ships as we evaluate additional growth opportunities and assess the attractiveness of longer and shorter-term employment opportunities to maximize returns in a risk-efficient manner. The duration and other terms of our charters may require the approval of our lenders in some cases.

 

 

 

 

Strengthen relationships with existing customers. We expect BG Group and Shell will further expand their LNG operations, and that their demand for LNG shipping capacity will consequently increase. While we cannot guarantee that BG Group and Shell will further expand their LNG operations or that they will use our services, we believe we are well positioned to support them in executing their growth plans if their demand for LNG carriers and services increases in the future.

 

 

 

 

Opportunistically seek to expand and diversify our customer base. We intend to cultivate relationships that we have with a number of major energy companies beyond our current customer base and explore relationships with other leading energy companies, with an aim to supporting their growth programs and capitalizing on attractive opportunities these programs may offer. We believe our operational expertise, in combination with our reputation and track record in LNG shipping, positions us favorably to capture additional commercial opportunities in the LNG industry.

 

 

 

 

Provide high-quality customer service that acts as a benchmark for the industry. We intend to adhere to the highest standards with regard to reliability, safety and operational excellence as we execute our fleet expansion plans. Maintaining the highest safety and technical standards will, we believe, give us greater commercial opportunities to service new and existing customers.

Our Relationship to Our Controlling Shareholders

Our chairman and chief executive officer, Peter G. Livanos, is our controlling shareholder through his ownership of Ceres Shipping Ltd., or “Ceres Shipping”, which has a majority ownership interest in Blenheim Holdings Ltd., or “Blenheim Holdings”. Following the completion of this offering and the concurrent private placement, Mr. Livanos will continue to be our largest shareholder through his interest in Blenheim Holdings, which will hold approximately 50.92% of our issued and outstanding

5


common shares, assuming no exercise by the underwriters of their option to purchase additional shares. Accordingly, he will be able to effectively control the outcome of most matters on which our shareholders are entitled to vote. Members of the Radziwill family, who have an indirect minority ownership interest in the Company through Blenheim Holdings, and the Alexander S. Onassis Foundation, or the “Onassis Foundation”, which has a minority ownership interest in the Company through Olympic LNG Investments Ltd., act as partners to the Livanos family in establishing the growth strategy for the Company. These shareholders have agreed with one another to provide equity funding on a pro rata basis prior to this offering and in the event that this offering is not consummated, in connection with the expansion of our owned fleet, although we do not have written agreements with them which would give us the right to require them to provide such funding.

The shipping activities of the Livanos family commenced more than 100 years ago, and Ceres Shipping also has interests in tankers, dry bulk carriers and containerships. Ceres Shipping’s LNG shipping activities commenced in 2001, and its operations in the LNG shipping sector are conducted exclusively through GasLog and our subsidiaries. Prior to the closing of this offering, Mr. Livanos, who controls Ceres Shipping and Blenheim Holdings, will enter into a restrictive covenant agreement with us pursuant to which he will agree that he will not directly or indirectly compete with our LNG shipping business. The agreement will terminate in the event that Mr. Livanos ceases to beneficially own at least 20% of our common shares and will not prohibit certain specified activities, including the ownership of certain minority interests in companies that may compete with the Company. See “Certain Relationships and Related Party Transactions”. In addition, Mr. Livanos and Blenheim Holdings will agree that, subject to certain exceptions, they will not sell any shares of the Company owned by them for 18 months following the closing of the offering.

The Onassis Foundation’s shipping business is managed through Olympic Shipping & Management S.A. It is the successor to Olympic Maritime S.A., a company established by Aristotle Onassis in Paris in 1952, and currently manages a fleet of tankers and dry bulk carriers. The Onassis Foundation has advised the Company that it currently intends for GasLog to be its sole vehicle for investing in the LNG business. We do not, however, have any written agreements in place that would prohibit the Onassis Foundation from investing in the LNG business outside of its investment in us.

Selected Risk Factors

Our ability to successfully implement our business strategy is dependent on our ability to manage a number of risks relating to our industry and our business. These risks include:

 

 

 

 

Our future performance depends on continued growth in LNG production and demand for LNG and LNG shipping, which could be significantly affected by the overall demand for and price of natural gas, which can be volatile. Growth in LNG production and demand for LNG and LNG shipping could also be negatively impacted by material delays in the construction of new liquefaction facilities, increases in the production levels of low-cost natural gas in domestic natural gas consuming markets or in areas linked by pipelines to consuming markets, new taxes or regulations affecting LNG production or liquefaction, or any significant explosion, spill or other incident involving an LNG facility or carrier.

 

 

 

 

Our controlling shareholder, Peter G. Livanos, who is also our chairman and chief executive officer, may have interests that are different from the interests of other shareholders. He will be able to control the outcome of most matters on which our shareholders are entitled to vote. Although we will enter into a restrictive covenant agreement with Mr. Livanos and Blenheim Holdings prior to the closing of this offering, we do not have any such agreements in place with our other shareholders, whose interests may conflict with ours.

 

 

 

 

We depend upon two customers for nearly all of our revenues, and the loss of either or both of these customers would result in a significant loss of revenues.

6


 

 

 

 

If any of our ships is unable to generate revenues for a significant period of time, including due to unexpected periods of off-hire or early charter termination, our business could be materially and adversely affected.

 

 

 

 

A number of marine transportation companies have entered the LNG shipping market in recent years, and the supply of LNG carriers has and is expected to continue to increase, driven in part by an increase in LNG production capacity. Although a significant portion of LNG carriers continue to be built for longer-term contracts tied to new LNG projects, some newbuilding orders have been placed without a firm charter in place. This expansion of the global LNG carrier fleet and increase in competition could adversely impact charter hire rates when we are seeking new time charters and could prevent us from expanding our relationships with existing customers or obtaining new customers.

 

 

 

 

Our substantial debt levels, consisting of $283.11 million of outstanding indebtedness as of December 31, 2011 and $1.13 billion in borrowings we expect to make in connection with the financing of our contracted newbuildings, could limit our flexibility to obtain additional financing and pursue other business opportunities. A failure to meet our payment and other obligations under our debt facilities, or to comply with the operating and financial covenants in the facilities, including covenants based on the value of our ships, could cause our loans to be accelerated and result in foreclosure on our ships.

For further discussion of the risks that we face, see “Risk Factors” beginning on page 15 of this prospectus.

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Corporate and Ownership Structure

The following diagram provides a summary of our corporate and ownership structure after giving effect to this offering and the concurrent private placement, assuming no exercise by the underwriters of their option to purchase additional shares.


 

 

(1)

 

 

 

Peter G. Livanos, our chairman and chief executive officer, has a majority ownership interest in Blenheim Holdings through Ceres Shipping and through other shares of Blenheim Holdings held for the benefit of Mr. Livanos and members of his family. John S. Radziwill, the father of our vice chairman, Philip Radziwill, may be deemed to have an indirect minority ownership interest in Blenheim Holdings.

 

(2)

 

 

 

Reflects shares beneficially held by the directors and officers named in this prospectus other than the shares that are held by Peter G. Livanos through Blenheim Holdings.

 

(3)

 

 

 

BG Asia Pacific Ptd. Limited, a subsidiary of BG Group, and Eagle Gas Shipping Co. E.S.A., an entity affiliated with the government of Egypt, have 25% and 50% equity interests, respectively, in Egypt LNG Shipping Ltd.

8


Dividend Policy

Following this offering, we intend to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. As our fleet expands, we will evaluate future increases to the quarterly dividend consistent with our cash flow and liquidity position. Our policy is to pay dividends in amounts that will allow us to retain sufficient liquidity to fund our obligations as well as execute our business plan going forward. Our board of directors will determine the timing and amount of all dividend payments, based on various factors, including our financial performance, cash requirements and contractual and legal restrictions. Accordingly, we cannot guarantee that we will be able to pay quarterly dividends. See “Dividend Policy” and “Risk Factors”.

Certain Matters of Bermuda Law

Consent under the Exchange Control Act 1972 (and its related regulations) has been obtained from the Bermuda Monetary Authority for the issue and transfer of the common shares to and between residents and non-residents of Bermuda for exchange control purposes provided our shares remain listed on an appointed stock exchange, which includes the New York Stock Exchange. This prospectus will be filed with the Registrar of Companies in Bermuda in accordance with Bermuda law. In granting such consent and in accepting this prospectus for filing, neither the Bermuda Monetary Authority nor the Registrar of Companies in Bermuda accepts any responsibility for our financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

Company Information

GasLog Ltd. is an exempted company incorporated on July 16, 2003 under the laws of Bermuda. We are registered with the Registrar of Companies in Bermuda under registration number 33928. We are a holding company and we conduct our operations through various subsidiaries. We maintain a registered office in Bermuda at Clarendon House, 2 Church Street, Hamilton, HM 11, Bermuda.

Our principal executive offices are at Gildo Pastor Center, 7 Rue du Gabian, MC 98000, Monaco. Our telephone number at that address is +377 97 97 51 15. Our website is http://www.gaslogltd.com. The information and other content contained on our website are not part of this prospectus.

9


The Offering

 

 

 

Common shares offered

 

23,500,000 shares.

 

 

 

27,025,000 shares, if the underwriters exercise their option to purchase additional shares in full.

 

Concurrent private placement

 

Concurrently with the public offering of common shares pursuant to this prospectus, we are also selling approximately $3.7 million of our common shares through a private placement to certain of our directors and officers, at the public offering price.

 

Common shares issued and outstanding immediately after offering and concurrent private placement

 

62,819,143 shares.

 

 

 

66,344,143 shares, if the underwriters exercise their option to purchase additional shares in full.

 

Use of proceeds

 

We estimate that the net proceeds to us from this offering and the concurrent private placement will be approximately $373.48 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, based on an assumed initial public offering price of $17.00 per share, which is the mid-point of the price range on the cover page of this prospectus. We intend to use the net proceeds of this offering and the concurrent private placement to fund our scheduled installment payments under our eight new LNG carrier construction contracts and for other general corporate purposes. See “Use of Proceeds”.

 

Dividends

 

Following this offering, we intend to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. As our fleet expands, we will evaluate future increases to the quarterly dividend consistent with our cash flow and liquidity position. Our board of directors will determine the timing and amount of all dividend payments, based on various factors, including our financial performance, cash requirements and contractual and legal restrictions.

 

NYSE listing

 

Our common shares have been approved for listing on the New York Stock Exchange under the symbol “GLOG”.

 

Risk factors

 

Investment in our common shares involves a high degree of risk. You should carefully read and consider the information set forth under the heading “Risk Factors” and all other information set forth in this prospectus before investing in our common shares.

10


Summary Consolidated Financial and Other Data

The following table presents summary consolidated financial and operating data of our business, as of the dates and for the periods indicated. The summary consolidated financial data as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The summary consolidated financial data as of December 31, 2009 has been derived from our audited statement of financial position as of December 31, 2009, which is not included in this prospectus. Our consolidated financial statements are prepared and presented in accordance with International Financial Reporting Standards, or “IFRS”, as issued by the International Accounting Standards Board, or the “IASB”.

This information should be read together with, and is qualified in its entirety by, our consolidated financial statements and the notes thereto included elsewhere in this prospectus. You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars,
except share and per share data)

STATEMENT OF INCOME

 

 

 

 

 

 

Revenues

 

 

$

 

8,528

 

 

 

$

 

39,832

 

 

 

$

 

66,471

 

Vessel operating and supervision costs

 

 

 

(3,056

)

 

 

 

 

(8,644

)

 

 

 

 

(12,946

)

 

Depreciation of fixed assets

 

 

 

(126

)

 

 

 

 

(6,560

)

 

 

 

 

(12,827

)

 

General and administrative expenses

 

 

 

(6,241

)

 

 

 

 

(11,571

)

 

 

 

 

(15,997

)

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

(894

)

 

 

 

 

13,056

 

 

 

 

24,701

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(72

)

 

 

 

 

(5,046

)

 

 

 

 

(9,631

)

 

Financial income

 

 

 

52

 

 

 

 

121

 

 

 

 

42

 

Loss on interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

(2,725

)

 

Gain on financial investments

 

 

 

4,689

 

 

 

 

 

 

 

 

 

Share of profit of associate

 

 

 

635

 

 

 

 

1,460

 

 

 

 

1,312

 

Gain on disposal of subsidiaries

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

Total other income/(expense)

 

 

 

5,304

 

 

 

 

(3,465

)

 

 

 

 

(10,978

)

 

 

 

 

 

 

 

 

Profit for the year

 

 

$

 

4,409

 

 

 

$

 

9,591

 

 

 

$

 

13,723

 

 

 

 

 

 

 

 

Profit attributable to owners of the Group

 

 

 

4,409

 

 

 

 

9,849

 

 

 

 

14,040

 

Loss attributable to non-controlling interest

 

 

 

 

 

 

 

(258

)

 

 

 

 

(317

)

 

Earnings per share, basic and diluted(1)

 

 

$

 

0.12

 

 

 

$

 

0.25

 

 

 

$

 

0.36

 

Weighted average number of shares, basic(1)

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

35,837,297

 

Weighted average number of shares, diluted(1)

 

 

 

35,700,000

 

 

 

 

39,101,496

 

 

 

 

39,101,496

 

Dividends declared per share(1)(2)

 

 

 

 

 

 

$

 

0.44

 

 

 

$

 

0.22

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

SEGMENT REVENUES AND EXPENSES(3)

 

 

 

 

 

 

Revenues attributable to vessel ownership segment

 

 

$

 

5

 

 

 

$

 

28,304

 

 

 

$

 

55,756

 

Vessel operating and supervision costs attributable to vessel ownership segment

 

 

 

 

 

 

 

(4,781

)

 

 

 

 

(10,100

)

 

Revenues attributable to vessel management segment

 

 

 

10,122

 

 

 

 

14,240

 

 

 

 

13,292

 

Vessel operating and supervision costs attributable to vessel management segment

 

 

 

(4,655

)

 

 

 

 

(5,174

)

 

 

 

 

(4,693

)

 

11


 

 

 

 

 

 

 

 

 

As of December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

STATEMENT OF FINANCIAL POSITION DATA

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

7,240

 

 

 

$

 

23,270

 

 

 

$

 

20,093

 

Investment in associate(4)

 

 

 

7,113

 

 

 

 

7,003

 

 

 

 

6,528

 

Tangible fixed assets(5)

 

 

 

475

 

 

 

 

450,265

 

 

 

 

438,902

 

Vessels under construction

 

 

 

246,445

 

 

 

 

18,700

 

 

 

 

109,070

 

Total assets

 

 

 

277,924

 

 

 

 

512,005

 

 

 

 

607,013

 

Loans—current portion

 

 

 

4,191

 

 

 

 

22,640

 

 

 

 

24,277

 

Loans—non-current portion

 

 

 

170,869

 

 

 

 

287,597

 

 

 

 

256,788

 

Share capital(1)

 

 

 

391

 

 

 

 

391

 

 

 

 

391

 

Equity attributable to owners of the Group

 

 

 

91,017

 

 

 

 

171,733

 

 

 

 

290,414

 

Non-controlling interest

 

 

 

 

 

 

 

9,199

 

 

 

 

 

Total equity

 

 

 

91,017

 

 

 

 

180,932

 

 

 

 

290,414

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

CASH FLOW DATA

 

 

 

 

 

 

Net cash from operating activities

 

 

$

 

134

 

 

 

$

 

25,633

 

 

 

$

 

27,001

 

Net cash used in investing activities

 

 

 

(32,167

)

 

 

 

 

(212,806

)

 

 

 

 

(86,464

)

 

Net cash from financing activities

 

 

 

33,796

 

 

 

 

203,203

 

 

 

 

56,286

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

OTHER FINANCIAL DATA

 

 

 

 

 

 

EBITDA(6)

 

 

$

 

4,555

 

 

 

$

 

21,076

 

 

 

$

 

36,139

 

Adjusted EBITDA(6)

 

 

 

4,555

 

 

 

 

21,076

 

 

 

 

38,864

 

Net debt at end of period(6)

 

 

 

172,933

 

 

 

 

293,853

 

 

 

 

262,074

 

 

 

 

 

 

 

 

 

 

Year Ended
December 31,

 

2009

 

2010

 

2011

FLEET DATA(7)

 

 

 

 

 

 

Number of managed ships at end of period

 

 

 

8

 

 

 

 

14

 

 

 

 

14

 

Average number of managed ships during period

 

 

 

8.0

 

 

 

 

10.3

 

 

 

 

14.0

 

Number of owned ships at end of period

 

 

 

 

 

 

 

2

 

 

 

 

2

 

Average number of owned ships during period

 

 

 

 

 

 

 

1.0

 

 

 

 

2.0

 

Average age of owned ships (years)

 

 

 

 

 

 

 

0.5

 

 

 

 

1.5

 

Total calendar days for owned fleet

 

 

 

 

 

 

 

372

 

 

 

 

730

 

Total operating days for owned fleet

 

 

 

 

 

 

 

372

 

 

 

 

730

 


 

 

(1)

 

 

 

Gives effect to the 238-for-1 share split effected on March 13, 2012, as described under “Capitalization”.

 

(2)

 

 

 

Of the total $17.25 million and $8.5 million dividends declared, respectively, during the years ended December 31, 2010 and 2011, $16.77 million and $0.77 million, respectively, was paid in cash and the remainder was contributed to the capital of the Company by our existing majority shareholder.

 

(3)

 

 

 

Includes inter-segment revenues and expenses, which are eliminated in the consolidation of our accounts. See Note 24 to our consolidated annual financial statements included elsewhere in this prospectus.

 

(4)

 

 

 

Consists of our 25% ownership interest in Egypt LNG Shipping Ltd., a Bermuda exempted company whose principal asset is the LNG carrier Methane Nile Eagle.

12


 

(5)

 

 

 

Includes delivered vessels (including drydocking component of vessel cost) as well as office property and other tangible assets, less accumulated depreciation. See Note 6 to our consolidated annual financial statements included elsewhere in this prospectus.

 

(6)

 

 

 

Non-GAAP Financial Measures

 

 

 

 

 

EBITDA and Adjusted EBITDA. EBITDA represents earnings before interest income and expense, taxes, depreciation and amortization. Adjusted EBITDA represents earnings before interest income and expense, taxes, depreciation, amortization and non-cash loss on interest rate swaps resulting from mark-to- market adjustments. EBITDA and Adjusted EBITDA, which are non-GAAP financial measures, are used as supplemental financial measures by management and external users of financial statements, such as investors, to assess our financial and operating performance. We believe that EBITDA and Adjusted EBITDA assist our management and investors by increasing the comparability of our performance from period to period and against the performance of other companies in our industry that provide EBITDA and Adjusted EBITDA information. We believe that including EBITDA and Adjusted EBITDA as financial and operating measures benefits investors in (i) selecting between investing in us and other investment alternatives and (ii) monitoring our ongoing financial and operational strength in assessing whether to continue to hold common shares. This increased comparability is achieved by excluding the potentially disparate effects between periods or companies of interest, taxes, depreciation and amortization and, in the case of Adjusted EBITDA, non-cash loss on interest rate swaps, which items are affected by various and possibly changing financing methods, capital structure and historical cost basis and which items may significantly affect results of operations between periods.

 

 

 

 

 

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives to, or as substitutes for, profit, profit from operations, net cash from operating activities or any other measure of financial performance presented in accordance with IFRS. EBITDA and Adjusted EBITDA exclude some, but not all, items that affect profit, and these measures may vary among companies. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Therefore, EBITDA and Adjusted EBITDA as presented below may not be comparable to similarly titled measures of other companies.

 

 

 

 

 

The following table sets forth a reconciliation of EBITDA and Adjusted EBITDA to Profit for the periods presented:

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

Reconciliation of EBITDA and Adjusted EBITDA to Profit

 

 

 

 

 

 

Profit for the year

 

 

$

 

4,409

 

 

 

$

 

9,591

 

 

 

$

 

13,723

 

Depreciation of fixed assets

 

 

 

126

 

 

 

 

6,560

 

 

 

 

12,827

 

Financial costs

 

 

 

72

 

 

 

 

5,046

 

 

 

 

9,631

 

Financial income

 

 

 

(52

)

 

 

 

 

(121

)

 

 

 

 

(42

)

 

 

 

 

 

 

 

 

EBITDA

 

 

$

 

4,555

 

 

 

$

 

21,076

 

 

 

$

 

36,139

 

 

 

 

 

 

 

 

Loss on interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

2,725

 

 

 

 

 

 

 

 

Adjusted EBITDA

 

 

$

 

4,555

 

 

 

$

 

21,076

 

 

 

$

 

38,864

 

 

 

 

 

 

 

 

 

 

 

 

 

Net debt. Net debt, which is a non-GAAP financial measure, is defined as the sum of Loans—current portion and Loans—non-current portion, less cash and cash equivalents (excluding cash held in ship management client accounts) as of the end of the relevant period. We believe that Net debt assists our management and investors by providing a means to assess our leverage while giving consideration to the cash and cash equivalents we hold.

13


The following table sets forth a reconciliation of Net debt to Loans for the periods presented:

 

 

 

 

 

 

 

 

 

As of December 31,

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

Reconciliation of Net debt to Loans

 

 

 

 

 

 

Loans—non-current portion

 

 

$

 

170,869

 

 

 

$

 

287,597

 

 

 

$

 

256,788

 

Loans—current portion

 

 

 

4,191

 

 

 

 

22,640

 

 

 

 

24,277

 

Cash and cash equivalents

 

 

 

(7,240

)

 

 

 

 

(23,270

)

 

 

 

 

(20,093

)

 

Ship management client accounts(a)

 

 

 

5,113

 

 

 

 

6,886

 

 

 

 

1,102

 

 

 

 

 

 

 

 

Net debt

 

 

$

 

172,933

 

 

 

$

 

293,853

 

 

 

$

 

262,074

 

 

 

 

 

 

 

 


 

 

(a)

 

 

 

We hold funds in ship management client accounts on behalf of our vessel management customers to cover operating expenses of customer-owned ships operating under our management.

 

(7)

 

 

  Presentation of fleet data does not include newbuilding ships on order during the relevant periods. The data presented regarding our owned fleet includes only our currently wholly owned ships, the GasLog Savannah and the GasLog Singapore. The data presented regarding our managed fleet includes our owned fleet as well as ships owned by BG Group and Egypt LNG that are operating under our management.

14


RISK FACTORS

You should consider carefully the following risk factors, as well as the other information contained in this prospectus, before making an investment in our common shares. Any of the risk factors described below could significantly and negatively affect our business, financial condition or operating results, which may reduce our ability to pay dividends and lower the trading price of our common shares. You may lose part or all of your investment.

Risks Related to Our Industry

Our future performance depends on continued growth in LNG production and demand for LNG and LNG shipping.

Our future performance, including our ability to profitably expand our fleet beyond delivery of our eight contracted newbuildings, will depend on continued growth in LNG production and the demand for LNG and LNG shipping. A complete LNG project includes production, liquefaction, storage, regasification and distribution facilities, in addition to the marine transportation of LNG. Increased infrastructure investment has led to an expansion of LNG production capacity in recent years, but material delays in the construction of new liquefaction facilities could constrain the amount of LNG available for shipping, reducing ship utilization. While global LNG demand has continued to rise, it has risen at a slower pace than previously predicted and the rate of its growth has fluctuated due to several factors, including the global economic crisis and continued economic uncertainty, fluctuations in the price of natural gas and other sources of energy, the continued acceleration in natural gas production from unconventional sources in regions such as North America and the highly complex and capital intensive nature of new or expanded LNG projects, including liquefaction projects. Continued growth in LNG production and demand for LNG and LNG shipping could be negatively affected by a number of factors, including:

 

 

 

 

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

 

 

 

 

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;

 

 

 

 

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, decreases in the price of alternative energy sources or other factors making consumption of natural gas less attractive;

 

 

 

 

any significant explosion, spill or other incident involving an LNG facility or carrier;

 

 

 

 

infrastructure constraints such as delays in the construction of liquefaction facilities, the inability of project owners or operators to obtain governmental approvals to construct or operate LNG facilities, as well as community or political action group resistance to new LNG infrastructure due to concerns about the environment, safety and terrorism;

 

 

 

 

labor or political unrest or military conflicts affecting existing or proposed areas of LNG production or regasification;

 

 

 

 

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

 

 

 

 

new taxes or regulations affecting LNG production or liquefaction that make LNG production less attractive; or

 

 

 

 

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

15


Reduced demand for LNG or LNG shipping, or any reduction or limitation in LNG production capacity, could have a material adverse effect on our ability to secure future multi-year time charters upon expiration or early termination of our current charter arrangements, or for any new ships we acquire beyond our contracted newbuildings, which could harm our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Demand for LNG shipping could be significantly affected by volatile natural gas prices and the overall demand for natural gas.

Gas prices are volatile and are affected by numerous factors beyond our control, including but not limited to the following:

 

 

 

 

worldwide demand for natural gas;

 

 

 

 

the cost of exploration, development, production, transportation and distribution of natural gas;

 

 

 

 

expectations regarding future energy prices for both natural gas and other sources of energy;

 

 

 

 

the level of worldwide LNG production and exports;

 

 

 

 

government laws and regulations, including but not limited to environmental protection laws and regulations;

 

 

 

 

local and international political, economic and weather conditions;

 

 

 

 

political and military conflicts; and

 

 

 

 

the availability and cost of alternative energy sources, including alternate sources of natural gas in gas importing and consuming countries.

Our future growth depends on our ability to expand relationships with existing customers, establish relationships with new customers and obtain new time charter contracts, for which we will face substantial competition from established companies with significant resources and potential new entrants.

We will seek to enter into additional multi-year time charter contracts upon the expiration or early termination of our existing charter arrangements, and we may also seek to enter into additional multi-year time charter contracts in connection with the expansion of our fleet of owned ships beyond our contracted newbuildings. In addition, we may seek to expand the customer base for our ship management services. The process of obtaining multi-year charters for LNG carriers is highly competitive and generally involves an intensive screening procedure and competitive bids, which often extends for several months. We believe LNG carrier time charters are awarded based upon a variety of factors relating to the ship and the ship operator, including:

 

 

 

 

size, age, technical specifications and condition of the ship;

 

 

 

 

efficiency of ship operation;

 

 

 

 

LNG shipping experience and quality of ship operations;

 

 

 

 

shipping industry relationships and reputation for customer service;

 

 

 

 

technical ability and reputation for operation of highly specialized ships;

 

 

 

 

quality and experience of officers and crew;

 

 

 

 

safety record;

 

 

 

 

the ability to finance ships at competitive rates and financial stability generally;

 

 

 

 

relationships with shipyards and the ability to get suitable berths;

 

 

 

 

construction management experience, including the ability to obtain on-time delivery of new ships according to customer specifications; and

 

 

 

 

competitiveness of the bid in terms of overall price.

We expect substantial competition for providing marine transportation services for potential LNG projects from a number of experienced companies, including other independent ship owners as well as

16


state-sponsored entities and major energy companies that own and operate LNG carriers and may compete with independent owners by using their fleets to carry LNG for third parties. Some of these competitors have significantly greater financial resources and larger fleets than we have. A number of marine transportation companies—including companies with strong reputations and extensive resources and experience—have entered the LNG transportation market in recent years, and there are other ship owners and managers who may also attempt to participate in the LNG market in the future. 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 could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Hire rates for LNG carriers are not generally publicly available and may fluctuate substantially. If rates are lower when we are seeking a new charter, our revenues and cash flows may decline.

