This operating and financial review should be read together with Section 10 “Selected Financial and Other Information” and the Combined Financial Statements, the Consolidated Financial Statements and the Combined Interim Financial Statements and related notes included in Appendix B1, Appendix B2 and Appendix C, respectively, of this Prospectus. The following discussion contains forward-looking statements. These forward-looking statements are not historical facts, but are rather based on the Group’s current expectations, estimates, assumptions and projections about the Group’s industry, business and future financial results. Actual results could differ materially from the results contemplated by these forward-looking statements because of a number of factors, including those discussed in Section 2 “Risk Factors” of this Prospectus and Section 4.3 “Cautionary Note Regarding Forward-Looking Statements” as well as other Sections of this Prospectus.
11.1 Overview
11.1.1 General overview
The Group is a leading global provider of maritime transportation of liquefied petroleum gas and related products, and the world’s largest VLGC owner and operator.4 At 30 June 2013 and 31 December 2012, the Group owned, partly owned and/or operated a fleet of 27 vessels and 28 vessels, respectively, which excludes one MGC (BW Hermes), committed for sale to BW Group upon expiry of current voyage commitments to Yara within 2013. Since 30 June 2013, ten vessels have joined the fleet and the Group has disposed one VLGC (BW Danuta), resulting in a total fleet size of 36 vessels (excluding six newbuildings) at the date of this Prospectus.
The LPG industry has been experiencing growth in recent years. Increased production of natural gas has generated significant fresh supplies of associated LPG. As a result, the volume of seaborne traded LPG has risen 15% between 2009 and 2012. Increasing gas production and processing in the AG and the United States, in particular, is expected to lift volumes of seaborne traded LPG in the coming years. The increasingly global trade is being driven by the gap between U.S. LPG prices, which have decreased due to the shale oil and gas boom there, and LPG prices in the AG, which are traditionally linked to crude oil prices. Seaborne LPG exports and the associated trade routes are the primary indicators of the health of the LPG shipping market. The new long haul trades from the U.S. to Asia now being established are likely to become among the most important routes in the seaborne LPG trade.
With an industry shifting to long haul and large volume trade - on the back of increased LPG supply out of the U.S. and growing demand in Asia - 50% of the current LPG carriers’ orderbook is represented by the “fully refrigerated” segment best-suited to these requirements, particularly VLGCs. The fleet of LPG ships sized above 12,000 cubic meters (cbm) – the fleet involved in regional and long haul trade – increased 27% in total capacity terms during the 2009-2012 period. This growth in shipping capacity has not been sufficient to keep pace with the growth in LPG supply seen between 2011 and 2012, resulting in a strengthening of rates. This scenario has attracted several new entrants into the LPG shipping industry, placing newbuild vessel orders to capitalise from the expected growth of the seaborne LPG industry.
Since 2011 until June 2013, the Group has strategically increased its LPG exposure in the VLGC segment through acquisitions of 14 VLGCs, one chartered-in vessel, resulting in increase of 15 VLGCs since 2011. The Group presently has six VLGC newbuildings that are scheduled for delivery between 2014 and 2016.
The Group recently completed an acquisition from Maersk (through Maersk Gas Carriers Pte Ltd and Maersk Tankers A/S) of five modern VLGCs, five VLGC charter-ins and two CoAs. Four out of the five acquired Maersk VLGCs were delivered in September/October 2013, while one VLGC (BW Pine formerly known as Maersk Tuas/Derby) is expected to be delivered in November 2013.
11.1.2 Reporting segments
The Group operates its business in two main segments, namely the VLGC (capacity above 60,000 cbm) and LGC (capacities ranging between 40,000 and 60,000 cbm) segments.
• VLGCs: At 30 June 2013, the Group operated 15 owned VLGCs, one finance lease accounted as owned and six chartered-in VLGCs. At 31 December 2012, the Group operated 14 owned VLGCs, one finance lease accounted as owned and seven chartered-in VLGCs. The Group has six new VLGCs on firm order, which are scheduled for delivery between October 2014 and the third quarter of 2016. The Group also participates with a 33% interest in an agreement that charters in two VLGCs with purchase options.
