SFL 20-F DEF-14A Report Dec. 31, 2014 | Alphaminr
ALPHAMINR

SFL 20-F Report ended Dec. 31, 2014

Balance Sheet
Cash Flow
Income Statement
Debt
20-F 1 sfl201420-f.htm 20-F SFL 2014 20-F


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F
[   ]   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR
[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 2014

OR
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from

OR
[   ]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report

Commission file number
001-32199
Ship Finance International Limited
(Exact name of Registrant as specified in its charter)
Ship Finance International Limited
(Translation of Registrant's name into English)
Bermuda
(Jurisdiction of incorporation or organization)
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
(Address of principal executive offices)
Georgina Sousa
Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda
Tel: +1 (441)295-9500, Fax: +1(441)295-3494
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

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

Title of each class
Name of each exchange
Common Shares, $1.00 Par Value
New York Stock Exchange

Securities registered or to be registered pursuant to section 12(g) of the Act.

None
(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None
(Title of Class)

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

93,404,000 Common Shares, $1.00 Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
[ X ] Yes  [  ] No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
[   ] Yes  [ X ] No

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
[ X ] Yes  [   ] No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[ X ] Yes  [   ] No

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

Large accelerated filer  [ X ]
Accelerated filer  [  ]
Non-accelerated filer  [   ]

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

[ X ]  U.S. GAAP
[   ]  International Financial Reporting Standards as issued by the International Accounting Standards Board
[   ]  Other

If "Other" has been checked in response to the previous question, indicate by check mark which financial item the registrant has elected to follow:
[    ] Item 17  [   ] Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
[   ] Yes  [ X ] No



INDEX TO REPORT ON FORM 20-F

PAGE



i


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Matters discussed in this document may constitute forward-looking statements.  The Private Securities Litigation Reform Act of 1995 provides safe harbor protections for forward-looking statements in order to encourage companies to provide prospective information about their business.  Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements, which are other than statements of historical facts.

Ship Finance International Limited, or the Company, desires to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and is including this cautionary statement in connection with this safe harbor legislation.  This document and any other written or oral statements made by us or on our behalf may include forward-looking statements, which reflect our current views with respect to future events and financial performance.  The words "believe", "anticipate", "intends", "estimate", "forecast", "project", "plan", "potential", "will", "may", "should", "expect" and similar expressions identify forward-looking statements. The Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements in this annual report on Form 20-F and written or oral forward-looking statements attributable to the Company or its representatives after the date of this Form 20-F are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the Securities and Exchange Commission, or the SEC.

The forward-looking statements in this document are based upon various assumptions, many of which are based, in turn, upon further assumptions, including without limitation, management's examination of historical operating trends, data contained in our records and other data available from third parties.  Although we believe that these assumptions were reasonable when made, because these assumptions are inherently subject to significant uncertainties and contingencies which are difficult or impossible to predict and are beyond our control, we cannot assure you that we will achieve or accomplish these expectations, beliefs or projections.

In addition to these important factors and matters discussed elsewhere herein, important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements include:

•
the strength of world economies;
•
fluctuations in currencies and interest rates;
•
general market conditions including fluctuations in charterhire rates and vessel values;
•
changes in demand in the markets in which we operate;
•
changes in demand resulting from changes in the Organization of the Petroleum Exporting Countries', or OPEC's, petroleum production levels and worldwide oil consumption and storage;
•
developments regarding the technologies relating to oil exploration;
•
changes in market demand in countries which import commodities and finished goods and changes in the amount and location of the production of those commodities and finished goods;
•
increased inspection procedures and more restrictive import and export controls;
•
changes in our operating expenses, including bunker prices, drydocking and insurance costs;
•
performance of our charterers and other counterparties with whom we deal;
•
timely delivery of vessels under construction within the contracted price;
•
changes in governmental rules and regulations or actions taken by regulatory authorities;
•
potential liability from pending or future litigation;
•
general domestic and international political conditions;
•
potential disruption of shipping routes due to accidents or political events; and
•
other important factors described from time to time in the reports filed by the Company with the SEC.



ii


PART I

ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable

ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable

ITEM 3.
KEY INFORMATION

Throughout this report, the "Company", "Ship Finance", "we", "us" and "our" all refer to Ship Finance International Limited and its subsidiaries. We use the term deadweight ton, or dwt, in describing the size of the vessels. Dwt, expressed in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel can carry. We use the term twenty-foot equivalent units, or TEU, in describing container vessels to refer to the number of standard twenty foot containers that the vessel can carry, and we use the term car equivalent units, or CEU, in describing car carriers to refer to the number of standard cars that the vessel can carry. Unless otherwise indicated, all references to "USD," "US$" and "$" in this report are to, and amounts are presented in, U.S. dollars.

A. SELECTED FINANCIAL DATA

Our selected income statement and cash flow statement data with respect to the fiscal years ended December 31, 2014, 2013 and 2012 and our selected balance sheet data with respect to the fiscal years ended December 31, 2014 and 2013 have been derived from our consolidated financial statements included in Item 18 of this annual report, prepared in accordance with accounting principles generally accepted in the United States, which we refer to as US GAAP.

The selected income statement and cash flow statement data for the fiscal years ended December 31, 2011 and 2010 and the selected balance sheet data for the fiscal years ended December 31, 2012, 2011 and 2010 have been derived from our consolidated financial statements not included herein.  The following table should be read in conjunction with Item 5. "Operating and Financial Review and Prospects" and our consolidated financial statements and the notes to those statements included herein.

Year Ended December 31
2014

2013

2012

2011

2010

(in thousands of dollars except common share and per share data)
Income Statement Data:
Total operating revenues
327,487

270,860

319,692

295,114

308,060

Net operating income
145,146

117,366

207,620

162,705

211,845

Net income
122,815

89,206

185,836

131,175

165,712

Earnings per share, basic
$
1.32

$
1.00

$
2.31

$
1.66

$
2.10

Earnings per share, diluted
$
1.24

$
0.99

$
2.22

$
1.62

$
2.09

Dividends declared
152,152

109,114

152,009

122,644

106,028

Dividends declared per share
$
1.63

$
1.17

$
1.86

$
1.55

$
1.34



1


Year Ended December 31
2014

2013

2012

2011

2010

(in thousands of dollars except common share and per share data)
Balance Sheet Data (at end of period):
Cash and cash equivalents
50,818

58,641

60,542

94,915

86,967

Vessels and equipment, net (including newbuildings)
1,464,700

1,215,624

1,110,301

1,020,580

786,112

Investment in direct financing and sales-type leases (including current portion)
746,531

903,408

1,143,859

1,220,060

1,455,281

Investment in associated companies (including loans)
399,488

571,702

454,775

444,022

489,976

Total assets
3,041,554

3,045,983

2,973,089

2,896,128

2,882,361

Short and long term debt  (including current portion)
1,732,459

1,736,879

1,831,200

1,910,464

1,922,854

Share capital
93,404

93,260

85,225

79,125

79,125

Stockholders' equity
1,153,492

1,191,933

994,768

857,091

828,920

Common shares outstanding
93,404,000

93,260,000

85,225,000

79,125,000

79,125,000

Weighted average common shares outstanding
93,330,622

89,508,233

80,594,399

79,125,000

79,056,183

Cash Flow Data:





Cash provided by operating activities
132,401

140,124

86,570

163,661

153,771

Cash provided by (used in) investing activities
(21,940
)
(73,982
)
34,309

(5,862
)
76,977

Cash used in financing activities
(118,284
)
(68,043
)
(155,252
)
(149,851
)
(227,967
)


B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not Applicable

D. RISK FACTORS
Our assets are primarily engaged in transporting crude oil and oil products, drybulk and containerized cargos, and in offshore drilling and related activities. The following summarizes the risks that may materially affect our business, financial condition or results of operations.  Unless otherwise indicated in this annual report on Form 20-F, all information concerning our business and our assets is as of April 9, 2015 .

Risks Relating to Our Industry

The seaborne transportation industry is cyclical and volatile, and this may lead to reductions in our charter rates, vessel values and results of operations.
The international seaborne transportation industry is both cyclical and volatile in terms of charter rates and profitability. The degree of charter rate volatility for vessels has varied widely.  Fluctuations in charter rates result from changes in the supply and demand for vessel capacity and changes in the supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products internationally carried at sea. If we enter into a charter when charterhire rates are low, our revenues and earnings will be adversely affected. In addition, a decline in charterhire rates is likely to cause the market value of our vessels to decline. We cannot assure you that we will be able to successfully charter our vessels in the future or renew our existing charters at rates sufficient to allow us to operate our business profitably, meet our obligations or pay dividends to our shareholders. The factors affecting the supply and demand for vessels are outside of our control, and the nature, timing and degree of changes in industry conditions are unpredictable.

2


Factors that influence demand for vessel capacity include:
•
supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;
•
changes in the exploration for and production of energy resources, commodities, semi-finished and finished consumer and industrial products;
•
the location of regional and global production and manufacturing facilities;
•
the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;
•
the globalization of production and manufacturing;
•
global and regional economic and political conditions, including armed conflicts, terrorist activities, embargoes and strikes;
•
developments in international trade;
•
changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;
•
environmental and other regulatory developments;
•
currency exchange rates; and
•
weather and natural disasters.

Factors that influence the supply of vessel capacity include:
•
the number of newbuilding deliveries;
•
the scrapping rate of older vessels;
•
the price of steel and vessel equipment;
•
changes in environmental and other regulations that may limit the useful lives of vessels;
•
vessel casualties;
•
the number of vessels that are out of service; and
•
port or canal congestion.

Demand for our vessels and charter rates are dependent upon, among other things, seasonal and regional changes in demand and changes to the capacity of the world fleet. We believe the capacity of the world fleet is likely to increase, and there can be no assurance that global economic growth will be at a rate sufficient to utilize this new capacity. Continued adverse economic, political or social conditions or other developments could further negatively impact charter rates, and therefore have a material adverse effect on our business, results of operations and ability to pay dividends.


The current state of the world financial markets and current economic conditions may result in a general reduction in the availability of loan finance, which would have a material adverse impact on our results of operations, financial condition and cash flows, and could cause the market price of our common shares to decline.

Global financial markets and economic conditions have been, and continue to be, volatile. The amount of available capital from commercial lenders remains below levels seen before the global financial crisis. There has been a general decline in the willingness by banks and other financial institutions to extend credit, particularly in the shipping industry, due to the historically volatile asset values of vessels. As the shipping industry is highly dependent on the availability of credit to finance and expand operations, it has been and may continue to be negatively affected by this decline.
Also, as a result of concerns about the stability of financial markets generally and the solvency of counterparties specifically, the availability and cost of obtaining money from the credit markets has become more difficult as many lenders have increased interest rates, enacted tighter lending standards, refused to refinance existing debt at all or on terms similar to current debt and reduced, and in some cases ceased, to provide funding to borrowers. Due to these factors, we cannot be certain that financing will be available if needed and to the extent required on acceptable terms. If financing is not available when needed, or is available only on unfavorable terms, we may be unable to meet our obligations as they come due or we may be unable to enhance our existing business, complete additional vessel acquisitions or otherwise take advantage of business opportunities as they arise.
The uncertainty surrounding the future of the credit markets in the United States, Europe and the rest of the world has resulted in reduced access to credit worldwide. As of December 31, 2014, we had total outstanding indebtedness of $2.8 billion under our various credit facilities and bond loans, including our equity-accounted subsidiaries.


3


The instability of the euro or the inability of countries to refinance their debts could have a material adverse effect on our revenue, profitability and financial position.
As a result of the credit crisis in Europe, the European Commission created the European Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the EFSM, to provide funding to Eurozone countries in financial difficulties that seek such support. In September 2012, the European Council established a permanent stability mechanism, the European Stability Mechanism, or the ESM, to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, and the overall stability of the euro. An extended period of adverse development in the outlook for European countries could reduce the overall demand for drybulk and containerized cargoes, and for our services. These potential developments, or market perceptions concerning these and related issues, could affect our financial position, results of operations and cash flow.


Volatile economic conditions throughout the world could have an adverse impact on our operations and financial results.
The world economy continues to face a number of challenges, including turmoil and hostilities in the Middle East, North Africa and other geographic areas and continuing economic weakness in the European Union. There has historically been a strong link between development of the world economy and demand for energy, including oil and gas, and other materials and finished products transported on our vessels. An extended period of deterioration in the outlook for the world economy could reduce the overall demand for oil and gas and for our services. We cannot predict how long the current market conditions will last. However, recent and developing economic and governmental factors, together with the concurrent decline in charter rates and vessel values for some of our asset classes, have had a negative effect on our results of operations, financial condition and cash flows, have caused the price of our common shares to decline and could cause the price of our common shares to decline further.

The European Union continues to experience relatively slow growth and exhibits weak economic trends. Over the past six years, the credit markets in Europe have experienced significant contraction, de-leveraging and reduced liquidity. While credit conditions are beginning to stabilize, global financial markets have been, and continue to be, disrupted and volatile.
The continued economic slowdown in the Asia Pacific region, especially in Japan and China, may exacerbate the effect on us of the recent slowdown in the rest of the world. Before the global economic financial crisis that began in 2008, China had one of the world's fastest growing economies in terms of gross domestic product, or GDP, which had a significant impact on shipping demand. The growth rate of China's GDP for the year ended December 31, 2014, is estimated to be around 7.4%, down from the growth rate for the year ended December 31, 2013, and remaining below pre-2008 levels. China and other countries in the Asia Pacific region may continue to experience slowed or even negative economic growth in the future. In addition, the charters we enter into with Chinese customers, including existing charters with Chinese customers, may be subject to new regulations in China which may require us to incur new or additional compliance or other administrative costs, and may require us to pay new taxes or other fees to the Chinese government. Our financial condition and results of operations, as well as our future prospects, would likely be impeded by a continuing or worsening economic downturn in any of these countries.

4


Changes in the economic and political environment in China and policies adopted by the government to regulate its economy may have a material adverse effect on our business, financial condition and results of operations.
The Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development, or OECD, in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, rate of inflation and balance of payments position. Prior to 1978, the Chinese economy was a planned economy. Since 1978, increasing emphasis has been placed on the utilization of market forces in the development of the Chinese economy. Annual and five-year plans, or State Plans, are adopted by the Chinese government in connection with the development of the economy. Although state-owned enterprises still account for a substantial portion of the Chinese industrial output in general, the Chinese government is reducing the level of direct control that it exercises over the economy through State Plans and other measures. There is an increasing level of freedom and autonomy in areas such as allocation of resources, production, pricing and management, and a gradual shift in emphasis to a "market economy" and enterprise reform. Limited price reforms were undertaken, with the result that prices for certain commodities are principally determined by market forces. Many of the reforms are unprecedented or experimental and may be subject to revision, change or abolition based upon the outcome of such experiments. In 2012, China appointed new members to its Politburo Standing Committee, who replaced members of the committee who have served for periods of up to ten years, which obscures the future policy plans of the country. If the Chinese government does not continue to pursue a policy of economic reform, the level of imports to and exports from China could be adversely affected by these economic reforms by the Chinese government, as well as by changes in political, economic and social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions, all of which could adversely affect our business, operating results and financial condition.

Safety, environmental and other governmental and other requirements expose us to liability, and compliance with current and future regulations could require significant additional expenditures, which could have a material adverse effect on our business and financial results.
Our operations are affected by extensive and changing international, national, state and local laws, regulations, treaties, conventions and standards in force in international waters, the jurisdictions in which our tankers and other vessels operate, and the country or countries in which such vessels are registered, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil spills and other contamination, air emissions, and water discharges and ballast and bilge water management. These regulations include, but are not limited to, the U.S. Oil Pollution Act of 1990, or the OPA, requirements of the U.S. Coast Guard and the U.S. Environmental Protection Agency, or EPA, the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980, or CERCLA, the U.S. Clean Water Act, the U.S. Maritime Transportation Security Act of 2002, and regulations of the International Maritime Organization, or IMO, including the International Convention for the Safety of Life at Sea of 1974, or SOLAS, the International Convention for the Prevention of Pollution from Ships of 1973, or MARPOL, including the designation thereunder of Emission Control Areas, or ECAs, the International Convention on Civil Liability for Oil Pollution Damage of 1969, or CLC, and the International Convention on Load Lines of 1966.

In addition, vessel classification societies and the requirements set forth in the IMO's International Management Code for the Safe Operation of Ships and for Pollution Prevention, or the ISM Code, also impose significant safety and other requirements on our vessels. In complying with current and future environmental requirements, vessel owners and operators may also incur significant additional costs in meeting new maintenance and inspection requirements, in developing contingency arrangements for potential spills and in obtaining insurance coverage. Government regulation of vessels, particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future and require us to incur significant capital expenditures on our vessels to keep them in compliance, or even to scrap or sell certain vessels altogether.


5


Many of these requirements are designed to reduce the risk of oil spills and other pollution, and our compliance with these requirements can be costly. These requirements can also affect the resale value or useful lives of our vessels, require reductions in cargo capacity, ship modifications or operational changes or restrictions, lead to decreased availability of insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports, or detention in certain ports.