Our ability from time to time to charter or re-charter any ship at attractive rates will depend on, among other things, the prevailing economic conditions in the LNG industry. Hire rates for LNG carriers are not generally publicly available and may fluctuate over time as a result of changes in the supply-demand balance relating to current and future ship capacity. This supply-demand relationship largely depends on a number of factors outside our control. The LNG charter market is connected to world natural gas prices and energy markets, which we cannot predict. A substantial or extended decline in demand for natural gas or LNG could adversely affect our ability to re-charter our ships at acceptable rates or to acquire and profitably operate new ships. Hire rates for newbuildings are correlated with the price of newbuildings. Hire rates at a time when we may be seeking new charters may be lower than the hire rates at which our ships are currently chartered. If hire rates are lower when we are seeking a new charter, our revenues and cash flows, including cash available for dividends to our shareholders, may decline, as we may only be able to enter into new charters at reduced or unprofitable rates or we may have to secure a charter in the spot market, where hire rates are more volatile. Prolonged periods of low charter hire rates or low ship utilization could also have a material adverse effect on the value of our assets.

An oversupply of ships may lead to a reduction in the charter hire rates we are able to obtain when seeking charters in the future.

Driven in part by an increase in LNG production capacity, the market supply of LNG carriers has been increasing as a result of the construction of new ships. During the period from 2005 to 2010, the global fleet of LNG carriers grew by an average of 15% per year due to the construction and delivery of new LNG carriers. Although the global newbuilding order book dropped steeply in 2009 and 2010, orders for over 50 newbuilding LNG carriers were placed during 2011. The newbuilding order book of almost 60 ships as of December 31, 2011 amounts to 17% of global LNG carrier fleet capacity, with the majority of the newbuildings scheduled for delivery in 2013 and 2014. This and any future expansion of the global LNG carrier fleet may have a negative impact on charter hire rates, ship utilization and ship values, which impact could be amplified if the expansion of LNG production capacity does not keep pace with fleet growth.

If charter hire rates are lower when we are seeking new time charters upon expiration or early termination of our current charter arrangements, or for any new ships we acquire beyond our contracted newbuildings, our revenues and cash flows, including cash available for dividends to our shareholders, may decline.

If an active short-term or spot LNG carrier charter market continues to develop, our revenues and cash flows may become more volatile and may decline following expiration or early termination of our current charter arrangements.

One of our principal strategies is to enter into multi-year time charters for our owned ships. Most shipping requirements for new LNG projects continue to be provided on a multi-year basis, though the

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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 short-term or spot charter market continues to develop, we may have increased difficulty entering into multi-year time charters upon expiration or early termination of our current charters, or for any new ships we acquire beyond our contracted newbuildings. As a result, our revenues and cash flows may become more volatile. In addition, an active short-term or spot charter market may require us to enter into charters based on changing market prices, as opposed to contracts based on fixed rates, which could result in a decrease in our revenues and cash flows, including cash available for dividends to our shareholders, if we enter into charters during periods when the market price for shipping LNG is depressed.

Further technological advancements and other innovations affecting LNG carriers could reduce the charter hire rates we are able to obtain when seeking new employment, and this could adversely impact the value of our assets.

The charter rates, asset value and operational life of an LNG carrier are determined by a number of factors, including the ship’s efficiency, operational flexibility and physical life. Efficiency includes speed and fuel economy. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and straits. Physical life is related to the original design and construction, the ongoing maintenance and the impact of operational stresses on the asset. If more advanced ship designs are developed in the future and new ships are built that are more efficient or more flexible or have longer physical lives than ours, competition from these more technologically advanced LNG carriers could adversely affect the charter hire rates we will be able to secure when we seek to re-charter our ships upon expiration or early termination of our current charter arrangements and could also reduce the resale value of our ships. This could adversely affect our revenues and cash flows, including cash available for dividends to our shareholders.

Risks associated with operating and managing ocean-going ships could affect our business and reputation.

The operation and management of ocean-going ships carries inherent risks. These risks include the possibility of:

 

 

 

 

marine disaster;

 

 

 

 

piracy;

 

 

 

 

environmental accidents;

 

 

 

 

bad weather;

 

 

 

 

grounding, fire, explosions and collisions;

 

 

 

 

cargo and property loss or damage;

 

 

 

 

business interruptions caused by mechanical failure, human error, war, terrorism, disease and quarantine, or political action in various countries; and

 

 

 

 

work stoppages or other labor problems with crew members serving on our ships.

An accident involving any of our owned or managed ships 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 termination of charter contracts or ship management agreements;

 

 

 

 

governmental fines, penalties or restrictions on conducting business;

 

 

 

 

litigation with our employees, customers or third parties;

 

 

 

 

higher insurance rates; and

 

 

 

 

damage to our reputation and customer relationships generally.

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Any of these results could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

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

The operation of any ship includes risks such as mechanical failure, personal injury, collision, fire, contact with floating objects, property loss or damage, cargo loss or damage and business interruption due to a number of reasons, including political circumstances in foreign countries, hostilities and labor strikes. In addition, there is always an inherent possibility of a marine disaster, including explosion, spills and other environmental mishaps, and other liabilities arising from owning, operating or managing ships in international trade.

Although we carry protection and indemnity insurance covering our owned ships consistent with industry standards, we can give no assurance that we are adequately insured against all risks or that our insurers will pay a particular claim. We also may be unable to procure adequate insurance coverage at commercially reasonable rates in the future. Even if our insurance coverage is adequate to cover our losses, we may not be able to obtain a timely replacement ship in the event of a loss of a ship. Any uninsured or underinsured loss could harm our business, financial condition, results of operations and cash flows, including cash available for dividends to shareholders. Similarly, although we carry ship manager insurance in connection with our management of third-party ships, we can give no assurance that such insurance will adequately insure us against all risks associated with our ship management services, that our insurers will pay a particular claim or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.

In addition, some 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.

Our ships may suffer damage and we may face unexpected costs and off-hire days.

In the event of damage to our owned ships, the damaged ship would be off-hire while it is being repaired, which would decrease our revenues and cash flows, including cash available for dividends to our shareholders. In addition, the costs of ship repairs are unpredictable and can be substantial. In the event of repair costs that are not covered by our insurance policies, we may have to pay such repair costs, which would decrease our earnings and cash flows.

The required drydocking of our ships could be more expensive and time consuming than we anticipate, which could adversely affect our results of operations and cash flows.

Drydockings of our owned ships require significant capital expenditures and result in loss of revenue while our ships are off-hire. Any significant increase in either the number of off-hire days due to such drydockings or in the costs of any repairs carried out during the drydockings could have a material adverse effect on our profitability and our cash flows. We may not be able to accurately predict the time required to drydock any of our ships or any unanticipated problems that may arise. If more than one of our ships is required to be out of service at the same time, or if a ship is drydocked longer than expected or if the cost of repairs during the drydocking is greater than budgeted, our results of operations and our cash flows, including cash available for dividends to our shareholders, could be adversely affected.

Changes in global and regional economic conditions could adversely impact our business, financial condition, results of operations and cash flows.

Weak global or regional economic conditions may negatively impact our business, financial condition, results of operations and cash flows in ways that we cannot predict. Our ability to expand our fleet beyond our contracted newbuildings will be dependent on our ability to obtain financing to fund the acquisition of additional ships. In addition, uncertainty about current and future global economic conditions may cause our customers to defer projects in response to tighter credit, decreased capital

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availability and declining customer confidence, which may negatively impact the demand for our ships and services and could also result in defaults under our current charters or termination of our ship management contracts. 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.

Disruptions in world financial markets could limit our ability to obtain future debt financing or refinance existing debt.

Global financial markets and economic conditions have been severely disrupted and volatile in recent years and remain subject to significant vulnerabilities, such as the deterioration of fiscal balances and the rapid accumulation of public debt, continued deleveraging in the banking sector and a limited supply of credit. Credit markets as well as the debt and equity capital markets were exceedingly distressed during 2008 and 2009 and have been extremely volatile in recent months. The current credit crisis in countries such as Greece, for example, and concerns over debt levels of certain other European Union member states and in other countries around the world, as well as concerns about international banks, have led to increased volatility in global credit and equity markets. These issues, along with the re-pricing of credit risk and the difficulties currently experienced by financial institutions have made, and will likely continue to make, it difficult to obtain financing. As a result of the disruptions in the credit markets, many lenders have increased margins on lending rates, enacted tighter lending standards, required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts), or have refused to refinance existing debt at all. Furthermore, certain banks that have historically been significant lenders to the shipping industry have reduced or ceased lending activities in the shipping industry. New banking regulations, including larger capital requirements and the resulting policies adopted by lenders, could reduce lending activities. We may experience difficulties obtaining financing commitments, including commitments to refinance our existing debt as substantial balloon payments come due under our credit facilities, in the future if lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity, capital or solvency issues. As a result, financing may not be available on acceptable terms or at all. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our future obligations as they come due. Our failure to obtain the funds for these capital expenditures could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders. In the absence of available financing, we also may be unable to take advantage of further business opportunities or respond to competitive pressures.

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

The hull and machinery of every commercial LNG carrier must be classed by a classification society. The classification society certifies that the ship has been built and maintained in accordance with the applicable rules and regulations of that classification society. Moreover, every ship must comply with all applicable international conventions and the regulations of the ship’s flag state as verified by a classification society. Finally, each ship must successfully undergo periodic surveys, including annual, intermediate and special surveys performed under the classification society’s rules.

If any ship does not maintain its class, it will lose its insurance coverage and be unable to trade, and the ship’s owner will be in breach of relevant covenants under its financing arrangements. Failure to maintain the class of one or more of our ships could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

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The LNG shipping industry is subject to substantial environmental and other regulations, which may significantly limit our operations or increase our expenses.

Our operations are materially affected by extensive and changing international, national, state and local environmental laws, regulations, treaties, conventions and standards which are in force in international waters, or in the jurisdictional waters of the countries in which our ships operate and in the countries in which our ships are registered. These requirements include those relating to equipping and operating ships, providing security and to minimizing or addressing impacts on the environment from ship operations. We have incurred, and expect to continue to incur, substantial expenses in complying with these requirements, including expenses for ship modifications and changes in operating procedures. We also could incur substantial costs, including cleanup costs, civil and criminal penalties and sanctions, the suspension or termination of operations and third-party claims as a result of violations of, or liabilities under, such laws and regulations.

In addition, these requirements can affect the resale value or useful lives of our ships, require a reduction in cargo capacity, necessitate ship modifications or operational changes or restrictions or lead to decreased availability of insurance coverage for environmental matters. They could further result in the denial of access to certain jurisdictional waters or ports or detention in certain ports. We are required to obtain governmental approvals and permits to operate our ships. Delays in obtaining such governmental approvals may increase our expenses, and the terms and conditions of such approvals could materially and adversely affect our operations.

Additional laws and regulations may be adopted that could limit our ability to do business or increase our operating costs, which could materially and adversely affect our business. For example, new or amended legislation relating to ship recycling, sewage systems, emission control (including emissions of greenhouse gases) as well as ballast water treatment and ballast water handling may be adopted. The United States has recently enacted legislation and regulations that require more stringent controls of air and water emissions from ocean-going ships. 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 ships’ compliance with international and/or national regulations. We also may become subject to additional laws and regulations if we enter new markets or trades.

We also 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 as well as greater inspection and safety requirements on all LNG carriers in the marine transportation market. 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 ships to obtain and, possibly, collect on, insurance or to obtain the required certificates for entry into the different ports where we operate.

Some environmental laws and regulations, such as the U.S. Oil Pollution Act of 1990, or “OPA”, provide for potentially unlimited joint, several, and/or strict liability for owners, operators and demise or bareboat charterers for oil pollution and related damages. OPA applies to discharges of any oil from a ship in U.S. waters, including discharges of fuel and lubricants from an LNG carrier, even if the ships do not carry oil as cargo. In addition, many states in the United States bordering on a navigable waterway have enacted legislation providing for potentially unlimited strict liability without regard to fault for the discharge of pollutants within their waters. We also are subject to other laws and conventions outside the United States that provide for an owner or operator of LNG carriers to bear strict liability for pollution, such as the Convention on Limitation of Liability for Maritime Claims of 1976, or the “London Convention”.

Some of these laws and conventions, including OPA and the London Convention, may include limitations on liability. However, the limitations may not be applicable in certain circumstances, such as where a spill is caused by a ship owner’s or operator’s intentional or reckless conduct. In addition, in response to the Deepwater Horizon oil spill, the U.S. Congress is currently considering a number of bills that could potentially modify or eliminate the limits of liability under OPA.

Compliance with OPA and other environmental laws and regulations also may result in ship owners and operators incurring increased costs for additional maintenance and inspection requirements,

21


the development of contingency arrangements for potential spills, obtaining mandated insurance coverage and meeting financial responsibility requirements.

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

Due to concern over the risks of climate change, a number of countries and the International Maritime Organization, or “IMO”, have adopted, or are considering the adoption of, regulatory frameworks to reduce greenhouse gas emission from ships. These regulatory measures may include adoption of cap and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. Although emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, or the “Kyoto Protocol”, a new treaty may be adopted in the future that includes restrictions on shipping emissions. Compliance with future changes in laws and regulations relating to climate change could increase the costs of operating and maintaining our ships and could require us to install new emission controls, as well as acquire allowances, pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions program. Revenue generation and strategic growth opportunities may also be adversely affected.

Adverse effects upon the oil and gas production industry relating to climate change, including growing public concern about the environmental impact of climate change, may also have an effect 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 production industry could have significant financial and operational adverse impacts on our business that we cannot predict with certainty at this time.

We operate our ships worldwide, which could expose us to political, governmental and economic instability that could harm our business.

Because we operate our ships worldwide in the geographic areas where our customers do business, our operations may be affected by economic, political and governmental conditions in the countries where our ships operate or where they are registered. Any disruption caused by these factors could harm our business, financial condition, results of operations and cash flows. In particular, our ships frequent LNG terminals in countries including Egypt, Equatorial Guinea and Trinidad as well as transit through the Gulf of Aden and the Strait of Malacca. Economic, political and governmental conditions in these and other regions have from time to time resulted in military conflicts, terrorism, attacks on ships, mining of waterways, piracy and other efforts to disrupt shipping. Future hostilities or other political instability in the geographic regions where we operate or may operate could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders. In addition, our business could also be harmed by tariffs, trade embargoes and other economic sanctions by the United States or other countries against countries in the Middle East, Southeast Asia or elsewhere as a result of terrorist attacks, hostilities or diplomatic or political pressures that limit trading activities with those countries.

Terrorist attacks, international hostilities and piracy could adversely affect our business, financial condition, results of operations and cash flows.

Terrorist attacks such as the attacks on the United States on September 11, 2001 and more recent attacks in other parts of the world, as well as the continuing response of the United States and other countries to these attacks, and the threat of future terrorist attacks continue to cause uncertainty in the world financial markets and may affect our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders. The current conflicts in Iraq and Afghanistan, and continuing hostilities in the Middle East, may lead to additional acts of terrorism, further regional conflicts and other armed actions around the world, which may contribute to further instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain additional financing on terms acceptable to us, or at all.

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In the past, political conflicts have also resulted in attacks on ships, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected ships trading in regions such as the South China Sea and the Gulf of Aden. Since 2008, the frequency of piracy incidents against commercial shipping vessels has increased significantly, particularly in the Gulf of Aden and off the coast of Somalia. Any terrorist attacks targeted at ships may in the future negatively materially affect our business, financial condition, results of operations and cash flows and could directly impact our ships or our customers. We may not be adequately insured to cover losses from these incidents. In addition, crew costs, including those due to employing onboard security guards, could increase in such circumstances.

In addition, LNG facilities, shipyards, ships, pipelines and gas fields could be targets of future terrorist attacks or piracy. Any such attacks could lead to, among other things, bodily injury or loss of life, as well as damage to the ships or other property, increased ship operating costs, including insurance costs, reductions in the supply of LNG and the inability to transport LNG to or from certain locations. Terrorist attacks, war or other events beyond our control that adversely affect the production, storage or transportation of LNG to be shipped by us could entitle our customers to terminate our charter contracts in certain circumstances, which would harm our cash flows and our business.

Terrorist attacks, or the perception that LNG facilities and LNG carriers are potential terrorist targets, could materially and adversely affect expansion of LNG infrastructure and the continued supply of LNG. Concern that LNG facilities may be targeted for attack by terrorists has contributed significantly to local community and environmental group resistance to the construction of a number of LNG facilities, primarily in North America. If a terrorist incident involving an LNG facility or LNG carrier did occur, in addition to the possible effects identified in the previous paragraph, the incident may adversely affect the construction of additional LNG facilities and could lead to the temporary or permanent closing of various LNG facilities currently in operation.

In the future the ships we own or manage could be required to call on ports located in countries that are subject to restrictions imposed by the United States and other governments.

The United States and other governments and their agencies impose sanctions and embargoes on certain countries and maintain lists of countries they consider to be state sponsors of terrorism. In particular, in 2010, the United States enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or “CISADA”, which expanded the scope of the former Iran Sanctions Act. Among other things, CISADA expanded the application of the prohibitions imposed by the U.S. government to non-U.S. companies, such as us, and limits the ability of companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined petroleum or petroleum products, as well as LNG. In addition, the U.S. Congress is currently considering the enactment of the Iran, North Korea and Syria Nonproliferation Reform and Modernization Act of 2011, which would, among other things, provide for the imposition of sanctions, including a prohibition on investments by U.S. persons and a 180-day prohibition on a vessel landing at any U.S. port after landing in such countries, on companies or persons that provide certain shipping services to or from Iran, North Korea or Syria. If enacted, this act would apply to our charterers as well as to us. Although the ships we own and those we manage have not called on ports in countries subject to sanctions or embargoes or in countries identified as state sponsors of terrorism, including Iran, North Korea and Syria, we cannot assure you that these ships will not call on ports in these countries in the future.

While we intend to maintain compliance with all sanctions and embargoes applicable to us, U.S. and international sanctions and embargo laws and regulations do not necessarily apply to the same countries or proscribe the same activities, which may make compliance difficult. Additionally, the scope of certain laws may be unclear, and these laws may be subject to changing interpretations and application and may be amended or strengthened from time to time, including by adding or removing countries from the proscribed lists. Violations of sanctions and embargo laws and regulations could result in fines or other penalties and could result in some investors deciding, or being required, to divest their investment, or not to invest, in us.

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Operating costs and capital expenses will increase as our ships age.

In general, capital expenditures and other costs necessary for maintaining a ship in good operating condition increase as the age of the ship increases. Accordingly, it is likely that the operating costs of our ships will increase in the future.

Reliability of suppliers may limit our ability to obtain supplies and services when needed.

We rely, and will in the future rely, on a significant supply of consumables, spare parts and equipment to operate, maintain, repair and upgrade our fleet of ships. Delays in delivery or unavailability of supplies could result in off-hire days due to consequent delays in the repair and maintenance of our fleet. This would negatively impact our revenues and cash flows. Cost increases could also negatively impact our future operations, although we expect that the impact of significant cost increases would be mitigated to some extent by provisions in our charter contracts, including review provisions and cost pass-through provisions.

Governments could requisition our ships during a period of war or emergency, resulting in loss of earnings.

The government of a jurisdiction where one or more of our ships are registered could requisition for title or seize our ships. Requisition for title occurs when a government takes control of a ship and becomes its owner. Also, a government could requisition our ships for hire. Requisition for hire occurs when a government takes control of a ship and effectively becomes the charterer at dictated charter rates. Generally, requisitions occur during a period of war or emergency, although governments may elect to requisition ships in other circumstances. Although we would expect to be entitled to government compensation in the event of a requisition of one or more of our ships, the amount and timing of payments, if any, would be uncertain. A government requisition of one or more of our ships would result in off-hire days under our time charters and may cause us to breach covenants in certain of our credit facilities, and could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Maritime claimants could arrest our ships, which could interrupt our cash flows.

Crew members, suppliers of goods and services to a ship, shippers of cargo and other parties may be entitled to a maritime lien against a ship for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lienholder may enforce its lien by arresting a ship. The arrest or attachment of one or more of our ships which is not timely discharged could cause us to default on a charter or breach covenants in certain of our credit facilities and, to the extent such arrest or attachment is not covered by our protection and indemnity insurance, could require us to pay large sums of money to have the arrest or attachment lifted. Any of these occurrences could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Additionally, in some jurisdictions, such as the Republic of South Africa, under the “sister ship” theory of liability, a claimant may arrest both the ship that is subject to the claimant’s maritime lien and any “associated” ship, which is any ship owned or controlled by the same owner. Claimants could try to assert “sister ship” liability against one ship in our fleet for claims relating to another of our ships.

We may be subject to litigation that could have an adverse effect on us.

We may in the future be involved from time to time in litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, toxic tort claims, employment matters and governmental claims for taxes or duties as well as other litigation that arises in the ordinary course of our business. We cannot predict with certainty the outcome of any claim or other litigation matter. The ultimate outcome of any litigation matter and the potential costs associated with prosecuting or defending such lawsuits, including the diversion of management’s attention to these matters, could have an adverse effect on us and, in the event of litigation that could reasonably be expected to have a material adverse effect on us, could lead to an event of default under certain of our credit facilities.

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Risks Related to Our Business

Any limitation in the availability or operation of our ships could have a material adverse effect on our business, financial condition, results of operations and cash flows, which effect would be amplified by the small size of our fleet during the period prior to delivery of our new LNG carriers that are on order.

Our owned fleet consists of two LNG carriers that are currently in operation and eight newbuilding ships on order. If any of our ships is unable to generate revenues for any significant period of time for any reason, including unexpected periods of off-hire, early charter termination or failure to secure employment for the two newbuilding ships scheduled for delivery in 2014 and 2015 for which we have not yet secured charters, our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders, could be materially and adversely affected. The impact of any limitation in the operation of our ships or any early charter termination would be amplified during the period prior to delivery of our newbuildings, as a substantial portion of our current cash flows and income are dependent on the revenues earned by the chartering of our two LNG carriers currently in operation. We do not carry loss of hire insurance.

Our vessel ownership segment has a limited operating history.

We have provided LNG ship management services through our subsidiary GasLog LNG Services since 2001, but our vessel ownership operating segment has a more limited operating history. The principal assets of our vessel ownership segment are our two wholly owned LNG carriers delivered in 2010. As we take delivery of our eight newbuilding ships on order, an increasingly large portion of our operating results will dependent on the performance of our vessel ownership segment. Accordingly, we expect our future operating results to differ materially from our historical operating results.

We depend upon two customers for nearly all of our revenues. The loss of either or both of these customers would result in a significant loss of revenues and could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We have historically derived nearly all of our revenues from one customer, BG Group. For the year ended December 31, 2011, BG Group accounted for 99% of our revenues. Following the delivery of our eight new LNG carriers on order, they will continue to be a key customer, as four of our newbuildings will be chartered to a subsidiary of BG Group upon delivery from the shipyard. Of the remaining four newbuildings, two will be chartered to a subsidiary of Shell. We could lose a customer or the benefits of our time charter or ship management arrangements for many different reasons, including if the customer is unable or unwilling to make charter hire or other payments to us because of a deterioration in its financial condition, disagreements with us or otherwise. If either or both of our customers terminates its charters, chooses not to re-charter our ships after the initial charter terms or is unable to perform under its charters and we are not able to find replacement charters, we will suffer a loss of revenues that could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders. Our revenues would also be impacted if BG Group terminates or is unable to perform under our ship management contracts.

Any charter termination could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our charterers have the right to terminate a ship’s time charter in certain circumstances, such as:

 

 

 

 

loss of the ship or damage to it beyond repair;

 

 

 

 

if the ship is off-hire for any reason other than scheduled drydocking for a period exceeding 90 consecutive days, or for more than 90 days or 110 days, depending on the charter, in any one-year period;

 

 

 

 

defaults by us in our obligations under the charter; or

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the outbreak of war or hostilities involving two or more major nations, such as the United States or the Peoples Republic of China, that would materially and adversely affect the trading of the ship for a period of at least 30 days.

A termination right under one ship’s time charter would not automatically give the charterer the right to terminate its other charter contracts with us. However, a charter termination could materially affect our relationship with the customer and our reputation in the LNG shipping industry, and in some circumstances the event giving rise to the termination right could potentially impact multiple charters. Accordingly, the existence of any right of termination could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

If we lose a charter, we may be unable to obtain a new time charter on terms as favorable to us or with a charterer of comparable standing, particularly if we are seeking new time charters at a time when charter rates in the LNG industry are depressed. Consequently, we may have an increased exposure to the volatile spot market, which is highly competitive and subject to significant price fluctuations. In the event that we are unable to re-deploy a ship for which a charter has been terminated, we will not receive any revenues from that ship, and we may be required to pay expenses necessary to maintain the ship in proper operating condition. In addition, in the event of a charter termination we could be required under certain of our credit facilities to deposit cash in an account held with the applicable lender until we have obtained a new time charter on terms acceptable to such lender, which could restrict our cash available for dividends to our shareholders.

Our ship management agreements may be terminated with limited advance notice.

Unlike our time charters, our ship management agreements with a subsidiary of BG Group and Egypt LNG may be terminated at any time by either party with a short period of advance notice. In the event that a ship management agreement is terminated by BG Group other than in connection with the sale of a ship, BG Group would generally be entitled to immediately terminate the ship management agreements for the other ships we manage on its behalf. If a customer were to terminate our ship management agreements, we may be unable to find new customers for our ship management services or we may choose not to continue providing ship management services to third-party customers, which could adversely impact our revenues and cash flows, including cash available for dividends to our shareholders.

Due to our lack of diversification, adverse developments in the LNG transportation industry could adversely affect our business, particularly if such developments occur at a time when we are seeking a new charter.

Due to our lack of diversification, an adverse development in the LNG transportation industry could have a significantly greater impact on our business, particularly if such developments occur at a time when our charters have expired or been terminated, than if we maintained more diverse assets or lines of businesses.

Our contracts for the eight newbuilding ships we have on order are subject to risks that could cause delays in the delivery of the ships, which could adversely affect our results of operations and cash flows.

Our eight contracted newbuilding ships are scheduled to be delivered to us on various dates between 2013 and 2015. Significant delays in the delivery of one or more of these ships, which are expected to generate a substantial portion of our contracted revenue in future years, would delay our receipt of revenues under the related time charters. These delays could result in the cancellation of those time charters or introduce other liabilities under those charters, which could adversely affect our anticipated results of operations and cash flows, including cash available for dividends to our shareholders. In addition, the delivery of any of these ships with substantial defects or unexpected operational problems could have similar consequences.

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The delivery of a newbuilding could be delayed because of numerous factors, including, but not limited to:

 

 

 

 

shortages of equipment, materials or skilled labor;

 

 

 

 

delays in the receipt of necessary construction materials, such as steel, or equipment, such as engines or generators;

 

 

 

 

failure of equipment to meet quality and/or performance standards;

 

 

 

 

the shipyard’s over-committing to new ships to be constructed;

 

 

 

 

changes in governmental regulations or maritime self-regulatory organization standards;

 

 

 

 

financial or operating difficulties experienced by equipment vendors or the shipyard;

 

 

 

 

required changes to the original ship specifications;

 

 

 

 

inability to obtain required permits or approvals;

 

 

 

 

disputes with the shipyard;

 

 

 

 

work stoppages and other labor disputes; and

 

 

 

 

adverse weather conditions or any other events of force majeure, including war or hostilities between South Korea, where we have ships on order at Samsung Heavy Industries, and North Korea.

As we take delivery of our newbuilding ships, we will need to expand our staff and crew. If we cannot recruit and retain employees and provide adequate compensation, our business, financial condition, results of operations and cash flows may be adversely affected.

Our ability to acquire and retain customers depends on a number of factors, including our ability to man our ships with masters, officers and crews of suitable experience in operating LNG carriers. As we take delivery of our newbuilding ships, we expect to hire a significant number of seafarers qualified to man and operate our new ships, as well as additional shoreside personnel. As the global LNG carrier fleet continues to grow, we expect the demand for technically skilled and experienced officers and crew to increase. This could lead to an industry-wide shortfall of qualified personnel, resulting in increased crew costs, which could constrain our ability to recruit suitable employees to operate our LNG carriers within our budget parameters.