• LGCs: At 30 June 2013 and 31 December 2012, the Group owned and operated five LGCs and six LGCs respectively, excluding one MGC, BW Hermes, which has been committed for sale to BW Group upon expiry of current voyage commitments to Yara within 2013. Currently, the Group has no LGC newbuildings on order.
11.1.3 Presentation of financial information
The audited Combined Financial Statements for the years ended 31 December 2012 and 2011 and the audited Consolidated Financial Statements for the year ended 31 December 2010 have been prepared in accordance with IFRS and the unaudited Combined Interim Financial Statements for the six month period ended 30 June 2013 have been prepared in accordance with IAS 34. The Combined Financial Statements have been audited by PricewaterhouseCoopers LLP and PricewaterhouseCoopers LLP has issued a report on their review on the Combined Interim Financial Statements.
11.1.4 Recent acquisitions and disposals of vessels
Acquisitions
The following table sets forth information on the LPG vessels the Group has acquired between 1 January 2010 and the date of this Prospectus:
Name Size (cbm) Year built Ownership (%) Year acquired
BW Borg1 ... 84,333 2001 100% 2011 BW Captain1 ... 78,530 1991 100% 2011 BW Danuta1 ... 78,552 2000 100% 2011 BW Prince1 ... 82,383 2007 100% 2011 BW Princess1 ... 82,361 2008 100% 2011 BW Lord1 ... 84,614 2008 100% 2011 BW Austria1 ... 84,603 2009 100% 2011 BW Energy1 ... 82,548 2002 100% 2011 BW Vision1 ... 81,952 2001 100% 2011 BW Loyalty1 ... 84,600 2008 100% 2011 BW Liberty1 ... 84,597 2007 100% 2011 BW Trader1,2 ... 80,236 2006 100% 2011 BW Confidence1 ... 83,269 2006 100% 2012 BW Hermes1,3 ... 24,977 1983 100% 2012 BW Havlys1 ... 17,640 1983 100% 2012 BW Helios1 ... 57,160 1992 100% 2012 BW Nice1 ... 59,374 2003 100% 2012 BW Nantes1,4 ... 59,399 2003 100% 2012 BW Empress1 ... 78,908 2005 100% 2013 BW Birch ... 82,302 2007 100% 2013 BW Cedar ... 82,270 2007 100% 2013 BW Maple ... 82,290 2007 100% 2013 BW Oak ... 82,252 2008 100% 2013 BW Pine ... 80,156 2011 100% 2013
1 These vessels were acquired as secondhand vessels.
2 The Group sold the vessel to a joint venture 50% owned by the Group and 50% owned by Tailwind and subsequently chartered-in through a finance lease arrangement. BW Trader is presently accounted for as an owned vessel as the Group has given notice to cancel the charterparty in January 2014 and is in the process of acquiring the vessel. See Section 8.6.2 “Very Large Gas Carriers (VLGCs)” for further information regarding BW Trader.
3 This vessel has been committed for sale to BW Group upon expiry of current voyage commitments to Yara between December 2013 and January 2014.
4 BW Nantes was originally purchased by BW Gas Cyprus Limited and is sold to the Group under a Memorandum of Agreement dated 9 September 2013. The vessel will be delivered to the Group upon discharge of its present cargo which is expected to take place around 10 November 2013.
The Group’s total investment was USD 43.6 million during the six months ended 30 June 2013, USD 200.7 million during 2012, USD 743.3 million during 2011 and USD 23.0 million during 2010. The Group’s investment in 2010 was largely related to Berge Summit under a finance lease arrangement, as well as capitalized drydocking for vessels owned prior to 2010. Apart from the finance lease related to Berge Summit, there was no other vessel acquisition in 2010 since no attractive investment opportunities arose, or where the Group was not the highest bidder on such opportunities.