Under local, national and foreign laws, as well as international treaties and conventions, we could incur material liabilities, including cleanup obligations, natural resource damages and third-party claims for personal injury or property damages, in the event that there is a release of petroleum or other hazardous substances from our vessels or otherwise in connection with our current or historic operations. We could also incur substantial penalties, fines and other civil or criminal sanctions, including in certain instances seizure or detention of our vessels, as a result of violations of or liabilities under environmental laws, regulations and other requirements. Environmental laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject us to liability without regard to whether we were negligent or at fault. For example, OPA affects all vessel owners shipping oil to, from or within the United States.  Under OPA, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil in U.S. waters, including the 200 nautical mile exclusive economic zone around the United States.  Similarly the CLC, which has been adopted by most countries outside of the United States, imposes liability for oil pollution in international waters. OPA expressly permits individual states to impose their own liability regimes with regard to hazardous materials and oil pollution incidents occurring within their boundaries, provided they accept, at a minimum, the levels of liability established under OPA. Coastal states in the United States have enacted pollution prevention liability and response laws, many providing for unlimited liability. Furthermore, the 2010 explosion of the drilling rig Deepwater Horizon , which is unrelated to Ship Finance, and the subsequent release of oil into the Gulf of Mexico, or other events, may result in further regulation of the shipping and offshore industries and modifications to statutory liability schemes, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. An oil spill could also result in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under other international and U.S. federal, state and local laws, as well as third-party damages, and could harm our reputation with current or potential charterers of our vessels. We are required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other pollution incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that any claims will not have a material adverse effect on our business, results of operations, cash flows and financial condition and available cash.

Acts of piracy on ocean-going vessels could adversely affect our business.
Acts of piracy have historically affected ocean-going vessels trading in regions of the world such as the South China Sea, the Indian Ocean and in the Gulf of Aden off the coast of Somalia. Although the frequency of sea piracy worldwide has decreased in recent years, sea piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and increasingly in the Gulf of Guinea, with drybulk vessels and tankers particularly vulnerable to such attacks.  If these piracy attacks occur in regions in which our vessels are deployed that are characterized by insurers as "war risk" zones or by the Joint War Committee as "war and strikes" listed areas, premiums payable for insurance coverage could increase significantly and such coverage may be more difficult to obtain. In addition, crew costs, including costs which may be incurred to the extent we employ onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from these incidents, which could have a material adverse effect on us. In addition, detention hijacking as a result of an act of piracy against our vessels, or an increase in cost, or unavailability of insurance for our vessels, could have a material adverse impact on our business, results of operations, cash flows, financial condition and ability to pay dividends and may result in loss of revenues, increased costs and decreased cashflows to our customers, which could impair their ability to make payments to us under our charters.


6


Our vessels may call on ports located in countries that are subject to restrictions imposed by the U.S. or other governments, which could adversely affect our reputation and the market for our common shares.
From time to time on charterers' instructions, our vessels may call on ports located in countries subject to sanctions and embargoes imposed by the U.S. government and countries identified by the U.S. government as state sponsors of terrorism, such as Cuba, Iran, Sudan and Syria, and in the past certain of our vessels have made port calls in Iran. The U.S. sanctions and embargo laws and regulations vary in their application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo laws and regulations may be amended or strengthened over time. With effect from July 1, 2010, the U.S. enacted the Comprehensive Iran Sanctions Accountability and Divestment Act, or CISADA, which expanded the scope of the Iran Sanctions Act. Among other things, CISADA expands the application of the prohibitions to companies such as ours, and introduces limits on 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. In addition, on May 1, 2012, President Obama signed Executive Order 13608 which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanctions in effect against Iran or facilitating any deceptive transactions for or on behalf of any person subject to U.S. sanctions. Any persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all contacts with the United States, including conducting business in U.S. dollars. Also in 2012, President Obama signed into law the Iran Threat Reduction and Syria Human Rights Act of 2012, or the Iran Threat Reduction Act, which created new sanctions and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies existing sanctions regarding the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical sector. The Iran Threat Reduction Act also includes a provision requiring the President of the United States to impose five or more sanctions from Section 6(a) of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise owns, operates, or controls or insures a vessel that was used to transport crude oil from Iran to another country and (1) if the person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used. Such a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions subject to U.S. jurisdiction, and exclusion of that person's vessels from U.S. ports for up to two years.

On November 24, 2013, the P5+1 (the United States, United Kingdom, Germany, France, Russia and China) entered into an interim agreement with Iran entitled the "Joint Plan of Action", or JPOA. Under the JPOA it was agreed that, in exchange for Iran taking certain voluntary measures to ensure that its nuclear program is only used for peaceful purposes, the U.S. and EU would voluntarily suspend certain sanctions for a period of six months. On January 20, 2014, the U.S. and EU indicated that they would begin implementing the temporary relief measures provided for under the JPOA. These measures include, among other things, the suspension of certain sanctions on the Iranian petrochemicals, precious metals and automotive industries from January 20, 2014, to July 20, 2014. The JPOA has been extended twice and is set to expire on June 30, 2015.

Certain of our charterers or other parties that we have entered into contracts with may be affiliated with persons or entities that are subject to sanctions imposed by the U.S. administration, the European Union and/or other international bodies as a result of the annexation of Crimea by Russia in March 2014. If we determine that such sanctions require us to terminate existing charters or if we are found to be in violation of such applicable sanctions, our results of operations may be adversely affected or we may suffer reputational harm.

Although we believe that we have been in compliance with all applicable sanctions and embargo laws and regulations, and intend to maintain such compliance, there can be no assurance that we will be in compliance in the future, particularly as the scope of certain laws may be unclear and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could severely impact our ability to access U.S. capital markets and conduct our business, and could result in some investors deciding, or being required, to divest their interest, or not to invest, in us. In addition, certain institutional investors may have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to divest from, our common stock may adversely affect the price at which our common stock trades. Moreover, our charterers may violate applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled by their governments. Investor perception of the value of our common stock may be adversely affected by the consequences of war, the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.


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In the highly competitive international seaborne transportation industry, we may not be able to compete for charters with new entrants or established companies with greater resources, and as a result we may be unable to employ our vessels profitably.
We employ our vessels in a highly competitive market that is capital intensive and highly fragmented, and competition arises primarily from other vessel owners. Competition for seaborne transportation of goods and products is intense and depends on charter rates and the location, size, age, condition and acceptability of the vessel and its operators to charterers.  Due in part to the highly fragmented market, competitors with greater resources could operate larger fleets than we may operate and thus be able to offer lower charter rates and higher quality vessels than we are able to offer.  If this were to occur, we may be unable to retain or attract new charterers on attractive terms or at all, which may have a material adverse effect on our business, financial condition and results of operations.

An over-supply of vessel capacity may lead to further reductions in charter hire rates and profitability.
The supply of vessels generally increases with deliveries of new vessels and decreases with the scrapping of older vessels, conversion of vessels to other uses, such as floating production and storage facilities, and loss of tonnage as a result of casualties. Currently, there is significant newbuilding activity with respect to virtually all sizes and classes of vessels. An over-supply of vessel capacity, combined with a decline in the demand for such vessels, may result in a further reduction of charter hire rates.  If such a reduction continues in the future, upon the expiration or termination of our vessels' current charters, we may only be able to re-charter our vessels at reduced or unprofitable rates or we may not be able to charter our vessels at all, which would have a material adverse effect on our revenues and profitability.


Increased inspection procedures, tighter import and export controls and new security regulations could increase costs and disrupt our business.
International shipping is subject to various security and customs inspection and related procedures in countries of origin, destination and trans-shipment points. Inspection procedures can result in the seizure of the contents of our vessels, delays in loading, offloading or delivery, and the levying of customs duties, fines or other penalties against us.

It is possible that changes to inspection procedures could impose additional financial and legal obligations on us.  Changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain types of cargo uneconomical or impractical.  Any such changes or developments may have a material adverse effect on our business, financial condition and results of operations.

The offshore drilling sector depends on the level of activity in the offshore oil and gas industry, which is significantly affected by, among other things, volatile oil and gas prices, and may be materially and adversely affected by a decline in the offshore oil and gas industry.
The offshore contract drilling industry is cyclical and volatile, and depends on the level of activity in oil and gas exploration and development and production in offshore areas worldwide. The availability of quality drilling prospects, exploration success, relative production costs, the stage of reservoir development and political and regulatory environments affect our customers' drilling campaigns. Oil and gas prices, and market expectations of potential changes in these prices, also significantly affect the level of activity and demand for drilling units.
Oil and gas prices are extremely volatile and are affected by numerous factors, including the following:
•
worldwide production and demand for oil and gas;
•
the cost of exploring for, developing, producing and delivering oil and gas;
•
expectations regarding future energy prices;
•
advances in exploration, development and production technology;
•
the ability of the Organization of Petroleum Exporting Countries, or OPEC, to set and maintain production levels and pricing;
•
the level of production in non-OPEC countries;
•
government regulations;
•
local and international political, economic and weather conditions;

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•
domestic and foreign tax policies;
•
the development and implementation of policies to increase the use of renewable energy;
•
the policies of various governments regarding exploration and development of their oil and gas reserves; and
•
the worldwide military and political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities, insurrection, or other  crises in the Middle East or other geographic areas, or further acts of terrorism in the United States or elsewhere.

Recent declines in oil and gas prices have negatively affected the offshore drilling sector and resulted in reduced exploration and drilling. These reductions in commodity prices have reduced the demand for drilling units. Continued weakness in oil and gas prices may result in an excess supply of drilling units and intensify competition in the industry, which may result in drilling units, particularly older and lower specification drilling units, being idle for long periods of time.  We cannot predict the future level of demand for drilling units or future conditions of the oil and gas industry.

In addition to oil and gas prices, the offshore drilling industry is influenced by additional factors, including:
•
the availability of competing offshore drilling units;
•
the level of costs for associated offshore oilfield and construction services;
•
oil and gas transportation costs;
•
the discovery of new oil and gas reserves;
•
the cost of non-conventional hydrocarbons, such as the exploitation of oil sands; and
•
regulatory restrictions on offshore drilling.


An over-supply of drilling units may lead to a reduction in day-rates and therefore may adversely affect the ability of certain of our rig charterers to make charterhire payments to us.
We have chartered two of our drilling units to two subsidiaries of Seadrill Limited, or Seadrill, namely Seadrill Deepwater Charterer Ltd., or Seadrill Deepwater, and Seadrill Offshore AS, or Seadrill Offshore, which we refer to collectively as the Seadrill Charterers. In addition, we have chartered one drilling unit to Apexindo Offshore Pte. Ltd., or Apexindo, and one drilling unit to North Atlantic Linus Charterer Ltd., or North Atlantic Linus, which is a subsidiary of North Atlantic Drilling Limited, or NADL. The Seadrill Charterers, Apexindo and North Atlantic Linus are collectively referred to as the Rig Charterers. Following the 2008 peak in the oil price of around $140 per barrel, there was a period of high utilization and high dayrates, which prompted industry participants to increase the supply of drilling units by ordering the construction of new drilling units. According to industry sources, the worldwide fleet of drilling rigs increased from an average of 605 units in 2008 to 823 units in 2014, and significant further deliveries of new units are projected. The recent reduction in oil prices has resulted in reduced demand for drilling units, which may adversely affect the Rig Charterers' ability to secure drilling contracts and, therefore, their ability to make charterhire payments to us, and may cause them to terminate or renegotiate their charter agreements to our detriment. In addition, the new construction of high-specification units, as well as changes in the Rig Charterers' competitors' drilling rig fleets, could cause our drilling units to become less competitive.


Consolidation of suppliers may limit the ability of the Rig Charterers to obtain supplies and services for their offshore drilling operations at an acceptable cost, on schedule or at all, which may have a material adverse effect on their ability to make charterhire payments to us.
The Rig Charterers may rely on certain third parties to provide supplies and services necessary for their offshore drilling operations, including but not limited to drilling equipment suppliers, catering and machinery suppliers. Recent mergers have reduced the number of available suppliers, resulting in fewer alternatives for sourcing key supplies. The Rig Charterers may not be able to obtain supplies and services at an acceptable cost, at the times they need them or at all. Such consolidation, combined with a high volume of drilling units under construction, may result in a shortage of supplies and services thereby potentially inhibiting the ability of suppliers to deliver on time. These cost increases or delays could have a material adverse affect on the Rig Charterers' results of operations and financial condition, and may adversely affect their ability to make charterhire payments to us.



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Governmental laws and regulations, including environmental laws and regulations, may add to the costs of the Rig Charterers or limit their drilling activity, and may adversely affect their ability to make charterhire payments to us.
The Rig Charterers' business in the offshore drilling industry is affected by public policy and laws and regulations relating to the energy industry and the environment in the geographic areas where they operate.

The offshore drilling industry is dependent on demand for services from the oil and gas exploration and production industry, and accordingly the Rig Charterers are directly affected by the adoption of laws and regulations that for economic, environmental or other policy reasons curtail exploration and development drilling for oil and gas. The Rig Charterers may be required to make significant capital expenditures to comply with governmental laws and regulations. It is also possible that these laws and regulations may in the future add significantly to the Rig Charterers' operating costs or significantly limit drilling activity. Governments in some countries are increasingly active in regulating and controlling the ownership of concessions, the exploration for oil and gas, and other aspects of the oil and gas industries. In recent years, increased concern has been raised over protection of the environment. Offshore drilling in certain areas has been opposed by environmental groups, and has in certain cases been restricted.

In certain jurisdictions there are or may be imposed restrictions or limitations on the operation of foreign flag vessels and rigs, and these restrictions may prevent us or our charterers from operating our assets as intended. We cannot guarantee that we or our charterers will be able to accommodate such restrictions or limitations, nor that we or our charterers can relocate the assets to other jurisdictions where such restrictions or limitations do not apply. A violation of such restrictions, or expropriation in particular, could result in the total loss of our investments and/or financial loss for our charterers, and we cannot guarantee that we have sufficient insurance coverage to compensate for such loss. This may have a material adverse effect on our business and financial results.

To the extent that new laws are enacted or other governmental actions are taken that prohibit or restrict offshore drilling or impose additional environmental protection requirements that result in increased costs to the oil and gas industry in general or the offshore drilling industry in particular, the Rig Charterers' business or prospects could be materially adversely affected. The operation of our drilling units will require certain governmental approvals, the number and prerequisites of which cannot be determined until the Rig Charterers identify the jurisdictions in which they will operate upon securing contracts for the drilling units. Depending on the jurisdiction, these governmental approvals may involve public hearings and costly undertakings on the part of the Rig Charterers. The Rig Charterers may not obtain such approvals, or such approvals may not be obtained in a timely manner. If the Rig Charterers fail to secure the necessary approvals or permits in a timely manner, their customers may have the right to terminate or seek to renegotiate their drilling services contracts to the Rig Charterers' detriment. The amendment or modification of existing laws and regulations, or the adoption of new laws and regulations curtailing or further regulating exploratory or development drilling and production of oil and gas, could have a material adverse effect on the Rig Charterers' business, operating results or financial condition. Future earnings of the Rig Charterers may be negatively affected by compliance with any such new legislation or regulations. In addition, the Rig Charterers may become subject to additional laws and regulations as a result of future rig operations or repositioning. These factors may adversely affect the ability of the Rig Charterers to make charterhire payments to us.


Charter hire rates for dry bulk vessels may decrease in the future, which may adversely affect our earnings.

The dry bulk shipping industry is cyclical with attendant volatility in charter hire rates and profitability. The degree of charter hire rate volatility among different types of dry bulk vessels has varied widely, and charter hire rates for dry bulk vessels have declined significantly from historically high levels. Fluctuations in charter rates result from changes in the supply and demand for vessel capacity and changes in the supply and demand for the major commodities carried by water internationally. We cannot assure you that we will be able to successfully charter our vessels in the future or renew existing charters at rates sufficient to allow us to meet our obligations. The supply of and demand for shipping capacity strongly influence charter rates. Because the factors affecting the supply and demand for vessels are outside our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.
Factors that influence demand for vessel capacity include:
•
supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;
•
changes in the exploration or production of energy resources, commodities, semi-finished and finished consumer and industrial products;
•
the location of regional and global exploration, production and manufacturing facilities;

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•
the location of consuming regions for energy resources, commodities, semi-finished and finished consumer and industrial products;
•
the globalization of production and manufacturing;
•
global and regional economic and political conditions, including armed conflicts and terrorist activities, embargoes and strikes;
•
developments in international trade;
•
changes in seaborne and other transportation patterns, including the distance cargo is transported by sea;
•
environmental and other regulatory developments;
•
currency exchange rates; and
•
the weather.

Factors that influence the supply of vessel capacity include:
•
number of newbuilding deliveries;
•
port and canal congestion;
•
scrapping of older vessels;
•
vessel casualties; and
•
number of vessels that are out of service.

Demand for our dry bulk vessels is dependent upon economic growth in the world’s economies, seasonal and regional changes in demand, changes in the capacity of the global dry bulk fleet and the sources and supply of dry bulk cargo transported by sea. Given the large number of new dry bulk carriers currently on order with shipyards, the capacity of the global dry bulk carrier fleet seems likely to increase and economic growth may not resume in areas that have experienced a recession or continue in other areas. Adverse economic, political, social or other developments could have a material adverse effect on our business and operating results.

The continued downturn in the dry bulk carrier charter market has had and may continue to have an adverse effect on our earnings.

The abrupt and dramatic downturn in the dry bulk charter market, from which we derive some of our revenues, has severely affected the dry bulk shipping industry. The Baltic Dry Index, an index published by The Baltic Exchange of shipping rates for 20 key dry bulk routes, fell 94% from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and has remained volatile since, with a low of 698 and a high of 2,337 in 2013 and a low of 723 and a high of 2,113 in 2014. It has remained low since the beginning of 2015, dropping to 509 in February 2015.

This downturn in dry bulk charter rates and their volatility has had a number of adverse consequences for dry bulk shipping, including, among other things:

•
an absence of financing for vessels;
•
no active second-hand market for the sale of vessels;
•
extremely low charter rates, particularly for vessels employed in the spot market;
•
widespread loan covenant defaults in the dry bulk shipping industry; and
•
declaration of bankruptcy by some operators and ship owners as well as charterers.