Material increases in crew costs could adversely affect our results of operations and cash flows. In addition, if we cannot recruit and retain sufficient numbers of quality on-board seafaring personnel, we may not be able to fully utilize our expanded fleet, which could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

We must make substantial capital expenditures to acquire the eight newbuilding ships we have on order and any additional ships we may acquire in the future.

We are obligated to make substantial capital expenditures to fund our commitments for the eight newbuilding ships we have on order. We are scheduled to take delivery of the ships on various dates between 2013 and 2015. The total remaining balance of the contract prices for the eight ships is approximately $1.42 billion, with amounts payable under each shipbuilding contract in installments upon the attainment of certain specified milestones. The largest portion of the purchase price for each ship will come due upon its delivery to us from the shipyard. We intend to fund these commitments with the proceeds of this offering and with borrowings under the four new loan agreements we have entered into for $1.13 billion in the aggregate.

To the extent that we are unable to draw down the amounts committed under our credit facilities, whether due to our failure to comply with the terms of such facilities including vessel employment conditions or the lender’s failure to fund the committed amounts, we will need to find alternative financing. If we are unable to find alternative financing, we will not be capable of funding all of our commitments for capital expenditures relating to our eight contracted newbuilding ships. In the event

27


that we fail to meet our payment obligations under a shipbuilding contract, we would be in default under the applicable contract and the shipbuilder would have the option of cancelling the contract and retaining any previously funded installment payments, which could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

In addition, we may choose to make substantial capital expenditures to expand the size of our fleet in the future. In order to exercise our options with Samsung Heavy Industries to purchase two additional newbuilding ships, we would need to obtain financing on terms acceptable to us. We expect to finance the cost of any new ships through cash from operations and debt or equity financings. Use of cash from operations would reduce cash available for dividends to our shareholders. 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 further contingencies and uncertainties that are beyond our control. Even if we are successful in obtaining necessary funds, the terms of any debt financings could limit our ability to further expand our fleet and to pay dividends to our shareholders.

We may have difficulty further expanding our fleet in the future.

We may expand our fleet beyond our contracted newbuildings by ordering additional newbuilding ships or by making selective acquisitions of high-quality secondhand ships to the extent that they are available. Our future growth will depend on numerous factors, some of which are beyond our control, including our ability to:

 

 

 

 

identify attractive ship acquisition opportunities and consummate such acquisitions;

 

 

 

 

obtain newbuilding contracts at acceptable prices;

 

 

 

 

obtain required financing on acceptable terms;

 

 

 

 

secure charter arrangements on terms acceptable to our lenders;

 

 

 

 

expand our relationships with existing customers and establish new customer relationships;

 

 

 

 

recruit and retain additional suitably qualified and experienced seafarers and shore-based employees;

 

 

 

 

continue to meet technical and safety performance standards;

 

 

 

 

manage joint ventures; and

 

 

 

 

manage the expansion of our operations to integrate the new ships into our fleet.

During periods in which charter rates are high, ship values are generally high as well, and it may be difficult to consummate ship acquisitions or enter into shipbuilding contracts at favorable prices. In addition, any ship acquisition we complete may not be profitable at or after the time of acquisition and may not generate cash flows sufficient to justify the investment. We may not be successful in executing any future growth plans, and we cannot give any assurances that we will not incur significant expenses and losses in connection with such growth efforts.

Our credit facilities are secured by our ships and contain payment obligations and restrictive covenants that may restrict our business and financing activities as well as our ability to pay dividends. A failure by us to meet our obligations under our credit facilities could result in an event of default under such credit facilities and foreclosure on our ships.

Our credit facilities impose, and any future credit facility we enter into will impose, operating and financial restrictions on us. These restrictions in our credit facilities, including the four new loan agreements we have entered into, generally limit our ship-owning subsidiaries’ ability to, among other things:

 

 

 

 

incur additional indebtedness, create liens or provide guarantees;

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provide any form of credit or financial assistance to, or enter into any non-arms’ length transactions with, us or any of our affiliates;

 

 

 

 

sell or otherwise dispose of assets, including our ships;

 

 

 

 

engage in merger transactions;

 

 

 

 

enter into, terminate or amend any charter;

 

 

 

 

amend our shipbuilding contracts;

 

 

 

 

change the manager of our ships;

 

 

 

 

undergo a change in ownership; or

 

 

 

 

acquire assets, make investments or enter into any joint-venture agreements outside the ordinary course of business.

Our credit facilities also impose certain restrictions relating to us and our other subsidiaries, including restrictions that limit our ability to make any substantial change in the nature of our business or to engage in transactions that would constitute a change of control, as defined in the relevant credit facility, without repaying all of our indebtedness in full, or to allow our controlling shareholders to reduce their shareholding in us below specified thresholds.

After completion of this offering, we will be subject to specified financial covenants that apply to us and our subsidiaries on a consolidated basis. These financial covenants include the following:

 

 

 

 

our net working capital (excluding the current portion of long-term debt) must be positive;

 

 

 

 

our total indebtedness divided by our total capitalization must not exceed 65%;

 

 

 

 

the ratio of EBITDA over our debt service obligations (including interest and debt repayments) on a trailing 12 months’ basis must be no less than 110%;

 

 

 

 

the aggregate amount of all unencumbered cash and cash equivalents must exceed the higher of 3% of our total indebtedness or $20 million;

 

 

 

 

we are permitted to pay dividends, provided that we hold unencumbered cash equal to at least 4% of our total indebtedness, subject to no event of default having occurred or occurring as a consequence of the payment of such dividends; and

 

 

 

 

our market value adjusted net worth must at all times exceed $350 million.

In addition, all of our credit facilities contain covenants requiring that the fair market value of our ships remain above 120% (or in the case of one facility, 142.8% on the date of this offering and 120% thereafter) of all amounts outstanding under the applicable facility. In the event that the value of a ship falls below the threshold, we could be required to provide the lender with additional security or prepay a portion of the outstanding loan balance, which could negatively impact our liquidity. If we are unable to provide such additional security or prepayment, we may be in breach of covenants under the facility.

The new loan agreement we entered into in March 2012 for a $272.5 million credit facility provides that the lenders thereunder will have a put option that gives them the right to request repayment of the facility in full on the fifth anniversary of the delivery of the first ship serving as collateral under the facility. If the lenders exercise this option, we may not have, or be able to obtain, sufficient funds to meet our payment obligations under the facility.

Certain of our credit facilities also contain vessel employment conditions, pursuant to which we could be required in the event of a charter termination to deposit cash in an account held with the applicable lender until we have obtained a new time charter on terms acceptable to such lender. In addition, we are required under one of our facilities to secure charters for the ships identified by hull numbers 2043 and 2044, on terms approved by the lenders, at least 60 days prior to the scheduled delivery date of the applicable ship.

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. A failure to comply with covenants and restrictions or to meet our payment and other obligations could lead to defaults under our credit facilities which could cause our payment obligations to be accelerated. We may not have, or be able to obtain, sufficient funds to make these accelerated

29


payments. Because obligations under our financing arrangements are secured by our ships and are guaranteed by our ship-owning subsidiaries, if we are unable to repay debt under our financing arrangements, the lenders could seek to foreclose on those assets, which would materially and adversely impact our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders. In addition, a default under one of our credit facilities could result in the cross-acceleration of our other indebtedness. For more information regarding our credit facilities, including our new loan agreements, please read “Description of Indebtedness”.

Ship values may fluctuate substantially which could impact our compliance with the covenants in our loan agreements and, if the values are lower at a time when we are attempting to dispose of ships, could cause us to incur a loss.

Values for ships 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;

 

 

 

 

the level of worldwide LNG production and exports;

 

 

 

 

changes in the supply-demand balance of the global LNG carrier fleet;

 

 

 

 

changes in prevailing charter hire rates;

 

 

 

 

the physical condition of the ship;

 

 

 

 

the size, age and technical specifications of the ship;

 

 

 

 

demand for LNG carriers; and

 

 

 

 

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

If the market value of our ships declines, we may breach some of the covenants contained in our credit facilities, including covenants contained in the four new loan agreements we have entered into. If we do breach such covenants and we are unable to remedy the relevant breach, our lenders could accelerate our indebtedness and seek to foreclose on the ships in our fleet securing those credit facilities. In addition, if a charter contract expires or is terminated by the customer, we may be unable to re-deploy the affected ships at attractive rates and, rather than continue to incur costs to maintain and finance them, we may seek to dispose of them. Any foreclosure on our ships, or any disposal by us of a ship at a time when ship prices have fallen, could result in a loss and could materially and adversely affect our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Substantial debt levels could limit our flexibility to obtain additional financing and pursue other business opportunities.

As of December 31, 2011, we had an aggregate of $283.11 million of outstanding indebtedness under two credit agreements. In addition, we have entered into four loan agreements for $1.13 billion in the aggregate in connection with the financing of a portion of the contract prices of our eight contracted newbuildings. We may incur additional indebtedness in the future as we grow our fleet. This level of debt could have important consequences to us, including the following:

 

 

 

 

our ability to obtain additional financing for working capital, capital expenditures, ship acquisitions or other purposes may be impaired or such financing may be unavailable on favorable terms;

 

 

 

 

our costs of borrowing could increase as we become more leveraged;

 

 

 

 

we may need to use a substantial portion of our cash from operations to make principal and interest payments on our debt, reducing the funds that would otherwise be available for operations, future business opportunities and dividends to our shareholders;

30


 

 

 

 

our debt level could make us more vulnerable than our competitors with less debt to competitive pressures, 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.

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 as well as financial, business, regulatory and other factors, some of which are beyond our control. If our operating income is not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt or seeking additional equity capital. We may not be able to effect any of these remedies on satisfactory terms, or at all.

Our ability to obtain additional debt financing for future acquisitions of ships or to refinance our existing debt may depend on the creditworthiness of our charterers and the terms of our future charters.

Our ability to borrow against the ships in our existing fleet and any ships we may acquire in the future largely depends on the value of the ships, which in turn depends in part on charter hire rates and the ability of our charterers to comply with the terms of their charters. The actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional capital resources that we will require to purchase additional ships and to refinance our existing debt as balloon payments come due, or may significantly increase our costs of obtaining such capital. Our inability to obtain additional financing or committing to financing on unattractive terms could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Our ability to pay dividends may be limited by the amount of cash we generate from operations, by restrictions in our credit facilities and by additional factors unrelated to our profitability.

Following this offering, we intend to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. There can be no assurance, however, that we will pay regular quarterly dividends in the future.

The declaration of any dividend is subject to the discretion of our board of directors and the requirements of Bermuda law. We may not be able to pay regular quarterly dividends in the amounts stated above. The timing and amount of any dividend payments will be dependent on our earnings, financial condition, cash requirements and availability, restrictions in our credit facilities, the provisions of Bermuda law and other factors. The amount of cash we generate from operations and the actual amount of cash we will have available for dividends will vary based upon, among other things:

 

 

 

 

our earnings, financial condition and cash requirements;

 

 

 

 

restrictions in our credit facilities and other financing agreements;

 

 

 

 

the provisions of Bermuda law affecting the payment of dividends to shareholders;

 

 

 

 

the charter hire payments we obtain from our charters as well as the future rates obtained upon the expiration of our existing charters;

 

 

 

 

our fleet expansion and associated uses of our cash as well as any financing requirements;

 

 

 

 

delays in the delivery of newbuilding ships and the commencement of payments under charters relating to those ships;

 

 

 

 

the level of our operating costs, such as the costs of crews and insurance, as well as the costs of repairs, maintenance or modifications of our ships;

 

 

 

 

the number of unscheduled off-hire days for our fleet as well as the timing of, and number of days required for, scheduled drydocking of our ships;

 

 

 

 

prevailing global and regional economic or political conditions;

 

 

 

 

changes in interest rates;

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

 

 

 

 

changes in the basis of taxation of our activities in various jurisdictions;

 

 

 

 

modification or revocation of our dividend policy by our board of directors; 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. We may incur other expenses or liabilities that could reduce or eliminate the cash available for dividends.

Under Bermuda law, a company may not declare or pay dividends if there are reasonable grounds for believing that: (i) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the company’s assets would thereby be less than its liabilities. Under our bye-laws, each common share is entitled to dividends as and when any such dividends are declared by our board of directors.

As a result of these and the other factors mentioned above, we may pay dividends during periods when we record losses and may not pay dividends during periods where we record a profit. We can give no assurance that dividends will be paid in the future.

We are a holding company and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial obligations and to make dividend payments.

We are a holding company. Our subsidiaries conduct all of our operations and own all of our operating assets, including our ships. We have no significant assets other than the equity interests in our subsidiaries. As a result, our ability to pay our obligations and to make dividend payments depends entirely on our subsidiaries and their ability to distribute funds to us. The ability of a subsidiary to make these distributions could be affected by a claim or other action by a third party, including a creditor, or by the law of its jurisdiction of incorporation which regulates the payment of dividends. If we are unable to obtain funds from our subsidiaries, our board of directors may exercise its discretion not to declare or pay dividends.

Fluctuations in exchange rates and interest rates could result in financial losses for us.

Fluctuations in currency exchange rates and interest rates may have a material impact on our financial performance. We receive virtually all of our revenues in dollars, while some of our operating expenses, including crew costs, are denominated in euros. As a result, we are exposed to a foreign exchange risk. Although we monitor exchange rate fluctuations on a continuous basis, we do not currently hedge movements in currency exchange rates. As a result, there is a risk that currency fluctuations will have a negative effect on our cash flows and results of operations.

In addition, we are exposed to a market risk relating to fluctuations in interest rates because our credit facilities bear interest costs at a floating rate based on LIBOR. Significant increases in LIBOR rates could adversely affect our cash flows, results of operations and ability to service our debt. Although we use interest rate swaps from time to time to reduce our exposure to interest rate risk, we hedge only a portion of our outstanding indebtedness. There is no assurance that our derivative contracts will provide adequate protection against adverse changes in interest rates or that our bank counterparties will be able to perform their obligations.

The derivative contracts used to hedge our exposure to fluctuations in interest rates could result in reductions in our shareholders’ equity as well as charges against our profit.

We enter into interest rate swaps from time to time for purposes of managing our exposure to fluctuations in interest rates applicable to floating rate indebtedness. As of December 31, 2011, we had five interest rate swaps in place with a notional amount of $367.16 million, and we have entered into two additional interest rate swaps since that date in connection with one of our new debt facilities. Changes in the fair value of our derivative contracts are recognized in our statement of comprehensive income as cash flow hedge gains or losses for the period, and could affect compliance with the market

32


value adjusted net worth covenants in our credit facilities. In addition, to the extent our existing interest rate swaps do not, and future derivative contracts may not, qualify for treatment as cash flow hedges for accounting purposes, we would recognize fluctuations in the fair value of such contracts in our income statement. Changes in the fair value of any derivative contracts that do not qualify for treatment as cash flow hedges for accounting and financial reporting purposes would affect, among other things, our profit, earnings per share and EBITDA coverage ratio.

Our earnings and business are subject to the credit risk associated with our contractual counterparties.

We enter into, among other things, time charters, ship management agreements and other contracts with our customers, shipbuilding contracts and refund guarantees relating to newbuilding ships, credit facilities and commitment letters with banks, insurance contracts and interest rate swaps. Such agreements subject us to counterparty credit risk. The ability and willingness of each of our counterparties to perform its obligations under a contract with us will depend upon a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the natural gas and LNG markets and charter hire rates. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which in turn could have a material adverse effect on our business, financial condition, results of operations and cash flows, including cash available for dividends to our shareholders.

Our business depends on certain of our senior executives who may not necessarily continue to work for us.

Our success depends to a significant extent upon the abilities and the efforts of our chairman and chief executive officer, Peter G. Livanos, and certain of our other senior executives. Mr. Livanos has substantial experience in the shipping industry and has worked with us for many years. He and certain of our other senior executives are important to the execution of our business strategies and to the growth and development of our business. If Mr. Livanos or one or more of our other senior executives ceased to be affiliated with us, we may be unable to recruit other employees with equivalent talent and experience, and our business and financial condition could suffer.

We are a partial owner of Egypt LNG Shipping Ltd. The dividends we receive on account of our ownership interest may decline in the future and we may have to write down the value of our investment.

We currently own a 25% stake in Egypt LNG Shipping Ltd., or “Egypt LNG”, an entity whose principal asset is the LNG carrier Methane Nile Eagle, which is currently operating under a 20-year time charter with a subsidiary of BG Group. The declaration and payment of dividends by Egypt LNG is subject to the discretion of its board of directors, which we do not control, as well as other restrictions, including a minimum cash reserve requirement. As a result, the dividends we receive on account of our ownership interest may decline in the future, which would adversely impact our cash flows, including cash available for dividends to our shareholders. In the event of an adverse change in the operating results of Egypt LNG resulting from, among other things, unscheduled off-hire days, damage to or loss of the Methane Nile Eagle or early termination of the ship’s charter, we would expect the amount of dividends we receive to be reduced or eliminated, and we may be required to record an impairment of our investment. The loss may limit our ability to borrow against our assets for future credit and could also adversely affect our share price. In addition, we have entered into a shareholders’ agreement with the other shareholders of Egypt LNG that imposes restrictions, including preemption rights, on each party’s ability to transfer, grant any security interest over or otherwise dispose of it ownership interest.

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Risks Related to the Offering

There is no guarantee that an active and liquid public market will develop for you to resell our common shares.

Prior to this offering, there has not been a public market for our common shares. A liquid trading market for our common shares may not develop. If an active, liquid trading market does not develop, you may have difficulty selling any of our common shares that you buy. The initial public offering price will be determined in negotiations between the representatives of the underwriters and us and may not be indicative of prices that will prevail in the trading market.

The price of our common shares after this offering may be volatile.

The price of our common shares after this offering may be volatile and may fluctuate due to factors including:

 

 

 

 

actual or anticipated fluctuations in quarterly and annual results;

 

 

 

 

fluctuations in the seaborne transportation industry, including fluctuations in the LNG carrier market;

 

 

 

 

mergers and strategic alliances in the shipping industry;

 

 

 

 

changes in governmental regulations or maritime self-regulatory organization standards;

 

 

 

 

shortfalls in our operating results from levels forecasted by securities analysts;

 

 

 

 

our payment of dividends;

 

 

 

 

announcements concerning us or our competitors;

 

 

 

 

the failure of securities analysts to publish research about us after this offering, or analysts making changes in their financial estimates;

 

 

 

 

general economic conditions;

 

 

 

 

terrorist acts;

 

 

 

 

future sales of our shares or other securities;

 

 

 

 

investors’ perception of us and the LNG shipping industry;

 

 

 

 

the general state of the securities market; and

 

 

 

 

other developments affecting us, our industry or our competitors.

Securities markets worldwide are experiencing significant price and volume fluctuations. The market price for our common shares may also be volatile. This market volatility, as well as general economic, market or political conditions, could reduce the market price of our common shares in spite of our operating performance. Consequently, you may not be able to sell our common shares at prices equal to or greater than those that you pay in this offering.

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

An increase in interest rates may cause a corresponding decline in demand for equity investments in general. Any such increase in interest rates or reduction in demand for our common shares resulting from other relatively more attractive investment opportunities may cause the trading price of our common shares to decline.

Our costs will increase as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

We have never operated as a public company. As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley”, as well as rules subsequently adopted by the U.S. Securities and Exchange Commission, or “SEC”, and the New York Stock Exchange, or “NYSE”, including the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or “Dodd-Frank”, have

34


imposed various requirements on public companies, including changes in corporate governance practices. Our directors, management and other personnel will need to devote a substantial amount of time to comply with these requirements. Moreover, these rules and regulations relating to public companies will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

Sarbanes-Oxley requires, among other things, that we maintain and periodically evaluate our internal control over financial reporting as well as disclosure controls and procedures. In particular, we will have to perform systems and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of Sarbanes-Oxley. Compliance with Section 404 will require substantial accounting expense and significant management efforts, and we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to satisfy ongoing compliance requirements. We may have significant difficulties in making such hires given the shortage of available experienced personnel.

If we do not implement all required accounting practices and policies, we may be unable to provide the required financial information in a timely and reliable manner.

Prior to this offering, as a privately held company, we did not adopt the financial reporting practices and policies required of a publicly traded company. Implementation of these practices and policies could disrupt our business, distract our management and employees and increase our costs. If we fail to develop and maintain effective controls and procedures, we may be unable to provide the financial information that a publicly traded company is required to provide in a timely and reliable fashion. Any such delays or deficiencies could limit our ability to obtain financing, either in the public capital markets or from private sources, and could thereby impede our ability to implement our growth strategies. In addition, any such delays or deficiencies could result in failure to meet the requirements for continued listing of our common shares on the NYSE, which would adversely affect the liquidity of our common shares.

Under Section 404 of Sarbanes-Oxley, we will be required to include in each of our future annual reports on Form 20-F a report containing our management’s assessment of the effectiveness of our internal control over financial reporting and a related attestation of our independent auditors. This requirement for an attestation of our independent auditors will first apply to us with respect to our annual report on Form 20-F for the fiscal year ending December 31, 2013. After the completion of this offering, we will undertake a comprehensive effort in preparation for compliance with Section 404. This effort will include the documentation, testing and review of our internal controls under the direction of our management. We cannot be certain at this time that all our controls will be considered effective. As such, our internal control over financial reporting may not satisfy the regulatory requirements when they become applicable to us.

We will be a “foreign private issuer” and may be a “controlled company” under the NYSE rules, and as such we are entitled to exemption from certain NYSE corporate governance standards, and you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

After the consummation of this offering, we will be a “foreign private issuer” under the securities laws of the United States and the rules of the NYSE. Under the securities laws of the United States, “foreign private issuers” are subject to different disclosure requirements than U.S. domiciled registrants, as well as different financial reporting requirements. Under the NYSE rules, a “foreign private issuer” is subject to less stringent corporate governance requirements. Subject to certain exceptions, the rules of the NYSE permit a “foreign private issuer” to follow its home country practice in lieu of the listing requirements of the NYSE. In addition, after the consummation of this offering, our largest shareholder may continue to control a majority of our issued and outstanding common shares. As a result, we may be a “controlled company” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a company of which more than 50% of the voting power is held by an individual, a

35


group or another company is a “controlled company” and may elect not to comply with certain NYSE corporate governance requirements, including (i) the requirement that a majority of the board of directors consist of independent directors, (ii) the requirement that the nominating/corporate governance committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities, (iii) the requirement that the compensation committee be composed entirely of independent directors and have a written charter addressing the committee’s purpose and responsibilities and (iv) the requirement of an annual performance evaluation of the nominating/corporate governance and compensation committees.

As permitted by these exemptions, as well as by our bye-laws and the laws of Bermuda, we currently have a board of directors with a majority of non-independent directors. However, following completion of this offering, we anticipate that a majority of our directors will qualify as independent. We also have one or more non-independent directors serving as committee members on our compensation committee and our corporate governance and nominating committee. As a result, non-independent directors may among other things, participate in fixing the compensation of our management, making share and option awards and resolving governance issues regarding our Company.

Accordingly, in the future you may not have the same protections afforded to shareholders of companies that are subject to all of the NYSE corporate governance requirements.

We are a Bermuda company. Bermuda law differs from the laws in effect in the United States and may afford less protection to shareholders, and it may be difficult for you to enforce judgments against us or certain of our directors and officers.

We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law, our memorandum of association and our bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. In particular, under Bermuda law and our bye-laws, the duties of directors and officers of a company are generally owed to the company only, and shareholders do not have rights to take action against directors or officers of the company except in respect of fraud or dishonesty of such director or officer. Class actions and derivative actions are generally not available to shareholders under Bermuda law. In addition, our bye-laws contain a provision which provides that in the event any dispute arises concerning the Bermuda Companies Act 1981, as amended, or the “Companies Act”, or out of our bye-laws it shall be subject to the exclusive jurisdiction of the Supreme Court of Bermuda.

Furthermore, a majority of our directors and some of the named experts referred to in this prospectus are not residents of the United States. In addition to this, a substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. It is doubtful whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.

You will incur immediate and substantial dilution.

We expect the initial public offering price per share of our common shares to be substantially higher than the pro forma net tangible book value per share of our issued and outstanding common shares. As a result, you would incur immediate and substantial dilution of $6.90 per share, representing the difference between the assumed initial public offering price of $17.00 per share and our pro forma net tangible book value per share on December 31, 2011. In addition, purchasers of our common shares in this offering will have contributed approximately 62.98% of the aggregate price paid by all purchasers of our common shares, but will own only approximately 37.41% of the shares outstanding after this offering and the concurrent private placement.

36


Future sales of our common shares could cause the market price of our common shares to decline.

Sales of a substantial number of shares of our common shares in the public market following this offering, or the perception that these sales could occur, may depress the market price for our common shares. These sales could also impair our ability to raise additional capital through the sale of our equity securities in the future.

Although we do not currently have any plans to sell additional common shares beyond what is necessary to fund our current capital plan, subject to the rules of the NYSE, in the future we may issue additional common shares, without shareholder approval, in a number of circumstances.

The issuance by us of additional common shares or other equity securities would have the following effects:

 

 

 

 

our existing shareholders’ proportionate ownership interest in us will decrease;

 

 

 

 

the dividend amount payable per share on our common shares may be lower;

 

 

 

 

the relative voting strength of each previously outstanding common share may be diminished; and

 

 

 

 

the market price of our common shares may decline.

Our shareholders also may elect to sell large numbers of shares held by them from time to time. The number of our common shares available for sale in the public market will be limited by restrictions applicable under securities laws and under agreements that we and our executive officers, directors and existing shareholders have entered into with the underwriters of this offering. Subject to certain exceptions, the agreements entered into with the underwriters of this offering generally restrict us and our executive officers, directors and existing shareholders from directly or indirectly offering, selling, pledging, hedging or otherwise disposing of our equity securities, including common shares that will be issued and outstanding upon the conversion of manager shares, subsidiary manager shares and common A shares, or any security that is convertible into or exercisable or exchangeable for our equity securities and from engaging in certain other transactions relating to such securities for a period of 180 days after the date of this prospectus without the prior written consent of each of Goldman, Sachs & Co., Citigroup Global Markets Inc., J.P. Morgan Securities LLC and UBS Securities LLC.

Entities controlled by members of the Livanos and Radziwill families are our principal existing shareholders and will control the outcome of most matters on which our shareholders are entitled to vote following this offering; their interests may be different from yours.

Through Blenheim Holdings, entities controlled by members of the Livanos family, including our chairman and chief executive officer, and members of the Radziwill family will directly or indirectly own approximately 50.92% of our issued and outstanding common shares after this offering and the concurrent private placement. These shareholders effectively will be able to control the outcome of most matters on which our shareholders are entitled to vote, including the election of our entire board of directors and other significant corporate actions. The interests of these shareholders may be different from yours.

Provisions in our organizational documents may have anti-takeover effects.

Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions require an affirmative vote of a majority of the votes attaching to all issued and outstanding shares to approve any merger, consolidation, amalgamation or similar transactions. Our bye-laws also provide for restrictions on the time period in which directors may be nominated.

These provisions could make it difficult for our shareholders to replace or remove our current board of directors or could have the effect of discouraging, delaying or preventing an offer by a third party to acquire us, even if the third party’s offer may be considered beneficial by many shareholders. As a result, shareholders may be limited in their ability to obtain a premium for their shares.

37


Tax Risks

In addition to the following risk factors, you should read “Tax Considerations” for a more complete discussion of the material Bermuda and U.S. Federal income tax consequences of owning and disposing of our common shares.

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

Under the United States Internal Revenue Code of 1986, as amended, or the “Code”, the U.S. source gross transportation income of a ship-owning or chartering corporation, such as ourselves, is subject to a 4% U.S. Federal income tax without allowance for deduction, unless that corporation qualifies for exemption from tax under Section 883 of the Code and the Treasury Regulations promulgated thereunder. U.S. source gross transportation income consists of 50% of the gross shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States.