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2012 contributed revenue of USD 33.5 million and TCE income of USD 27.5 million during the financial year ended 31 December 2012. See Section 11.5.1 “Six months ended 30 June 2013 compared with six months ended 30 June 2012—VLGC segment and LGC segment” for information relating to which months the vessels were acquired.
Disposals
The following table sets forth information on the vessels the Group has sold between 1 January 2010 and the date of this Prospectus.
Name Size (cbm) Year built Ownership (%) Year sold
BW Odin1 ... 38,501 2005 50% 2011 BW Havlur1 ... 18,152 1997 50% 2011 BW Havsol1 ... 18,152 1997 50% 2011 BW Trader1 ... 80,236 2006 50% 2011 BW Captain ... 78,530 1991 100% 2011 BW Havlys ... 17,640 1983 100% 2013 BW Danuta ... 78,552 2000 100% 2013
1 These vessels were sold to a joint venture 50% owned by the Group. Three vessels (BW Odin, BW Havlur and BW Havsol) were subsequently finance leased out to the joint venture partner in return for the BW Trader to be finance leased to the Group (essentially an asset swap). See Section 8.6.2 “Very Large Gas Carriers (VLGCs)” for further information regarding BW Trader. Two vessels were sold in 2013 and no vessel was sold in 2012. Five vessels were sold in 2011 and the total gain recognised upon the sale of the vessels in 2011 was USD 4.2 million.
Time charter-in vessels
The following table sets forth information on the vessels the Group has started and ended the time chartered-in between 1 January 2010 and the date of this Prospectus.
Name Size (cbm) Year built Ownership (%) Year commenced Year ceased
Tower Bridge. ... 75,352 1991 100% 2005 2010 Chelsea Bridge ... 77,749 1987 100% 2005 2010 Yushan ... 78,929 2002 100% 2006 2010 Berge Summit1. ... 78,488 1990 100% 2010 - Berge Nantong ... 82,244 2006 100% 2006 - Berge Ningbo ... 82,252 2006 100% 2006 - BW Kyoto ... 83,298 2010 33.3% 2010 - BW Tokyo... 83,270 2009 33.3% 2009 - Dynamic Energy ... 82,548 2002 100% 2008 2011 Dynamic Vision ... 81,952 2001 100% 2008 2011 Gas Friend ... 78,914 2005 100% 2008 2012 Lotus Gas ... 79,200 2008 100% 2009 2012 Lucina Providence ... 78,000 2008 100% 2010 2013 Yuyo Berge ... 78,908 2005 100% 2005 2013 Reimei ... 80,196 2007 100% 2013 - Vermillion First ... 78,901 2010 100% 2013 - Yuricosmos ... 78,907 2010 100% 2013 - Yuyo Spirits ... 78,902 2009 100% 2013 - G Symphony ... 83,000 2011 100% 2013 - Gas Capricorn ... 78,935 2003 100% 2013 -
1 Berge Summit is presently accounted for as an owned vessel as it is a finance lease and therefore classified as an owned vessel for accounting purposes.
11.2 Factors Affecting the Group’s Results of Operations Overview
The management of the Group believes that the important measures for analysing trends in the results of operations of the Group include income on time charter equivalent basis (or “TCE income”), TCE income per calendar day, TCE income per voyage day and operating expenses per calendar day. Components of these measures include the following:
• TCE income. The Group defines TCE income as the income from its time charters, spot voyages and CoAs for owned, partly owned, bareboated and chartered-in vessels. TCE income is calculated as gross freight income net of broker commissions less voyage expenses.
• Voyage expenses. Voyage expenses are expenses related to a spot voyage or a CoA, including bunker fuel expenses, port fees, cargo loading and unloading expenses, canal tolls and agency fees.
• TCE income per calendar day. The Group defines TCE income per calendar day as TCE income per vessel per calendar day, including waiting days and technical off-hire days. TCE income per calendar day is a measure of how well the Company manages the fleet technically and commercially.
• TCE income per voyage day. The Group defines TCE income per voyage day as TCE income per vessel per voyage day. TCE income per voyage day is a measure of how well the Group manages the fleet commercially.