The occurrence of one or more of these events could adversely affect our business, results of operations, cash flows, financial condition and ability to pay cash distributions. There can be no assurance that the dry bulk charter market will recover and the market could continue to decline further.

Dry bulk carrier values have also declined both as a result of a slowdown in the availability of global credit and the significant deterioration in charter rates. Charter rates and vessel values have been affected in part by the lack of availability of credit to finance both vessel purchases and purchases of commodities carried by sea, resulting in a decline in cargo shipments, and the excess supply of iron ore in China, which resulted in falling iron ore prices and increased stockpiles in Chinese ports. There can be no assurance as to how long spot charter rates and vessel values will remain at their currently low levels. Charter rates may remain at low levels for some time, which may adversely affect our results and financial condition and our ability to pay dividends in the future.


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In addition, because the market value of the Company’s vessels may fluctuate significantly, we may incur losses when the Company sells vessels, which may adversely affect earnings. If we sell vessels at a time when vessel prices have fallen and before we have recorded an impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount in those financial statements, resulting in a loss and a reduction in earnings.


World events could adversely affect our results of operations and financial condition.
Continuing conflicts and recent developments in the Middle East and North Africa, and the presence of United States and other armed forces in Afghanistan, may lead to additional acts of terrorism and armed conflict around the world, which may contribute to further economic instability in the global financial markets. These uncertainties could also adversely affect our ability to obtain financing on terms acceptable to us or at all. In the past, political conflicts have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China Sea and the Gulf of Aden off the coast of Somalia.  Any of these occurrences, or the perception that our vessels are potential terrorist targets, could have a material adverse impact on our business, financial condition, results of operations and ability to pay dividends.

Our business has inherent operational risks, which may not be adequately covered by insurance.
Our vessels and their cargoes are at risk of being damaged or lost, due to events such as marine disasters, bad weather, mechanical failures, human error, environmental accidents, war, terrorism, piracy, political circumstances and hostilities in foreign countries, labor strikes and boycotts, changes in tax rates or policies, and governmental expropriation of our vessels.  Any of these events may result in loss of revenues, increased costs and decreased cash flows to our customers, which could impair their ability to make payments to us under our charters.

In the event of a casualty to a vessel or other catastrophic event, we will rely on our insurance to pay the insured value of the vessel or the damages incurred. Through the agreements with our vessel managers, we procure insurance for most of the vessels in our fleet employed under time charters against those risks that we believe the shipping industry commonly insures against. These insurances include marine hull and machinery insurance, protection and indemnity insurance, which include pollution risks and crew insurances, and war risk insurance. Currently, the amount of coverage for liability for pollution, spillage and leakage available to us on commercially reasonable terms through protection and indemnity associations and providers of excess coverage is $1 billion per vessel per occurrence.

We cannot assure you that we will be adequately insured against all risks. Our vessel managers may not be able to obtain adequate insurance coverage at reasonable rates for our vessels in the future. For example, in the past more stringent environmental regulations have led to increased costs for, and in the future may result in the lack of availability of, insurance against risks of environmental damage or pollution. Additionally, our insurers may refuse to pay particular claims. For example, the circumstances of a spill, including non-compliance with environmental laws, could result in denial of coverage, protracted litigation, and delayed or diminished insurance recoveries or settlements. Any significant loss or liability for which we are not insured could have a material adverse effect on our financial condition. Under the terms of our bareboat charters, the charterer is responsible for procuring all insurances for the vessel.


Maritime claimants could arrest one or more of our vessels, which could interrupt our customers' or our cash flows.
Crew members, suppliers of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against one or more of our vessels for unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder may enforce its lien by arresting a vessel through foreclosure proceedings. The arrest or attachment of one or more of our vessels could interrupt the cash flow of the charterer and/or the Company and require us to pay a significant amount of money to have the arrest lifted. In addition, in some jurisdictions, such as South Africa, under the "sister ship" theory of liability, a claimant may arrest both the vessel which is subject to the claimant's maritime lien and any "associated" vessel, which is any vessel owned or controlled by the same owner. Claimants could try to assert "sister ship" liability against vessels in our fleet managed by our vessel managers for claims relating to another vessel managed by that manager.


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Governments could requisition our vessels during a period of war or emergency without adequate compensation, resulting in a loss of earnings.
A government could requisition one or more of our vessels for title or for hire. Requisition for title occurs when a government takes control of a vessel and becomes her owner, while requisition for hire occurs when a government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions occur during periods of war or emergency, although governments may elect to requisition vessels in other circumstances. Although we would be entitled to compensation in the event of a requisition of one or more of our vessels, the amount and timing of payment could be materially less than the charterhire that would have been payable otherwise. In addition, we would bear all risk of loss or damage to a vessel under requisition for hire. Government requisition of one or more of our vessels may negatively impact our revenues and reduce the amount of dividends paid, if any, to our shareholders.

As our fleet ages, the risks associated with older vessels could adversely affect our operations.
In general, the costs to maintain a vessel in good operating condition increase as the vessel ages.  Due to improvements in engine technology, older vessels are typically less fuel-efficient than more recently constructed vessels.  Cargo insurance rates increase with the age of a vessel, making older vessels less desirable to charterers.

Governmental regulations, safety, environmental or other equipment standards related to the age of tankers and other types of vessels may require expenditures for alterations or the addition of new equipment to our vessels to comply with safety or environmental laws or regulations that may be enacted in the future. These laws or regulations may also restrict the type of activities in which our vessels may engage or prohibit their operation in certain geographic regions. We cannot predict what alterations or modifications our vessels may be required to undergo as a result of requirements that may be promulgated in the future, or that as our vessels age market conditions will justify any required expenditures or enable us to operate our vessels profitably during the remainder of their useful lives.


There are risks associated with the purchase and operation of second-hand vessels.
Our current business strategy includes additional growth through the acquisition of both newbuildings and second-hand vessels.  Although we generally inspect second-hand vessels prior to purchase, this does not normally provide us with the same knowledge about the vessels' condition that we would have had if such vessels had been built for and operated exclusively by us.  Therefore, our future operating results could be negatively affected if the vessels do not perform as we expect.  Also, we do not receive the benefit of warranties from the builders if the vessels we buy are older than one year.
Risks relating to our Company

Changes in our dividend policy could adversely affect holders of our common shares.
Any dividend that we declare is at the discretion of our Board of Directors. We cannot assure you that our dividend will not be reduced or eliminated in the future. Our profitability and corresponding ability to pay dividends is substantially affected by amounts we receive through charter-hire and profit sharing payments from our charterers. Our entitlement to profit sharing payments, if any, is based on the financial performance of our vessels which is outside of our control. If our charter hire and profit sharing payments decrease substantially, we may not be able to continue to pay dividends at present levels, or at all. We are also subject to contractual limitations on our ability to pay dividends pursuant to certain debt agreements, and we may agree to additional limitations in the future. Additional factors that could affect our ability to pay dividends include statutory and contractual limitations on the ability of our subsidiaries to pay dividends to us, including under current or future debt arrangements.


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We depend on our charterers, including the Frontline Charterers, the Seadrill Charterers and North Atlantic Linus, which are companies affiliated with us, for our operating cash flows and for our ability to pay dividends to our shareholders and repay our outstanding borrowings.
Most of the tanker vessels in our fleet are chartered to subsidiaries of Frontline Ltd., or Frontline, namely Frontline Shipping Limited and Frontline Shipping II Limited, which we refer to collectively as the Frontline Charterers. In addition, we have chartered two of our drilling units to the Seadrill Charterers, and one drilling unit to North Atlantic Linus. Our other vessels that have charters attached to them are chartered to other customers under short, medium or long term time and bareboat charters.

The charter-hire payments that we receive from our customers constitute substantially all of our operating cash flows. The Frontline Charterers have no business or sources of funds other than those related to the chartering of our tanker fleet to third parties.

In December 2011, our charter agreements with the Frontline Charterers, which remain wholly-owned subsidiaries of Frontline, were amended and we agreed to temporarily reduce the charter rates receivable on our, at the time, 28 double-hull tankers and oil/bulk/ore carriers, or OBOs, by $6,500 per day per vessel from 2012 through 2015, subject to cash sweep arrangements described in the immediately following risk factor.  In terms of the amendments, we received compensation payments from Frontline in the amount of $106 million in cash. Frontline continues to guarantee the payment of charterhire with respect to the Frontline Charterers. The amendments to the charter agreements were necessitated by an extended period of substantial weakness in the tanker market. Frontline recently stated in its Annual Report on Form 20-F that in the fourth quarter of 2014 and the first quarter of 2015, it has reduced the outstanding balance on its $225 million convertible bond which matures in April 2015 from $190.0 million as at September 30, 2014, to $93.4 million through bond buybacks and debt/equity swaps. Frontline further stated that it believes that it will be able to repay all of the outstanding borrowings under the convertible bonds when they are due in April 2015, based on existing cash resources, cash expected to be generated from operations and monetizing or borrowing against its investment in Frontline 2012 Ltd. Nonetheless, it remains possible that the market situation might force a restructuring of Frontline, including further modifications of charter lease agreements.

Although there are restrictions on the Frontline Charterers' rights to use their cash to pay dividends or make other distributions, at any given time their available cash may be diminished or exhausted, and they may be unable to make charterhire payments to us without support from Frontline. The performance under the charters with the Seadrill Charterers is guaranteed by Seadrill. The performance under the charter with North Atlantic Linus was originally guaranteed by NADL, but following an amendment to the charter in February 2015, Seadrill has replaced NADL as guarantor under the charter. If the Frontline Charterers, the Seadrill Charterers, North Atlantic Linus or any of our other charterers are unable to make charterhire payments to us, our results of operations and financial condition will be materially adversely affected and we may not have cash available to pay dividends to our shareholders and to repay our outstanding borrowings.

The amount of the cash sweep or profit sharing payment we receive under our charters with the Frontline Charterers and other charterers, if any, may depend on prevailing spot market rates, which are volatile.
Most of our tanker vessels operate under time charters to the Frontline Charterers.  These charter contracts provide for base charterhire and additional cash sweep and profit sharing payments when the Frontline Charterers' earnings from deploying our vessels exceed certain levels. The majority of our vessels chartered to the Frontline Charterers are sub-chartered by the Frontline Charterers in the spot market, which is subject to greater volatility than the long-term time charter market, and the amount of future cash sweep and profit sharing payments that we receive, if any, will be primarily dependent on the strength of the spot market.

Prior to December 31, 2011, the Frontline Charterers paid us a profit sharing rate of 20% of their earnings above average threshold charter rates on a time-charter equivalent basis from their use of our fleet each fiscal year. The amendments to the charter agreements with the Frontline Charterers described in the preceding risk factor increased the profit sharing percentage to 25% for earnings above the threshold levels, effective as of January 1, 2012. The amendments also provided for a temporary reduction in charter rates for a four year period. During that period, the Frontline Charterers are obligated to pay us 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day, which we refer to as cash sweep amounts. As described above, we received a compensation payment of $106 million, of which $50 million represented a non-refundable advance relating to the 25% profit sharing agreement. We earned $52 million of cash sweep revenue for 2012 and $33 million for 2014, but no cash sweep revenue was receivable for 2013. There was no accumulated 25% profit share for 2012, 2013 or 2014, and $50 million in 25% profit share will need to accumulate before we recognize 25% profit share revenues in our consolidated accounts.


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We may also enter into agreements which include profit sharing provisions with other charterers. At present we have five drybulk carriers chartered to United Freight Carriers, or UFC, which is a joint venture approximately 50% owned by Golden Ocean Group Limited, or Golden Ocean, which include profit sharing provisions in the charter agreements. We earned $1.1 million in profit sharing revenue on these vessels in 2014 and $0.8 million in 2013.

We cannot assure you that we will receive any profit sharing payments, including cash sweep payments, for any periods in the future, which may have an adverse affect on our results and financial condition and our ability to pay dividends in the future.


The charter-free market values of our vessels and drilling units may decrease, which could limit the amount of funds that we can borrow or trigger certain financial covenants under our current or future credit facilities and we may incur a loss if we sell vessels or drilling units following a decline in their charter-free market value. This could affect future dividend payments.
During the period a vessel or drilling unit is subject to a charter, we will not be permitted to sell it to take advantage of increases in vessel or drilling unit values without the charterers' agreement. Conversely, if the charterers were to default under the charters due to adverse market conditions, causing a termination of the charters, it is likely that the charter-free market value of our vessels would also be depressed. The charter-free market values of our vessels have experienced high volatility in recent years.

The charter-free market value of our vessels and drilling units may increase and decrease depending on a number of factors including, but not limited to, the prevailing level of charter rates and dayrates, general economic and market conditions affecting the international shipping and offshore drilling industries, types, sizes and ages of vessels and drilling units, supply and demand for vessels and drilling units, availability of or developments in other modes of transportation, competition from other shipping companies, cost of newbuildings, governmental or other regulations and technological advances.

In addition, as vessels and drilling units grow older, they generally decline in value. If the charter-free market values of our vessels and drilling units decline, we may not be in compliance with certain provisions of our credit facilities and we may not be able to refinance our debt, obtain additional financing or make distributions to our shareholders. Additionally, if we sell one or more of our vessels or drilling units at a time when vessel and drilling unit prices have fallen and before we have recorded an impairment adjustment to our consolidated financial statements, the sale price may be less than the vessel's or drilling unit's carrying value on our consolidated financial statements, resulting in a loss and a reduction in earnings. Furthermore, if vessel and drilling unit values fall significantly, we may have to record an impairment adjustment in our financial statements, which could adversely affect our financial results and condition.

We are subject to certain risks with respect to our counterparties on contracts, and failure of such counterparties to meet their obligations could cause us to suffer losses or otherwise adversely affect our business.
From time to time, we enter into, among other things, charter parties with our customers, newbuilding contracts with shipyards, credit facilities with banks, guarantees, interest rate swap agreements, currency swap agreements, total return bond swaps, and total return equity swaps. Such agreements subject us to counterparty risks. The ability of each of our counterparties to perform its obligations under a contract with us will depend on a number of factors that are beyond our control and may include, among other things, general economic conditions, the condition of the maritime and offshore industries, the overall financial condition of the counterparty, charter rates and dayrates received for specific types of vessels and drilling units, and various expenses. In addition, in depressed market conditions, our charterers and customers may no longer need a vessel or drilling unit that is currently under charter or contract, or may be able to obtain a comparable vessel or drilling unit at a lower rate.  As a result, charterers and customers may seek to renegotiate the terms of their existing charter parties and drilling contracts, or avoid their obligations under those contracts. Should a counterparty fail to honor its obligations under agreements with us, we could sustain significant losses which could have a material adverse effect on our business, financial condition, results of operations and cash flows.



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Volatility in the international shipping and offshore markets may cause our customers to be unable to pay charterhire to us.
Our customers are subject to volatility in the shipping and offshore markets that affects their ability to operate the vessels and rigs they charter from us at a profit.  Our customers' successful operation of our vessels and rigs in the charter market will depend on, among other things, their ability to obtain profitable charters. We cannot assure you that future charters will be available to our customers at rates sufficient to enable them to meet their obligations to make charterhire payments to us.  As a result, our revenues and results of operations may be adversely affected. These factors include:
•
global and regional economic and political conditions;
•
supply and demand for oil and refined petroleum products, which is affected by, among other things, competition from alternative sources of energy;
•
supply and demand for energy resources, commodities, semi-finished and finished consumer and industrial products;
•
developments in international trade;
•
changes in seaborne and other transportation patterns, including changes in the distances that cargoes are transported;
•
environmental concerns and regulations;
•
weather;
•
the number of newbuilding deliveries;
•
the improved fuel efficiency of newer vessels;
•
the scrapping rate of older vessels; and
•
changes in production of crude oil, particularly by OPEC and other key producers.

Tanker charter rates also tend to be subject to seasonal variations, with demand (and therefore charter rates) normally higher in winter months in the northern hemisphere.

We depend on directors who are associated with affiliated companies which may create conflicts of interest.
Our principal shareholders Hemen Holding Ltd. and Farahead Investment Inc., which we refer to jointly as Hemen, are indirectly controlled by trusts established by Mr. John Fredriksen for the benefit of his immediate family. Hemen, and companies associated with Hemen, also have significant shareholdings in Frontline, Seadrill, Golden Ocean and Deep Sea Supply Plc., which are all our customers and/or suppliers. In addition, North Atlantic Linus, which is one of our customers, is a wholly-owned subsidiary of NADL, itself a subsidiary of Seadrill. Currently, one of our directors, Kate Blankenship, is also a director of Frontline, Golden Ocean, Seadrill and NADL, another of our directors, Paul Leand, is also a director of Seadrill and NADL, another of our directors, Cecilie A. Fredriksen, the daughter of Mr. John Fredriksen, is also a director of NADL, another of our directors, Hans Petter Aas, is also a director of Deep Sea Supply Plc. and another of our directors, Harald Thorstein, is also a director of Golden Ocean, Deep Sea Supply Plc. and NADL. These five directors owe fiduciary duties to the shareholders of each company and may have conflicts of interest in matters involving or affecting us and our customers. In addition, due to any ownership they may have in common shares of Frontline, Golden Ocean, Deep Sea Supply Plc., Seadrill or NADL, they may have conflicts of interest when faced with decisions that could have different implications for Frontline, Golden Ocean, Deep Sea Supply Plc., Seadrill or NADL than they do for us. We cannot assure you that any of these conflicts of interest will be resolved in our favor.