We expect that we will qualify for this statutory tax exemption, and we intend to take this position for U.S. Federal income tax purposes. However, there are factual circumstances beyond our control that could cause us to lose the benefit of this tax exemption and thereby become subject to the 4% U.S. Federal income tax described above. The imposition of this taxation could have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders. For a more detailed discussion, see the section entitled “Tax Considerations—United States Federal Income Tax Considerations—U.S. Taxation of Our Operating Income”.

If we were treated as a “passive foreign investment company”, certain adverse U.S. Federal income tax consequences could result to U.S. shareholders.

A foreign corporation will be treated as a “passive foreign investment company”, or “PFIC”, for U.S. Federal income tax purposes if at least 75% of its gross income for any taxable year consists of certain types of “passive income”, or at least 50% of the average value of the corporation’s assets produce or are held for the production of those types 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 shares in the PFIC. If we are treated as a PFIC for any taxable year, we will provide information to U.S. shareholders who request such information to enable them to make certain elections to alleviate certain of the adverse U.S. Federal income tax consequences that would arise as a result of holding an interest in a PFIC.

Based on our proposed method of operation, we do not believe that we will be a PFIC for the taxable year during which this offering occurs or any taxable year thereafter. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income, rather than rental income. Accordingly, we believe that our income from our time chartering activities does not constitute “passive income”, and the assets that we own and operate in connection with the production of that income do not constitute passive assets.

There is, however, no legal authority under the PFIC rules addressing our proposed method of operation. Accordingly, the U.S. Internal Revenue Service, or the “IRS”, or a court of law may not accept our position, and there is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, we could constitute a PFIC for a future taxable year if there were to be changes in the nature and extent of our operations.

If the IRS were to find that we are or have been a PFIC for any taxable year, U.S. shareholders would face adverse tax consequences. Under the PFIC rules, unless those shareholders make certain elections available under the Code, such shareholders would be liable to pay U.S. Federal income tax at the then prevailing income tax rates on ordinary income plus interest upon excess distributions and

38


upon any gain from the disposition of our common shares, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period. Please read “Tax Considerations—United States Federal Income Tax Considerations—Taxation of United States Holders—PFIC Status and Significant Tax Consequences” for a more detailed discussion of the U.S. Federal income tax consequences to U.S. shareholders if we are treated as a PFIC.

The enactment of proposed legislation could affect whether dividends paid by us constitute qualified dividend income eligible for the preferential rate.

Legislation was recently proposed in the United States Senate that would deny the preferential rate of U.S. Federal income tax currently imposed on qualified dividend income with respect to dividends received from a non-U.S. corporation, unless the non-U.S. corporation either is eligible for benefits of a comprehensive income tax treaty with the United States or is created or organized under the laws of a foreign country which has a comprehensive income tax system. Because Bermuda has not entered into a comprehensive income tax treaty with the United States and imposes only limited taxes on corporations organized under its laws, it is unlikely that we could satisfy either of these requirements. Consequently, if this legislation were enacted in its current form the preferential rate of U.S. Federal income tax discussed under the heading “Tax Considerations—United States Federal Income Tax Considerations—Taxation of United States Holders—Distributions on Our Common Shares” may no longer be applicable to dividends received from us. As of the date of this offering, it is not possible to predict with certainty whether or in what form the proposed legislation will be enacted.

39


FORWARD-LOOKING STATEMENTS

The disclosure and analysis set forth in this prospectus includes assumptions, expectations, projections, intentions and beliefs about future events in a number of places, particularly in relation to our operations, cash flows, financial position, plans, strategies, business prospects, changes and trends in our business and the markets in which we operate. These statements are intended as “forward-looking statements”. In some cases, predictive, future-tense or forward-looking words such as “believe”, “intend”, “anticipate”, “estimate”, “project”, “forecast”, “plan”, “potential”, “may”, “should”, “could” and “expect” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. In addition, we and our representatives may from time to time make other oral or written statements which are forward-looking statements, including in our periodic reports that we will file with the SEC, other information sent to our security holders, and other written materials.

Forward-looking statements include, but are not limited to, such matters as:

 

 

 

 

general LNG and LNG shipping market conditions and trends, including charter rates, ship values, factors affecting supply and demand and opportunities for the profitable operations of LNG carriers;

 

 

 

 

our continued ability to enter into multi-year time charters with our customers;

 

 

 

 

our contracted charter revenue;

 

 

 

 

our customers’ performance of their obligations under our time charters and other contracts;

 

 

 

 

the effect of the worldwide economic slowdown;

 

 

 

 

future operating or financial results and future revenues and expenses;

 

 

 

 

our future financial condition and liquidity;

 

 

 

 

our ability to obtain financing to fund capital expenditures, acquisitions and other corporate activities, and funding by banks of their financial commitments;

 

 

 

 

future, pending or recent acquisitions of ships or other assets, business strategy, areas of possible expansion and expected capital spending or operating expenses;

 

 

 

 

our expectations relating to dividend payments and our ability to make such payments;

 

 

 

 

our ability to enter into shipbuilding contracts for newbuilding ships and our expectations about the availability of existing LNG carriers to purchase, as well as our ability to consummate any such acquisitions;

 

 

 

 

our expectations about the time that it may take to construct and deliver newbuilding ships and the useful lives of our ships;

 

 

 

 

number of off-hire days, drydocking requirements and insurance costs;

 

 

 

 

our anticipated general and administrative expenses;

 

 

 

 

fluctuations in currencies and interest rates;

 

 

 

 

our ability to maintain long-term relationships with major energy companies;

 

 

 

 

expiration dates and extensions of charters;

 

 

 

 

our ability to maximize the use of our ships, including the re-employment or disposal of ships no longer under multi-year time charter commitments;

 

 

 

 

environmental and regulatory conditions, including changes in laws and regulations or actions taken by regulatory authorities;

 

 

 

 

risks inherent in ship operation, including the discharge of pollutants;

 

 

 

 

availability of skilled labor, ship crews and management;

 

 

 

 

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

 

 

 

 

potential liability from future litigation; and

40


 

 

 

 

other factors discussed in the section entitled “Risk Factors”.

We caution that these and other forward-looking statements included in this prospectus represent our estimates and assumptions only as of the date of this prospectus and are not intended to give any assurance as to future results. Many of the forward-looking statements included in this prospectus are based on our assumptions about factors that are beyond our ability to control or predict. Assumptions, expectations, projections, intentions and beliefs about future events may, and often do, vary from actual results and these differences can be material. The reasons for this include the risks, uncertainties and factors described in the section of this prospectus entitled “Risk Factors”. As a result, the forward-looking events discussed in this prospectus might not occur and our actual results may differ materially from those anticipated in the forward-looking statements. Accordingly, you should not unduly rely on any forward- looking statements.

We undertake no obligation to update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events, a change in our views or expectations or otherwise. New factors emerge from time to time, and it is not possible for us to predict all of these factors. Further, we cannot assess the impact of each such factor on our business or the extent to which any factor, or combination of factors, may cause actual results to be materially different from those contained in any forward-looking statement. We make no prediction or statement about the performance of our common shares.

41


DIVIDEND POLICY

Following this offering, we intend to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. As our fleet expands, we will evaluate future increases to the quarterly dividend consistent with our cash flow and liquidity position. Our policy is to pay dividends in amounts that will allow us to retain sufficient liquidity to fund our obligations as well as execute our business plan going forward.

The declaration of any dividend is subject to the discretion of our board of directors and the requirements of Bermuda law. In addition, our credit facilities impose limitations on our ability to pay dividends. Our board of directors will determine the timing and amount of all dividend payments, based on various factors, including our earnings, financial condition, cash requirements and availability, restrictions in our credit facilities and the provisions of Bermuda law. Accordingly, we cannot guarantee that we will be able to pay quarterly dividends. See “Risk Factors—Risks Related to Our Business” for a discussion of risks related to our ability to pay dividends.

Dividends and Distributions Prior to this Offering

In the year ended December 31, 2010, we declared dividends to our existing shareholders of $17.25 million, $16.77 million of which was paid in cash, with the remainder contributed to the capital of the Company by our existing majority shareholder. In the year ended December 31, 2011, we declared dividends to our existing shareholders of $8.5 million, $0.77 million of which was paid in cash, with the remainder contributed to the capital of the Company by our existing majority shareholder. Other than these dividends, we have not historically paid dividends or distributions to our shareholders. Investors in this offering are not entitled to receive any portion of these dividends.

42


USE OF PROCEEDS

We estimate that the net proceeds to us from this offering and the concurrent private placement will be approximately $373.48 million after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, based on an assumed initial public offering price of $17.00 per share, which is the mid-point of the price range on the cover page of this prospectus. We intend to use the net proceeds of this offering and the concurrent private placement, together with our $1.13 billion of committed debt financing, to fund the remaining scheduled installment payments totaling $1.42 billion under our eight new LNG carrier construction contracts. We intend to use the remaining proceeds of this offering and the concurrent private placement, if any, for other general corporate purposes.

A $1.00 increase or decrease in the assumed initial public offering price of $17.00 per share, the mid-point of the price range on the cover page of this prospectus, would increase or decrease the net proceeds we receive from this offering and the concurrent private placement by approximately $22.25 million, based on the number of shares offered by us as set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

43


CAPITALIZATION

The following table sets forth:

 

 

 

 

our historical cash and cash equivalents and capitalization as of December 31, 2011; and

 

 

 

 

our adjusted cash and cash equivalents and capitalization as of December 31, 2011, giving effect to (i) capital contributions of $18.66 million since December 31, 2011, (ii) our scheduled debt repayments totaling $6.85 million since December 31, 2011 and (iii) the issuance and sale of 23,500,000 common shares pursuant to this offering and the issuance and sale of 217,647 common shares in the concurrent private placement at an assumed initial public offering price of $17.00 per share, which is the mid-point of the price range on the cover page of this prospectus, after the deduction of estimated underwriting discounts and commissions and estimated offering expenses payable by us.

There has been no material change in our capitalization between December 31, 2011 and the date of this prospectus, except as adjusted as described above.

This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

 

 

 

 

 

 

 

As of December 31, 2011

 

Actual

 

Adjusted

 

 

(in thousands of U.S. dollars)

Cash:

 

 

 

 

Cash and cash equivalents(1)

 

 

$

 

20,093

   

$

 

405,387

 

 

 

 

 

 

Debt:(2)

 

 

 

 

Loans—current portion(3)

 

 

$

 

24,277

 

 

 

$

 

17,427

 

Loans—non-current portion(3)

 

 

$

 

256,788

 

 

 

$

 

256,788

 

 

 

 

 

 

Total debt

 

 

$

 

281,065

 

 

 

$

 

274,215

 

 

 

 

 

 

Equity attributable to shareholders:

 

 

 

 

Share capital(4)

 

 

$

 

391

   

 

$

 

628

 

Contributed surplus

 

 

 

300,716

   

 

692,623

 

Reserves

 

 

 

1,744

 

 

 

 

1,744

 

Accumulated deficit

 

 

 

(12,438

)

 

 

 

 

(12,438

)

 

 

 

 

 

 

Total equity attributable to shareholders

 

 

 

290,414

   

 

682,558

 

 

 

 

 

 

Total capitalization

 

 

$

 

571,479

   

$

 

956,773

 

 

 

 

 

 


 

 

(1)

 

 

 

Includes $1.10 million of cash held in ship management client accounts, which funds were held on behalf of customers of our vessel management segment to cover operating expenses of customer-owned ships operating under our management.

 

(2)

 

 

 

All of our indebtedness is secured by mortgages on our owned ships. Debt presented does not include borrowings we expect to make under our four new loan agreements aggregating $1.13 billion to fund a portion of the contract prices of our eight newbuilding ships on order. Borrowings under these facilities will be drawn upon delivery of the ships, which is scheduled for various dates between 2013 and 2015, and will be secured by mortgages on the ships. See “Description of Indebtedness” for more information about our credit facilities.

 

(3)

 

 

 

Loans presented at December 31, 2011 are shown net of $2.05 million of loan issuance costs that are being amortized over the term of the loans.

 

(4)

 

 

 

As of December 31, 2011, giving effect to the 238-for-1 share split effected by way of a 100-for-1 subdivision and 1.38-for-1 share dividend (referred to as an issuance of bonus shares for Bermuda law purposes) on March 13, 2012, our issued and outstanding share capital consisted of: (i) 35,700,000 common shares, par value $0.01 per share; (ii) 2,150,092 manager shares, par value $0.01 per share; (iii) 859,894 subsidiary manager shares, par value $0.01 per share; and (iv) 391,510 common A shares, par value $0.01 per share. All issued and outstanding manager shares, subsidiary manager shares and common A shares will be converted to common shares on a one-for-one basis immediately prior to the closing of this offering. Our authorized share capital consists of 500,000,000 shares, par value $0.01 per share, of which 62,819,143 are expected to be issued and outstanding after giving effect to the 23,717,647 common shares offered hereby and in the concurrent private placement, or 66,344,143 are expected to be issued and outstanding if the underwriters exercise their option to purchase additional shares in full.

44


DILUTION

As of December 31, 2011, we had net tangible book value of $260.81 million, or $6.67 per share, giving effect to the 238-for-1 share split effected on March 13, 2012. After giving effect to the sale of 23,717,647 common shares in this offering and the concurrent private placement at a price of $17.00 per share, which is the mid-point of the initial public offering price range on the cover page of this prospectus of $16.00 to $18.00 per share, deducting the estimated underwriting discounts and commissions and estimated offering expenses, and assuming that the underwriters’ option to purchase additional shares is not exercised, the pro forma net tangible book value as of December 31, 2011 would have been $634.29 million or $10.10 per share. This represents an immediate appreciation in net tangible book value of $3.43 per share to existing shareholders and an immediate dilution of net tangible book value of $6.90 per share to new investors. The following table illustrates the pro forma per share dilution and appreciation:

 

 

 

Assumed initial public offering price per share

 

 

$

 

17.00

 

Net tangible book value per share as of December 31, 2011

 

 

$

 

6.67

 

Increase in net tangible book value per share attributable to new investors in this offering and the concurrent private placement

 

 

$

 

3.43

 

Pro forma net tangible book value per share after giving effect to this offering and the concurrent private placement

 

 

$

 

10.10

 

 

 

 

Dilution per share to new investors

 

 

$

 

6.90

 

 

 

 

Net tangible book value per share is determined by dividing our tangible net worth, which consists of tangible assets less liabilities, by the number of our common shares outstanding. Dilution is determined by subtracting the net tangible book value per share after this offering and the concurrent private placement from the public offering price per share. Dilution per share to new investors would be $6.01 if the underwriters exercised their option to purchase additional shares in full.

The following table summarizes, on a pro forma basis as of December 31, 2011, the differences between the number of common shares acquired from us, the total amount paid and the average price per share paid by the existing holders of our common shares and by you in this offering, based upon an assumed initial public offering price of $17.00 per share, which is the mid-point of the initial public offering price range on the cover page of this prospectus of $16.00 to $18.00 per share.

 

 

 

 

 

 

 

 

 

 

 

 

 

Pro Forma Shares
Outstanding

 

Total Consideration

 

Average Price
Per Share

 

Number

 

Percentage

 

Amount

 

Percentage

 

 

(in thousands of U.S. dollars, except percentages and share data)

Existing shareholders

 

 

39,101,496

   

 

62.24

%

 

 

 

$

 

231,088

   

 

36.44

%

 

 

 

$

 

5.91

 

 

 

 

 

 

 

 

 

 

 

 

Purchasers in private placement

 

 

217,647

   

 

0.35

%

 

 

$

 

3,700

   

 

0.58

%

 

 

$

 

17.00

 

New investors

 

 

23,500,000

   

 

37.41

%

 

 

 

$

 

399,500

   

 

62.98

%

 

 

 

$

 

17.00

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

62,819,143

   

 

100

%

 

 

 

$

 

634,288

   

 

100

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45


SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following table presents selected consolidated financial and operating data of our business, as of the dates and for the periods indicated. The selected consolidated financial data as of December 31, 2010 and 2011 and for the years ended December 31, 2009, 2010 and 2011 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial data as of December 31, 2009 and for the year ended December 31, 2008 have been derived from our audited consolidated financial statements which are not included in this prospectus. The selected consolidated financial data as of December 31, 2007 and 2008 and for the year ended December 31, 2007 have been derived from our unaudited consolidated financial statements, which are not included in this prospectus. Our consolidated financial statements are prepared and presented in accordance with IFRS, as issued by the IASB.

This information should be read together with, and is qualified in its entirety by, our consolidated financial statements and the notes thereto included elsewhere in this prospectus. You should also read “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2007(1)

 

2008

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars, except share and per share data)

STATEMENT OF INCOME

 

 

 

 

 

 

 

 

 

 

Revenues

 

 

$

 

7,190

 

 

 

$

 

8,134

 

 

 

$

 

8,528

 

 

 

$

 

39,832

 

 

 

$

 

66,471

 

Vessel operating and supervision costs

 

 

 

(3,084

)

 

 

 

 

(3,193

)

 

 

 

 

(3,056

)

 

 

 

 

(8,644

)

 

 

 

 

(12,946

)

 

Depreciation of fixed assets

 

 

 

(71

)

 

 

 

 

(96

)

 

 

 

 

(126

)

 

 

 

 

(6,560

)

 

 

 

 

(12,827

)

 

General and administrative expenses

 

 

 

(9,690

)

 

 

 

 

(7,487

)

 

 

 

 

(6,241

)

 

 

 

 

(11,571

)

 

 

 

 

(15,997

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

(5,655

)

 

 

 

 

(2,642

)

 

 

 

 

(894

)

 

 

 

 

13,056

 

 

 

 

24,701

 

 

 

 

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(622

)

 

 

 

 

(32

)

 

 

 

 

(72

)

 

 

 

 

(5,046

)

 

 

 

 

(9,631

)

 

Financial income

 

 

 

446

 

 

 

 

360

 

 

 

 

52

 

 

 

 

121

 

 

 

 

42

 

Loss on interest rate swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,725

)

 

Gain/(loss) on financial investments

 

 

 

(4,435

)

 

 

 

 

(23,614

)

 

 

 

 

4,689

 

 

 

 

 

 

 

 

 

Share of profit of associate

 

 

 

42

 

 

 

 

645

 

 

 

 

635

 

 

 

 

1,460

 

 

 

 

1,312

 

Gain on disposal of subsidiaries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

Total other (expense)/income

 

 

 

(4,569

)

 

 

 

 

(22,641

)

 

 

 

 

5,304

 

 

 

 

(3,465

)

 

 

 

 

(10,978

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the period

 

 

$

 

(10,224

)

 

 

 

$

 

(25,283

)

 

 

 

$

 

4,409

 

 

 

$

 

9,591

 

 

 

$

 

13,723

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) attributable to owners of the Group

 

 

 

(10,224

)

 

 

 

 

(25,283

)

 

 

 

 

4,409

 

 

 

 

9,849

 

 

 

 

14,040

 

Loss attributable to non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(258

)

 

 

 

 

(317

)

 

Earnings/(loss) per share, basic and diluted(2)

 

 

$

 

(0.29

)

 

 

 

$

 

(0.71

)

 

 

 

$

 

0.12

 

 

 

$

 

0.25

 

 

 

$

 

0.36

 

Weighted average number of shares, basic(2)

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

35,837,297

 

Weighted average number of shares, diluted(2)

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

35,700,000

 

 

 

 

39,101,496

 

 

 

 

39,101,496

 

Dividends declared per share(2)(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 

0.44

 

 

 

$

 

0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31,

 

2007

 

2008

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

STATEMENT OF FINANCIAL POSITION DATA

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

 

15,075

 

 

 

$

 

5,477

 

 

 

$

 

7,240

 

 

 

$

 

23,270

 

 

 

$

 

20,093

 

Investment in associate(4)

 

 

 

7,008

 

 

 

 

7,103

 

 

 

 

7,113

 

 

 

 

7,003

 

 

 

 

6,528

 

Tangible fixed assets(5)

 

 

 

177

 

 

 

 

191

 

 

 

 

475

 

 

 

 

450,265

 

 

 

 

438,902

 

Vessels under construction

 

 

 

 

 

 

 

201,427

 

 

 

 

246,445

 

 

 

 

18,700

 

 

 

 

109,070

 

Total assets

 

 

 

58,802

 

 

 

 

237,956

 

 

 

 

277,924

 

 

 

 

512,005

 

 

 

 

607,013

 

Loans—current portion

 

 

 

 

 

 

 

 

 

 

 

4,191

 

 

 

 

22,640

 

 

 

 

24,277

 

Loans—non-current portion

 

 

 

 

 

 

 

160,156

 

 

 

 

170,869

 

 

 

 

287,597

 

 

 

 

256,788

 

Share capital(2)

 

 

 

382

 

 

 

 

382

 

 

 

 

391

 

 

 

 

391

 

 

 

 

391

 

Equity attributable to owners of the Group

 

 

 

54,235

 

 

 

 

65,599

 

 

 

 

91,017

 

 

 

 

171,733

 

 

 

 

290,414

 

Non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,199

 

 

 

 

 

Total equity

 

 

 

54,235

 

 

 

 

65,599

 

 

 

 

91,017

 

 

 

 

180,932

 

 

 

 

290,414

 

46


 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2007(1)

 

2008

 

2009

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

CASH FLOW DATA

 

 

 

 

 

 

 

 

 

 

Net cash from/(used in) operating activities

 

 

$

 

(5,477

)

 

 

 

$

 

(1,884

)

 

 

 

$

 

134

 

 

 

$

 

25,633

 

 

 

$

 

27,001

 

Net cash used in investing activities

 

 

 

(37,213

)

 

 

 

 

(210,449

)

 

 

 

 

(32,167

)

 

 

 

 

(212,806

)

 

 

 

 

(86,464

)

 

Net cash from financing activities

 

 

 

55,337

 

 

 

 

202,734

 

 

 

 

33,796

 

 

 

 

203,203

 

 

 

 

56,286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

2007

 

2008

 

2009

 

2010

 

2011

FLEET DATA(6)

 

 

 

 

 

 

 

 

 

 

Number of managed ships at end of period

 

 

 

8

 

 

 

 

8

 

 

 

 

8

 

 

 

 

14

 

 

 

 

14

 

Average number of managed ships during period

 

 

 

6.1

 

 

 

 

8.0

 

 

 

 

8.0

 

 

 

 

10.3

 

 

 

 

14.0

 

Number of owned ships at end of period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

 

2

 

Average number of owned ships during period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.0

 

 

 

 

2.0

 

Average age of owned ships (years)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.5

 

 

 

 

1.5

 

Total calendar days for owned fleet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

372

 

 

 

 

730

 

Total operating days for owned fleet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

372

 

 

 

 

730

 


 

 

(1)

 

 

 

The selected consolidated financial data for the year ended December 31, 2007 excludes our 60% interest in EnergyLog Investments Ltd., or “EnergyLog”. EnergyLog’s principal business activity is the holding of investments. Its main equity investment in 2007 was its 19.06% ownership interest in Odfjell SE, a company listed on the Norwegian stock exchange which is engaged in the transportation and storage of bulk liquid chemicals, acids, edible oils and other special products. We acquired EnergyLog in December 2006 and sold it in December 2007 for the same price in non-cash transactions with our controlling shareholder, since the investment in EnergyLog was not in line with our new strategy to exclusively own, operate and manage LNG carriers. We believe that excluding EnergyLog in the 2007 selected financial data facilitates a more meaningful comparison between periods and presents a better view of our management’s track record, given that the businesses of the Company and EnergyLog are dissimilar.

 

(2)

 

 

 

Gives effect to the 238-for-1 share split effected on March 13, 2012, as described under “Capitalization”.

 

(3)

 

 

 

Of the total $17.25 million and $8.5 million dividends declared, respectively, during the years ended December 31, 2010 and 2011, $16.77 million and $0.77 million, respectively, was paid in cash and the remainder was contributed to the capital of the Company by our existing majority shareholder.

 

(4)

 

 

 

Consists of our 25% ownership interest in Egypt LNG.

 

(5)

 

 

 

Includes delivered vessels (including drydocking component of vessel cost) as well as office property and other tangible assets, less accumulated depreciation. See Note 6 to our consolidated annual financial statements included elsewhere in this prospectus.

 

(6)

 

 

 

Presentation of fleet data does not include newbuilding ships on order during the relevant periods. The data presented regarding our owned fleet includes only our currently wholly owned ships, the GasLog Savannah and the GasLog Singapore. The data presented regarding our managed fleet includes our owned fleet as well as ships owned by BG Group and Egypt LNG that are operating under our management.

47


MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto and the financial and other information included elsewhere in this prospectus. Among other things, those financial statements include more detailed information regarding the basis of presentation for the following information. The financial statements have been prepared in accordance with IFRS, as issued by the IASB, and are presented in U.S. Dollars.

This discussion contains forward-looking statements based on assumptions about our future business. Our actual results may differ from those contained in the forward-looking statements and such differences may be material. Please read “Forward-Looking Statements” for more information.

Overview

We are a growth-oriented international owner, operator and manager of LNG carriers. Our owned fleet consists of 10 wholly owned LNG carriers, including two ships delivered to us in 2010 and eight LNG carriers on order to be constructed. We currently manage and operate 14 LNG carriers, and we are supervising the construction of our eight newbuilding ships. We have secured multi-year time charter contracts for the two ships delivered to us in 2010 and six of our newbuilding ships on order that from December 31, 2011 provide total contracted revenue in excess of $1.2 billion during their initial terms, which expire between 2015 and 2021.

In addition to our committed order book, we have options to purchase two additional LNG carriers from Samsung Heavy Industries that expire in 2012, and we have a 25% interest in an additional ship, the Methane Nile Eagle, a 2007-built LNG carrier owned by Egypt LNG and technically managed by us that is currently operating under a 20-year time charter to a subsidiary of BG Group. The information about our owned fleet presented in this prospectus does not include our ownership interest in the Methane Nile Eagle.

The total contract price for our eight newbuilding ships on order is approximately $1.55 billion, of which $124.4 million has been paid to date. The balance is payable under each shipbuilding contract in installments upon the attainment of certain specified milestones, with the largest portion of the purchase price for each ship coming due upon its delivery. We have entered into four loan agreements aggregating $1.13 billion to finance a portion of the contract prices of our eight newbuildings. We expect to fund the balance of the total contract price with the proceeds of this offering.

We manage our business and analyze and report our results of operations on the basis of two segments: vessel ownership and vessel management. Our vessel ownership segment generates revenues by chartering our ships to customers on multi-year time charters at rates that are generally fixed but contain a variable component, such as an inflation adjustment or an adjustment based on the actual expenses we incur in operating the ship. We currently focus on multi-year time charters, as we believe that their economic terms offer us a combination of return on our investment, rate stability and re-chartering flexibility. Our current time charters have initial terms of up to seven years and include options that permit the charterers to extend the terms for successive multi-year periods under hire rate provisions that are comparable to those prevailing at the end of the expiring term. We will continue to evaluate the attractiveness of longer and shorter term chartering opportunities as the commercial characteristics of the LNG carrier industry evolve. We have structured our order book of new LNG carriers to have staggered delivery dates, facilitating a smooth integration of the ships into our fleet as well as significant annual growth through 2015. This has the additional advantage of spreading our exposure to the re-employment of these ships over several years upon expiration of their current charters.

Both of our existing owned ships, the GasLog Savannah and the GasLog Singapore, have been chartered to BG Group since their delivery from the shipyard in 2010 under multi-year time charters that, as of December 31, 2011, have remaining durations of approximately four and five years, respectively. We have entered into fixed multi-year time charter agreements with BG Group and Shell

48


pursuant to which four of our newbuilding ships will be chartered to BG Group upon delivery and two of our newbuilding ships will be chartered to Shell upon delivery.