• Vessel operating expenses per calendar day. The Group defines vessel operating expenses as per vessel per calendar day. These expenses include insurance, repairs and maintenance, spares and consumable stores, lube oils and communication. Vessel operating expenses is a component of other operating expense.
• Technical off-hire. The Group defines technical off-hire as the time lost due to off-hire days associated with major repairs, drydockings or special or intermediate surveys. Technical off-hire per vessel is calculated as an average for owned, partly owned, bareboat and chartered-in vessels (not weighted by ownership share in each vessel).
• Calendar days. The Group defines calendar days as the total number of days in a period during which each vessel is owned, partly owned or chartered-in is in its possession, including technical off-hire days and waiting days. Calendar days are an indicator of the size of the Fleet over a period and affect both the amount of revenue and the amount of expense that the Company records during that period.
• Waiting days. The Group defines waiting days as the number of days its vessels are unemployed for market reasons, excluding technical off-hire days. Ballast voyages, positioning voyages prior to deliveries on time charters and time spent on cleaning of tanks when vessels are switching from one cargo type to another are not considered waiting time. Waiting days per vessel are calculated as total waiting days for owned, partly owned, bareboat and chartered-in vessels divided by the number of owned, partly owned, bareboat and chartered-in vessels (not weighted by ownership share in each vessel). For vessels that participated in the LGC pools before their termination, the figure represents the average waiting days in the pool.
• Voyage days. The Group defines voyage days as the total number of days (including waiting time) in a period during which each vessel is owned, partly owned, operated under a bareboat arrangement or chartered-in, net of technical off-hire days. The Company uses voyage days to measure the number of days in a period during which vessels actually generate or are capable of generating revenue.
• Average number of owned vessels. The Group defines average number of vessels in a period as the number of vessels included in the consolidated accounts according to the accounting principles for such period. Accordingly, this excludes vessels owned by associated companies, which are accounted for using the equity method for financial reporting purposes. Vessels owned by joint ventures are included using the Group’s ownership share. Vessels sold or purchased during the relevant period are weighted by the number of days owned.
• Average number of chartered-in vessels. The Group defines average number of chartered-in vessels as the number of vessels chartered-in, weighted by the participating share in the contract and the number of days the time charter contracts are effective during the period. Vessels chartered-in directly into the pools are not included in the calculation.
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The following table sets forth, for the periods indicated, certain financial and operating information in respect of the Group’s LPG fleet:
Six months ended 30 June
Year ended 31 December
2013 2012 2012 2011
VLGC
TCE income/calendar day (USD thousand)1 ... 22.5 22.3 24.0 19.7
TCE income/voyage day (USD thousand)2 ... 23.3 22.6 24.5 20.4
Vessel Operating expenses/calendar day (USD thousand)3 ... 9.7 10.2 9.8 10.5
Average number of owned, partly owned and bareboat vessels (calendar days) ... 16.5 15.0 15.1 9.1 Average number of owned, partly owned and bareboat vessels (voyage days) ... 15.8 14.8 14.7 8.6 Average number of chartered-in vessels ... 4.5 5.7 5.7 7.7 LGC
TCE income/calendar day (USD thousand)1 ... 21.8 16.4 20.2 11.9
TCE income/voyage day (USD thousand)2 ... 24.6 17.6 20.9 13.0
Vessel Operating expenses/calendar day (USD thousand)3 ... 9.1 9.6 8.9 10.8
Average number of owned, partly owned and bareboat vessels (calendar days) ... 6.4 4.4 5.7 2.1 Average number of owned, partly owned and bareboat vessels (voyage days) ... 5.7 4.1 5.5 1.9 Average number of chartered-in vessels ... - - - -
1 (TCE income)*1,000/(Average number of owned, partly owned and bareboat vessels (calendar days) + Average number of chartered-in vessels on TCE)/(Number of days in period).
2 (TCE income)*1,000/(Average number of owned, partly owned and bareboat vessels (voyage days) + Average number of chartered-in vessels on TCE) /(Number of days in period) Voyage days = Calendar days – Technical Offhire days.