The agreements between us and affiliates of Hemen may be less favorable to us than agreements that we could obtain from unaffiliated third parties.
The charters, management agreements, charter ancillary agreements and the other contractual agreements we have with companies affiliated with Hemen were made in the context of an affiliated relationship. Although every effort was made to ensure that such agreements were made on an arm's-length basis, the negotiation of these agreements may have resulted in prices and other terms that are less favorable to us than terms we might have obtained in arm's-length negotiations with unaffiliated third parties for similar services.



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Hemen and its associated companies' business activities may conflict with ours.
While Frontline has agreed to cause the Frontline Charterers to use their commercial best efforts to employ our vessels on market terms and not to give preferential treatment in the marketing of any other vessels owned or managed by Frontline or its other affiliates, it is possible that conflicts of interests in this regard will adversely affect us. Under our charter ancillary agreements with the Frontline Charterers and Frontline, we are entitled to receive annual cash sweep and profit sharing payments to the extent that the average daily time-charter equivalent, or TCE, rates realized by the Frontline Charterers exceed specified levels. Because Frontline also owns or manages other vessels in addition to our fleet, which are not included in the cash sweep and profit sharing calculations, conflicts of interest may arise between us and Frontline in the allocation of chartering opportunities that could limit our fleet's earnings and reduce the cash sweep payments, profit sharing payments or charterhire due under our charters.

Our shareholders must rely on us to enforce our rights against our contract counterparties.
Holders of our common shares and other securities have no direct right to enforce the obligations of the Frontline Charterers, Frontline Management (Bermuda) Ltd., or Frontline Management, Frontline, Golden Ocean, Deep Sea Supply Plc., the Seadrill Charterers and Seadrill, North Atlantic Linus and NADL, or any of our other customers under the charters, or any of the other agreements to which we are a party. Accordingly, if any of those counterparties were to breach their obligations to us under any of these agreements, our shareholders would have to rely on us to pursue our remedies against those counterparties.

There is a risk that U.S. tax authorities could treat us as a "passive foreign investment company", which would have adverse U.S. federal income tax consequences to U.S. shareholders.
A foreign corporation will be treated as a "passive foreign investment company," or PFIC, for U.S. federal income tax purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of "passive income" or (2) 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 and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which 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", but income from bareboat charters does 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.

Under these rules, if our income from our time charters is considered to be passive rental income, rather than income from the performance of services, we will be considered to be a PFIC.  We believe that it is more likely than not that our income from time charters will not be treated as passive rental income for purposes of determining whether we are a PFIC. Correspondingly, we believe that the assets that we own and operate in the connection with the production of such income do not constitute passive assets for purposes of determining whether we are a PFIC.  This position is principally based upon the positions that (1) our time charter income will constitute services income, rather than rental income, and (2) Frontline Management, which provides services to most of our time-chartered vessels, will be respected as a separate entity from the Frontline Charterers, with which it is affiliated. We do not believe that we will be treated as a PFIC for our 2014 taxable year. Nevertheless, for the 2015 taxable year and future taxable years, depending upon the relative amounts of income we derive from our various assets as well as their relative fair market values, we may be treated as a PFIC.

We note that there is no direct legal authority under the PFIC rules addressing our current and expected method of operation. Accordingly, no assurance can be given that the Internal Revenue Service, or the IRS, or a court of law will accept our position, and there is a significant risk that the IRS or a court of law could determine that we are a PFIC.  Furthermore, even if we would not be a PFIC under the foregoing tests, no assurance can be given that we would not constitute a PFIC for any future taxable year if the nature and extent of our operations were to change.

If the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. federal income tax consequences.  For example, U.S. non-corporate shareholders would not be eligible for the preferential rate on dividends that we pay.


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We may have to pay tax on U.S. source income, which would reduce our earnings.
Under the U.S. Internal Revenue Code of 1986 as amended, or the Code, 50% of the gross shipping income of a vessel owning or chartering corporation, such as ourselves and our subsidiaries, that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States may be 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 applicable Treasury Regulations promulgated thereunder.

We believe that we and each of our subsidiaries qualify for this statutory tax exemption and we will take this position for U.S. federal income tax return reporting 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 U.S. federal income tax on our U.S. source shipping income.  For example, Hemen owned approximately 36% of our common shares as of April 9, 2015 .  There is therefore a risk that we could no longer qualify for exemption under Section 883 of the Code for a particular taxable year if other shareholders with a five percent or greater interest in our common shares were, in combination with Hemen, to own 50% or more of our outstanding common shares on more than half the days during the taxable year. Due to the factual nature of the issues involved, we can give no assurances on our tax-exempt status or that of any of our subsidiaries.

If we, or our subsidiaries, are not entitled to exemption under Section 883 of the Code for any taxable year, we, or our subsidiaries, could be subject for those years to an effective 2% U.S. federal income tax on the gross shipping income these companies derive during the year that is attributable to the transport of cargoes to or from the United States.  The imposition of this tax would have a negative effect on our business and would result in decreased earnings available for distribution to our shareholders.

If our long-term time or bareboat charters or management agreements with respect to our vessels employed on long-term time charters terminate, we could be exposed to increased volatility in our business and financial results, our revenues could significantly decrease and our operating expenses could significantly increase.
If any of our charters terminate, we may not be able to re-charter those vessels on a long-term basis with terms similar to the terms of our existing charters, or at all. The terms of our current charters for our tanker vessels to the Frontline Charterers end between 2018 and 2027.

Apart from two container vessels and five drybulk carriers trading under short-term charters, the vessels in our fleet that have charters attached to them are generally contracted to expire between one and 14 years from now.  However, we have granted some of our charterers purchase or early termination options that, if exercised, may effectively terminate our charters with these customers at an earlier date.  One or more of the charters with respect to our vessels may also terminate in the event of a requisition for title or a loss of a vessel.

In addition, under our vessel management agreements with Frontline Management, for a fixed management fee, Frontline Management is responsible for all of the technical and operational management of the vessels chartered by the Frontline Charterers, and will indemnify us against certain loss of hire and various other liabilities relating to the operation of these vessels.  We may terminate our management agreements with Frontline Management for any reason at any time on 90 days' notice, or an agreement may be terminated if the relevant charter is terminated.

We currently operate six container vessels, two car carriers and 14 drybulk carriers under time charters and two Suezmax tankers in the spot market. The agreements for the technical and operational management of these vessels are not fixed price agreements, and we cannot assure you that any further vessels which we may acquire in the future will be operated under fixed price management agreements.

Therefore, to the extent that we acquire additional vessels, our cash flow could be more volatile in the future and we could be exposed to increases in our vessel operating expenses, each of which could materially and adversely affect our results of operations and business.







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Certain of our vessels are subject to purchase options held by the charterer of the vessel, which, if exercised, could reduce the size of our fleet and reduce our future revenues.
The charter-free market values of our vessels are expected to change from time to time depending on a number of factors including general economic and market conditions affecting the shipping industry, competition, cost of vessel construction, governmental or other regulations, prevailing levels of charter rates and technological changes. We have granted fixed price purchase options to certain of our customers with respect to the vessels they have chartered from us, and these prices may be less than the respective vessel's charter-free market value at the time the option may be exercised. In addition, we may not be able to obtain a replacement vessel for the price at which we sell the vessel. In such a case, we could incur a loss and a reduction in earnings.

A change in interest rates could materially and adversely affect our financial performance.
As of December 31, 2014, the Company and its consolidated subsidiaries had approximately $1.3 billion in floating rate debt outstanding under our credit facilities, and a further $1.0 billion in floating rate debt held by our unconsolidated wholly-owned subsidiaries accounted for under the equity method.  Although we use interest rate swaps to manage our interest rate exposure and have interest rate adjustment clauses in some of our chartering agreements, we are exposed to fluctuations in interest rates. For a portion of our floating rate debt, if interest rates rise, interest payments on our floating rate debt that we have not swapped into effectively fixed rates would increase.

As of December 31, 2014, the Company, its consolidated subsidiaries and its wholly-owned subsidiaries accounted for under the equity method have entered into interest rate swaps which fix the interest on $1.3 billion of our outstanding indebtedness.

An increase in interest rates could cause us to incur additional costs associated with our debt service, which may materially and adversely affect our results of operations. Our maximum exposure to interest rate fluctuations on our outstanding debt at December 31, 2014, was approximately $1.0 billion, including our equity-accounted subsidiaries.  A one percentage change in interest rates would at most increase or decrease interest expense by approximately $10 million per year as of December 31, 2014.  The maximum figure does not take into account that certain of our charter contracts include interest adjustment clauses, whereby the charter rate is adjusted to reflect the actual interest paid on a deemed outstanding debt related to the assets on charter. At December 31, 2014, $1.1 billion of our floating rate debt was subject to such interest adjustment clauses, including our equity-accounted subsidiaries. Of this amount, a total of $0.2 billion was subject to interest rate swaps and the balance of $0.9 billion remained on a floating rate basis, effectively reducing our exposure to floating rate debt to $86 million.

The interest rate swaps that have been entered into by the Company and its subsidiaries are derivative financial instruments that effectively translate floating rate debt into fixed rate debt. US GAAP requires that these derivatives be valued at current market prices in our financial statements, with increases or decreases in valuations reflected in results of operations or, if the instrument is designated as a hedge, in other comprehensive income. Changes in interest rates give rise to changes in the valuations of interest rate swaps and could adversely affect results of operations and other comprehensive income.


We may have difficulty managing our planned growth properly.
Since our original acquisitions from Frontline, we have expanded and diversified our fleet, and we are performing certain administrative services through our wholly-owned subsidiaries Ship Finance Management AS and Ship Finance Management (Bermuda) Ltd.

We intend to continue to expand our fleet. Our future growth will primarily depend on our ability to locate and acquire suitable vessels and drilling units, identify and consummate acquisitions or joint ventures, obtain required financing, integrate any acquired vessels and drilling units with our existing operations, enhance our customer base, and manage our expansion.

The growth in the size and diversity of our fleet will continue to impose additional responsibilities on our management, and may present numerous risks, such as undisclosed liabilities and obligations, difficulty in recruiting additional qualified personnel and managing relationships with customers and suppliers, and integrating newly acquired operations into existing infrastructures. We cannot assure you that we will be successful in executing our growth plans or that we will not incur significant expenses and losses in connection with our future growth.



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We are highly leveraged and subject to restrictions in our financing agreements that impose constraints on our operating and financing flexibility.
We have significant indebtedness outstanding under our 3.75% Senior Unsecured Convertible Notes due 2016, our Norwegian kroner ("NOK")600 million Senior Unsecured Bonds due 2017, our 3.25% Senior Unsecured Convertible Notes due 2018 and our NOK900 million Senior Unsecured Bonds due 2019. We have also entered into loan facilities that we have used to refinance existing indebtedness and to acquire additional vessels.  We may need to refinance some or all of our indebtedness on maturity of our convertible notes, bonds or loan facilities and to acquire additional vessels in the future. We cannot assure you that we will be able to do so on terms acceptable to us or at all. If we cannot refinance our indebtedness, we will have to dedicate some or all of our cash flows, and we may be required to sell some of our assets, to pay the principal and interest on our indebtedness. In such a case, we may not be able to pay dividends to our shareholders and may not be able to grow our fleet as planned.  We may also incur additional debt in the future.

Our loan facilities and the indentures for our convertible notes and bonds subject us to limitations on our business and future financing activities, including:
•
limitations on the incurrence of additional indebtedness, including  issuance of additional guarantees;
•
limitations on incurrence of liens;
•
limitations on our ability to pay dividends and make other distributions; and
•
limitations on our ability to renegotiate or amend our charters, management agreements and other material agreements.

Further, our loan facilities contain financial covenants that require us to, among other things:
•
provide additional security under the loan facility or prepay an amount of the loan facility as necessary to maintain the fair market value of our vessels securing the loan facility at not less than specified percentages (ranging from 100% to 140%) of the principal amount outstanding under the loan facility;
•
maintain available cash on a consolidated basis of not less than $25 million;
•
maintain positive working capital on a consolidated basis; and
•
maintain a ratio of total liabilities to adjusted total assets of less than 0.80.

Under the terms of our loan facilities, we may not make distributions to our shareholders if we do not satisfy these covenants or receive waivers from the lenders. We cannot assure you that we will be able to satisfy these covenants in the future.

Due to these restrictions, we may need to seek permission from our lenders in order to engage in some corporate actions. Our lenders' interests may be different from ours and we cannot guarantee that we will be able to obtain our lenders' permission when needed. This may prevent us from taking actions that are in our best interests.

Our debt service obligations require us to dedicate a substantial portion of our cash flows from operations to required payments on indebtedness and could limit our ability to obtain additional financing, make capital expenditures and acquisitions, and carry out other general corporate activities in the future. These obligations may also limit our flexibility in planning for, or reacting to, changes in our business and the shipping industry or detract from our ability to successfully withstand a downturn in our business or the economy generally. This may place us at a competitive disadvantage to other less leveraged competitors.

We may be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse effect on us.
We may be, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes, personal injury claims, environmental claims or proceedings, asbestos and other toxic tort claims, employment matters, governmental claims for taxes or duties, and other litigation that arises in the ordinary course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential costs to resolve them may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases and/or insurers may not remain solvent which may have a material adverse effect on our financial condition.






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Risks Relating to Our Common Shares

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 and other obligations.
We are a holding company, and have no significant assets other than the equity interests in our subsidiaries. Our subsidiaries own all of our vessels and drilling units, and payments under our charter agreements are made to our subsidiaries. As a result, our ability to make distributions to our shareholders depends on the performance of 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 or by the law of their respective jurisdiction of incorporation which regulates the payment of dividends by companies. If we are unable to obtain funds from our subsidiaries, we will not be able to pay dividends to our shareholders.

The market price of our common shares may be unpredictable and volatile.
The market price of our common shares has been volatile. Since January 1, 2014, the closing market price of our common shares has ranged from a high of $19.82 on August 28, 2014, to a low of $13.11 on December 11, 2014. The market price of our common shares may continue to fluctuate due to factors such as actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry, any reductions in the payment of our dividends or changes in our dividend policy, mergers and strategic alliances in the shipping industry, market conditions in the shipping industry, changes in government regulation, shortfalls in our operating results from levels forecast by securities analysts, announcements concerning us or our competitors and the general state of the securities market. The shipping industry has been highly unpredictable and volatile. The market for common shares in this industry may be equally volatile. Therefore, we cannot assure you that you will be able to sell any of our common shares you may have purchased at a price greater than or equal to its original purchase price.

Future sales of our common shares could cause the market price of our common shares to decline.
The market price of our common shares could decline due to sales of a large number of our shares in the market or the perception that such sales could occur. This could depress the market price of our common shares and make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate, or at all.


Because we are a foreign corporation, you may not have the same rights as a shareholder in a U.S. corporation has.
We are a Bermuda exempted company. Bermuda law may not as clearly establish your rights and the fiduciary responsibilities of our directors as do statutes and judicial precedent in some jurisdictions in the United States. In addition, most of our directors and officers are not resident in the United States and the majority of our assets are located outside of the United States. As a result, investors may have more difficulty in protecting their interests and enforcing judgments in the face of actions by our management, directors or controlling shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.


Our major shareholder, Hemen, may be able to influence us, including the outcome of shareholder votes, with interests that may be different from yours.
As at April 9, 2015 , Hemen owned approximately 36% of our outstanding common shares. As a result of its ownership of our common shares, Hemen may influence our business, including the outcome of any vote of our shareholders. Hemen, and companies associated with Hemen, also currently beneficially own substantial stakes in Frontline, Golden Ocean, Seadrill (and indirectly its subsidiary NADL) and Deep Sea Supply Plc. The interests of Hemen may be different from your interests.








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ITEM 4.
INFORMATION ON THE COMPANY

A. HISTORY AND DEVELOPMENT OF THE COMPANY

The Company

We are Ship Finance International Limited, a Bermuda-based company incorporated in Bermuda on October 10, 2003, as a Bermuda exempted company under the Bermuda Companies Law of 1981 (Company No. EC-34296). We are engaged primarily in the ownership and operation of vessels and offshore related assets, and also involved in the charter, purchase and sale of assets.  Our registered and principal executive offices are located at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, HM 08, Bermuda, and our telephone number is +1 (441) 295-9500.

We operate through subsidiaries, partnerships and branches located in Bermuda, Cyprus, Malta, Liberia, Norway, Singapore, the United Kingdom and the Marshall Islands.

We are an international ship owning and chartering company with one of the largest asset bases across the maritime and offshore industries. As at April 9, 2015 , our assets consist of 19 oil tankers, 14 drybulk carriers, 17 container vessels, two car carriers, two jack-up drilling rigs, two ultra-deepwater drilling units, six offshore supply vessels and two chemical tankers. Our oil tankers and chemical tankers are all double-hull vessels.

Our customers currently include Frontline, Seadrill, NADL, Sinochem Shipping Co. Ltd. ("Sinochem"), China National Chartering Co Ltd ("Sinochart"), Heung-A Shipping Co. Ltd. ("Heung-A"), Hyundai Glovis Co. Ltd. ("Hyundai Glovis"), Western Bulk A/S ("Western Bulk"), Hamburg Süd Group, Hanjin Shipping ("Hanjin"), PT Apexindo Pratama Duta, Orient Overseas Container Line Ltd ("OOCL"), MSC Mediterranean Shipping Company S.A. ("MSC") and UFC. Our customers also currently include Deep Sea Supply Plc. and Deep Sea Supply BTG B.V., which is a joint venture owned 50% by Deep Sea Supply Plc. and 50% by BTG Pactual Oil & Gas Empreendimentos e Particapacoes S.A., or BTG Pactual. We refer to Deep Sea Supply Plc. and Deep Sea Supply BTG B.V. together as Deep Sea.