Our vessel management segment, the operations of which are carried out through our wholly owned subsidiary GasLog LNG Services, generates revenues by offering plan approval and construction supervision services in connection with newbuilding LNG carriers and providing technical ship management services, including crewing, training, maintenance, regulatory and classification compliance and health, safety, security and environmental, or “HSSE”, management and reporting, for our owned fleet as well as the ships in our managed fleet.

For the year ended December 31, 2011, we received 99% of our consolidated revenues from BG Group and 1% of our revenues from Egypt LNG, an entity in which we have a 25% ownership interest. Shell will become a customer of ours upon delivery of the two newbuildings that will be chartered to one of its subsidiaries, scheduled for dates in 2013 and 2014.

Background

In 2001, Ceres Hellenic Shipping Enterprises Inc., the predecessor to Ceres Shipping, entered the LNG shipping sector by undertaking the management of BG Group’s owned fleet of LNG carriers. The LNG carrier management activities were carried out by GasLog LNG Services (formerly known as “Ceres LNG Services Ltd.”), which is our wholly owned subsidiary. GasLog Ltd. was incorporated on July 16, 2003 under the laws of Bermuda. Our chairman and chief executive officer, Peter G. Livanos, is our controlling shareholder, through his ownership of Ceres Shipping, which has a majority ownership interest in Blenheim Holdings. Following completion of this offering and the concurrent private placement, Mr. Livanos will continue to be our largest shareholder through his interest in Blenheim Holdings, which will hold approximately 50.92% of our issued and outstanding common shares, assuming no exercise by the underwriters of their option to purchase additional shares. Accordingly, he will be able to effectively control the outcome of most matters on which our shareholders are entitled to vote.

Ceres Shipping’s founding family’s shipping activities commenced more than 100 years ago. The late Mr. George P. Livanos, father of our current chairman and chief executive officer, established the predecessor to Ceres Shipping, a shipping group that also has interests in tankers, dry bulk carriers and containerships. Ceres Shipping’s LNG shipping activities and operations are conducted exclusively through GasLog and our subsidiaries. Members of the Radziwill family, who have an indirect minority ownership interest in the Company through Blenheim Holdings, and the Onassis Foundation, which has a minority ownership interest in the Company through Olympic LNG Investments Ltd., act as partners to the Livanos family in establishing the growth strategy for the Company and providing equity funding prior to this offering in connection with the expansion of our owned fleet.

Until delivery of our two wholly owned ships, the GasLog Savannah and the GasLog Singapore, in May 2010 and July 2010, respectively, our business principally consisted of providing technical ship management services for BG Group’s owned fleet and for the Methane Nile Eagle. Additionally, we were involved in providing plan approval and construction supervision services in connection with newbuilding ships ordered by BG Group and Egypt LNG. Beginning with the construction of the GasLog Savannah and the GasLog Singapore, we provided the same services for our owned ships.

We are a holding company and we conduct our operations through various subsidiaries. Our wholly owned subsidiary GasLog LNG Services provides technical management to our fleet, while our wholly owned subsidiaries GAS-one Ltd. and GAS-two Ltd. own the GasLog Savannah and GasLog Singapore, respectively. In 2010 and 2011, we established eight new ship-owning subsidiaries to enter into shipbuilding contracts for the construction and eventual ownership of our eight new ships to be delivered on various dates between 2013 and 2015. For additional information about our subsidiaries, see Note 1 to our consolidated annual financial statements included elsewhere in this prospectus.

Between October 2010 and March 2011, we entered into joint venture agreements with an entity jointly owned by the Livanos and Radziwill families, which we refer to as the “Joint Venture Partner”, pursuant to which the Joint Venture Partner received a 49% ownership interest in four of our ship-owning subsidiaries: GAS-three Ltd., GAS-four Ltd., GAS-five Ltd. and GAS-six Ltd. In return for the 49% ownership interest in those four entities, the Joint Venture Partner paid us $19.21 million,

49


including equity contributions to the entities, and committed to provide loan guarantees for its pro rata share of the debt financing for the four newbuilding ships to be owned by the entities.

In June 2011, the Joint Venture Partner sold its 49% non-controlling interest in the issued shares of GAS-three Ltd., GAS-four Ltd., GAS-five Ltd. and GAS-six Ltd. to Ceres Shipping, which in turn contributed the 49% interest in the four ship-owning subsidiaries to us through Blenheim Holdings, our direct majority shareholder. The contribution of the 49% ownership interest in the entities by Blenheim Holdings was a non-cash transaction for us. Following the completion of this transaction, GAS-three Ltd., GAS-four Ltd., GAS-five Ltd. and GAS-six Ltd. are 100% owned by us through our wholly owned subsidiary GasLog Carriers Ltd. See “Certain Relationships and Related Party Transactions” and Note 1 to our consolidated annual financial statements included in this prospectus.

Below we discuss various factors we believe have affected and will continue to affect our results of operations. As you review and evaluate this discussion, you should recognize that our vessel ownership segment has a limited operating history and that the principal assets of that segment are our two wholly owned ships delivered in 2010. Accordingly, a comparison of our operating results for the years ended December 31, 2010 and 2011 with operating results for previous years may not be very informative, particularly with respect to our vessel ownership segment, and may not be indicative of results that may be expected in the future.

In addition, as discussed below, we expect to continue to expand our staffing levels significantly in 2012 as we prepare for the delivery of additional vessels in 2013 and incur increased general and administrative expenses associated with being a public company. At the same time, since none of our newbuildings will be delivered before 2013, we expect our revenue for 2012 to increase only modestly in 2012 over 2011. Accordingly, we expect that for 2012 our profit will be significantly lower than the $13.72 million recorded in 2011, while on a percentage basis the decline in our Adjusted EBITDA is expected to be substantially less.

Factors Affecting Our Results of Operations

We believe the principal factors that will affect our future results of operations include:

 

 

 

 

the number of LNG carriers in our owned and managed fleets;

 

 

 

 

the timely delivery of our ships under construction;

 

 

 

 

our ability to maintain good working relationships with our existing customers and our ability to increase the number of our customers through the development of new working relationships;

 

 

 

 

the performance of their charter obligations by subsidiaries of BG Group and Shell;

 

 

 

 

the supply-demand relationship for LNG shipping services;

 

 

 

 

our ability to successfully re-employ the ships we own, including our LNG carriers on order, at economically attractive rates;

 

 

 

 

the effective and efficient technical management of the ships under our management;

 

 

 

 

our ability to obtain acceptable debt financing in respect of our capital commitments;

 

 

 

 

our ability to obtain and maintain regulatory approvals and to satisfy technical, health, safety and compliance standards that meet our customers’ requirements; and

 

 

 

 

economic, regulatory, political and governmental conditions that affect shipping and the LNG industry, which includes changes in the number of new LNG importing countries and regions, as well as structural LNG market changes impacting LNG supply that may allow greater flexibility and competition of other energy sources with global LNG use.

In addition to the general factors discussed above, we believe certain specific factors have impacted, and will continue to impact, our results of operations. These factors include:

 

 

 

 

the hire rate earned by our owned ships;

 

 

 

 

unscheduled off-hire days;

 

 

 

 

the fees we receive for construction supervision and technical ship management services;

 

 

 

 

the level of our ship operating expenses, including crewing costs, insurance and maintenance costs;

50


 

 

 

 

our access to capital required to acquire additional ships and/or to implement our business strategy;

 

 

 

 

our level of debt, the related interest expense and the timing of required payments of principal;

 

 

 

 

mark-to-market changes in interest rate swaps and foreign currency fluctuations; and

 

 

 

 

the level of our general and administrative expenses, including salaries and costs of consultants.

Please read “Risk Factors” for a discussion of certain risks inherent in our business.

Principal Components of Revenues and Expenses

Revenues

Vessel Ownership

Our vessel ownership revenues are driven primarily by the number of LNG carriers in our owned fleet, the amount of daily charter hire that they earn under time charters and the number of operating days during which they generate revenues. These factors, in turn, are affected by our decisions relating to ship acquisitions and disposals, the amount of time that our ships spend in drydock undergoing repairs, maintenance and upgrade work, the age, condition and technical specifications of our ships as well as the relative levels of supply and demand in the LNG carrier charter market. Under the terms of our time charter arrangements, the operating cost component of the daily hire rate is intended to correspond to the costs of operating the ship. Accordingly, we will receive additional revenue under certain of our time charters through an annual escalation of the operating cost component of the daily hire rate and, in the event of more material increases in a ship’s operating costs, we may be entitled to receive additional revenues under those charters. Under our other time charter arrangements, most of our operating costs are passed-through to the charterer in the form of an adjustment to the operating cost component of the daily hire rate. We believe these adjustment provisions provide substantial protection against significant cost increases. See “Business—Ship Time Charters—Hire Rate Provisions” for a more detailed discussion of the hire rate provisions of our charter contracts.

Our LNG carriers are employed through multi-year time charter contracts, which for accounting purposes are considered as operating leases. Revenues under our time charters are recognized when services are performed, revenue is earned and the collection of the revenue is reasonably assured. The charter hire revenue is recognized on a straight-line basis over the term of the relevant time charter. We do not recognize revenue during days when the ship is off-hire. Advance payments under time charter contracts are classified as liabilities until such time as the criteria for recognizing the revenue are met.

The table below provides additional information about our contracted charter revenues based on contracts in effect as of December 31, 2011 for the eight ships in our owned fleet for which we have secured time charters, including the contracts for six of our LNG carriers on order that are scheduled to be delivered on various dates in 2013 and 2014. Other than the assumptions reflected in the footnotes below, including our assumption that the six newbuildings are delivered on schedule, the table below does not reflect events occurring after December 31, 2011 and we do not intend to update it. The table below reflects only our contracted charter revenues for the eight ships in our owned fleet for which we have secured time charters, and it does not reflect the costs or expenses we will incur in fulfilling our obligations under the charters, nor does it include other revenues we may earn, such as revenues for technical management of customer-owned ships. In particular, the table does not reflect any time charter revenues for our two LNG carriers on order for which we have not yet secured time charter contracts or any additional ships we may acquire in the future, nor does it reflect the options under our time charters that permit our charterers to extend the time charter terms for successive multi-year periods at comparable charter hire rates. The entry into time charter contracts for the two remaining newbuildings on order or any additional ships we may acquire, or the exercise of options extending the terms of our existing charters, would result in an increase in the number of contracted days and the contracted revenue for our fleet in the future. Although the contracted charter revenues are based on contracted charter hire rate provisions, they reflect certain assumptions, including assumptions relating to future ship operating costs. We consider the assumptions to be reasonable as of the date of this prospectus, but if these assumptions prove to be incorrect, our actual time charter revenues could differ from those reflected in the table. Furthermore, any contract is subject to various risks, including

51


performance by the counterparties or an early termination of the contract pursuant to its terms. If the charterers are unable or unwilling to make charter payments to us, or if we agree to renegotiate charter terms at the request of a charterer or if contracts are prematurely terminated for any reason, we would be exposed to prevailing market conditions at the time, and our results of operations and financial condition may be materially adversely affected. Please see “Risk Factors”. For these reasons, the contracted charter revenue information presented below is not fact and should not be relied upon as being necessarily indicative of future results, and readers are cautioned not to place undue reliance on this information. Neither the Company’s independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the information presented in the table, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the information in the table.

Contracted Charter Revenues and Days from Time Charters as of December 31, 2011

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On and after December 31,

   
 

2012

 

2013

 

2014

 

2015

 

2016 and
thereafter

 

Total

 

 

(in millions of U.S. dollars, except days and percentages)

 

 

Contracted time charter revenues(1)(2)(3)(4)(5)

 

 

$

 

55.86

 

 

 

$

 

132.62

 

 

 

$

 

214.33

 

 

 

$

 

210.34

 

 

 

$

 

615.20

 

 

 

$

 

1,228.34

 

Total contracted days(1)

 

 

 

732

 

 

 

 

1,742

 

 

 

 

2,831

 

 

 

 

2,768

 

 

 

 

7,885

 

 

 

 

15,958

 

Percentage of total contracted days/total calendar days for the eight ships(1)

 

 

 

100.00

%

 

 

 

 

100.00

%

 

 

 

 

100.00

%

 

 

 

 

94.79

%

 

 

 

 

N/A

 

 

 

 

N/A

 


 

 

(1)

 

 

 

Reflects time charter revenues and contracted days for the two LNG carriers delivered to us in 2010 and the six LNG carriers on order for which we have secured time charters. Calculations assume that all the LNG carriers on order are delivered on schedule.

 

(2)

 

 

 

Revenue calculations assume 365 revenue days per ship per annum, with 30 off-hire days when the ship undergoes scheduled drydocking. Two of our ships are scheduled to be drydocked in 2015.

 

(3)

 

 

 

For time charters that include a fixed operating cost component subject to annual escalation, revenue calculations include that fixed annual escalation. No special adjustments are assumed under those time charter contracts.

 

(4)

 

 

 

For time charters that give the charterer the option to set the charter hire rate at prevailing market rates during an initial portion of the time charter’s term, revenue calculations assume that charterer does not elect such option. Revenue calculations for these charters include an estimate of the amount of the operating cost component and the management fee component.

 

(5)

 

 

 

Revenue calculations assume no exercise of any option to extend the terms of charters.

Vessel Management

The revenues of GasLog LNG Services, our wholly owned subsidiary, are driven primarily by the number of ships operating under our technical management and the amount of the fees we earn for each of these ships as well as the amount of fees that we earn for plan approval and construction supervision of newbuilding LNG carriers. In addition to revenues from external customers, GasLog LNG Services receives revenues for technical management, plan approval and construction supervision services provided to our owned fleet. These revenues are eliminated in the consolidation of our accounts.

Revenue from ship management and ship construction project supervision contracts is recognized in the statement of income when earned and when it is probable that future economic benefits will flow to us and such benefits can be measured reliably.

Vessel Operating and Supervision Costs

Vessel Ownership

Vessel operating and supervision costs of our owned fleet consist of two components: voyage expenses and ship operating expenses. Under our time charter arrangements, charterers bear

52


substantially all voyage expenses, including bunker fuel, port charges and canal tolls, but not commissions, which we have historically paid based on a flat fee per ship which during 2010 and 2011 equated to approximately 0.53% of the daily charter hire rate per ship to unaffiliated ship brokers. Commissions are recognized as expenses on a pro-rata basis over the duration of the period of the time charter.

We are generally responsible for ship operating expenses, which include costs for crewing, insurance, repairs, modifications and maintenance, including drydocking, lubricants, spare parts, and consumable stores and other miscellaneous expenses as well as the associated cost of providing these items and services. However, as described above, the hire rate provisions of our time charters are intended to reflect the operating costs borne by us. Our charters contain provisions that significantly reduce our exposure to increases in operating costs, including review provisions and cost pass-through provisions. Ship operating expenses are recognized as expenses when incurred.

Our vessel ownership segment pays fees to GasLog LNG Services in connection with our own newbuilding ships on order for plan approval and construction supervision services provided by GasLog LNG Services and to cover third-party expenses incurred by GasLog LNG Services in respect of the newbuildings. These fees, other than any inter-segment profit, are capitalized as part of the asset value of our ships. The fees paid for technical ship management services, which are considered expenses of the vessel ownership segment (and corresponding revenues of GasLog LNG Services), are eliminated in the consolidation of our accounts.

Vessel Management

Vessel operating and supervision costs of GasLog LNG Services include staff costs, such as salaries, social security and training for the technical management team and project specialists, and project-related expenses.

Depreciation of Fixed Assets

Vessel Ownership

The majority of our consolidated depreciation expenses relate to the cost of our owned ships. We depreciate the cost of our ships on the basis of two components: a vessel component and a drydocking component. The vessel component is depreciated on a straight-line basis over the expected useful life of each ship, based on the cost of the ship less its estimated residual value. We estimate the useful lives of our ships to be 35 years from the date of delivery from the shipyard. Furthermore, we estimate the residual values of our ships to be 10% of the initial ship cost, which represents our estimate of the market value of the ship at the end of its useful life.

We must periodically drydock each of our ships for inspection, repairs and maintenance and any modifications to comply with industry certification or governmental requirements. All our owned ships are required to be drydocked for these inspections at least once every five years. At the time of delivery of a ship from the shipyard, we estimate the drydocking component of the cost of the ship, which represents the estimated cost of the ship’s first drydocking based on our historical experience with similar types of ships. The drydocking component of the ship’s cost is depreciated over a five-year period.

Vessel Management

Depreciation expenses in GasLog LNG Services, our ship management company, are less significant than the depreciation expenses in our vessel ownership segment. They relate to property renovation costs and the costs of furniture, computer software and other equipment. Furniture, software, computer equipment and other equipment are depreciated based on expected useful lives of three to five years.

General and Administrative Expenses

General and administrative expenses consist principally of personnel costs for administrative and support staff, board of directors fees, expense recognized in connection with equity-settled

53


compensation, rent, utilities, travel expenses, legal expenses, training and other advisor costs. As of December 31, 2011 the amount of compensation expense remaining to be recognized in connection with outstanding manager shares and subsidiary manager shares awarded as equity-settled compensation amounted to $3.17 million, to be recognized during 2012. In August 2011 and January 2012, 391,510 and 801,346 manager shares were converted into common A shares and common shares, respectively, which resulted in accelerated vesting for these shares. As a result of the accelerated vesting, we recognized $0.41 million of additional compensation expense during the year ended December 31, 2011 and expect to recognize $0.63 million of additional compensation expense in the first quarter of 2012. Taking into account the accelerated vesting of these shares, we expect to recognize total compensation expense in respect of outstanding manager shares and subsidiary manager shares of $1.42 million in the first quarter of 2012. We expect to recognize the $1.75 million of compensation expense remaining to be recognized immediately prior to completion of this offering, when all manager shares and subsidiary manager shares will be converted into common shares.

After the completion of this offering, we expect to incur additional general and administrative expenses going forward as a public company, including costs associated with the preparation of disclosure documents, increased legal and accounting costs, investor relations costs, incremental director and officer liability insurance costs as well as costs related to compliance with Sarbanes-Oxley and Dodd-Frank.

Financial Costs

We incur interest expense on the outstanding indebtedness under our existing credit facilities and our swap arrangement, which we include in our financial costs. Financial costs also include amortization of other loan issuance costs incurred in connection with establishing our existing credit facilities. We will incur additional interest expense and other borrowing costs in the future on our outstanding borrowings and under future borrowings, including interest expense and loan issuance costs in connection with the four new loan agreements we have entered into through subsidiaries aggregating $1.13 billion. For a description of our credit facilities, including our new loan agreements, see “Description of Indebtedness”.

Interest expense and the amortization of loan issuance costs that relate to an LNG carrier under construction and are incurred during the construction period are capitalized as part of the cost of the ship. Otherwise, interest expense and amortization of loan issuance costs are expensed as incurred.

Financial Income

Financial income consists of interest income, which will depend on the level of our cash deposits, investments and prevailing interest rates. Interest income is recognized on an accrual basis.

Gain/(Loss) on Interest Rate Swaps

Any gain or loss derived from the fair value of the swaps at their inception and any ineffective portion of changes in the fair value of the swaps that cannot be recognized in other comprehensive income, is presented as gain or loss on interest rate swaps in our consolidated statements of income.

Gain/(Loss) on Financial Investments

Any gain or loss on financial investments is presented in a separate line item in our consolidated statements of income. Between 2006 and 2008, we acquired 2,784,700 shares of BW Gas ASA through a subsidiary. These shares were subsequently exchanged at a one-for-one rate for shares of BW Gas Limited. During the year ended December 31, 2008, we recorded a write-down of $23.61 million based on the decrease in the fair value of the shares of BW Gas Limited. In April 2009, we sold all of our investment in BW Gas Limited and recorded a gain of $4.69 million in connection with the sale. We do not currently hold any financial investments.

54


Share of Profit of Associate

The share of profit of associate consists of our share of profits from our 25% ownership interest in Egypt LNG, a Bermuda exempted company whose principal asset is the LNG carrier Methane Nile Eagle. Our share of the profits or losses arising out of our interest in Egypt LNG is reported in our vessel ownership segment.

Gain/(Loss) on Disposal of Subsidiaries

Any gain or loss resulting from the disposal of subsidiaries is presented in a separate line item in our consolidated statements of income. In July and September 2011, we transferred ownership of two subsidiaries that were wholly owned by us, GasLog Holdings Limited and GasLog Services Limited, to Ceres Shipping. GasLog Holdings Limited was formed in 2005 as our indirect subsidiary as a holding company for our investment in BW Gas Limited. The entity has been dormant since April 2009, when we sold all of our investment in BW Gas Limited. GasLog Services Limited was formed in 2007 in connection with our establishment of a branch office in Copenhagen. The entity has been dormant since 2010, when we closed the branch office. We transferred all outstanding shares of each of the dormant entities to Ceres Shipping in non-cash transactions for no consideration. Aggregate cash and net liabilities of the two entities of $0.06 million and $0.08 million, respectively, were transferred to Ceres Shipping in the transactions, resulting in a gain of $0.02 million recorded in our consolidated statement of income.

55


Results of Operations

Year ended December 31, 2011 compared to the year ended December 31, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2011

 

Vessel
Ownership

 

Vessel
Management

 

Unallocated(1)

 

Eliminations

 

Total

 

 

(in thousands of U.S. dollars)

Statement of income by segment

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

$

 

55,756

 

 

 

$

 

10,714

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

66,471

 

Revenues from other operating segments

 

 

 

 

 

 

 

2,578

 

 

 

 

 

 

 

 

(2,578

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

55,756

 

 

 

 

13,292

 

 

 

 

 

 

 

 

(2,578

)

 

 

 

 

66,471

 

 

 

 

 

 

 

 

 

 

 

 

Vessel operating and supervision costs

 

 

 

(10,100

)

 

 

 

 

(4,693

)

 

 

 

 

 

 

 

 

1,846

 

 

 

 

(12,946

)

 

Depreciation of fixed assets

 

 

 

(12,612

)

 

 

 

 

(149

)

 

 

 

 

(66

)

 

 

 

 

 

 

 

 

(12,827

)

 

General and administrative expenses

 

 

 

(1,142

)

 

 

 

 

(6,050

)

 

 

 

 

(9,610

)

 

 

 

 

805

 

 

 

 

(15,997

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

31,903

 

 

 

 

2,401

 

 

 

 

(9,676

)

 

 

 

 

73

 

 

 

 

24,701

 

 

 

 

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(9,573

)

 

 

 

 

(47

)

 

 

 

 

(12

)

 

 

 

 

 

 

 

 

(9,631

)

 

Financial income

 

 

 

34

 

 

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

42

 

Loss on interest rate swaps

 

 

 

(2,725

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,725

)

 

Share of profit of associate

 

 

 

1,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,312

 

Gain on disposal of subsidiaries

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the year

 

 

$

 

20,950

 

 

 

$

 

2,363

 

 

 

$

 

(9,663

)

 

 

 

$

 

73

 

 

 

$

 

13,723

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Unallocated items consist of expenses of GasLog Ltd. related to administrative functions and compensation paid to senior management.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2010

 

Vessel
Ownership

 

Vessel
Management

 

Unallocated(1)

 

Eliminations

 

Total

 

 

(in thousands of U.S. dollars)

Statement of income by segment

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

$

 

28,304

 

 

 

$

 

11,528

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

39,832

 

Revenues from other operating segments

 

 

 

 

 

 

 

2,712

 

 

 

 

 

 

 

 

(2,712

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

28,304

 

 

 

 

14,240

 

 

 

 

 

 

 

 

(2,712

)

 

 

 

 

39,832

 

 

 

 

 

 

 

 

 

 

 

 

Vessel operating and supervision costs

 

 

 

(4,781

)

 

 

 

 

(5,174

)

 

 

 

 

(112

)

 

 

 

 

1,423

 

 

 

 

(8,644

)

 

Depreciation of fixed assets

 

 

 

(6,396

)

 

 

 

 

(110

)

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

(6,560

)

 

General and administrative expenses

 

 

 

(1,189

)

 

 

 

 

(5,509

)

 

 

 

 

(5,563

)

 

 

 

 

689

 

 

 

 

(11,571

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

15,938

 

 

 

 

3,448

 

 

 

 

(5,729

)

 

 

 

 

(600

)

 

 

 

 

13,056

 

 

 

 

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(4,991

)

 

 

 

 

(48

)

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(5,046

)

 

Financial income

 

 

 

98

 

 

 

 

23

 

 

 

 

Ï—

 

 

 

 

 

 

 

 

121

 

Share of profit of associate

 

 

 

1,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,460

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the year

 

 

$

 

12,504

 

 

 

$

 

3,423

 

 

 

$

 

(5,736

)

 

 

 

$

 

(600

)

 

 

 

$

 

9,591

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Unallocated items consist of expenses of GasLog Ltd. related to administrative functions and compensation paid to senior management.

During the year ended December 31, 2011, we had an average of 2.0 ships operating in our owned fleet. We had an average of 14.0 ships operating under our technical management during the year ended December 31, 2011, including our 2.0 owned ships, and we had an average of 0.7 ships under construction supervision. During the year ended December 31, 2010, we had an average of 1.0 ships operating in our owned fleet. We had an average of 10.3 ships operating under our technical management during the year ended December 31, 2010, including our 1.0 owned ships, and we had an average of 3.8 ships under construction supervision, which includes 1.0 ships under construction supervision in our owned fleet.

56


Revenues

Revenues increased by 66.88%, or $26.64 million, to $66.47 million during the year ended December 31, 2011, from $39.83 million during the year ended December 31, 2010. The increase is due to the operation of the GasLog Savannah and the GasLog Singapore for the full year during 2011. The two ships were delivered to us in May 2010 and July 2010, respectively, and commenced their charters with BG Group upon delivery to us from the shipyard.

Vessel Operating and Supervision Costs

Vessel operating and supervision costs increased by 49.88%, or $4.31 million, to $12.95 million during the year ended December 31, 2011, from $8.64 million during the year ended December 31, 2010. The increase is mainly due to the increased operating days of our owned fleet, resulting from the operation of the GasLog Savannah and the GasLog Singapore for the full year during 2011, as well as an increase in the number of managed ships.

Depreciation of Fixed Assets

Depreciation expense increased by 95.58%, or $6.27 million, to $12.83 million during the year ended December 31, 2011, from $6.56 million during the year ended December 31, 2010. The increase is directly attributable to the depreciation on our two owned ships in operation for the full year during 2011, compared to the depreciation for part of the year in 2010.

General and Administrative Expenses

General and administrative expenses increased by 38.29%, or $4.43 million, to $16.00 million during the year ended December 31, 2011, from $11.57 million during the year ended December 31, 2010. The increase is a result of (a) an increase of $3.47 million in personnel costs due to an increase in management compensation in connection with the expansion of our fleet, an increase in directors’ fees, an increase in payroll costs related to the expansion of our fleet and an increase in other personnel-related expenses such as insurance and training, (b) an increase of $0.41 million in equity-settled compensation due to the acceleration derived from the conversion of 391,510 manager shares into common A shares in August 2011, (c) an increase of $0.67 million in legal and professional fees. These increases were partially offset by a decrease of $0.12 million in other expenses.

Financial Costs

Financial costs increased by 90.69%, or $4.58 million, to $9.63 million during the year ended December 31, 2011, from $5.05 million during the year ended December 31, 2010. The increase is primarily a result of the interest expense on outstanding indebtedness used to finance the purchase of the GasLog Savannah and the GasLog Singapore. Interest expense on the indebtedness was capitalized until delivery of the ships in 2010. During the year ended December 31, 2011, we had an average of $296.70 million of outstanding indebtedness with a weighted average interest rate of 2.92%, and during the year ended December 31, 2010, we had an average of $236.67 million of outstanding indebtedness with a weighted average interest rate of 3.21%.