3 (Vessel Operating expenses)*1,000/(Average number of owned, partly owned and bareboat vessels (calendar days)/ (Number of days in period). Vessel operating expenses is a part of Other operating expenses.
Operating revenue General
The Group’s operating revenue is earned from revenue received from LPG vessels that operate on spot voyages, CoAs and time charters.
The Group’s revenue is driven primarily by the number of vessels in its fleet, the number of days during which the vessels in the fleet operate and the freight rates that the Group’s vessels earn under charters, which, in turn, are affected by a number of factors discussed in Section 2 “Risk Factors” and, in particular, Section 2.1 “Risks Related to the Industry in which the Group Operates”, Section 2.2 “Risks Related to the Group” and Section 2.3 “”Risks Related to the Group’s Operations”.
LPG fleet operating revenue
The vessels in the Group’s fleet operate on spot voyages, CoAs and short to medium-term time charters, which the Group considers to include all time charters for a period of five years or less:
• a spot voyage is typically a single round trip that is priced on a current or spot market rate;
• under time charters vessels are chartered to customers for fixed periods of time at rates that are generally fixed; and
• under a CoA, the ship-owner provides capacity to transport a certain amount of cargo within a specified period from one place to a destination designated by the customer.
During the last few years, the Group has been increasing the volume of LPG business under CoAs. Under CoAs, customers benefit from access to a large fleet, rather than a single vessel. This increases customer flexibility to choose when cargoes are transported and reduces risk of not having a vessel available when needed, while the Group benefits from increased volumes and more efficient fleet utilisation. The management of the Group believes that ship-owners need to have a sizeable fleet to provide satisfactory service to customers under CoAs. This has limited the number of shipping companies that can compete effectively for CoAs and the management of the Group believes that this is a competitive advantage for the Group. The freight rate for CoAs is normally agreed on a per cargo ton basis. The freight rate can be fixed or floating, or a combination of both.
Group’s fleet. These pools were marketing and revenue sharing arrangements under which each participating vessel was given “pool points”. Earnings from the pool were distributed between the owners according to these pool points. The pool points were negotiated between the owners of the vessels participating in the relevant pool and revised from time to time based on each vessel’s size, speed, fuel consumption and other technical and operational parameters. Pool managers received a percentage of the pool’s revenue as fee for managing the pool. The Company acted as the manager for the VLGC and LGC pools and received a commission for all vessels that participated in this pool.
The VLGC pool currently comprises all vessels owned and/or operated by the Group. Vessel size in the pool ranges from approximately 60,000 to 86,000 cbm. There are currently no external pool members and all vessels within the Revenue Sharing System (RSS) are owned or operated by BW LPG, except for two vessels where two pool members each have an interest of 1/3 in two long term charter in vessels.
Freight rates
The Group’s operating revenue is based on the mix of spot, charter and CoA rates for the maritime transportation of LPG and related products, which are determined by market forces based upon various factors, such as the supply and demand for VLGC and LGC vessels and the number of available vessels. The operating revenue depends on freight rates, the distance that cargoes must be transported and the number of vessels expected to be available at the time such cargoes need to be transported.
Time charter rates reflect, among other things, the prevailing spot market rates and expectations of future time charter rates at the time of entry into the relevant time charter agreement.
The Group’s CoAs have been entered into both on fixed and floating rates, or a combination of the terms. Therefore, the prevailing spot market rates and expectations of future time charter rates at the time of entry into the relevant CoA are also reflected in the rates the Group charges under CoAs.
Interest rate fluctuations
At 30 June 2013 and 31 December 2012, the Group’s net interest-bearing floating rate debt was approximately USD 130 million and USD 128 million, respectively. As a result of the net floating rate borrowings, an increase in interest rates would cause an increase in the amount of interest payments affecting the results of operations of the Group, see Section 2.4 “Risks Related to Financing and Market Risk—Derivative contracts used to hedge the Group’s exposure to fluctuations in interest rates could result in reductions in its shareholder’s equity as well as charges against its profit”.