Our primary objective is to continue to grow our business through accretive acquisitions across a diverse range of marine and offshore asset classes. In doing so, our strategy is to generate stable and increasing cash flows by chartering our assets primarily under medium to long-term bareboat or time charters.
History of the Company

We were formed in 2003 as a wholly owned subsidiary of Frontline, a major operator of large crude oil tankers. In 2004, Frontline distributed 25% of our common shares to its ordinary shareholders in a partial spin off, and our common shares commenced trading on the New York Stock Exchange, or the NYSE, under the ticker symbol "SFL" on June 17, 2004. Frontline subsequently made six further dividends of our shares to its shareholders and its ownership in our Company is now less than one percent. Our assets at the time consisted of a fleet of Suezmax tankers, Very Large Crude Carriers, or VLCCs, and oil/bulk/ore carriers, or OBOs.

Since 2004, we have diversified our asset base and now have eight asset types, comprising crude oil tankers, chemical tankers, container vessels, car carriers, drybulk carriers, jack-up drilling rigs, ultra-deepwater drilling units and offshore supply vessels.


Most of our oil tankers are chartered to the Frontline Charterers under longer term time charters that have remaining terms that range from three to 12 years. The Frontline Charterers, in turn, charter our vessels to third parties. The daily base charter rates payable to us under the charters have been fixed in advance and will decrease as our vessels age. In December 2011, in response to a restructuring of Frontline necessitated by an extended period of low charter rates for oil tankers and OBOs, amendments were made to the charter agreements with the Frontline Charterers relating to 28 double-hull vessels, whereby we received a compensation payment of $106 million and agreed to temporarily reduce by $6,500 per day the base charter rates payable on each vessel.  The temporary reduction applies from January 1, 2012, until December 31, 2015. Thereafter, the base charter rates will revert to the previously agreed levels. For the duration of the temporary reduction, we are entitled to receive 100% of any excess above the reduced charter rates earned by the Frontline Charterers on our vessels, calculated annually on an average daily TCE basis and subject to a maximum excess of $6,500 per day per vessel. Eleven of the vessels have been sold since December 2011, including all of the OBOs.


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In addition to the base charter rates, the Frontline Charterers pay us a profit sharing amount equal to 25% of the charter revenues they realize above specified threshold levels, paid annually and calculated on an average daily TCE basis. Previously, up until December 31, 2011, this profit sharing rate was 20%. In terms of the agreement relating to the temporary reduction in base charter rates, of the $106 million compensation payment received, $50 million represents a non-refundable advance on profit sharing earnings relating to the 25% profit sharing agreement which took effect on January 1, 2012.

We have also entered into agreements with Frontline Management to provide fixed rate operation and maintenance services for the vessels on time charter to the Frontline Charterers, and for administrative support services. These agreements enhance the predictability and stability of our cash flows, by fixing substantially all of the operating expenses of our crude oil tankers.

The charters for the two jack-up drilling rigs, two ultra-deepwater drilling units, six offshore supply vessels, two chemical tankers and 11 of the container vessels are all on bareboat terms, under which the respective charterer will bear all operating and maintenance expenses.


Acquisitions and Disposals

Acquisitions
In the year ended December 31, 2014, we took delivery of the following vessels:
•
In February 2014, we took delivery of the newbuilding harsh environment jack-up drilling rig West Linus , which immediately commenced a bareboat charter in excess of 15 years to a subsidiary of NADL.
•
In March 2014, we took delivery of two 5,800 TEU container vessels, MSC Margarita built in 2001 and MSC Vidhi built in 2002, which immediately commenced long-term bareboat charters to MSC.
•
In March 2014, we announced the acquisition of seven 4,100 TEU container vessels built in 2002, in combination with long-term bareboat charters to MSC. One of these vessels was delivered to us in March 2014 ( MSC Vaishnavi R. ), five were delivered in April 2014 ( MSC Julia R. , MSC Arushi R. , Santa Roberta , Santa Ricarda and Santa Rafaela ) and the final one was delivered in May 2014 ( Santa Rebecca ).
•
In May 2014, we announced the acquisition of two 82,000 dwt Kamsarmax dry-bulk carriers built in 2012. The Sinochart Beijing and Min Sheng I were delivered to us in July and August 2014, respectively, and immediately commenced long-term time-charters to a Chinese state-owned charterer.
•
In September and November 2014, we took delivery of two newbuilding 8,700 TEU container vessels, respectively San Felipe and San Felix, which immediately commenced seven year time-charters to Hamburg Süd.
Since January 1, 2015, we have taken delivery of the following vessels:
•
In January 2015, we took delivery of two newbuilding 8,700 TEU container vessels, respectively San Fernando and San Francisca , which immediately commenced seven year time-charters to Hamburg Süd.

Disposals
In the year ended December 31, 2014, we disposed of the following vessels:

•
In January 2014 and March 2014, the arrangements whereby we chartered-in the container vessels CMA CGM Magellan and CMA CGM Corte Real and chartered them out to CMA CGM S.A., or CMA CGM, were terminated after CMA CGM exercised their options to acquire the entities owning the vessels.
•
In the first half of 2014, we cancelled the remaining three of the four newbuilding 4,800 TEU container vessels which we had agreed to acquire in April 2011. The cancellations were for reasons of excessive delays in delivery and no loss was recorded, as the contracts provided for full reimbursement of all installments paid plus interest thereon. The first of these four newbuilding vessels had also been cancelled in December 2013 for reasons of excessive delays.
•
In November 2014, we sold the VLCCs Front Comanche , Front Commerce and Front Opalia to an unrelated third party. Net cash proceeds of approximately $77.4 million were received, including $10.5 million cash compensation from Frontline for early termination of the charters. Additional compensation was received from Frontline in the form of loan notes with a face value of $48.4 million, bearing interest at 7.25% per annum and amortizing over the approximately eight year remaining period of the terminated charters. A loss of $1.4 million was recorded on these disposals.
•
In December 2014, the ultra deepwater drillship West Polaris was delivered to Seadrill pursuant to the exercise of a pre-agreed option. A gain of approximately $6.1 million was recorded.

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Since January 1, 2015, we have disposed of vessels as follows:
•
In February 2015, we transferred ownership of five 2,800 TEU container vessels to unrelated third parties following the exhaustion of an indirect limited performance guarantee from Ship Finance International Limited to the providers of loan finance secured against the vessels (see Consolidated Financial Statements Note 27: Subsequent events). An impairment charge of $11.8 million had been taken against these vessels in the fourth quarter of 2014.

B.BUSINESS OVERVIEW

Our Business Strategies
Our primary objectives are to profitably grow our business and increase long-term distributable cash flow per share by pursuing the following strategies:

(1)
Expand our asset base. We have increased, and intend to further increase, the size of our asset base through timely and selective acquisitions of additional assets that we believe will be accretive to long-term distributable cash flow per share.  We will seek to expand our asset base through placing newbuilding orders, acquiring new and modern second-hand vessels and entering into medium or long-term charter arrangements. From time to time we may also acquire vessels with no or limited initial charter coverage. We believe that by entering into newbuilding contracts or acquiring modern second-hand vessels or rigs we can provide for long-term growth of our assets and continue to decrease the average age of our fleet.

(2)
Diversify our asset base. Since 2004, we have diversified our asset base and now have eight asset types, comprising oil tankers, chemical tankers, container vessels, car carriers, drybulk carriers, jack-up drilling rigs, ultra-deepwater drilling units and offshore supply vessels.  We believe that there are other attractive markets that could provide us with the opportunity to further diversify our asset base.  These markets include vessels and other assets that are of long-term strategic importance to certain operators in the shipping and offshore industries. We believe that the expertise and relationships of our management, together with our relationship and affiliation with Mr. John Fredriksen, could provide us with incremental opportunities to expand our asset base.

(3)
Expand and diversify our customer relationships. Since 2004, we have increased our customer base from one to 15 customers. Of these 15 customers, Frontline, Deep Sea, Seadrill, NADL and UFC are related parties. We intend to continue to expand our relationships with our existing customers and also to add new customers, as companies servicing the international shipping and offshore oil exploration markets continue to expand their use of chartered-in assets to add capacity.

(4)
Pursue medium to long-term fixed-rate charters. We intend to continue to pursue medium to long-term fixed rate charters, which provide us with stable future cash flows.  Our customers typically employ long-term charters for strategic expansion as most of their assets are typically of strategic importance to certain operating pools, established trade routes or dedicated oil-field installations.  We believe that we will be well positioned to participate in their growth.  In addition, we will also seek to enter into charter agreements that are shorter and provide for profit sharing, so that we can generate incremental revenue and share in the upside during strong markets.

Customers
The Frontline Charterers have been our principal customers since we were spun-off from Frontline in 2004. However, in 2008 we made substantial investments in offshore drilling units which are chartered to the Seadrill Charterers, and the percentage of our business attributable to the Frontline Charterers has decreased following the sale of several of the vessels chartered by them and the delivery and commencement of the charters of the drilling units. We anticipate that the percentage of our business attributable to both the Frontline Charterers and the Seadrill Charterers will decrease as we continue to expand our business and our customer base.



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Competition
We currently operate in several sectors of the shipping and offshore industry, including oil transportation, drybulk shipments, chemical transportation, container transportation, car transportation, drilling rigs and offshore supply vessels.

The markets for international seaborne oil transportation services, drybulk transportation services, and container and car transportation services are highly fragmented and competitive. Seaborne oil transportation services are generally provided by two main types of operators: major oil companies or captive fleets (both private and state-owned) and independent shipowner fleets.

In addition, several owners and operators pool their vessels together on an ongoing basis, and such pools are available to customers to the same extent as independently owned and operated fleets. Many major oil companies and other commodity carriers also operate their own vessels and use such vessels not only to transport their own cargoes but also to transport cargoes for third parties, in direct competition with independent owners and operators.

Container vessels and car carriers are generally operated by logistics companies, where the vessels are used as an integral part of their services. Therefore, container vessels and car carriers are typically chartered more on a period basis and single voyage chartering is less common. As the market has grown significantly over recent decades, we expect in the future to see more vessels chartered by logistics companies on a shorter term basis, particularly smaller vessels.

Our jack-up drilling rigs, ultra-deepwater drilling units and offshore supply vessels are chartered out on long-term charters to contractors, and therefore we do not expect to be directly exposed to short and medium-term fluctuations in these markets. Jack-up drilling rigs, ultra-deepwater drilling units and offshore supply vessels are normally chartered by oil companies on a shorter-term basis linked to area-specific well drilling or oil exploration activities, but there have also been longer period charters available when oil companies want to cover their longer term requirements for such vessels. Offshore supply vessels, ultra-deepwater drillships and semi-submersible drilling rigs are self-propelled, and can therefore easily move between geographic areas. Jack-up drilling rigs are not self-propelled, but it is common to move these assets over long distances on heavy-lift vessels. Therefore, the markets and competition for these rigs are effectively world-wide.

Competition for charters in all the above sectors is intense and is based upon price, location, size, age, condition and acceptability of the vessel/rig and its manager. Competition is also affected by the availability of other size vessels/rigs to compete in the trades in which we engage. Most of our existing vessels are chartered at fixed rates on a long-term basis and are thus not directly affected by competition in the short-term. However, tankers chartered to the Frontline Charterers and drybulk carriers chartered to UFC are subject to profit sharing agreements, which will be affected by competition experienced by the charterers.

Risk of Loss and Insurance
Our business is affected by a number of risks, including mechanical failure, collisions, property loss to the vessels, cargo loss or damage, and business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, the operation of any ocean-going vessel is subject to the inherent possibility of catastrophic marine disaster, including oil spills and other environmental mishaps, and the liabilities arising from owning and operating vessels in international trade.

The insurance of our vessels which are chartered on a bareboat basis or on a time charter basis to the Frontline Charterers is the responsibility of the bareboat charterers or Frontline Management, respectively, who arrange insurance in line with standard industry practice. We are responsible for the insurance of our other time chartered and voyage chartered vessels. In accordance with standard practice, we maintain marine hull and machinery and war risks insurance, which include the risk of actual or constructive total loss, and protection and indemnity insurance with mutual assurance associations. From time to time we carry insurance covering the loss of hire resulting from marine casualties in respect of some of our vessels. Currently, the amount of coverage for liability for pollution, spillage and leakage available to us on commercially reasonable terms through protection and indemnity associations and providers of excess coverage is up to $1 billion per tanker per occurrence. Protection and indemnity associations are mutual marine indemnity associations formed by shipowners to provide protection from large financial loss to one member by contribution towards that loss by all members.


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We believe that our current insurance coverage is adequate to protect us against the accident-related risks involved in the conduct of our business and that we maintain appropriate levels of environmental damage and pollution insurance coverage, consistent with standard industry practice. However, there is no assurance that all risks are adequately insured against, that any particular claims will be paid, or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future.

Environmental Regulation and Other Regulations
Government regulations and laws significantly affect the ownership and operation of our crude oil tankers, drybulk carriers, chemical tankers, drilling units, container vessels, car carriers and offshore supply vessels.  We are subject to various international conventions, laws and regulations in force in the countries in which our vessels and drilling units may operate or are registered. Compliance with such laws, regulations and other requirements entails significant expense, including vessel and drilling unit modification and implementation of certain operating procedures.
A variety of governmental, quasi-governmental and private organizations subject our assets to both scheduled and unscheduled inspections.  These organizations include the local port authorities, national authorities, harbor masters or equivalent, classification societies, flag states and charterers, terminal operators, oil companies and drybulk and commodity owners.  Some of these entities require us to obtain permits, licenses and certificates for the operation of our assets.  Our failure to maintain necessary permits or approvals could require us to incur substantial costs or temporarily suspend operation of one or more of the assets in our fleet.

We believe that the heightened levels of environmental and quality concerns among insurance underwriters, regulators and charterers have led to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout the industry, particularly older tankers.  Increasing environmental concerns have created a demand for tankers that conform to the stricter environmental standards.  We are required to maintain operating standards for all of our vessels emphasizing operational safety, quality maintenance, continuous training of our officers and crews, and compliance with applicable local, national and international environmental laws and regulations.  We believe that the operation of our vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material permits, licenses, certificates or other authorizations necessary for the conduct of our operations; however, because such laws and regulations are frequently changed and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels.  The IMO adopted the International Convention for the Control and Management of Ship's Ballast Water and Sediments Convention, or the BWM Convention, in February 2004, which when ratified will require investment in new equipment on board our vessels, but it is not possible to quantify the costs of such modifications at this time. In addition, a future serious marine incident that results in significant oil pollution or otherwise causes significant adverse environmental impact, such as the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, could result in additional legislation or regulation that could negatively affect our profitability.

The laws and regulations discussed below may not constitute a comprehensive list of all such laws and regulations that are applicable to the operation of our vessels and drilling units.

Flag State
The flag state, as defined by the United Nations Convention on the Law of the Sea, is responsible for implementing and enforcing a broad range of international maritime regulations with respect to all ships granted the right to fly its flag. The "Shipping Industry Guidelines on Flag State Performance" evaluates flag states based on factors such as sufficiency of infrastructure, ratification, implementation and enforcement of principal international maritime treaties, supervision of surveys, casualty investigations, compliance with International Labour Organization reporting, and participation at International Maritime Organization meetings. Our vessels are flagged in Liberia, Singapore, the Bahamas, Cyprus, Malta, the Marshall Islands, Panama, Hong Kong, and Norway.



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International Maritime Organization
The United Nations' International Maritime Organization, or the IMO, has adopted the International Convention for the Prevention of Marine Pollution from Ships, 1973, as modified by the Protocol of 1978 relating thereto, collectively referred to as MARPOL 73/78 and herein as "MARPOL". MARPOL entered into force on October 2, 1983.  It has been adopted by over 150 nations, including many of the jurisdictions in which our vessels operate.  MARPOL sets forth pollution prevention requirements applicable to all vessels, and is broken into six Annexes, each of which regulates a different source of pollution.  Annex I relates to oil leakage or spill; Annexes II and III relate to harmful substances carried in liquid bulk or packaged form, respectively; Annexes IV and V relate to sewage and garbage management, respectively; and lastly, Annex VI relates to air emissions.  Annex VI was separately adopted by the IMO in September 1997.
In December 2003, the Marine Environmental Protection Committee of the IMO, or MEPC, adopted amendments to Annex I of MARPOL, which became effective in April 2005. The amendments:

a) revised then existing regulation 13G (now Regulation 20 of Annex I) accelerating the phase-out of single hull oil tankers (of which we have none); and
b) adopted a new regulation 13H (now Regulation 21 of Annex I), aimed at the prevention of oil pollution from oil tankers carrying as cargo heavy grade oil, or HGO, which includes most of the grades of marine fuel. Under Regulation 21, HGO means any of the following:
•
crude oils having a density at 15ºC higher than 900 kg/m³;
•
fuel oils having either a density at 15ºC higher than 900 kg/m³ or a kinematic viscosity at 50ºC higher than 180 mm²/s; or
•
bitumen, tar and their emulsions.
Any port state can deny ship-to-ship transfer of HGO in areas under its jurisdiction, except when such transfer is necessary for the purpose of securing the safety of a ship or saving life at sea.