Financial Income

Financial income decreased by 66.67%, or $0.08 million, to $0.04 million for the year ended December 31, 2011, from $0.12 million during the year ended December 31, 2010. The decrease is a result of the decrease in average time deposits during the period.

Share of Profit of Associate

Our share of profits from our interest in Egypt LNG decreased by 10.27%, or $0.15 million, to $1.31 million during the year ended December 31, 2011, from $1.46 million during the year ended December 31, 2010, due to increased operating expenses for the Methane Nile Eagle during the year ended December 31, 2011, which resulted in lower net income for Egypt LNG.

57


Gain on Disposal of Subsidiaries

During the year ended December 31, 2011, we recorded a gain of $0.02 million resulting from the transfer of shares of two dormant subsidiaries, GasLog Holdings Limited and GasLog Services Limited, to Ceres Shipping in a non-cash transaction for no consideration.

Profit for the Year

Profit for the year ended December 31, 2011 increased by 43.07%, or $4.13 million to $13.72 million, from $9.59 million for the year ended December 31, 2010. As described below, this reflects a significant increase in profit attributable to the vessel ownership segment, to $20.95 million for the year ended December 31, 2011, from $12.50 million for the year ended December 31, 2010. This increase in profit was partially offset by a decrease in profit attributable to the vessel management segment, to $2.36 million for the year ended December 31, 2011, from $3.42 million for the year ended December 31, 2010, and an increase in unallocated loss, to $9.66 million for the year ended December 31, 2011, from $5.74 million for the year ended December 31, 2010.

Segment Performance

Vessel Ownership

Revenues

In our vessel ownership segment, revenues increased significantly to $55.76 million during the year ended December 31, 2011, from $28.30 million during the year ended December 31, 2010. The increase is due to the operation of the GasLog Savannah and the GasLog Singapore for the full year during 2011. The two ships were delivered to us in May 2010 and July 2010, respectively, and commenced their charters with BG Group upon delivery to us from the shipyard.

Costs and Expenses

Vessel operating costs in the segment also increased by $5.32 million as a result of the higher number of operating days of the two ships in our owned fleet during 2011, to $10.10 million during the year ended December 31, 2011, from $4.78 million during the year ended December 31, 2010.

General and administrative expenses in the segment had a minor decrease of $0.05 million, to $1.14 million during the year ended December 31, 2011, from $1.19 million during the year ended December 31, 2010. The decrease is principally attributable to the legal and professional fees we incurred during the year ended December 31, 2010 in connection with the registration of our two owned ships upon delivery.

Depreciation expense in the segment, which primarily relates to the GasLog Savannah and the GasLog Singapore, increased by $6.21 million to $12.61 million during the year ended December 31, 2011, from $6.40 million during the year ended December 31, 2010, as a result of the depreciation on our two owned ships in operation for the full year during 2011, compared to depreciation for part of the year in 2010.

Financial costs in the segment increased by $4.58 million, to $9.57 million during the year ended December 31, 2011, from $4.99 million during the year ended December 31, 2010, as a result of interest expense on the indebtedness used to finance the purchase of the GasLog Savannah and the GasLog Singapore. Interest expense on the indebtedness was capitalized until the delivery of the ships in 2010.

A loss of $2.73 million on interest rate swaps was recognized in 2011 as a result of a $2.46 million loss recognized at the inception of swap agreements signed in 2011 and a $0.27 million loss of the ineffective portion of the changes in the fair value of the swap agreements.

Share of Profit of Associate

Also contributing to the results of operations of the vessel ownership segment was the decrease in our share of profit from our interest in Egypt LNG to $1.31 million during the year ended December 31, 2011, from $1.46 million during the year ended December 31, 2010. The decrease is the result of lower net income during the year ended December 31, 2011 for the Methane Nile Eagle.

58


Vessel Management

Revenues

Revenues of GasLog LNG Services decreased by $0.95 million to $13.29 million, of which $10.71 million was from external customers, during the year ended December 31, 2011, from $14.24 million, of which $11.53 million was from external customers, during the year ended December 31, 2010. This decrease is mainly attributable to (a) a $2.58 million decrease in revenues from construction supervision services due to the completion of the construction of the GasLog Savannah and the GasLog Singapore as well as four newbuilding ships delivered to BG Group during 2010 and (b) a $1.17 million decrease in revenues derived from professional services fees, mainly attributable to a decrease in various consultancy fees paid by BG Group, a special bonus that was paid by BG Group in 2010 due to successful completion of the newbuilding projects and a decrease in services provided to Ceres Marine Partners. This decrease was offset in part by an increase in the performance bonus we received from BG Group for the management of its ships. The decrease in revenues in our vessel management segment from construction supervision services and professional services fees was partially offset by an increase of $2.80 million in management fees due to the increase in the managed fleet to an average of 14.0 vessels in 2011 compared to an average of 10.3 vessels in 2010.

Costs and Expenses

Vessel operating and supervision costs of GasLog LNG Services decreased by $0.48 million, to $4.69 million during the year ended December 31, 2011, from $5.17 million during the year ended December 31, 2010, primarily as a result of lower payroll costs for personnel related to the newbuilding supervision project.

General and administrative expenses in the segment increased by $0.54 million, to $6.05 million during the year ended December 31, 2011, from $5.51 million during the year ended December 31, 2010. The increase in general and administrative expenses is primarily attributable to the need to add resources and shoreside personnel in connection with the management of the additional ships.

Unallocated

During the year ended December 31, 2011, $9.66 million of loss was not allocated to either segment, compared to $5.74 million of loss during the year ended December 31, 2010. The unallocated losses are principally due to general and administrative expenses that are not attributable to either segment, including compensation paid to senior management and directors and expense recognized in connection with equity-settled compensation.

Unallocated general and administrative expenses increased by $4.05 million to $9.61 million during the year ended December 31, 2011, from $5.56 million during the year ended December 31, 2010. The increase is mainly attributable to (a) an increase of $2.70 million in personnel costs due to an increase in management compensation in connection with the expansion of our fleet, an increase in directors’ fees and an increase in payroll and other personnel-related expenses, (b) an increase of $0.41 million in equity-settled compensation due to acceleration derived from the conversion of 391,510 manager shares into common A shares in August 2011 and (c) an increase of $0.94 million in all other unallocated costs such as office rent, utilities, professional fees, legal fees and other expenses.

59


Year ended December 31, 2010 compared to the year ended December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2010

 

Vessel
Ownership

 

Vessel
Management

 

Unallocated(1)

 

Eliminations

 

Total

 

 

(in thousands of U.S. dollars)

Statement of income by segment

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

$

 

28,304

 

 

 

$

 

11,528

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

39,832

 

Revenues from other operating segments

 

 

 

 

 

 

 

2,712

 

 

 

 

 

 

 

 

(2,712

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

28,304

 

 

 

 

14,240

 

 

 

 

 

 

 

 

(2,712

)

 

 

 

 

39,832

 

 

 

 

 

 

 

 

 

 

 

 

Vessel operating and supervision costs

 

 

 

(4,781

)

 

 

 

 

(5,174

)

 

 

 

 

(112

)

 

 

 

 

1, 423

 

 

 

 

(8,644

)

 

Depreciation of fixed assets

 

 

 

(6,396

)

 

 

 

 

(110

)

 

 

 

 

(54

)

 

 

 

 

 

 

 

 

(6,560

)

 

General and administrative expenses

 

 

 

(1,189

)

 

 

 

 

(5,509

)

 

 

 

 

(5,563

)

 

 

 

 

689

 

 

 

 

(11,571

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

15,938

 

 

 

 

3,448

 

 

 

 

(5,729

)

 

 

 

 

(600

)

 

 

 

 

13,056

 

 

 

 

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(4,991

)

 

 

 

 

(48

)

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(5,046

)

 

Financial income

 

 

 

98

 

 

 

 

23

 

 

 

 

 

 

 

 

 

 

 

 

121

 

Share of profit of associate

 

 

 

1,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,460

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) for the year

 

 

$

 

12,504

 

 

 

$

 

3,423

 

 

 

$

 

(5,736

)

 

 

 

$

 

(600

)

 

 

 

$

 

9,591

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Unallocated items consist of expenses of GasLog Ltd. related to administrative functions and compensation paid to senior management.

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2009

 

Vessel
Ownership

 

Vessel
Management

 

Unallocated(1)

 

Eliminations

 

Total

 

 

(in thousands of U.S. dollars)

Statement of income by segment

 

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

 

$

 

5

 

 

 

$

 

8,523

 

 

 

$

 

 

 

 

$

 

 

 

 

$

 

8,528

 

Revenues from other operating segments

 

 

 

 

 

 

 

1,599

 

 

 

 

 

 

 

 

(1,599

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

 

 

5

 

 

 

 

10,122

 

 

 

 

 

 

 

 

(1,599

)

 

 

 

 

8,528

 

 

 

 

 

 

 

 

 

 

 

 

Vessel operating and supervision costs

 

 

 

 

 

 

 

(4,655

)

 

 

 

 

 

 

 

 

1,599

 

 

 

 

(3,056

)

 

Depreciation of fixed assets

 

 

 

 

 

 

 

(115

)

 

 

 

 

(11

)

 

 

 

 

 

 

 

 

(126

)

 

General and administrative expenses

 

 

 

(121

)

 

 

 

 

(3,414

)

 

 

 

 

(2,706

)

 

 

 

 

 

 

 

 

(6,241

)

 

 

 

 

 

 

 

 

 

 

 

 

Profit/(loss) from operations

 

 

 

(115

)

 

 

 

 

1,938

 

 

 

 

(2,717

)

 

 

 

 

 

 

 

 

(894

)

 

 

 

 

 

 

 

 

 

 

 

 

Financial costs

 

 

 

(1

)

 

 

 

 

(63

)

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

(72

)

 

Financial income

 

 

 

6

 

 

 

 

 

 

 

 

46

 

 

 

 

 

 

 

 

52

 

Gain on financial investments

 

 

 

 

 

 

 

 

 

 

 

4,689

 

 

 

 

 

 

 

 

4,689

 

Share of profit of associate

 

 

 

635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

635

 

 

 

 

 

 

 

 

 

 

 

 

Profit for the year

 

 

$

 

525

 

 

 

$

 

1,875

 

 

 

$

 

2,010

 

 

 

 

 

 

 

$

 

4,409

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

Unallocated items consist of expenses of GasLog Ltd. related to administrative functions and financial investment activities, as well as compensation paid to senior management.

During the year ended December 31, 2010, we had an average of 1.0 ships operating in our owned fleet. We had an average of 10.3 ships operating under our technical management during the year ended December 31, 2010, including our 1.0 owned ships, and we had an average of 3.8 ships under construction supervision, which includes 1.0 ships under construction supervision in our owned fleet. During the year ended December 31, 2009, we had no ships operating in our owned fleet (other than our 25% ownership interest in the Methane Nile Eagle). We had eight ships operating under our technical management during the year ended December 31, 2009, and we had an average of 6.0 ships under construction supervision, which includes 2.0 ships under construction supervision in our owned fleet.

60


Revenues

Revenues increased more than fourfold to $39.83 million during the year ended December 31, 2010, from $8.53 million during the year ended December 31, 2009. The increase is almost entirely due to the entry into service of the GasLog Savannah and the GasLog Singapore, which were delivered to us in May 2010 and July 2010, respectively, and commenced their charters with BG Group upon delivery to us from the shipyard.

Vessel Operating and Supervision Costs

Vessel operating and supervision costs increased more than twofold to $8.64 million during the year ended December 31, 2010, from $3.06 million during the year ended December 31, 2009. The increase is mainly due to the increased operating days of our owned fleet, resulting from the delivery to us from the shipyard of the GasLog Savannah and the GasLog Singapore.

Depreciation of Fixed Assets

Depreciation expense increased significantly to $6.56 million during the year ended December 31, 2010, from $0.13 million during the year ended December 31, 2009. The increase is directly attributable to the increased number of ships in our owned fleet.

General and Administrative Expenses

General and administrative expenses increased by 85.42%, or $5.33 million, to $11.57 million during the year ended December 31, 2010, from $6.24 million during the year ended December 31, 2009. The increase is primarily a result of the $3.58 million expense we recognized in respect of equity-settled compensation granted to members of senior management and other employees, and it also reflects costs of approximately $0.37 million incurred in connection with naming ceremonies for the GasLog Savannah and the GasLog Singapore. In addition, there was an increase in personnel costs due to the additional staff hired in connection with the expansion of our managed fleet by six ships (our two owned ships and four BG Group-owned ships), and an increase in costs for office rent and utilities due to the additional space required to accommodate the new personnel. Finally, there was an increase in travel expenses due to the increased size of our managed fleet.

Financial Costs

Financial costs increased significantly to $5.05 million during the year ended December 31, 2010, from $0.07 million during the year ended December 31, 2009. The increase is a result of interest expense on outstanding indebtedness used to finance the purchase of the GasLog Savannah and the GasLog Singapore. Interest expense on the indebtedness was capitalized until delivery of the ships, and as a result only a limited amount of interest cost was expensed during the ship construction period.

Financial Income

Financial income increased to $0.12 million during the year ended December 31, 2010, from $0.05 million during the year ended December 31, 2009. The increase is a result of increased interest earned on a higher average cash balance in 2010 compared to 2009. Our average cash balance was higher in 2010 as a result of the operation of our two LNG carriers that were delivered in 2010.

Gain on Financial Investments

We did not have any gain or loss on financial investments during the year ended December 31, 2010 because we did not hold any financial investments during that period. During the year ended December 31, 2009, we recorded a gain on financial investments of $4.69 million resulting from the sale of shares of BW Gas Limited.

61


Share of Profit of Associate

Our share of profits from our interest in Egypt LNG increased more than twofold to $1.46 million during the year ended December 31, 2010, from $0.64 million during the year ended December 31, 2009. The increase is the result of lower depreciation costs during the year ended December 31, 2010 for the Methane Nile Eagle.

Profit for the Year

Profit for the year ended December 31, 2010 increased by 117.46% to $9.59 million, from $4.41 million for the year ended December 31, 2009. As described below, this reflects a significant increase in profit attributable to the vessel ownership segment. The profit from the vessel ownership segment was $12.50 million for the year ended December 31, 2010 up from $0.53 million for the year ended December 31, 2009. In addition, there was a 81.91% increase in profit attributable to the vessel management segment, to $3.42 million for the year ended December 31, 2010, from $1.88 million for the year ended December 31, 2009. These increases in segment profits were offset in part by an unallocated loss of $5.74 million for the year ended December 31, 2010 which was not attributable to either segment. This unallocated loss is compared to an unallocated profit of $2.01 million for the year ended December 31, 2009.

Segment Performance

Vessel Ownership

Revenues

In our vessel ownership segment, revenues increased to $28.30 million during the year ended December 31, 2010, from $5,400 during the year ended December 31, 2009. The increase is due to the entry into service of the GasLog Savannah and the GasLog Singapore, which commenced their charters with BG Group upon delivery to us from the shipyard in May 2010 and July 2010, respectively.

Costs and Expenses

Vessel operating costs in the segment also increased as a result of the entry into service of the two ships, to $4.78 million during the year ended December 31, 2010, from $0 during the year ended December 31, 2009.

General and administrative expenses in the segment increased significantly to $1.19 million during the year ended December 31, 2010, from $0.12 million during the year ended December 31, 2009. The increase is primarily attributable to a $0.70 million increase in costs for professional services provided by the vessel management segment to the vessel ownership segment for newbuilding ships on order, which costs are eliminated in the consolidation of our accounts, as well as costs of $0.37 million incurred in 2010 relating to ship naming ceremonies.

Depreciation expense in the segment, which primarily relates to the GasLog Savannah and the GasLog Singapore, increased significantly to $6.40 million during the year ended December 31, 2010, from $0 during the year ended December 31, 2009, as a result of the delivery of the two ships.

Financial costs in the segment increased significantly to $4.99 million during the year ended December 31, 2010, from $724 during the year ended December 31, 2009, as a result of interest expense on the indebtedness used to finance the purchase of the GasLog Savannah and the GasLog Singapore, which interest expense had been capitalized until the delivery of the ships, and as a result only a limited amount of interest cost was expensed during the ship construction period.

Share of Profit of Associate

Also contributing to the results of operations of the vessel ownership segment was the increase in our share of profit from our interest in Egypt LNG to $1.46 million during the year ended December 31, 2010, from $0.64 million during the year ended December 31, 2009. The increase is the result of lower depreciation costs during the year ended December 31, 2010 for the Methane Nile Eagle.

62


Vessel Management

Revenues

Revenues of GasLog LNG Services increased by 40.71% to $14.24 million, of which $11.53 million was from external customers, during the year ended December 31, 2010, from $10.12 million, of which $8.52 million was from external customers, during the year ended December 31, 2009. The increase is mainly attributable to an increase in the number of ships under management due to the delivery of the GasLog Savannah and the GasLog Singapore as well as four newbuilding ships delivered to BG Group during 2010, which resulted in additional vessel management revenues of $2.96 million for the year ended December 31, 2010. The increased revenues in the segment also reflect a $0.70 million increase in fees for professional services provided to the vessel ownership segment for ships under construction and an increase of $0.36 million in fees from the newbuilding supervision project.

Costs and Expenses

Vessel operating and supervision costs of GasLog LNG Services increased by 10.94% to $5.17 million during the year ended December 31, 2010, from $4.66 million during the year ended December 31, 2009, primarily as a result of additional resources needed for the management of the additional ships.

General and administrative expenses in the segment increased by 61.58% to $5.51 million during the year ended December 31, 2010, from $3.41 million during the year ended December 31, 2009. The increase in general and administrative expenses is primarily attributable to the need to add resources and office space in connection with the management of the additional ships, as well as incentive payments awarded to key employees of GasLog LNG Services.

Unallocated

During the year ended December 31, 2010, $5.74 million of loss was not allocated to either segment, compared to $2.01 million of unallocated profit during the year ended December 31, 2009. The unallocated losses during the year ended December 31, 2010 are principally due to general and administrative expenses that are not attributable to either segment, including compensation paid to senior management and expense recognized in connection with equity-settled compensation. The increase in unallocated losses is mainly attributable to expenses of $3.58 million relating to equity-settled compensation granted in the year ended December 31, 2010, $2.67 million of which was not allocated to either segment. As of December 31, 2010, the amount of compensation expense remaining to be recognized in connection with outstanding equity-settled compensation amounted to $7.16 million, to be recognized during 2011 and 2012. Immediately prior to completion of this offering, all manager shares and subsidiary manager shares will be converted into common shares and as a result, any remaining compensation expense will be recognized immediately. Also, while there was no gain or loss on financial investments during the year ended December 31, 2010 because no financial investments were held during the period, during the year ended December 31, 2009, a gain on financial investments of $4.69 million was recorded as a result of the sale of shares of BW Gas Limited.

Customers

Historically, we have derived nearly all of our revenues from one customer, BG Group. For the year ended December 31, 2011, we received 99% of our revenues from BG Group and 1% of our revenues from Egypt LNG, an entity in which we have a 25% ownership interest. For the year ended December 31, 2010, we received 98% of our revenues from BG Group and 2% of our revenues from Egypt LNG. Shell will become a customer upon delivery to us from the shipyard of the two newbuildings that will be chartered to one of its subsidiaries, which is scheduled for dates in 2013 and 2014.

63


Seasonality

Since our owned ships are employed under multi-year, fixed-rate charter arrangements, seasonal trends do not impact the revenues earned by our vessel ownership segment during the year. Seasonality also does not have a significant impact on revenues earned by our vessel management segment, as we provide technical ship management and ship construction supervision services under fixed-rate agreements.

Additionally, our business is not subject to seasonal borrowing requirements.

Liquidity and Capital Resources

In the past, our principal sources of funds have been contributions from our existing shareholders and the Joint Venture Partner, operating cash flows and long-term bank borrowings. Our principal uses of funds have been capital expenditures to establish, grow and maintain our owned fleet, service our debt, comply with international shipping standards, environmental laws and regulations, fund working capital requirements and pay dividends. In monitoring our working capital needs, we project our charter hire income and ships’ maintenance and running expenses, as well as debt service obligations, and seek to maintain adequate cash reserves in order to address any budget overruns.

Our primary short-term liquidity needs are to fund our ship operating expenses, finance the purchase and construction of our newbuilding ships and service our existing debt. Our long-term liquidity needs primarily relate to debt repayment and to additional ship acquisitions in the LNG sector. We anticipate that our primary sources of funds will be cash from operations, the proceeds of this offering and the concurrent private placement and borrowings under our new loan agreements, along with any borrowings under new credit facilities that we may obtain from time to time in connection with future ship acquisitions. Other than this offering and the concurrent private placement we do not currently have any specific plans with respect to any future equity financing. We believe that these sources of funds will be sufficient to meet our liquidity needs, although there can be no assurance that we will be able to obtain future debt financing on terms acceptable to us.

Our funding and treasury activities are intended to maximize investment returns while maintaining appropriate liquidity. Cash and cash equivalents are held primarily in U.S. dollars with some balances held in euros. We have not made use of derivative instruments other than for interest rate risk management purposes.

As of December 31, 2011, we had $20.09 million of cash and cash equivalents, of which $3.37 million was held in a retention account in connection with the next installment and interest payment due under the credit facility entered into by our subsidiary GAS-two Ltd. and $1.10 million was held in ship management client accounts. The funds in the ship management client accounts were held on behalf of customers of our vessel management segment to cover operating expenses of customer-owned ships operating under our management.

As of December 31, 2011, we had an aggregate of $283.11 million of indebtedness outstanding under two credit agreements, of which $24.99 million is repayable within one year. In addition, we have signed four loan agreements for $1.13 billion in the aggregate. Borrowings under these four facilities will be used to finance a portion of the contract prices of our eight new LNG carriers on order. For more details, see “—Capital Expenditures” and “Description of Indebtedness”.

In the years ended December 31, 2009, 2010 and 2011, our existing shareholders made surplus capital contributions to us of $19.11 million, $85.42 million and $92.97 million, respectively, to provide us with working capital and funding for capital expenditures. In the year ended December 31, 2010, we declared dividends to our existing shareholders of $17.25 million, $16.77 million of which was paid in cash, with the remainder contributed to the capital of the Company by our existing majority shareholder. In the year ended December 31, 2011, we declared dividends to our existing shareholders of $8.5 million, $0.77 million of which was paid in cash, with the remainder contributed to the capital of the Company by our existing majority shareholder. Other than these dividends, we have not historically paid dividends or distributions to our shareholders.

Following this offering, we intend to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. As our fleet expands, we will evaluate future increases to the quarterly dividend

64


consistent with our cash flow and liquidity position. Our policy is to pay dividends in amounts that will allow us to retain sufficient liquidity to fund our obligations as well as execute our business plan going forward. Our board of directors will determine the timing and amount of all dividend payments, based on various factors, including our financial performance, cash requirements and contractual and legal restrictions. Accordingly, we cannot guarantee that we will be able to pay quarterly dividends. See “Dividend Policy” and “Risk Factors”.

Working Capital Position

As of December 31, 2011, our current assets totaled $27.71 million while current liabilities totaled $49.19 million, resulting in a negative working capital position of $21.48 million. Under our credit facilities, we are subject to a requirement that our net working capital, excluding the current portion of long-term debt, is positive at all times. While our working capital position was negative as of December 31, 2011, taking into account the exclusion of the current portion of our long-term debt, which was $24.28 million as of such date, we were in compliance with these covenants.

Following the completion of this offering and taking into account generally expected market conditions, we anticipate that cash flow generated from operations will be sufficient to fund our operations, including our working capital requirements, and to make the required principal and interest payments on our indebtedness during the next 12 months.

Cash Flows

Year ended December 31, 2011 compared to the year ended December 31, 2010

The following table summarizes our net cash flows from operating, investing and financing activities for the periods indicated:

 

 

 

 

 

 

 

Year ended December 31,

 

2010

 

2011

 

 

(in thousands of U.S. dollars)

Net cash from operating activities

 

 

$

 

25,633

 

 

 

$

 

27,001

 

Net cash used in investing activities

 

 

 

(212,806

)

 

 

 

 

(86,464

)

 

Net cash from financing activities

 

 

 

203,203

 

 

 

 

56,286

 

Net Cash from Operating Activities

Net cash from operating activities was $27.00 million in the year ended December 31, 2011, compared to $25.63 million in the year ended December 31, 2010. The increase of $1.37 million was attributable to the increase in revenue by $26.64 million mainly due to the operation of the GasLog Savannah and the GasLog Singapore for the full year during 2011. This increase was partially offset by a $4.31 million increase in vessel operating and supervision costs, a $4.01 million increase in general and administrative expenses that generated a cash outflow, a $4.92 million increase in cash paid for interest and a decrease of $12.03 million in cash flows generated by working capital accounts, from $6.12 million inflow for the year ended December 31, 2010 to $5.92 million outflow for the year ended December 31, 2011. The $5.92 million outflow for the year ended December 31, 2011 derives mainly from (a) a $5.78 million decrease in the balance of funds held in ship management client accounts, (b) a $1.86 million increase in trade and other receivables due to a $1.47 million increase in accrued income and a $0.39 million increase in all other receivables and (c) an offsetting $2.08 million increase in other payables and accruals representing operating items. The $6.12 million inflow for the year ended December 31, 2010 is primarily due to advance collection of January 2011 charter hire of $4.74 million for our owned ships during December 2010.

Net Cash Used in Investing Activities

Net cash used in investing activities was $86.46 million in the year ended December 31, 2011, which principally consists of $86.95 million in payments for the construction costs of newbuilding ships, $1.09 million in payments for other tangible assets, partially offset by $1.09 million of dividends we received from Egypt LNG and $0.5 million we received from Egypt LNG as a return of capital contributions.

65


Net cash used in investing activities was $212.81 million in the year ended December 31, 2010, which principally consists of $228.49 million in payments for the construction costs of newbuilding ships, partially offset by $9.17 million we received from the Joint Venture Partner in return for equity in GAS-three Ltd. and GAS-four Ltd., $1.07 million of dividends we received from Egypt LNG and a release of $5.69 million in restricted cash.

Net Cash from Financing Activities

Net cash from financing activities was $56.29 million in the year ended December 31, 2011, which consists of capital contributions of $92.97 million we received from our existing shareholders and the Joint Venture Partner, offset by bank loan repayments of $29.88 million, payment of loan issuance costs of $4.76 million, payment of $0.77 million in dividends to existing shareholders and payment of $1.28 million related to IPO fees.

Net cash from financing activities was $203.20 million in the year ended December 31, 2010, which principally consists of a bank loan drawdown of $143.82 million and capital contributions of $85.42 million we received from our existing majority shareholder and the Joint Venture Partner, partially offset by $16.77 million in dividends we paid to existing shareholders, bank loan repayments of $8.54 million and $0.77 million in loan issuance costs we paid in connection with the bank loan drawdown.

Year ended December 31, 2010 compared to the year ended December 31, 2009

The following table summarizes our net cash flows from operating, investing and financing activities for the periods indicated:

 

 

 

 

 

 

 

Year ended December 31,

 

2009

 

2010

 

 

(in thousands of
U.S. dollars)

Net cash from operating activities

 

 

$

 

134

 

 

 

$

 

25,633

 

Net cash used in investing activities

 

 

 

(32,167

)

 

 

 

 

(212,806

)

 

Net cash from financing activities

 

 

 

33,796

 

 

 

 

203,203

 

Net Cash from Operating Activities

Net cash from operating activities was $25.63 million in the year ended December 31, 2010, compared to $0.13 million of Net cash from operating activities in the year ended December 31, 2009. The increase of $25.50 million in cash flows from operating activities was primarily attributable to (i) an increase as a result of a $28.11 million increase in revenue collected from BG Group due to its charter obligations for the GasLog Savannah and the GasLog Singapore, offset by a $5.59 million increase in operating expenses, including crewing, maintenance and insurance costs, for the two owned ships delivered in 2010, and a $1.75 million increase in general and administrative expenses (excluding expenses recognized in respect of equity-settled compensation, which is a non-cash item) and (ii) an increase of $5.14 million arising from movements in working capital primarily due to advance collection of the January 2011 charter hire for the two owned ships during December 2010. The increase in cash flows from operating activities was partially offset by $3.68 million of interest paid subsequently to the delivery of the two owned ships in 2010.