Revised Annex I to the MARPOL Convention entered into force in January 2007 and has undergone various minor amendments since then. Revised Annex I also imposes construction requirements for oil tankers delivered on or after January 1, 2010. An amendment to revised Annex I amended the definition of HGO and broadened the scope of regulation 21. An amendment to Annex I regulation 12A came into force on August 1, 2007. Regulation 12A requires fuel oil tanks to be located inside the double hull in all ships with an aggregate oil fuel capacity of 600m 3 and above which are delivered on or after August 1, 2010, including ships for which the building contract is entered into on or after August 1, 2007, or for which the keel is laid on or after February 1, 2008, in the absence of a contract.

Non-compliance with IMO regulations may subject a shipowner or bareboat charterer to increased liability, may lead to loss of or decreases in available insurance coverage for affected vessels and may result in denial of access to, or detention in, some ports including United States and European Union ports.

Air Emissions
In September 1997, the IMO adopted Annex VI to MARPOL to address air pollution.  Effective May 2005, Annex VI sets limits on nitrogen oxide emissions from ships whose diesel engines were constructed, or underwent major conversions, on or after January 1, 2000.  It also prohibits "deliberate emissions" of "ozone depleting substances", defined to include certain halons and chlorofluorocarbons. "Deliberate emissions" are not limited to times when the ship is at sea; they can for example include discharges occurring in the course of the ship's repair and maintenance. Also prohibited is the emission of "volatile organic compounds" from certain tankers, and the shipboard incineration of certain substances, such as polychlorinated biphenyls (PCBs), using incinerators installed after January 1, 2000. Annex VI also includes a global cap on the sulphur content of fuel oil and allows for special areas to be established with more stringent controls on sulfur emissions, known as Emission Control Areas ("ECAs").

The MEPC adopted amendments to Annex VI on October 10, 2008, which entered into force on July 1, 2010.  The amended Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur contained in any fuel oil used on ships. As of January 1, 2012, the amended Annex VI requires that fuel oil contain no more than 3.50% sulfur, a reduction from the previous cap of 4.50%.  By January 1, 2020, sulfur content must not exceed 0.50%, subject to a feasibility review to be completed no later than 2018.

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Sulfur content standards are even stricter within certain ECAs. As of July 1, 2010, ships operating within an ECA may not use fuel with sulfur content in excess of 1.00% (a reduction from the previous cap of 1.50%), which is further reduced to 0.10% on January 1, 2015.  The Baltic Sea and the North Sea have been designated ECAs, and Amended Annex VI establishes procedures for designating new ECAs. Effective August 1, 2012, certain coastal areas of North America were designated ECAs, and effective January 1, 2014, the United States Caribbean Sea was designated an ECA. Ocean-going vessels in these areas will be subject to stringent emissions controls, which may cause us to incur additional costs. If other ECAs are approved by the IMO, or other new or more stringent requirements relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA, or the states where we operate, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs of our operations.

As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for new ships, in part to address greenhouse gas emissions. It makes the Energy Efficiency Design Index (EEDI) apply to all new ships and the Ship Energy Efficiency Management Plan (SEEMP) apply to all ships.
Amended Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date of installation. The EPA promulgated equivalent, and in some cases stricter, emissions standards in 2009.

As of January 1, 2010, the Directive 2005/33/EC of the European Parliament and of the Council of July 6, 2005, amending Directive 1999/32/EC, came into force. The objective of the directive is to reduce emission of sulfur dioxide and particulate matter caused by the combustion of certain petroleum derived fuels. The directive imposes limits on the sulfur content of such fuels as a condition of their use within a Member State territory. As of January 1, 2010, marine fuels used by inland waterway vessels and ships at berth in ports in EU countries must have a maximum sulfur content of 0.10% by mass. On July 15, 2011, the European Commission adopted a proposal for an amendment of Directive 1999/32/EC which would align requirements with those imposed by the revised MARPOL Annex VI which introduced stricter sulfur limits. Directive 2012/33/EU, also amending Directive 1999/32//EC, was published in the Official Journal of the European Union on November 17, 2012. The deadline for bringing member states' legislation into compliance was June 18, 2014, and the amended sulfur directive entered into force on January 1, 2015.

Safety Requirements
The IMO has adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International Convention on Load Lines, or LL Convention, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises the SOLAS and LL Convention standards, and amendments to SOLAS made in May 2012 entered into force on January 1, 2014. The Convention on Limitation of Liability for Maritime Claims, or LLMC, was recently amended and the amendments are expected to go into effect on June 8, 2015. The amendments alter the limits of liability for loss of life or personal injury claims and property claims against ship-owners.

The operation of our ships is also affected by the requirements contained in Chapter IX of SOLAS, which sets forth the IMO's International Management Code for the Safe Operation of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires ship owners and bareboat charterers to develop and maintain an extensive "Safety Management System", or SMS, that includes the adoption of a safety and environmental protection policy, setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. We intend to rely upon the safety management system that the appointed ship managers have developed.

The ISM Code requires that vessel operators obtain a Safety Management Certificate, or SMC, for each vessel they operate.  This certificate evidences compliance by a vessel's operators with the ISM Code requirements for a SMS. No vessel can obtain a SMC under the ISM Code unless its manager has been awarded a "Document of Compliance", or DOC, issued in most instances by the vessel's flag state. As of the date of this report, our appointed ship managers have obtained DOCs for their office and SMCs for all of our vessels for which such certificates are required by the IMO, and these are renewed as required.

Non-compliance with the ISM Code or other IMO regulations may subject the ship owner or bareboat charterer to increased liability, lead to loss of or decreases in available insurance coverage for affected vessels, and result in the denial of access to, or detention in, some ports.  As of the date of this report, each of our vessels is ISM Code certified. However, there can be no assurance such certificates will be maintained.


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Ballast Water Requirements
The IMO adopted the BWM Convention, in February 2004. The BWM Convention's implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention will not become effective until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world's merchant shipping. To date, there has not been sufficient adoption of this standard for it to take force, but it is close. Many of the implementation dates originally written in the BWM Convention have already passed, so that once it enters into force, the period for installation of mandatory ballast water exchange requirements would be extremely short, with several thousand vessels each year needing to install ballast water management systems (BWMS). For this reason, on December 4, 2013, the IMO Assembly passed a resolution revising the application dates of the BWM Convention so that they are triggered by the entry into force date and not the dates originally in the BWM Convention. This in effect makes all vessels constructed before the entry into force date "existing vessels", and allows for the installation of a BWMS on such vessels at the first renewal survey following entry into force. Once mid-ocean ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers. Although we do not believe that the costs of such compliance would be material, it is difficult to predict the overall impact of such requirements on our operations.


Oil Pollution Liability
The IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters of the signatories to such conventions. For example, the IMO has adopted the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by Protocols in 1976, 1984 and 1992, and further amended in 2000, or the CLC (of which the United States is not a party). Under the CLC and depending on whether the country in which the damage results is a party to the 1992 Protocol to the CLC, a vessel's registered owner is strictly liable for pollution damage caused in the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions.  The 1992 Protocol changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights. The limits on liability have since been amended so the compensation limits on liability were raised. The right to limit liability is forfeited under the CLC where the spill is caused by the ship-owner's personal fault, and under the 1992 Protocol where the spill is caused by the ship-owner's personal act or omission by intentional or reckless conduct, where the ship-owner knew pollution damage would probably result. A state that is a party to the CLC may not allow a ship under its flag to trade unless that ship has a certificate of insurance or something equivalent. In jurisdictions where the CLC has not been adopted, various legislative schemes or common law govern, and liability is imposed either on the basis of fault or in a manner similar to that of the CLC. The CLC requires ships covered by it to maintain insurance covering the liability of the owner in a sum equivalent to an owner's liability for a single incident. We believe that our insurance will cover the liability under the plan adopted by the IMO.

The IMO has adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage of 2001, or the Bunker Convention, to impose strict liability on ship-owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying states, liability for spills or releases of oil carried as fuel in ships' bunkers is typically determined by the national or other domestic laws in the jurisdiction where the events or damages occur.

The IMO continues to review and introduce new conventions, laws and regulations. Although it is difficult to accurately predict what additional regulations, if any, may be passed by the IMO in the future and what effect, if any, such additional regulations may have on our operations, they could limit our ability to do business and have a material adverse effect on our business and results of operations.

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United States Requirements
The U.S. Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the environment following oil spills. OPA affects all "owners and operators" whose vessels trade with the United States, its territories and possessions, or whose vessels operate in United States waters, which include the United States territorial sea and its 200 nautical mile exclusive economic zone around the United States. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea. OPA and CERCLA both define "owner and operator" in the case of a vessel as "any person owning, operating or chartering by demise the vessel".  Both OPA and CERCLA impact our operations.

Under OPA, vessel owners and operators are "responsible parties" and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third party, other than an agent or employee of, or a person acting pursuant to a contractual relationship with, the responsible party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened discharges of oil from their vessels. OPA contains statutory caps on liability and damages, which include:
•
injury to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
•
injury to, or economic losses resulting from, the destruction of real and personal property;
•
net loss of taxes, royalties, rents, fees or net profit revenues resulting from injury to, or destruction or loss of, real or personal property or natural resources;
•
loss of subsistence use of natural resources that are injured, destroyed or lost;
•
loss of profits or impairment of earnings capacity due to injury to, or destruction or loss of, real or personal property or natural resources by any claimant, whether or not such claimant has a proprietary interest in the property; and
•
net cost of increased or additional public services necessitated by removal activities following a discharge of oil, such as protection from fire, safety or health hazards, and loss of subsistence use of natural resources.

OPA limits the liability of responsible parties with respect to single-hull tankers over 3,000 gross tons to the greater of $3,200 per gross ton or $23,496,000, while for all other tankers over 3,000 gross tons the liability is limited to the greater of $2,000 per gross ton or $17,088,000.  For non-tank vessels, such as drybulk carriers, liability is limited to the greater of $1,000 per gross ton or $854,400, subject to periodic adjustment for inflation.  For offshore facilities, except deepwater ports, liability is capped at the total of all removal costs plus $75 million. These limits of liability do not apply if an incident was proximately caused by the violation of an applicable U.S. federal safety, construction or operating regulation by a responsible party, or its agent, employee or a person acting pursuant to a contractual relationship with the responsible party, or by a responsible party's gross negligence or willful misconduct.  The limitation on liability similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsible party knows or has reason to know of the incident, (ii) reasonably cooperate and assist as requested in connection with oil removal activities, or (iii) without sufficient cause, comply with an order issued under the Federal Pollution Act (Section 311 (c) and (e)) or the Intervention on the High Seas Act.

OPA permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries. Some states have enacted legislation providing for unlimited liability for discharge of pollutants within their waters, which may include charterers and cargo owners and operators of vessels.

The 2010 Deepwater Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes, including the raising of liability caps under OPA.  For example, on August 15, 2012, the U.S. Bureau of Safety and Environment Enforcement released a final drilling safety rule for offshore oil and gas operations that strengthens the requirements for safety equipment, well control systems, and blowout prevention practices. Compliance with any new requirements of OPA may substantially impact our cost of operations or require us to incur additional expenses to comply with any new regulatory initiatives or statutes. Additional legislation or regulations applicable to the operation of our vessels that may be implemented in the future could adversely affect our business.


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CERCLA contains a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well as damages for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing same, and health assessments or health effects studies.  There is no liability if the discharge of a hazardous substance results solely from the act or omission of a non-contractual third party, an act of God or an act of war.  Liability under CERCLA is limited to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo, and the greater of $300 per gross ton or $500,000 for any other vessel.  These limits do not apply (rendering the responsible person liable for the total cost of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence, or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations.  The limitation on liability also does not apply if the responsible person fails or refuses to provide all reasonable cooperation and assistance as requested in connection with response activities where the vessel is subject to OPA.

OPA and CERCLA both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard, or USCG, evidence of financial responsibility sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. An owner or operator of more than one tanker is required to demonstrate evidence of financial responsibility for the entire fleet in an amount equal only to the financial responsibility requirement relating to the vessel with the greatest maximum liability. Vessel owners and operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification as a self-insurer, or a guarantee. We comply with the USCG's financial responsibility regulations by procuring a Certificate of Financial Responsibility provided by Maritime Insurance Solutions Ltd.

We have and expect to maintain pollution liability insurance coverage in the amount of $1 billion per incident for each of our vessels. If the damages from a catastrophic spill were to exceed our insurance coverage, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Owners or operators of vessels and facilities operating in the waters of the United States must file vessel and facility response plans with the USCG, and their vessels and facilities are required to operate in compliance with their USCG approved plans. These response plans must, among other things, describe response activities for a discharge, identify response resources, describe crew training and drills, and identify a qualified individual with full authority to implement removal actions.
We have obtained vessel response plans approved by the USCG for our vessels operating in the waters of the U.S.


Other Environmental Initiatives
The U.S. Clean Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the costs of removal, remediation and damages, and complements the remedies available under OPA and CERCLA.  Furthermore, many U.S. states that border a navigable waterway have enacted environmental pollution laws that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous substance. These laws may be more stringent than U.S. federal law.

The EPA and USCG have enacted rules relating to ballast water discharge, compliance with which requires the installation of equipment on our vessels to treat ballast water before it is discharged, or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or which may otherwise restrict our vessels from entering U.S. waters.
The EPA regulates the discharge of ballast and bilge water and other substances in U.S. waters under the CWA. EPA regulations require vessels 79 feet in length or longer (other than commercial fishing vessels and recreational vessels) to comply with a Vessel General Permit, or VGP, authorizing ballast and bilge water discharges and other discharges incidental to the operation of vessels.  The VGP imposes technology and water-quality based effluent limits for certain types of discharges and establishes specific inspection, monitoring, record-keeping and reporting requirements to ensure the effluent limits are met.  On March 28, 2013, the EPA re-issued the VGP for another five years, effective from December 19, 2013. The new VGP focuses on authorizing discharges incidental to operations of commercial vessels, and contains numeric ballast water discharge limits for most vessels to reduce the risk of invasive species in U.S. waters, more stringent requirements for exhaust gas scrubbers, and the use of environmentally acceptable lubricants.


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In addition, under §401 of the CWA, the VGP must be certified by the state where the discharge is to take place. Certain states have enacted additional discharge standards as conditions to their certification of the VGP. These local standards bring the VGP into compliance with more stringent state requirements, such as those further restricting ballast water discharges and preventing the introduction of non-indigenous species considered to be invasive. The VGP and its state-specific regulations and any similar restrictions enacted in the future will increase the costs of operating in the relevant waters.

USCG regulations adopted under the U.S. National Invasive Species Act also impose mandatory ballast water management practices for all vessels equipped with ballast water tanks entering or operating in U.S. waters. As of June 21, 2012, the USCG implemented revised regulations establishing standards on the allowable concentration of living organisms in ballast water discharged from ships in U.S. waters. Compliance with the EPA and the USCG regulations is likely to require the installation of certain engineering equipment and water treatment systems to treat ballast water before it is discharged, or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.

Notwithstanding the foregoing, as of January 1, 2014, vessels are technically subject to the phasing-in of these standards. As a result, the USCG has provided waivers to vessels which cannot install the as-yet unapproved technology. The EPA, on the other hand, has taken a different approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement response policy in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels do not have the requisite technology installed, but will not grant any waivers.

The U.S. Clean Air Act of 1970, including its amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards applicable to emissions of volatile organic compounds and other air contaminants.  Our vessels are subject to vapor control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated port areas.  Our vessels that operate in such port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these requirements.  The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based air quality standards in each state.  Although state-specific, SIPs may include regulations relating to emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment.  As indicated above, our vessels operating in covered port areas are already equipped with vapor recovery systems that satisfy these existing requirements.

Compliance with future EPA and USCG regulations could require the installation of certain engineering equipment and water treatment systems to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially substantial cost, or may otherwise restrict our vessels from entering U.S. waters.

Our vessels carry cargoes to U.S. waters regularly, and we believe that all of our vessels are suitable to meet OPA and other U.S. environmental requirements and that they would also qualify for trade if chartered to serve U.S. ports.

European Union Regulations
In October 2009, the European Union, or E.U., amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances, including minor discharges, if committed with intent, recklessly or with serious negligence and if the discharges individually or in aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may also lead to criminal penalties. Member states were required to enact laws or regulations to comply with the directive by the end of 2010.  Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims. The directive applies to all types of vessels irrespective of their flag, but certain exceptions apply to warships or where human safety or that of the ship is in danger.

The E.U. has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships, as determined by type, age, flag, and the number of times the ship has been detained.  The E.U. also adopted and then extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses.  The regulation also provided the E.U. with greater authority and control over classification societies, by imposing more requirements on classification societies and providing for fines or penalty payments for organizations that failed to comply.

Greenhouse Gas Regulation
Currently, emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework Convention on Climate Change, which entered into force in 2005, and pursuant to which adopting countries have been required to implement national programs to reduce greenhouse gas emissions.


32


As of January 1, 2013, all ships must comply with mandatory requirements adopted by the MEPC in July 2011, relating to greenhouse gas emissions. All ships are now required to follow the SEEMP, and the minimum energy efficiency levels per capacity mile outlined in the EEDI apply to all new ships. These requirements could cause us to incur additional compliance costs. The IMO is planning to implement market-based mechanisms to reduce greenhouse gas emissions from ships at an upcoming MEPC session. The E.U. has indicated that it intends to propose an expansion of the existing E.U. emissions trading scheme to include emissions of greenhouse gases from marine vessels, and in January 2012 the E.U. launched a public consultation on possible measures to reduce greenhouse gas emissions from ships. In April 2013, the E.U. Parliament rejected proposed changes to the E.U. Emissions Law regarding carbon trading. In June 2013, the European Commission developed a strategy to integrate maritime emissions into the overall E.U. strategy to reduce greenhouse gas emissions. If the strategy is adopted by the European Parliament and Council, large vessels using E.U. ports would be required to monitor, report and verify their carbon dioxide emissions beginning in January 2018. In December 2013, the E.U. environmental ministers discussed draft rules to implement monitoring and reporting of carbon dioxide emissions from ships. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health and safety, and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources. Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of vessels is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental groups seeking such regulation. Any passage of climate control legislation or other regulatory initiatives adopted by the IMO, European Union, the United States or other countries where we operate, or any treaty adopted at the international level to succeed the Kyoto Protocol, that restrict emissions of greenhouse gases could require us to make significant financial expenditures, including capital expenditures to upgrade our vessels, which we cannot predict with certainty at this time.