Net Cash Used In Investing Activities

Net cash used in investing activities was $212.81 million in the year ended December 31, 2010, which principally consists of $228.49 million in payments for the construction costs of newbuilding ships, partially offset by $9.17 million we received from the Joint Venture Partner in return for equity in GAS-three Ltd. and GAS-four Ltd., $1.07 million of dividends we received from Egypt LNG and a release of $5.69 million in restricted cash.

Net cash used in investing activities was $32.17 million in the year ended December 31, 2009, which principally consists of $44.60 million in payments for the construction costs of newbuilding ships, partially offset by $8.94 million in proceeds we received from the sale of shares of BW Gas Limited that

66


we held through a subsidiary, $0.78 million of dividends we received from Egypt LNG and a release of $2.91 million in restricted cash.

Net Cash from Financing Activities

Net cash from financing activities was $203.20 million in the year ended December 31, 2010, which principally consists of a bank loan drawdown of $143.82 million and capital contributions of $85.42 million we received from our existing majority shareholder and the Joint Venture Partner, partially offset by $16.77 million in dividends we paid to existing shareholders, bank loan repayments of $8.54 million and $0.77 million in loan issuance costs we paid in connection with the bank loan drawdown.

Net cash from financing activities was $33.80 million in the year ended December 31, 2009, which principally consists of a bank loan drawdown of $96.90 million and capital contributions of $19.11 million we received from our existing majority shareholder, partially offset by bank loan repayments of $80.00 million and $2.15 million in loan issuance costs we paid in connection with the bank loan drawdown.

Credit Facilities

Through our subsidiaries, we have entered into two credit facilities with amounts outstanding as of December 31, 2011. One of the credit facilities is secured by the GasLog Savannah and the other is secured by the GasLog Singapore. Both of the facilities are denominated in U.S. dollars. The following summarizes certain terms of the two facilities as of December 31, 2011:

 

 

 

 

 

 

 

 

 

 

 

Lender(s)

 

Subsidiary Party
(Collateral Ship)

 

Outstanding
Principal
Amount

 

Interest Rate

 

Maturity

 

Remaining Payment
Installments as of
December 31, 2011

Danish Ship Finance A/S

 

GAS-one Ltd. (GasLog Savannah)

 

$157.16 million

 

LIBOR + applicable margin(1)

 

2020

 

34 consecutive quarterly installments, the first 6 in the amount of $2.81 million each and the remaining 28 in the amount of $2.06 million each, plus a balloon payment in the amount of $82.52 million due in May 2020

 

DnB Bank ASA, National Bank of Greece S.A. and UBS AG

 

GAS-two Ltd. (GasLog Singapore)

 

$125.96 million

 

LIBOR + applicable margin(1)

 

2014

 

9 consecutive quarterly installments, with a balloon payment of $95.07 million due in January 2014


 

 

(1)

 

 

 

As of December 31, 2011, the applicable weighted average interest rate for the two loans, after giving effect to hedging, was 3.91%.

67


In addition, through our subsidiaries, we have entered into four new loan agreements in connection with the financing of a portion of the contract prices of our eight contracted newbuildings. Borrowings under these facilities will be drawn upon delivery of the ships, which is scheduled for various dates between 2013 and 2015, and will be secured by mortgages on the relevant ships. Each of the facilities will be denominated in U.S. dollars. The following summarizes certain terms of the facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lender(s)

 

Subsidiary
Parties
(Collateral
Ship)

 

Committed
Amount

 

Expected
Drawdown
Date(s)

 

Interest
Rate

 

Maturity

 

Payment Installment
Schedule

DNB Bank ASA, London Branch, and the Export- Import Bank of Korea

 

GAS-three Ltd. and GAS-four Ltd. (Hull Numbers 1946 and 1947)

 

Up to $272.5 million

 

Q1 2013

 

LIBOR + applicable margin(1)

 

2025

 

48 consecutive quarterly installments of $2.01 million under each tranche, with two balloon payments of up to $40 million each due under each tranche 12 years from delivery of the collateral ships; the lenders will have a put option giving them the right to request full repayment in 2018

 

Nordea Bank Finland Plc, London Branch, ABN AMRO Bank N.V. and Citibank International Plc, Greece Branch

 

GAS-five Ltd. and GAS-six Ltd. (Hull Numbers 2016 and 2017)

 

Up to $277 million

 

Q2 2013 and Q3 2013

 

LIBOR + applicable margin(1)

 

2019

 

24 consecutive quarterly installments of $2.04 million under each tranche, with two balloon payments of $89.62 million each due under each tranche no later than the earlier of six years from delivery of the collateral ships or July 2019

 

Credit Suisse AG

 

GAS-seven Ltd. (Hull Number 2041)

 

Up to $144 million

 

Q4 2013

 

LIBOR + applicable margin(1)

 

2020

 

28 consecutive quarterly installments of $2 million, with a balloon payment of $88 million due with the last installment

 

DnB Bank ASA, Commonwealth Bank of Australia, Danish Ship Finance A/S, ING Bank N.V. and Skandinaviska Enskilda Banken AB (publ)

 

GAS-eight Ltd., GAS-nine Ltd. and GAS-ten Ltd. (Hull Numbers 2042, 2043 and 2044)

 

Up to $435 million

 

Q1 2014, Q4 2014 and Q1 2015

 

LIBOR + applicable margin(1)

 

2021 (first tranche) and 2022 (second and third tranches)

 

28 consecutive quarterly installments of $1.99 million, $2.03 million and $2.03 million, respectively, under each tranche, with balloon payments of $87.28 million, $89.16 million and $89.16 million, respectively, due with the last installment under each tranche


 

 

(1)

 

 

 

Based on LIBOR as of December 31, 2011, the weighted average interest rate under the four loan agreements, assuming they were drawn in full, would have been 2.85%. In addition, we expect to incur aggregate commitment and arrangement fees of approximately $33.47 million in connection with the facilities.

68


Our credit facilities are secured as follows:

 

 

 

 

first priority mortgages over the ships owned by the respective borrowers;

 

 

 

 

for certain of our facilities, guarantees from us and our subsidiary GasLog Carriers Ltd.;

 

 

 

 

for certain of our facilities, a pledge of the share capital of the respective borrower; and

 

 

 

 

for certain of our facilities, a first priority assignment of all earnings and insurances related to the ship owned by the respective borrower.

In addition, all of the credit facilities are secured by guarantees from Ceres Shipping and certain of the credit facilities are secured by guarantees from the Joint Venture Partner. These guarantees from Ceres Shipping and the Joint Venture Partner, and corresponding cross-default provisions, will be terminated upon completion of this offering.

Our credit facilities impose certain operating and financial restrictions on us. These restrictions generally limit our subsidiaries’ ability to, among other things:

 

 

 

 

incur additional indebtedness, create liens or provide guarantees;

 

 

 

 

provide any form of credit or financial assistance to, or enter into any non-arms’ length transactions with, us or any of our affiliates;

 

 

 

 

sell or otherwise dispose of assets, including our ships;

 

 

 

 

engage in merger transactions;

 

 

 

 

enter into, terminate or amend any charter;

 

 

 

 

amend our shipbuilding contracts;

 

 

 

 

change the manager of our ships;

 

 

 

 

undergo a change in ownership; or

 

 

 

 

acquire assets, make investments or enter into any joint-venture arrangements outside of the ordinary course of business.

After completion of this offering, we will also be subject to specified financial covenants that apply to us and our subsidiaries on a consolidated basis. These financial covenants include the following:

 

 

 

 

our net working capital (excluding the current portion of long-term debt) must be positive;

 

 

 

 

our total indebtedness divided by our total capitalization must not exceed 65%;

 

 

 

 

the ratio of EBITDA over our debt service obligations (including interest and debt repayments) on a trailing 12 months’ basis must be no less than 110%;

 

 

 

 

the aggregate amount of all unencumbered cash and cash equivalents must exceed the higher of 3% of our total indebtedness or $20 million;

 

 

 

 

we are permitted to pay dividends, provided that we hold unencumbered cash equal to at least 4% of our total indebtedness, subject to no event of default having occurred or occurring as a consequence of the payment of such dividends; and

 

 

 

 

our market value adjusted net worth must at all times exceed $350 million.

Our credit facilities also impose certain restrictions relating to us and our other subsidiaries, including restrictions that limit our ability to make any substantial change in the nature of our business or to engage in transactions that would constitute a change of control, as defined in the relevant credit facility, without repaying all of our indebtedness in full, or to allow our controlling shareholders to reduce their shareholding in us below specified thresholds.

Our credit facilities contain customary events of default, including nonpayment of principal or interest, breach of covenants or material inaccuracy or representations, default under other material indebtedness and bankruptcy. In addition, each facility contains covenants requiring that the fair market value of the ship securing the facility remains above 120% (or in the case of one facility, 142.8% on the date of this offering and 120% thereafter) of all amounts outstanding under the applicable facility. In the event that the value of a ship falls below the threshold, we could be required to provide the lender

69


with additional security or prepay a portion of the outstanding loan balance, which could negatively impact our liquidity.

See “Description of Indebtedness” for more information about our credit facilities, including our new loan agreements.

Contractual Obligations

Our contractual obligations as of December 31, 2011 were:

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments Due by Period

 

Total

 

Less than
1 year

 

1 - 3 years

 

3 - 5 years

 

More than
5 years

 

 

(in thousands of U.S. dollars)

Long-term debt obligations(1)

 

 

$

 

283,114

 

 

 

$

 

24,987

 

 

 

$

 

130,227

 

 

 

$

 

16,503

 

 

 

$

 

111,397

 

Interest on long-term debt obligations(2)

 

 

 

53,809

 

 

 

 

10,883

 

 

 

 

16,742

 

 

 

 

10,978

 

 

 

 

15,206

 

Loan arrangement fees and commitments

 

 

 

28,715

 

 

 

 

17,584

 

 

 

 

10,940

 

 

 

 

191

 

 

 

 

 

Special bonus to management(3)

 

 

 

3,515

 

 

 

 

475

 

 

 

 

3,040

 

 

 

 

 

 

 

 

 

Shipbuilding contracts

 

 

 

1,440,975

 

 

 

 

114,450

 

 

 

 

1,167,125

 

 

 

 

159,400

 

 

 

 

 

Operating lease obligations

 

 

 

1,398

 

 

 

 

342

 

 

 

 

685

 

 

 

 

371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

 

1,811,526

 

 

 

$

 

168,721

 

 

 

$

 

1,328,759

 

 

 

$

 

187,443

 

 

 

$

 

126,603

 

 

 

 

 

 

 

 

 

 

 

 


 

 

(1)

 

 

 

The table does not include obligations under the loan agreement we entered into through our subsidiaries on October 3, 2011 with Nordea Bank Finland Plc, London Branch, ABN AMRO Bank N.V. and Citibank International plc, Greece Branch, for $277 million, the facility agreement we entered into through our subsidiaries on December 23, 2011 with DnB Bank ASA, Commonwealth Bank of Australia, Danish Ship Finance A/S, ING Bank N.V. and Skandinaviska Enskilda Banken AB (publ), for $435 million, the facility agreement we entered into through our subsidiary on January 18, 2012 with Credit Suisse AG, for $144 million or the facility agreement we entered into for $272.5 million through our subsidiaries on March 14, 2012 with DNB Bank ASA and the Export-Import Bank of Korea. We have not yet borrowed any amounts under these loan agreements. The first installment payment for any borrowings we make under these loan agreements will be due three months after the delivery of the newbuilding ships that will serve as collateral under the facilities.

 

(2)

 

 

 

Our interest commitment on long-term debt is calculated based on an assumed average applicable interest rate ranging from 3.26% to 5.44% which takes into account LIBOR and our various applicable margin rates and fixed-rate interest rate swaps associated with each debt.

 

(3)

 

 

 

As compensation for successful negotiation of commercial terms and conditions for the purchase of two of our newbuilding ships, our board of directors approved the award of a special bonus to be paid to key members of management. A portion of the bonus was paid in 2011. The balance will be paid in future periods. As of December 31, 2011, our future obligations in respect of the special bonus amounted to $3.52 million, with $0.48 million to be paid within one year and $3.04 million to be paid in two to three years. However, a portion of these future obligations was accelerated and paid in January 2012 in connection with the resignation of our former chief executive officer. See “Management—Separation Agreement with Former Chief Executive Officer”.

Capital Expenditures

We make capital expenditures from time to time in connection with the expansion and operation of our owned fleet. In 2010 we took delivery of two LNG carriers, the GasLog Savannah and the GasLog Singapore. During the years ended December 31, 2011, 2010 and 2009, we funded $86.95 million, $228.49 million and $44.60 million, respectively, of construction costs, including installment payments on newbuildings, with funds borrowed under credit facilities and capital contributions from our existing shareholders.

Our current commitments for capital expenditures are related to our eight contracted LNG carriers on order, which have a gross aggregate contract price of approximately $1.55 billion. We also have

70


options to acquire two additional newbuilding LNG carriers, which options expire in 2012. We have not yet decided whether we will exercise the options. We are scheduled to take delivery of the eight newbuilding ships on various dates in 2013, 2014 and 2015. The total remaining balance of the contract prices is $1.42 billion. Amounts are payable under each shipbuilding contract in installments upon the attainment of certain specified milestones in each ship’s construction, with the largest portion of the purchase price for each ship coming due upon its delivery.

We intend to fund these commitments with the proceeds of this offering and with borrowings under the four new loan agreements we have entered into for $1.13 billion in the aggregate. In the event we decide to exercise our options to order two additional ships from Samsung, we expect to finance the costs with cash from operations and a combination of debt and equity financing.

To the extent that we are unable to draw down the amounts committed under our credit facilities, we will need to find alternative financing. If we are unable to find alternative financing, we will not be capable of funding all of our commitments for capital expenditures relating to our eight contracted newbuilding ships, which could adversely impact the dividends we intend to pay following this offering, and materially adversely affect our results of operations and financial condition.

Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to market risks relating to changes in interest rates because we, through our subsidiaries, have floating rate debt outstanding. Significant increases in interest rates could adversely affect our operating margins, results of operations and our ability to service our debt. From time to time, we have used interest rate swaps to reduce our exposure to market risk from changes in interest rates. The principal objective of these contracts is to minimize the risks and costs associated with our floating rate debt and is not for speculative or trading purposes. We expect to continue to use interest rate swaps in the future as we deem appropriate to manage our exposure to interest rate risk.

The aggregate principal amount of our outstanding floating rate debt as of December 31, 2011 was $125.96 million. As an indication of the extent of our sensitivity to interest rate changes, an increase in LIBOR by 10 basis points would have decreased our profit during the years ended December 31, 2011 and 2010 by approximately 1.58%, or $0.22 million, and 2.33%, or $0.22 million, respectively, based upon our debt level during such years.

We expect our sensitivity to interest rate changes to increase in the future as a result of borrowings under our four new loan agreements. Borrowings under these floating rate debt facilities will be used to finance a portion of the contract prices of our eight newbuilding ships on order.

Interest Rate Swaps

As of December 31, 2010, we had one interest rate swap in place with a notional amount of $78.2 million. The principal terms of the interest rate swaps outstanding at December 31, 2011 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

GAS-one Ltd.

 

GAS-one Ltd.

 

GAS-five Ltd.

 

GAS-five Ltd.

 

GAS-six Ltd.

Counterparty

 

Danish Ship
Finance

 

Danish Ship
Finance

 

Nordea Bank
Finland

 

Nordea Bank
Finland

 

Nordea Bank
Finland

Initial Notional Amount

 

$80,804,648

 

 

 

 

$84,187,193

 

 

 

 

 

$60,000,000

 

 

 

 

 

$75,000,000

 

 

 

 

 

$75,000,000

 

Notional Amount, December 31, 2011

 

$72,968,326

 

 

 

 

$84,187,193

 

 

 

 

 

$60,000,000

 

 

 

 

 

$75,000,000

 

 

 

 

 

$75,000,000

 

Trade date

 

 

 

Sept 2008

 

 

 

 

Oct 2011

 

 

 

 

Nov 2011

 

 

 

 

Nov 2011

 

 

 

 

Nov 2011

 

Effective Date

 

 

 

Sept 2008

 

 

 

 

Nov 2011

 

 

 

 

May 2013

 

 

 

 

May 2013

 

 

 

 

July 2013

 

Termination Date

 

 

 

August 2013

 

 

 

 

May 2020

 

 

 

 

May 2018

 

 

 

 

May 2018

 

 

 

 

July 2018

 

Fixed Interest Rate

 

 

 

3.84

%

 

 

 

 

2.10

%

 

 

 

 

2.04

%

 

 

 

 

1.96

%

 

 

 

 

2.04

%

 

Under these swap transactions, the bank counterparty effects quarterly floating-rate payments to the Company for the relevant amount based on the three-month U.S. dollar LIBOR, and the Company effects quarterly payments to the bank on the relevant amount at the respective fixed rates.

71


Foreign Currency Exchange Risk

We generate all of our revenue in U.S. dollars, and the majority of our expenses, including debt repayment obligations under our credit facilities and a portion of our administrative expenses, are denominated in U.S. dollars. However, a portion of the ship operating expenses of our vessel ownership segment, primarily crew wages, and a large portion of our administrative expenses, are denominated in euros. The portion of our total expenses denominated in euros increased in 2011 as we took delivery of our two owned ships, and we expect our euro-denominated expenses to increase further upon delivery of our new building ships on order, primarily due to crew wages payable in euros. As of December 31, 2011 and 2010, approximately $4.62 million and $2.01 million, respectively, of our outstanding liabilities was denominated in euros.

Depreciation in the value of the U.S. dollar relative to the euro will increase the U.S. dollar cost of us paying expenses denominated in euros. Accordingly, there is a risk that currency fluctuations will have a negative effect on our cash flows. As an indication of the extent of our sensitivity to changes in exchange rate, a 10 percent increase in the average euro/dollar exchange rate would have decreased our profit and cash flows during the years ended December 31, 2011 and 2010 by approximately $2.02 million and $1.16 million, respectively, based upon our expenses during such years. We do not currently hedge movements in currency exchange rates, but our management monitors exchange rate fluctuations on a continuous basis. We may seek to hedge this currency fluctuation risk in the future.

Inflation and Cost Increases

We do not expect inflation to have a significant impact on us in the current economic environment and foreseeable future, other than potentially in relation to crew costs. LNG transportation is a specialized area and the number of LNG carriers has increased rapidly in recent years. As a result, there has been an increased demand for qualified crews, which has and will continue to put inflationary pressure on crew costs. The impact of cost increases would be mitigated to some extent by certain provisions in our time charters, including review provisions and cost pass-through provisions.

Off-Balance Sheet Arrangements

We do not have any transactions, obligations or relationships that should be considered off-balance sheet arrangements.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with IFRS as issued by the IASB. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions. Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application. For a description of all our principal accounting policies, see Note 2 to our consolidated annual financial statements included elsewhere in this prospectus.

Ship Cost, Lives and Residual Value

When determining ship construction cost, we recognize both the installment payments paid to the shipyard along with any directly attributable costs of bringing the ships to their working condition incurred during the construction periods. Directly attributable costs incurred during the ship construction period consist of capitalized borrowing costs, commissions, on-site supervision costs, costs for sea trials, certain spare parts and equipment, lubricants and other ship delivery expenses. Any vendor discounts are deducted from the cost of our ships. Subsequent expenditures for conversions and major improvements are also capitalized when the recognition criteria are met.

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The ship construction costs included in the ship component are depreciated on a straight-line basis over the expected useful life of each ship, based on the cost of the ship less its estimated residual value. We estimate the useful lives of our ships to be 35 years from the date of delivery from the shipyard, which we believe is within industry standards and represents the most reasonable useful life for each of our ships. Furthermore, we estimate the residual values of our ships to be 10% of the initial ship cost, which represents our estimate of the current market value of the ships as if they were at the end of their useful lives at the time we make such estimate. The estimated residual value of our ships may not represent the fair market value at any one time, in part because there has historically been very little scrapping of LNG carriers and because market prices of scrap values tend to fluctuate. We might revise our estimate of the residual values of our ships in the future in response to changing market conditions.

An increase in the estimated useful lives of our ships or in their residual value would have the effect of decreasing the annual depreciation charge and extending it into later periods. A decrease in the useful life of our ships or residual value would have the effect of increasing the annual depreciation charge.

When we are faced with regulations that place significant limitations over the ability of one of our ships to trade on a worldwide basis, we adjust the ship’s useful life to end at the date such regulations become effective.

Impairment of Ships

We periodically evaluate the carrying amounts of our ships to determine whether there is any indication of an impairment loss. If any such indication exists, the recoverable amount of the ships is estimated in order to determine the extent of the impairment loss, if any.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. The projection of cash flows related to ships is complex and requires us to make various estimates including future freight rates, earnings from the ships and discount rates. All of these items have been historically volatile. In assessing the fair value less cost to sell of the ship, we obtain ship valuations from leading, independent and internationally recognized ship brokers on an annual basis or when there is an indication that an asset or assets may be impaired.

If an indication of impairment is identified, the need for recognizing an impairment loss is assessed by comparing the carrying amount of the ships to the higher of the fair value less cost to sell and the value in use. At December 31, 2010 and December 31, 2011, the carrying amounts of our ships were lower than the independent broker valuation (after adjusting for estimated selling costs) for all of the owned ships; therefore there were no indicators that the carrying amounts of the ships may not be recoverable.

Deferred Drydocking Cost

We must periodically drydock each of our ships for inspection, repairs and any modifications. At the time of delivery of a ship from the shipyard, we estimate the drydocking component of the cost of the ship, representing estimated costs to be incurred during the first drydocking at the drydock yard for a special survey and parts and supplies used in making required major repairs that meet the recognition criteria, based on our historical experience with similar types of ships.

We use judgment when estimating the period between drydockings performed, which can result in adjustments to the estimated amortization of the drydocking expense. If a ship is disposed of before its next drydocking, the remaining balance of the deferred drydock is written-off and forms part of the gain or loss recognized upon disposal of ships in the period when contracted. We expect that our ships will be required to be drydocked approximately 60 months after their delivery from the shipyard and thereafter every 30 or 60 months our ships will be required to undergo special or intermediate surveys and be drydocked for major repairs and maintenance that cannot be performed while the ships are operating. We amortize our estimated drydocking expenses for the first special survey over five years, but this estimate might be revised in the future.

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Measurement of Equity-Settled Employee Benefits Expense

Equity-settled payments to employees are measured at the fair value of the equity instruments on the grant date. For the manager shares and subsidiary manager shares granted on January 1, 2010, we used the discounted future cash flow valuation technique (income approach), which included inputs that are not based on observable market data, because the market price for our shares is not available. The valuation was prepared internally on a contemporaneous basis pursuant to applicable IFRS guidance, which provides that in the absence of market prices for shares, fair value is estimated using a valuation technique to estimate what the price of the equity instruments would have been on the measurement date in an arms’ length transaction between knowledgeable, willing parties. IFRS does not require the use of a third-party valuation specialist to prepare the valuation. At the time of preparation of our financial statements as of and for the periods ended December 31, 2010 and December 31, 2011, we were a private company with sufficient internal knowledge and experience to prepare such a valuation. Accordingly, we did not think it was necessary to appoint an independent valuation specialist.

According to this valuation technique, the value of GasLog and its subsidiaries was determined to be equal to the present value of the net operating cash flows generated during each year of the explicit forecast period and the terminal value. The terminal value was determined to be the cash flows that GasLog and its subsidiaries will be able to generate beyond the explicit forecast period. The cash flows taken into consideration were the Operating Free Cash Flows discounted by using the Weighted Average Cost of Capital of 7.31%. The terminal value was calculated using a perpetuity growth method with a perpetual annual growth rate set at a level equal to 1% and a capitalization multiple of 16. The terminal value calculated by using the perpetuity growth method was then cross-checked with the terminal value calculated using the terminal multiple method. The fair value was divided by the total number of issued and outstanding shares of GasLog Ltd. to determine the fair value per share. We believe the valuation technique is consistent with generally accepted valuation methodologies for pricing financial instruments, and incorporates all factors and assumptions that knowledgeable, willing market participants would consider in setting the price. We estimate that none of the manager shares and subsidiary manager shares will be forfeited, but this estimate may be revised if necessary in the future.

The grant-date fair value of the manager shares and subsidiary manager shares determined according to the valuation technique described above differs from the price of shares offered to the public in this offering due to a number of factors. In particular, the valuation was based on our business as of January 1, 2010, when the equity-settled compensation was granted. Accordingly, the valuation took into account projected earnings from our two owned ships that were on order to be constructed, as well as projected earnings from our 25% interest in the Methane Nile Eagle and from our technical management of 14 ships, in each case as of January 1, 2010. Our business has changed significantly since January 1, 2010, due to, among other things:

 

 

 

 

the shipbuilding contracts we have entered into for eight newbuildings scheduled to be delivered between 2013 and 2015;

 

 

 

 

the time charter arrangements we have secured for six of our newbuildings, with initial terms of up to seven years;

 

 

 

 

the four loan agreements we have entered into for $1.13 billion in the aggregate of debt financing in connection with the financing of our eight newbuildings;

 

 

 

 

the declaration by the charterers of extension options under the charters that were in effect as of January 1, 2010 for our two owned ships;

 

 

 

 

the steps we have taken in contemplation of an initial public offering, including the filing of the registration statement with the SEC;

 

 

 

 

capital contributions from our existing shareholders;

 

 

 

 

revised assumptions regarding future exchange rates;

 

 

 

 

financing costs that were lower than expected due to a favorable interest rate environment; and

 

 

 

 

additional third-party revenues earned by our vessel management segment.

We believe each of the above factors, as well as changes in market conditions, has contributed to a difference between the fair value of the equity-settled compensation as determined on the date of grant and the price of shares offered to the public in this offering.

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Impairment of Goodwill

We review goodwill for impairment at least annually. For the purpose of impairment testing, goodwill has been allocated to the cash-generating unit representing our management company, GasLog LNG Services, which was acquired by us in 2005.

In order to determine whether goodwill has been impaired, we estimate the value-in- use of the cash-generating unit to which goodwill has been allocated. The value-in-use calculation requires us to estimate the future cash flows expected to arise from the cash-generating unit and also a suitable discount rate in order to calculate present value representing recoverable amount of the cash-generating unit. In determining the value-in-use of the cash-generating unit as of December 31, 2010 and 2011, we used cash flow projections based on financial budgets approved by us covering a four-year period and a terminal multiple of 8. Growth assumptions were based on conservative estimates and considered the number of ships expected to be under our management for which contracts were in place at the end of each year. The key assumptions used in the value-in-use calculations are as follows:

 

 

 

 

average inflation of 2% per annum;

 

 

 

 

a discount rate of 15% per annum;

 

 

 

 

annual growth rate of nil; and

 

 

 

 

1 euro = 1.30 U.S. dollars.

We assessed the recoverable amount of goodwill at the end of each annual reportable period and concluded that goodwill associated with our cash-generating unit was not impaired. We believe that any reasonably possible further change in the key assumptions on which the recoverable amount is based would not cause the carrying amount of the cash-generating unit to exceed its recoverable amount.

Consolidation of 51% Owned Subsidiaries

Our consolidated financial statements incorporate GasLog Ltd. and the subsidiaries controlled by GasLog Ltd. We consider control to be the power to govern the financial and operating policies of an invested enterprise so as to obtain benefits from its activities.