International Labour Organization
The International Labour Organization, or ILO, which is a specialized agency of the United Nations, has adopted the Maritime Labour Convention 2006, or the MLC 2006. A Maritime Labour Certificate and a Declaration of Maritime Labour Compliance will be required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 entered into force on August 20, 2013, and requires us to develop new procedures to ensure full compliance with its requirements. Our Protection &Indemnity Clubs have, with effect from August 20, 2013, amended their insurance policies to cover elements from MLC 2006, including but not limited to the repatriation of crew and other crew social security provisions.

Offshore Drilling Regulations
Our offshore drilling units are subject to many of the above environmental laws and regulations relating to vessels, but are also subject to laws and regulations focused on offshore drilling operations. We may incur costs to comply with these revised standards.

Rigs and drillships must comply with MARPOL limits on sulfur oxide and nitrogen oxide emissions, chlorofluorocarbons, and the discharge of other air pollutants, except that the MARPOL limits do not apply to emissions that are directly related to drilling, production, or processing activities. As of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for new ships, including the requirement that all new ships utilize the EEDI and the SEEMP.

Our drilling units are subject not only to MARPOL regulation of air emissions, but also to the Bunker Convention's strict liability for pollution damage caused by discharges of bunker fuel in jurisdictional waters of ratifying states. We believe that all of our drilling units are currently compliant in all material respects with these regulations.

Furthermore, any drillships that we may operate in United States waters, including the U.S. territorial sea and the 200 nautical mile exclusive economic zone around the United States, would have to comply with OPA and CERCLA requirements, among others, that impose liability (unless the spill results solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges of oil or other hazardous substances, other than discharges related to drilling.
The U.S. Bureau of Ocean Energy Management, or BOEM, periodically issues guidelines for rig fitness requirements in the Gulf of Mexico and may take other steps that could increase the cost of operations or reduce the area of operations for our units, thus reducing their marketability. Implementation of BOEM guidelines or regulations may subject us to increased costs or limit the operational capabilities of our units, and could materially and adversely affect our operations and financial condition.

33


In addition to the MARPOL, OPA and CERCLA requirements described above, our international offshore drilling operations are subject to various laws and regulations in countries in which we operate, including laws and regulations relating to the importation of and operation of drilling units and equipment, currency conversions and repatriation, oil and gas exploration and development, environmental protection, taxation of offshore earnings and earnings of expatriate personnel, the use of local employees and suppliers by foreign contractors, and duties on the importation and exportation of drilling units and other equipment. New environmental or safety laws and regulations could be enacted, which could adversely affect our ability to operate in certain jurisdictions. Governments in some countries have become increasingly active in regulating and controlling the ownership of concessions and companies holding concessions, the exploration for oil and gas, and other aspects of the oil and gas industries in their countries. In some areas of the world, this governmental activity has adversely affected the amount of exploration and development work done by major oil and gas companies and may continue to do so. Operations in less developed countries can be subject to legal systems that are not as mature or predictable as those in more developed countries, which can lead to greater uncertainty in legal matters and proceedings. Implementation of new environmental laws or regulations that may apply to ultra-deepwater drilling units may subject us to increased costs or limit the operational capabilities of our drilling units and could materially and adversely affect our operations and financial condition.

Vessel Security Regulations
Since the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002, the U.S. Maritime Transportation Security Act of 2002, or MTSA, came into effect. To implement certain portions of the MTSA, in July 2003 the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports and facilities, some of which are regulated by the EPA.
Similarly, in December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security.  The new Chapter V became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and mandates compliance with the International Ship and Port Facility Security Code, or the ISPS Code. The ISPS Code is designed to enhance the security of ports and ships against terrorism. Amendments to SOLAS Chapter VII, made mandatory in 2004, apply to vessels transporting dangerous goods and require those vessels to comply with the International Maritime Dangerous Goods Code.

To trade internationally a vessel must attain an International Ship Security Certificate, or ISSC, from a recognized security organization approved by the vessel's flag state. Among the various requirements are:
•
on-board installation of automatic identification systems to provide a means for the automatic transmission of safety-related information from among similarly equipped ships and shore stations, including information on a ship's identity, position, course, speed and navigational status;
•
on-board installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;
•
the development of vessel security plans;
•
ship identification number to be permanently marked on a vessel's hull;
•
a continuous synopsis record kept onboard showing a vessel's history including the name of the ship, the state whose flag the ship is entitled to fly, the date on which the ship was registered with that state, the ship's identification number, the port at which the ship is registered and the name of the registered owner(s) and their registered address; and
•
compliance with flag state security certification requirements.

A ship operating without a valid certificate may be detained at port until it obtains an ISSC, or it may be expelled from port or refused entry.

The USCG, intended to align with international maritime security standards, exempts from MTSA vessel security measures non-U.S. vessels that have on board as of July 1, 2004, a valid ISSC attesting to the vessel's compliance with SOLAS security requirements and the ISPS Code.

We have implemented the various security measures addressed by MTSA, SOLAS and the ISPS Code, and our fleet is in compliance with applicable security requirements.


34


Inspection by Classification Societies
Classification Societies are independent organizations that establish and apply technical standards in relation to the design, construction and survey of marine facilities including ships and offshore structures. Every ocean-going vessel must be "classed" by a classification society. The classification society certifies that the vessel is "in class", signifying that the vessel has been built and maintained in accordance with the rules of the classification society and complies with applicable rules and regulations of the vessel's country of registry and the international conventions of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on behalf of the authorities concerned.
The classification society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.

For maintenance of the class certification, regular and extraordinary surveys of hull and machinery, including the electrical plant and any special equipment classed, are required to be performed as follows:

•
Annual Surveys : For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable for special equipment classed, within three months before or after each anniversary of the date of commencement of the class period indicated in the certificate.
•
Intermediate Surveys : Extended annual surveys are referred to as intermediate surveys and typically are conducted thirty months after commissioning and each class renewal. Intermediate surveys are to be carried out at or between the occasion of the second or third annual survey.
•
Class Renewal Surveys : Class renewal surveys, also known as special surveys, are carried out for the ship's hull, machinery, including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification for the hull. At the special survey the vessel is thoroughly examined, including audio-gauging to determine the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe steel renewals. The classification society may grant a one year grace period for completion of the special survey. Substantial amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a vessel owner has the option of arranging with the classification society for the vessel's hull or machinery to be on a continuous survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. Upon a vessel-owner's request, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This process is referred to as continuous class renewal.

All areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five years.


Seasonality
Most of our vessels are chartered at fixed rates on a long-term basis and seasonal factors do not have a significant direct effect on our business. Our tankers on charter to the Frontline Charterers are subject to cash sweep and profit sharing agreements and to the extent that seasonal factors affect the profits of the charterers of these vessels we will also be affected. However, any cash sweep and profit sharing receivables relating to the Frontline Charterers are paid annually and the effects of seasonality will be limited to the timing of our cash sweep and profit sharing revenues. Five of our Handysize drybulk carriers currently employed under short-term charters to UFC are also subject to agreements for profit sharing payable at the expiry of their respective charters, and the effects of seasonality will be limited to the timing of these profit sharing revenues.
C. ORGANIZATIONAL STRUCTURE

See Exhibit 8.1 for a list of our significant subsidiaries.


35


D. PROPERTY, PLANTS AND EQUIPMENT
We own a substantially modern fleet of vessels. The following table sets forth the fleet that we own or have contracted for delivery as of April 9, 2015 . All of the VLCCs, Suezmaxes and chemical tankers are double-hull vessels.
Approximate
Lease
Charter Termination
Vessel
Built
Dwt.
Flag
Classification
Date
VLCCs
Front Century
1998
311,000

MI
Capital lease
2021
Front Vanguard
1998
300,000

MI
Capital lease
2021
Front Circassia
1999
306,000

MI
Capital lease
2021
Front Scilla
2000
303,000

MI
Capital lease
2023
Front Ariake
2001
299,000

BA
Capital lease
2023
Front Serenade
2002
299,000

LIB
Capital lease
2024
Front Hakata
2002
298,500

BA
Capital lease
2025
Front Stratus
2002
299,000

LIB
Capital lease
2025
Front Falcon
2002
309,000

BA
Capital lease
2025
Front Page
2002
299,000

LIB
Capital lease
2025
Front Energy
2004
305,000

MI
Capital lease
2027
Front Force
2004
305,000

MI
Capital lease
2027
Suezmaxes

Front Glory
1995
150,000

MI
Capital lease
2018
Front Splendour
1995
150,000

MI
Capital lease
2019
Front Ardenne
1997
153,000

MI
Capital lease
2020
Front Brabant
1998
153,000

MI
Capital lease
2021
Mindanao
1998
159,000

SG
Capital lease
2021
Glorycrown
2009
156,000

MI
n/a
(4
)
Everbright
2010
156,000

MI
n/a
(4
)
Chemical Tankers

Maria Victoria V
2008
17,000

PAN
Operating lease
2018
(1
)
SC Guangzhou
2008
17,000

PAN
Operating lease
2018
(1
)
Handysize Drybulk Carriers

SFL Spey
2011
34,000

HK
Operating lease
2015
(4
)
SFL Medway
2011
34,000

HK
Operating lease
2015
(4
)
SFL Trent
2012
34,000

HK
Operating lease
2015
(4
)
SFL Kent
2012
34,000

HK
Operating lease
2015
(4
)
SFL Tyne (ex Western Australia)
2012
32,000

HK
Operating lease
2015
(4
)
Western Houston
2012
32,000

HK
Operating lease
2015
(4
)
Western Copenhagen
2013
32,000

HK
Operating lease
2016
(4
)
Supramax Drybulk Carriers

SFL Hudson
2009
57,000

MI
Operating lease
2020
SFL Yukon
2010
57,000

HK
Operating lease
2018
SFL Sara
2011
57,000

HK
Operating lease
2019
SFL Kate
2011
57,000

HK
Operating lease
2021
SFL Humber
2012
57,000

HK
Operating lease
2022

36


Kamsarmax Drybulk Carriers
Sinochart Beijing
2012
82,000

HK
Operating lease
2022
Min Sheng 1
2012
82,000

HK
Operating lease
2022
Container vessels

MSC Margarita
2001
5,800

TEU
LIB
Operating lease
2019
(1
)
MSC Vidhi
2002
5,800

TEU
LIB
Operating lease
2019
(1
)
MSC Vaishnavi R.
2002
4,100

TEU
LIB
Operating lease
2019
(1
)
MSC Julia R.
2002
4,100

TEU
LIB
Operating lease
2019
(1
)
MSC Arushi R.
2002
4,100

TEU
LIB
Operating lease
2019
(1
)
Santa Rebecca
2002
4,100

TEU
LIB
Operating lease
2019
(1
)
Santa Roberta
2002
4,100

TEU
LIB
Operating lease
2020
(1
)
Santa Ricarda
2002
4,100

TEU
LIB
Operating lease
2020
(1
)
Santa Rafaela
2002
4,100

TEU
LIB
Operating lease
2020
(1
)
SFL Europa
2003
1,700

TEU
MI
Operating lease
2015
(4
)
Heung-A Green
2005
1,700

TEU
MAL
Operating lease
2020
(1
)
Green Ace
2005
1,700

TEU
MAL
Operating lease
2020
(1
)
SFL Avon
2010
1,700

TEU
MI
Operating lease
2015
(4
)
San Felipe
2014
8,700

TEU
MI
Operating lease
2021
San Felix
2014
8,700

TEU
MI
Operating lease
2021
San Fernando
2015
8,700

TEU
MI
n/a
2022
San Francisca
2015
8,700

TEU
MI
n/a
2022
Car Carriers
Glovis Composer
2005
6,500

CEU
HK
Operating lease
2017
Glovis Conductor
2006
6,500

CEU
PAN
Operating lease
2017
Jack-Up Drilling Rigs
Soehanah
2007
375

ft
PAN
Operating lease
2018
(1
)
West Linus
2014
450

ft
NOR
Capital lease
2029
(1
)
Ultra-Deepwater Drill Units
West Hercules
2008
10,000

ft
PAN
Capital lease
2023
(1
)
West Taurus
2008
10,000

ft
PAN
Capital lease
2023
(1
)
Offshore supply vessels

Sea Leopard
1998
AHTS

(2
)
CYP
Capital lease
2020
(1
)
Sea Bear
1999
AHTS

(2
)
MI
Capital lease
2020
(1
)
Sea Cheetah
2007
AHTS

(2
)
CYP
Operating lease
2019
(1
)
Sea Jaguar
2007
AHTS

(2
)
CYP
Operating lease
2019
(1
)
Sea Halibut
2007
PSV

(3
)
CYP
Operating lease
2019
(1
)
Sea Pike
2007
PSV

(3
)
CYP
Operating lease
2019
(1
)

Key to Flags : BA – Bahamas, CYP - Cyprus, MAL – Malta, HK – Hong Kong, LIB - Liberia, MI - Marshall Islands, PAN – Panama, SG - Singapore, NOR - Norway.

Notes:
(1)
Charterer has purchase options during the term of the charter.

37


(2)
Anchor handling tug supply vessel (AHTS).
(3)
Platform supply vessel (PSV).
(4)
Currently employed on a short-term charter or in the spot market.

Substantially, all of the above vessels and rigs are pledged under mortgages, excluding the two 1,700 TEU container vessels built in 2005. Furthermore, the 1,700 TEU container vessel built in 2003 and the nine VLCCs and five Suezmax tankers on charter to Frontline Shipping Limited, or Frontline Shipping, are no longer pledged under mortgages, following prepayment and cancellation of the related financings in January and February 2015, respectively.

Other than our interests in the vessels and drilling units described above, we do not own any material physical properties. We lease office space in Oslo from Frontline Management and in London from Arcadia Petroleum Limited, both related parties.


ITEM 4A.
UNRESOLVED STAFF COMMENTS
None

ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion should be read in conjunction with Item 3. "Selected Financial Data", Item 4. "Information on the Company" and our audited consolidated financial statements and notes thereto included herein.

Overview
Following our spin-off from Frontline and the purchase of our original fleet in 2004, we have established ourselves as a leading international maritime asset-owning company with one of the largest asset bases across the maritime and offshore industries. A full fleet list is provided in Item 4.D "Information on the Company" showing the assets that we currently own and charter to our customers.

Fleet Development
The following table summarizes the development of our active fleet of vessels:
Vessel type
Total fleet
December 31,
2012
Additions/
Disposals
2013
Total fleet
December 31,
2013
Additions/
Disposals
2014
Total fleet
December 31,
2014

Oil Tankers
26

-4

22

-3

19

Chemical tankers
2

2


2

Dry bulk carriers (including OBOs)
12

+1

-1

12

+2

14

Container vessels
11

11

+11

-2

20

Car carriers
2

2

2

Jack-up drilling rigs
1

1

+1

2

Ultra-deepwater drill units
3

3

-1

2

Offshore supply vessels
6

6



6

Total Active Fleet
63

+1

-5

59

+14

-6

67

The above table includes two 13,800 TEU container vessels which were chartered-in until the first quarter of 2014, when the chartering arrangements were terminated.

In January 2015, we took delivery of two newbuilding 8,700 TEU container vessels. In February 2015, we transferred ownership of five 2,800 TEU container vessels to unrelated third parties. No other deliveries or transfers of vessels are currently scheduled to take place after December 31, 2014.


38



Factors Affecting Our Current and Future Results
Principal factors that have affected our results since 2004, and are expected to affect our future results of operations and financial position, include:
•
the earnings of our vessels under time charters and bareboat charters to the Frontline Charterers, the Seadrill Charterers and other charterers;
•
the amount we receive under the profit sharing arrangements with the Frontline Charterers and UFC, including the arrangement with the Frontline Charterers whereby during the four year period of the temporary reduction in charter rates they will pay us 100% of any earnings above the temporarily reduced rates, subject to a maximum of $6,500 per day (see Revenues below);
•
the earnings and expenses related to any additional vessels that we acquire;
•
earnings from the sale of assets and termination of charters;
•
vessel management fees and expenses;
•
administrative expenses;
•
interest expenses; and
•
mark-to-market adjustments to the valuation of our interest rate swaps and other derivative financial instruments.

Revenues
Our revenues derive primarily from our long-term, fixed-rate charters. Most of the vessels that we acquired from Frontline are chartered to the Frontline Charterers under long-term time charters that are generally accounted for as direct financing leases. On December 30, 2011, amendments were made to the charter agreements with the Frontline Charterers relating to 28 double-hull vessels, all of which were accounted for as direct financing leases. Four of these vessels were sold in 2012, another four were sold in 2013, and a further three sold in 2014. In terms of the amended agreements, we received a compensation payment of $106 million and agreed to a $6,500 per day reduction in the time charter rate for each vessel for the four year period from January 1, 2012, to December 31, 2015. Thereafter, the charter rates revert to the previously agreed daily amounts. The leases were amended to reflect the compensation payment received and the reduction in future minimum lease payments to be received. The amendments affect direct financing lease interest income from January 1, 2012, onwards.