We determined that we controlled all of the subsidiaries that were 51% owned during the periods presented in our consolidated financial statements, GAS three Ltd., GAS-four Ltd., GAS five Ltd. and GAS-six Ltd., because we were able to appoint three out of five members of the Board of Directors of each subsidiary, who were empowered to make governance decisions. As of June 23, 2011, each of these four subsidiaries is now indirectly wholly owned by us. See “Certain Relationships and Related Party Transactions”.

Recent Accounting Pronouncements

Standards and Interpretations adopted in the current period

There are no new and revised Standards and Interpretations that are effective for the first time for the financial year beginning on or after January 1, 2011 that had a material impact on us.

Standards and amendments in issue not yet adopted

The following standards and amendments relevant to us have been issued but are not yet effective:

In October 2010, the IASB reissued IFRS 9—Financial Instruments. IFRS 9 specifies how an entity should classify and measure financial assets and financial liabilities. The new standard requires all financial assets to be subsequently measured at amortized cost or fair value depending on the business model of the legal entity in relation to the management of the financial assets and the contractual cash flows of the financial asset. The standard also requires a financial liability to be classified as either at fair value through profit and loss or at amortized cost. In December 2011, the IASB deferred the effective date of IFRS 9 to annual periods beginning on or after January 1, 2015. We have not early adopted this standard and are currently evaluating the impact of IFRS 9 on our financial statements and the timing of its adoption.

In May 2011, the IASB issued amendments to standards relating to consolidated financial statements, including IFRS 10—Consolidated Financial Statements, IFRS 11—Joint Arrangements, IFRS 12—Disclosures of Interest in Other Entities, IAS 27—Consolidated and Separate Financial Statements and IAS 28—Investments in Associates and Joint Ventures. These amendments, among other things, update the definition of control under IFRS and consolidate the disclosure requirements

75


for interests in other entities. The guidance is effective for fiscal years beginning on or after January 1, 2013, but early adoption is permitted. We are currently evaluating the impact of these amendments and anticipate that their adoption will not have a material impact on our financial statements in the period of initial application.

In May 2011, the IASB issued IFRS 13—Fair Value Measurement, which establishes a single source of guidance for fair value measurements under IFRS standards. IFRS 13 defines fair value, provides guidance on its determination and introduces consistent requirements for disclosures on fair value measurements. The standard is effective for fiscal years beginning on or after January 1, 2013, but early adoption is permitted. We are currently evaluating the impact of these standards and anticipate that their adoption will not have a material impact on our financial statements in the period of initial application.

In June 2011, the IASB issued amendments to IAS 1—Presentation of Financial Statements, which provide guidance on the presentation of items contained in other comprehensive income and their classification within other comprehensive income. The revised standard is effective for annual periods beginning on or after July 1, 2012. We are currently evaluating the impact of these amendments and anticipate that their adoption will not have a material impact on our financial statements in the period of initial application.

In June 2011, the IASB issued amendments to IAS 19—Employee Benefits that change the accounting for defined benefit plans and termination benefits. The most significant amendment requires an entity to recognize changes in defined benefit obligations and plan assets when they occur, thus eliminating the “corridor approach” permitted under the previous version of IAS 19. Entities will be required to segregate changes in the defined benefit obligation and in the fair value of plan assets into those associated with (1) service costs, (2) net interest on the net defined benefit liability (asset) and (3) remeasurements. The revised standard is effective for fiscal years beginning on or after January 1, 2013, but early adoption is permitted. We are currently evaluating the impact of these amendments and anticipate that their adoption will not have a material impact on our financial statements in the period of initial application.

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THE LNG SHIPPING INDUSTRY

The information and data contained in this prospectus relating to the global shipping industry has been provided by Clarkson Research Services Limited, or “Clarkson Research”, and is taken from Clarkson Research’s database and other sources. Clarkson Research has advised that: (i) some information in Clarkson Research’s database is derived from estimates or subjective judgments; (ii) the information in the databases of other maritime data collection agencies may differ from the information in Clarkson Research’s database; (iii) while Clarkson Research has taken reasonable care in the compilation of the statistical and graphical information and believes it to be accurate and correct, data compilation is subject to limited audit and validation procedures.

Unless otherwise indicated, the following information relating to the global shipping industry reflects information and data available as of January 1, 2012.

Summary

Natural gas is one of the fastest growing primary energy sources globally. It is supported by significant reserves, competitive pricing and environmental cleanliness compared with other hydrocarbons. Within the natural gas industry, the volume of LNG traded has increased at a rate 30% higher than pipeline trade and has grown over three times the rate of overall natural gas consumption during the past twenty years. A continuing disparity between the price of gas in various geographies compared to the relatively low cost of LNG shipping has enhanced the economics of LNG trade. Significant expansion of LNG liquefaction and regasification facilities has taken place in recent years and a large number of additional facilities has been planned. Liquefaction capacity is expected to increase by 38% by 2016. If these plans proceed on schedule, the demand for LNG shipping capacity is expected to increase significantly. There have also been significant increases in the number of LNG exporting and importing nations, the number of individual trading routes and the average trading distance.

The current order book of LNG carriers is relatively small in historic terms at 17% of the global LNG carrier fleet capacity, while only 7% of the global LNG carrier fleet capacity is due for delivery before 2014. Fleet growth will be limited for the next two years and will depend on the level of newbuilding orders thereafter. During 2011, newbuildings sized between 150,000 cbm and 160,000 cbm with diesel electric propulsion have been most popular given the trading flexibility and fuel cost savings. Although there have been a number of new entrants over the past 10 years, the LNG shipping sector is characterized by relatively high barriers to entry compared to other shipping sectors. These barriers include stringent customer standards requiring a strong safety track record and strong technical management capabilities, limited supply of highly qualified personnel and significant capital requirements for new ships.

Overview of the Natural Gas Market

Over the last two decades natural gas has been one of the world’s fastest growing energy sources. Natural gas is the third largest global energy source, after oil and coal respectively, and accounted for 24% of the world’s energy consumption in 2010. Natural gas is used primarily to generate electricity and as a heating source. Over the past twenty years, consumption has grown at an average rate of 2.4% per year, approximately twice the growth rate of oil consumption over the same period.

A number of forecasting agencies expect consumption of natural gas to continue to rise, with the Energy Information Administration, or “EIA”, projecting a 50% growth in demand between 2010 and 2035. This equates to a 1.6% increase on a per annum basis, with demand for oil and coal both expected to grow by lower volumes over the same period. Natural gas consumption is expected to grow for a number of reasons, including:

 

 

 

 

global economic growth that is expected to lead to additional energy demand, particularly from non-OECD economies such as China and India;

 

 

 

 

replacement demand from the shutdown of nuclear electricity generators in Japan;

 

 

 

 

natural gas being viewed as more environmentally friendly than other fossil fuels;

77


 

 

 

 

the wide applicability of natural gas as a fuel source;

 

 

 

 

known natural gas reserves that currently total 187 trillion cbm, a reserves to production ratio of 59 years; and

 

 

 

 

further market deregulation that may have a beneficial impact by increasing trading opportunities.

Given concerns about the impact of fossil fuels on global warming, there is a widespread desire to limit carbon emissions wherever possible in many countries. Natural gas is well-placed to take advantage of this as it is considered to be the most environmentally-friendly fossil fuel. The burning of natural gas emits approximately 30% less carbon dioxide than oil and approximately 45% less carbon dioxide than coal. Furthermore, natural gas emits relatively few particulates and relatively low levels of nitrogen oxide. Increasing opposition to nuclear energy around the world, particularly in countries such as Japan and Germany, is expected to further increase the demand for natural gas.

Between 2005 and 2010, natural gas consumption in Non-OECD Asia increased by over 50%, and most forecasting agencies expect this growth to continue, albeit under an assumption of continued economic growth. The EIA forecasts that growth in Non-OECD Asia will increase at 3.5% per year, which is twice the global average.

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By the end of 2010, natural gas reserves totaled 187 trillion cbm. This represents a reserves to production ratio of 59 years, some 27% higher than oil. Natural gas reserves, like crude oil reserves, are unevenly distributed and an imbalance exists between the location of reserves and both current and expected demand. The largest reserves are located in the Middle East (41%) and the territories of the former Soviet Union (31%), followed by the lesser developed countries in Asia and sub-Saharan Africa, at significant distances from the major locations of demand in North America and Europe, which generally have the lowest reserves.

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In the past, the production and consumption of natural gas was relatively geographically aligned, limiting the need for long-distance trading. However, today 31% of natural gas is traded between countries, up from 16% twenty years ago. As natural gas has become increasingly commoditized, an increasingly large amount is being traded globally via both pipelines and as LNG.

In recent years, there has been an increase in the production of “unconventional” natural gas, including tight gas, shale gas and coalbed methane. In particular there has been a significant increase in U.S. shale gas reserves, with improvements in technology helping U.S. domestic natural gas reserves to increase by over 30% over the past decade. Further to this, it is estimated that technically recoverable shale gas reserves could be found in a range of geographic regions, with the largest reserves outside of the United States projected to be in China, Argentina and Mexico. The advent of considerable shale gas production in the United States has led to a decline in U.S. LNG imports, which made up only 4% of global LNG imports in 2010. Recently, the United States has become a re-exporter of LNG.

Liquefied Natural Gas

Overview

There are two methods of transporting natural gas if not consumed in the producing region: pipelines, which accounted for 70% of the natural gas traded cross-border in 2010, and LNG shipping, in which natural gas is liquefied and transported in specialized seaborne carriers. LNG shipping has been increasing in importance and accounted for 31% of all natural gas trade in 2010, up from 28% in 2009 and 24% in 1990. Between 1990 and 2010, gas traded as LNG trade grew by an average 7.3% per annum compared to a growth rate of 5.5% per annum for gas transported by pipeline over the same period.

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The challenge of moving “stranded” gas as LNG to points of demand is that it has been traditionally highly capital intensive, technologically sophisticated and expensive. The first shipment of LNG was made in 1959 from Lake Charles in the United States to Canvey Island in the UK. LNG trade was subsequently developed in the 1960s with shipments from Arzew in Algeria to the UK, Spain, Italy and France, and in the 1970s with the expansion of the trade to Japan. Relatively few LNG carriers were ordered during the 1980s, while the 1990s saw limited activity in terms of infrastructure and trade development, with relatively few projects coming online during this period. By contrast, over the course of the last decade, a number of new projects in a range of countries, including some with no prior history of LNG production such as Trinidad and Tobago and Equatorial Guinea, have started producing LNG for export.

The LNG supply chain involves a number of different stages:

 

 

 

 

Liquefaction: Following the initial production of gas, natural gas is cooled to a temperature of -162°C (-260°F), which transforms it into a liquid. This reduces its volume to approximately 1/600th of its volume in a gaseous state and allows economical storage and transportation.

 

 

 

 

Shipping: LNG is transported overseas from the liquefaction facility to the receiving terminal in specially designed LNG carriers.

 

 

 

 

Terminalling and Regasification: LNG is stored in specially designed facilities until regasified. LNG is returned to its gaseous state at a regasification facility, which can be located either onshore or aboard specialized LNG carriers.

 

 

 

 

Distribution: Upon return to its gaseous state, the natural gas is transported to consumers through pipelines.

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Although the costs associated with the LNG supply chain have declined over the past two decades, it can be less expensive to transport natural gas via pipeline than LNG carriers. However, due to the growing distances between remote sources of supply and the location of demand, capital costs associated with constructing pipelines, which become prohibitively expensive over long distances, security issues relating to the existence of unattended energy pipelines and the potential for geopolitical factors disrupting the use of pipelines that run between countries, LNG carriers are expected to remain the pre-dominant means of transportation for a significant portion of global natural gas demand.

Furthermore, LNG carriers offer greater flexibility in the transportation of natural gas than do pipelines and enable a swifter response to market developments, including new sources of demand and supply or significant changes in the price of LNG in certain markets. The fixed infrastructure nature of pipelines does not allow for this flexibility.

LNG Supply

With the increased interest in natural gas, there has been an associated increase in investment in LNG infrastructure that will support an increase in the volume of trade over the next few years. As the demand for natural gas continues to expand, the pace of the buildout of infrastructure to export and import LNG as well as the geographic location of such infrastructure will have a direct impact on the demand for LNG shipping. By the end of 2010, there were 19 countries exporting LNG (plus two—Belgium and the United States—re-exporting it) and 23 countries importing LNG, as compared to 14 exporters and 15 importers as of the end of 2005.

As of January 2012, the LNG industry is based upon the output of 99 liquefaction trains at sites in 18 countries. The number of exporting nations is expected to continue to expand, reaching 21 by 2015. The total production capability of these existing units is estimated at just over 275 million tons per annum of LNG, while the average utilization rate of this global capacity was 81% in 2010. Idle liquefaction capacity can be a result of either underutilization, short interruptions of liquefaction trains due to maintenance activities or gas supply shortfalls. Qatar remains the largest exporter of LNG with exports of 56 million tons per annum in 2010, growth of 52% year over year. During 2009 and 2010, there were five projects completed in Qatar adding an extra 39 million tons per annum of capacity to existing infrastructure, which helps explain the magnitude of the increase in the volume of Qatari LNG exports. A number of existing U.S. regasification terminals in the U.S. Gulf are looking to achieve the necessary federal approvals which would allow them to export LNG. As of January 2012, the U.S. Department of Energy had only given a full export license to Cheniere Energy, Inc.’s proposal to add liquefaction facilites with a total capacity of 18 million tons per annum at its regasification terminal at Sabine Pass. It is projected that the U.S. Department of Energy will not give any additional permissions until it has completed a review of the impact of large-scale LNG exports on domestic gas prices.

There are eleven new LNG liquefaction projects currently under construction. These projects are scheduled to be completed by 2015 and will add a further 68 million tons per annum of capacity, an additional 25%. There are a further 13 projects that have received Final Investment Decision, or “FID”, or are at the Front End Engineering and Design, or “FEED”, stage, with start up dates ranging from 2013 to 2018. If these projects are completed on schedule, it is estimated that they will result in a further 98 million tons per annum of additional export capacity following full ramp up. Combining the projects under construction and at FID or FEED implies an increase of 38% in liquefaction capacity by 2016 and a requirement for 100 additional LNG carriers. Projects with start up dates beyond 2016 are also expected to generate significant further requirements. This ship requirement is calculated based on various assumptions, including the completion of liquefaction projects on time and utilization at current global averages.

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A further 30 export projects are currently at the proposal stage and have scheduled start up dates before the end of the decade. The total estimated capacity of these projects is over 200 million tons per annum, representing an increase of 73% over current capacity. Most of these developments are in countries with existing LNG facilities; however, entirely new projects have been proposed in Canada, Venezuela, Iran, Papua New Guinea and Mozambique. Elsewhere, Russia has huge potential to become a leading exporter of LNG but gas field locations in the Arctic region present new challenges, with longer lead times and higher costs likely. These proposals may be delayed or not move forward to the FEED or FID stages.

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Due to the complex and capital intensive nature of LNG projects, new installations have experienced regular delays regarding infrastructure coming on line, as demonstrated recently by the Sakhalin II project in Russia and the Snohvit project in Norway. However, there have also been instances where infrastructure has come online much more smoothly. For instance, exports of LNG from Oman began in May 2000, despite the fact that gas was only discovered in the country as late as 1991. The recent Equatorial Guinean and Egyptian projects also came online swiftly.

LNG Demand

The import side of the LNG business is based around 89 import facilities at locations in 25 countries, which is projected to increase to around 40 importing nations by 2015. Japan is the largest market for LNG, with imports increasing by 55% to 154 million cbm in the period between 1996 and 2010 and represented 32% of the total imports in 2010. In 2009, Canada, Chile and Kuwait were import newcomers, and in 2010 the UAE also commenced import operations while Chile added a second terminal. Other countries planning to receive their first cargoes, either from new plants, FSRUs or land-based sources include: Ireland, Germany, Poland, Sweden, Croatia, Cyprus and Israel in Europe and the Mediterranean; Pakistan, Singapore, Indonesia, Philippines and New Zealand in the East and Uruguay and Jamaica in the western hemisphere.

Nearly half of existing importers added to their capacity during 2009 and 2010, including the UK, France, Italy, India, China, Taiwan, Japan, Brazil and the United States. Some import terminals, such as Zeebrugge in Belgium and Huelva in Spain, have installed loading facilities that will give them the ability to move LNG out of storage so that it can be re-exported when the market prices make it profitable.

More recently, the tragic earthquake in Japan in March of last year has not only created reconstruction-related demand but, with the ongoing nuclear disaster, has acted as a catalyst for demand for other fuels. Since much of the country’s nuclear capacity is now offline and a number of coal fired power stations are also damaged, LNG is likely to benefit from replacement demand from electricity generators. It is conceivable that this will be a long-term phenomenon, as LNG’s share of the Japanese energy mix is likely to increase if Japan chooses to phase out electricity generation from nuclear plants in the aftermath of the disaster at the Fukushima nuclear power plant. In the second quarter of 2011, Japanese imports grew by 14.6% year-on-year, compared to an 8.3% growth rate for the corresponding period of 2010. During the whole of 2010, Japanese imports grew to 154 million cbm of LNG, up by 8.8%. The majority of those new imports were provided by Qatar, with additional significant volumes from Malaysia and Indonesia.

This increased demand from Japan is expected to continue together with strong continued growth in global demand. While recent years have seen the rate of growth of demand in Europe outstrip that of Asia, this pattern is expected to change in the short to medium term, as Asian economic growth rates are projected to exceed those in Europe. Heightened import demand in 2010 was due to a combination of an improvement in the state of the global economy, favorable natural gas prices relative to oil and a raft of import and project infrastructure coming online during the year. Another notable trend has been the expansion of LNG imports to South America, with the start-up of import terminals in Chile, Brazil and Argentina in recent years, some using floating regasification technology.

A significant recent driver of LNG demand is high regional price differentials caused by varying supply of natural gas, differing price formation mechanisms and regulations, regional gas infrastructures and demand dynamics. General economic activity is also a driver of LNG demand. In 2011 gas prices in Japan were more than three times that of prices in the United States.

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LNG: Trade and Shipping

The LNG trade can be considered as two main trading blocs, one covering the Asia/Pacific and the other the Atlantic (including the Mediterranean). Historically, there was little movement between the two blocs, although over the last three years there has been an increase in activity from the new Atlantic exporters (Norway, Equatorial Guinea and Trinidad) to the Pacific. The Middle East sits between these two blocs, but the balance of its trade to the East and the West has changed little in recent years. Demand for LNG shipping has increased in recent years as natural gas demand has continued to exceed production in mature gas producing regions, and as the cost of liquefaction and regasification has declined due to improved technology, efficiency gains and more competition. Moreover, high natural gas and LNG price differentials across varying regions has contributed to the proliferation of LNG trade. World seaborne LNG trade has grown strongly over the past two decades, with an average growth rate of 7.0% between 1990 and 2010.

In 2008 and 2009, global economic conditions reduced demand for LNG and the rate of growth in trade stalled, partly due to limited volumes being made available for trading. However, there was a

85


21.7% increase in trade volume in 2010 as LNG demand increased and new and existing facilities were able to commence production.

There has also been a general increase in the complexity and distance of trading patterns. As shown in the graph below, the number of LNG trade routes between countries has increased from 41 in 2001 to 157 in 2010, and in the period between 1997 and 2009 there was a considerable increase in the average distance of LNG trade routes, increasing from 2,338 nautical miles to 3,325 nautical miles, a 42% increase over the period. These increases in distance and complexity of trading routes have also increased the relative requirement for LNG shipping capacity.

Significant pricing differentials in varying regions of the world as well as the relatively low cost of LNG transport have created arbitrage opportunities for LNG producers and traders, leading to additional demand for LNG sea transport. During 2011 gas prices in the United States have been below $4 per mmbtu, while European prices have been at more than double these levels and Japanese prices have been more than three times these levels. With shipping costs significantly below these differentials, this has encouraged trading to take advantage of arbitrage opportunities.

LNG Shipping

Types of LNG Carriers

LNG carriers transport LNG internationally between liquefaction facilities and import terminals. These double-hulled ships include a sophisticated “containment” system that holds and insulates the LNG so it maintains its liquid form. There are two main types of containment system in use on LNG carriers. The Moss system, developed by Kvaerner in the 1970s, uses free standing insulated spherical tanks supported at the equator by a continuous cylindrical skirt, i.e., the tank and the hull are two separate entities. The Membrane technique uses insulation built directly into the hull of the ship, with a membrane covering inside the tanks to maintain integrity, i.e., the ship’s double hull directly takes the pressure of the cargo. The membrane technique is the most used and has been supplied to 246 ships (66% of the current fleet). The system is also the preferred choice for approximately 90% of the ships on the current global order book.

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Ship Technology

The traditional propulsion unit for an LNG carrier has been the steam turbine, which was the only practical way of utilizing the boil-off gas characteristic of LNG transport. Boil-off gas represents approximately 0.15% of cargo per day. The high value of LNG has nevertheless given rise to arguments over the merits of burning valuable cargo versus the cost of investment in improved insulation and/or alternative engines. Steam turbines have been unpopular with operators in recent years with only a handful of Japanese owners having ordered steam-propelled ships.

In 2002, Gaz de France became the first owner to commit to gas fired diesel electric engines, ordering from Chantiers de l’Atlantique (now Aker Shipyards) a 74,000 cbm ship delivered in 2006. The engine features the following advantages: (i) higher efficiency, when compared to steam turbine installations, resulting in significant cost savings in today’s fuel price environment; (ii) more compact which allows for a bigger cargo space; and (iii) allows greater freedom in the hiring of engineering staff. Tri-fuel diesel electric engines are capable of using LNG boil-off, marine diesel oil and heavy fuel oil and are able to reach approximately 45% efficiency, compared to under 30% for steam turbine engines. Although total fuel costs of a ship will depend on the relative cost of bunkers and LNG and trading patterns, during 2011 these engines have benefited from over 30% fuel cost savings a day when running on heavy fuel oil. Furthermore, when utilizing heavy fuel oil at a standard service speed, a modern diesel electric-powered ship would use between 52 and 65 tons less fuel per day than an equivalent ship using a steam turbine. The global LNG carrier fleet now includes 48 ships (13% of the fleet by number) with this technology, most within the 150,000 to 170,000 cbm size range. There are now more ships on the order book with diesel engines than steam turbine engines, accounting for 90% of the order book, due for delivery over the next 2 to 3 years. Wartsila, the original supplier of diesel electric engines, has now been joined by MAN with a similar offering.

Slow-speed diesel engines have been promoted for larger ships and were specified for the approximately 210,000 to 215,000 cbm “Q-Flex” and the approximately 260,000 cbm “Q-Max” orders for the Qatar project. The slow-speed engines feature twin slow-speed diesel engines with twin screws and a re- liquefaction plant used to return boil-off gas to the cargo. As of January 1, 2012, 31 Q-Flexes and 14 Q-Maxes have been delivered with this technology, comprising 12% of the current fleet in terms of numbers. No LNG carriers above 20,000 cbm with slow-speed diesel engines have been ordered since 2007.

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Global LNG Carrier Fleet and Order Book

The effective supply of LNG carrier capacity is primarily determined by three main factors: (i) the size of the existing fleet; (ii) the rate of deliveries of newbuildings; and (iii) scrapping. The LNG carrier fleet has grown from 90 to 373 ships since 1996, to reach an aggregate capacity of 53 million cbm as of January 1, 2012. The current average age of the global LNG carrier fleet is 10.6 years. During the period from 2005 to 2010, the LNG carrier fleet grew strongly as newbuilding deliveries gathered pace. However, more recently the fleet has grown more slowly as the delivery schedule has been more limited as shown by the graph below. Fleet growth was limited in 2011 and this is expected to continue in 2012, as few ships are due to be delivered. Fleet growth is expected to increase in 2013 and beyond as newbuildings scheduled for delivery in 2013 onwards are delivered and as new orders are placed.

World LNG Carrier Fleet By Size

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fleet

             

Order Book

 

 

Size (cbm)

 

Number

 

’000 cbm

 

% share of
cbm

 

Average
Age (Years)

 

Number

 

’000 cbm

 

% of fleet

 

210,000 & above

 

 

 

45

 

 

 

 

10,335

 

 

 

 

19.5

%

 

 

 

 

3.5

 

 

 

 

     

 

 

 

 

     

 

 

 

 

     

 

180-209,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150-179,999

 

 

 

60

 

 

 

 

9,610

 

 

 

 

18.1

%

 

 

 

 

2.7

 

 

 

 

55

 

 

 

 

8,828

 

 

 

 

91.9

%

 

120-149,999

 

 

 

229

 

 

 

 

31,711

 

 

 

 

59.7

%

 

 

 

 

12.8

 

 

 

 

2

 

 

 

 

293

 

 

 

 

0.9

%

 

90,000-119,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60,000-89,999

 

 

 

14

 

 

 

 

1,070

 

 

 

 

2.0

%

 

 

 

 

25.6

 

 

 

 

 

 

 

Less than 60,000

 

 

 

25

 

 

 

 

399

 

 

 

 

0.8

%

 

 

 

 

13.8

 

 

 

 

1

 

 

 

 

16

 

 

 

 

4.0

%

 

 

Total

 

 

 

373

 

 

 

 

53,125

 

 

 

 

100

%

 

 

 

 

10.6

 

 

 

 

58

 

 

 

 

9,137

 

 

 

 

17.2

%

 

 

Source: Clarkson Research, Jan. 2012

Historically, ships built between the early 1960s and 2000, could be grouped into one of three size ranges. The first category was the small carriers of between 25,000 and 50,000 cbm which were used for short range trades, especially in the Mediterranean. Ships between 60,000 and 90,000 cbm were termed mid- sized carriers and utilized on medium haul voyages, and ships between 120,000 and 138,000 cbm were in the larger sized class. In 2002, the first 140,000 cbm ship was delivered as the LNG supply chain looked to take advantage of economies of scale. However it was not until the fourth quarter of 2006 when a 150,000 cbm ship entered the fleet. From 2007 to 2010, there were a significant number of so

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called “Q-Flex” (210,000 to 217,000 cbm) and “Q-Max” (260,000 to 270,000 cbm) ships delivered into the fleet. These were designed to specifically service new projects in Qatar, and are likely to remain attached to these projects. No additional ships of this size have been ordered since. Ships ordered in 2011 were sized between 147,000 cbm and 170,000 cbm. This reflects the current interest in designs that are able to trade flexibly and can move average cargo stems.

In early 2011, the newbuilding order book dropped to its lowest level as a percentage of the fleet in over fifteen years and, consequently, growth of the global LNG carrier fleet is expected to be limited in coming years. Improved charter market conditions and a shortage of LNG carriers have resulted in just over 50 newbuilding contracts being placed in 2011, although the majority of these orders will not be due for delivery until 2014 and later. The current order book of 58 ships, however, represents just 17% of the world LNG carrier fleet capacity compared to nearly 100% in 2006, which is significantly lower than most other sectors of the shipping markets. There have been examples of owners converting bulker and tanker orders into LNG vessels but this has been limited to date. Such conversions will also require lead times and negotiations with the shipyard.

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Only 1% of the global fleet capacity is due for delivery in 2012 and 7% due for delivery in 2013. Although there is spare LNG shipbuilding capacity for delivery in 2014 and onwards, ships ordered in the near future are unlikely to be delivered until this date due to the lead time on LNG carriers. It is therefore expected that the global fleet capacity will grow by approximately 1% in 2012. Fleet growth in 2014 and beyond is expected to increase, although the exact levels will depend on the level of newbuilding contracting activity in the coming years.

World LNG Carrier Order Book By Year of Delivery

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capacity
Range

 

2012  

 

2013  

 

2014  

 

2015  

 

Total

cbm

 

Number

 

’000 cbm

 

Number

 

’000 cbm

 

Number

 

’000 cbm

 

Number

 

’000 cbm

 

Number

 

’000 cbm