Direct financing and sales-type lease interest income reduces over the terms of our leases as progressively a lesser proportion of the lease rental payment is allocated as lease interest income, and a higher amount is treated as repayment of the lease.

Our future earnings are dependent upon the continuation of existing lease arrangements and our continued investment in new lease arrangements. Future earnings may also be significantly affected by the sale of vessels. Investments and sales which have affected our earnings since January 1, 2014, are listed in Item 4 above under acquisitions and disposals. Some of our lease arrangements contain purchase options which, if exercised by our charterers, will affect our future leasing revenues.

We have profit sharing agreements with some of our charterers, in particular with the Frontline Charterers and UFC. Revenues received under profit sharing agreements depend upon the returns generated by the charterers from the deployment of our vessels. These returns are subject to market conditions which have historically been subject to significant volatility. Prior to December 31, 2011, the Frontline Charterers paid the Company a profit sharing rate of 20% of their earnings above average threshold charter rates on a time-charter equivalent basis from their use of the Company's fleet each fiscal year.  The amendments to the charter agreements made on December 30, 2011, increase the profit sharing percentage to 25% for earnings above those threshold levels. Additionally, the amendments provide that during the four year period of the temporary reduction in charter rates, the Frontline Charterers will pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day. Of the $106 million compensation payment received, $50 million represents a non-refundable advance on profit sharing earnings relating to the 25% profit sharing agreement which took effect on January 1, 2012. In addition to the tankers chartered to the Frontline Charterers, five of our Handysize drybulk carriers on short-term charters to UFC include profit sharing arrangements, whereby we earn a 50% share of profits earned by the vessels above threshold levels.






39


Vessel Management Expenses
Our vessel-owning subsidiaries with vessels on charter to the Frontline Charterers have entered into fixed rate management agreements with Frontline Management, under which Frontline Management is responsible for all technical management of the vessels.  These subsidiaries each pay Frontline Management a fixed fee of $6,500 per day per vessel for these services. An exception to this arrangement is for any vessel chartered to the Frontline Charterers which is sub-chartered by them on a bareboat basis, for which no management fee is payable for the duration of bareboat sub-charter.

In addition to the vessels on charter to the Frontline Charterers, we also have six container vessels, 14 drybulk carriers and two car carriers employed on time charters, and two Suezmax tankers employed in the spot market. We have outsourced the technical management for these vessels and we pay operating expenses for the vessels as they are incurred.  The remaining vessels we own that have charters attached to them are employed on bareboat charters, where the charterer pays all operating expenses, including maintenance, drydocking and insurance.


Administrative Expenses
Administrative expenses consist of general corporate overhead expenses, including personnel costs, property costs, legal and professional fees, and other administrative expenses. Personnel costs include, among other things, salaries, pension costs, fringe benefits, travel costs and health insurance. We have entered into an administrative services agreement with Frontline Management under which they provide us with certain administrative support services, and have agreed to reimburse them for reasonable third party costs, if any, advanced on our behalf. Some of the compensation paid to Frontline Management is based on cost sharing for the services rendered based on actual incurred costs plus a margin.

Mark-to-Market Adjustments
In order to hedge against fluctuations in interest rates, we have entered into interest rate swaps which effectively fix the interest payable on a portion of our floating rate debt. We have also entered into interest/currency swaps in order to fix both the interest and exchange rates applicable to the payment of interest and eventual settlement on our floating rate NOK bonds. Although the intention is to hold such financial instruments until maturity, US GAAP requires us to record them at market valuation in our financial statements. Adjustments to the mark-to-market valuation of these derivative financial instruments, which are caused by variations in interest and exchange rates, are reflected in results of operations and other comprehensive income. Accordingly, our financial results may be affected by fluctuations in interest and exchange rates.

Interest Expenses
Other than the interest expense associated with our 3.75% and 3.25% convertible senior unsecured bonds, and our NOK600 million and NOK900 million senior unsecured bonds, the amount of our interest expense will be dependent on our overall borrowing levels and may significantly increase when we acquire vessels or on the delivery of newbuildings. Interest incurred during the construction of a newbuilding is capitalized in the cost of the newbuilding. Interest expense may also change with prevailing interest rates, although the effect of these changes may be reduced by interest rate swaps or other derivative instruments that we enter into.

Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period.  The following is a discussion of the accounting policies we apply that are considered to involve a higher degree of judgment in their application. For details of all our material accounting policies, see Note 2 to our consolidated financial statements.









40


Revenue Recognition
Revenues are generated from time charter and bareboat charter hires, profit sharing arrangements and voyage freight billings, and are recognized on an accrual basis. Each charter agreement is evaluated and classified as an operating lease or a capital lease (see Leases below). Rental receipts from operating leases are recognized in income over the period to which the payment relates. Voyage revenues are recognized ratably over the estimated length of each voyage, and accordingly are allocated between reporting periods based on the relative transit time in each period. Voyage expenses are recognized as incurred. Probable losses on voyages are provided for in full at the time such losses can be estimated.

Rental payments from direct financing and sales-type leases are allocated between lease service revenues, if applicable, lease interest income and repayment of net investment in leases. The amount allocated to lease service revenue is based on the estimated fair value, at the time of entering the lease agreement, of the services provided which consist of ship management and operating services.

Any contingent elements of rental income, such as profit share or interest rate adjustments, are recognized when the contingent conditions have materialized.

Prior to December 31, 2011, the Frontline Charterers paid the Company a profit sharing rate of 20% of their earnings above average threshold charter rates on a time-charter equivalent basis from their use of the Company's fleet each fiscal year. For each profit sharing period, the threshold is calculated as the number of days in the period multiplied by the daily threshold TCE rates for the applicable vessels. Starting on January 1, 2012, amendments to the charter agreements increased the profit sharing percentage to 25% for earnings above those threshold levels. Additionally, the amendments provide that during the four year period of the temporary reduction in charter rates, the Frontline Charterers will pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day. Under the terms of the amendments to the charter agreements, we received a compensation payment of $106 million, of which $50 million represents a non-refundable advance relating to the 25% profit sharing agreement. Profit sharing revenues are recorded when earned and realizable.


Vessels and Depreciation
The cost of vessels and rigs less estimated residual value are depreciated on a straight line basis over their estimated remaining economic useful lives.  The estimated economic useful life of our offshore assets, including drilling rigs and drillships, is 30 years and for all other vessels it is 25 years. These are common life expectancies applied in the shipping and offshore industries.

If the estimated economic useful life or estimated residual value of a particular vessel is incorrect, or circumstances change and the estimated economic useful life and/or residual value have to be revised, an impairment loss could result in future periods. We monitor the carrying values of our vessels, including direct financing lease assets, and revise the estimated useful lives and residual values of any vessels where appropriate, particularly when new regulations are implemented.
Leases
Leases (charters) of our vessels where we are the lessor are classified as either operating leases or capital leases, based on an assessment of the terms of the lease. For charters classified as capital leases, the minimum lease payments, reduced in the case of time-chartered vessels by projected vessel operating costs, plus the estimated residual value of the vessel are recorded as the gross investment in the lease.

For direct financing leases, the difference between the gross investment in the lease and the carrying value of the vessel is recorded as unearned lease interest income. The net investment in the lease consists of the gross investment less the unearned income. Over the period of the lease each charter payment received, net of vessel operating costs if applicable, is allocated between "lease interest income" and "repayment of investment in lease" in such a way as to produce a constant percentage rate of return on the balance of the net investment in the lease. Thus, as the balance of the net investment in each direct financing lease decreases, a lower proportion of each lease payment received is allocated to lease interest income and a greater proportion is allocated to lease repayment. For direct financing leases relating to time chartered vessels, the portion of each time charter payment received that relates to vessel operating costs is classified as "lease service revenue".


41


The implicit rate of return for each of the Company's direct financing leases is derived in accordance with Accounting Standards Codification, or ASC, Topic 840 " Leases " using the fair value of the asset at the lease inception, the minimum contractual lease payments and the estimated residual values.

For sales-type leases, the difference between the gross investment in the lease and the present values of its components, i.e. the minimum lease payments and the estimated residual value, is recorded as unearned lease interest income. The discount rate used in determining the present values is the interest rate implicit in the lease, as defined in ASC Topic 840-10-20.  The present value of the minimum lease payments, computed using the interest rate implicit in the lease, is recorded as the sales price, from which the carrying value of the vessel at the commencement of the lease is deducted in order to determine the profit or loss on sale. As is the case for direct financing leases, the unearned lease interest income is amortized to income over the period of the lease so as to produce a constant periodic rate of return on the net investment in the lease. In addition, in the case of a sales-type lease, the difference between the fair value (or sales price) and the carrying value (or cost) of the asset is recognized as "profit on sale" in the period in which the lease commences.
We estimate the unguaranteed residual value of our direct financing lease assets at the end of the lease period by calculating depreciation in accordance with our accounting policies over the estimated useful life of the asset. Residual values are reviewed at least annually to ensure that original estimates remain appropriate.

There is a degree of uncertainty involved in the estimation of the unguaranteed residual values of assets leased under both operating and capital leases. Global effects of supply and demand for oil and other cargoes, and changes in international government regulations cause volatility in the spot market for second-hand vessels. Where assets are held until the end of their useful lives the unguaranteed residual value (i.e. scrap value) will fluctuate with the price of steel and any changes in laws related to the ship scrapping process, commonly known as ship breaking.

Classification of a lease involves the use of estimates or assumptions about fair values of leased vessels and expected future values of vessels.  We generally base our estimates of fair value on independent broker valuations of each of our vessels.  Our estimates of expected future values of vessels are based on current fair values amortized in accordance with our standard depreciation policy for owned vessels.


Fixed Price Purchase Options
Where an asset is subject to an operating lease that includes fixed price purchase options, the projected net book value of the asset is compared to the option price at the various option dates. If any option price is less than the projected net book value at an option date, the initial depreciation schedule is amended so that the carrying value of the asset is written down on a straight line basis to the option price at the option date. If the option is not exercised, this process is repeated so as to amortize the remaining carrying value, on a straight line basis, to the estimated scrap value or the option price at the next option date, as appropriate.

Similarly, where a direct financing or sales-type lease relates to a charter arrangement containing fixed price purchase options, the projected carrying value of the net investment in the lease is compared to the option price at the various option dates. If any option price is less than the projected net investment in the lease at an option date, the rate of amortization of unearned finance lease interest income is adjusted to reduce the net investment in the lease to the option price at the option date. If the option is not exercised, this process is repeated so as to reduce the net investment in the lease to the un-guaranteed residual value or the option price at the next option date, as appropriate.

Thus, for operating assets and direct financing and sales-type lease assets, if an option is exercised there will either be (a) no gain or loss on the exercise of the option or (b) in the event that an option is exercised at a price in excess of the net book value of the asset or the net investment in the lease, as appropriate, at the option date, a gain will be reported in the statement of operations at the date of delivery to the new owners.










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Impairment of Long-Lived Assets
The vessels and rigs held and used by us are reviewed for impairment on a quarterly basis and whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment charge would be recognized if the estimate of future undiscounted cash flows expected to result from the use of the vessel or rig and its eventual disposal is less than its carrying amount. When testing for impairment, we consider daily rates currently in effect for existing charters, the possibility of any medium or long-term charter arrangements being terminated early and, using historical trends, estimated daily rates for each vessel or rig for its remaining useful life not covered by existing charters. In assessing the recoverability of carrying amounts, we must make assumptions regarding estimated future cash flows. These assumptions include assumptions about spot market rates, operating costs and the estimated economic useful life of these assets. In making these assumptions we refer to five-year and ten-year historical trends and performance, as well as any known future factors. Factors we consider important which could affect recoverability and trigger impairment include significant underperformance relative to expected operating results, new regulations that change the estimated useful economic lives of our vessels and rigs, and significant negative industry or economic trends.

In the year ended December 31, 2012, reviews of the carrying value of long-lived assets indicated that the Company's long-term investments in shares in a container vessel owner/operator and warrants to purchase shares in a U.S. company were impaired, and charges were taken against these assets. No impairment charge was required in 2013. In the year ended December 31, 2014, reviews of the carrying value of long-lived assets indicated that the Company's five 2,800 TEU container vessels were impaired, and charges were taken against these assets.


Vessel Market Values
As we obtain information from various industry and other sources, our estimates of vessel market values are inherently uncertain. In addition, charter-free market values are highly volatile and any estimate of market value may not be indicative of the current or future basic market value of our vessels or prices that we could achieve if we were to sell them.  Moreover, we are not holding our vessels for sale, except as otherwise noted in this report, and most of our vessels are currently employed under long-term charters or leases or other arrangements. There is not a ready liquid market for vessels that are subject to such arrangements.

During the past few years, the charter-free market values of vessels have experienced particular volatility, with substantial declines in many vessel classes.  As a result, the charter-free market values of many of our vessels have declined below those vessels' carrying value. However, we would not impair those vessels' carrying value under our accounting impairment policy, because we expect future cash flows receivable from the vessels over their remaining useful lives, including existing charters, in all cases exceed such vessels' carrying values.

At December 31, 2014, we owned 67 vessels and rigs, and had newbuilding contracts to acquire a further two container vessels. Taking into account the $85 million scheduled remaining yard payments for completing the newbuildings, and including the two ultra-deepwater drilling units and the harsh-environment jack-up drilling rig which are owned by equity accounted subsidiaries, the aggregate carrying value of these 69 assets at December 31, 2014, was $3.8 billion, as summarized in the table below. The table is presented in the context of the markets in which the vessels operate, with oil tankers and chemical tankers grouped together under "Tanker vessels", container vessels and car carriers grouped together under "Liners" and jack-up drilling rigs, ultra-deepwater drilling units and offshore supply vessels grouped together under "Offshore units".

Number of
owned vessels

Aggregate carrying value
at December 31, 2014
($ millions)

Tanker vessels (1)
21

912

Drybulk carriers (2)
14

383

Liners (3)
24

825

Offshore units (4)
10

1,699

69

3,819


(1)
Inclu des 19 vessels with an aggregate carrying value of $820 million, which we believe exceeds their aggregate charter-free market value by approximately $265 million, and two vessels with a carrying value of $92 million, which we believe is approximately $17 million less than their aggregate charter-free market value.

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(2)
Includes 14 vessels with an aggregate carrying value of $383 million, which we believe exceeds their aggregate charter-free market value by approximately $113 million.
(3)
Includes 9 vessels with an aggregate carrying value of $287 million, which we believe exceeds their aggregate charter-free market value by approximately $171 million, and 15 vessels with an aggregate carrying value of $538 million, which we believe is approximately $46 million less than their aggregate charter-free market value.
(4)
Inc ludes two vessels with an aggregate carrying value of $65 million, which we believe exceeds their aggregate charter-free market value by approximately $24 million, and five vessels with an aggregate carrying value of $204 million, which we believe is approximately $83 million less than their aggregate charter-free market value. The remaining three offshore units, which are owned by wholly-owned subsidiaries accounted for using the equity method, have an aggregate carrying value of $1,430 million, which we believe is $312 million less than their aggregate charter-free market value.

The above aggregate carrying value of $3,819 million at December 31, 2014, is made up of (a) $840 million investments in capital leases, excluding adjustments for deferred equity contribution and unamortized gains (see Note 15 to the consolidated financial statements), (b) $1,377 million vessels and equipment, (c) $87 million newbuildings, (d) $85 million cost to complete newbuildings and (e) $1,430 million carrying value of two ultra-deepwater drilling units and one jack-up drilling rig owned by equity accounted subsidiaries.


Mark-to-Market Valuation of Financial Instruments
The Company enters into interest rate and currency swap transactions, total return bond swaps and total return equity swaps. As required by ASC Topic 815 "Derivatives and Hedging", the mark-to-market valuations of these transactions are recognized as assets or liabilities, with changes in their fair value recognized in the consolidated statements of operations or, in the case of swaps designated as hedges to underlying loans, in other comprehensive income. To determine the market valuation of these instruments, we use a variety of assumptions that are based on market conditions and risks existing at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.


Variable Interest Entities
A variable interest entity is defined in ASC Topic 810 "Consolidation" ("ASC 810") as a legal entity where either (a) the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated support; (b) equity interest holders as a group lack either i) the power to direct the activities of the entity that most significantly impact on its economic success, ii) the obligation to absorb the expected losses of the entity, or iii) the right to receive the expected residual returns of the entity; or (c) the voting rights of some investors in the entity are not proportional to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
ASC 810 requires a variable interest entity to be consolidated by its primary beneficiary, being the interest holder, if any, which has both (1) the power to direct the activities of the entity which most significantly impact on the entity's economic performance, and (2) the right to receive benefits or the obligation to absorb losses from the entity which could potentially be significant to the entity.

In applying the provisions of ASC 810, we must make assessments in respect of, but not limited to, the sufficiency of the equity investment in the underlying entity and the extent to which interest holders have the power to direct activities. These assessments include assumptions about future revenues and operating costs, fair values of assets, and estimated economic useful lives of assets of the underlying entity.

Recent accounting pronouncements

In April 2014, the FASB issued Accounting Standards Update ("ASU") 2014-08 "Presentation of Financial Statements and Property, Plant and Equipment" in order to clarify and change the criteria for reporting discontinued operations. Under ASU 2014-08, the disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the entity's operations and financial results. Additionally, ASU 2014-08 improves the definition of discontinued operations and requires expanded disclosures for discontinued operations. ASU 2014-08 is effective for annual reporting periods and interim periods beginning on or after December 15, 2014. Its adoption is not expected to have a material impact on the Company's disclosures or consolidated financial position, results of operations and cash flows.


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In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" in order to ensure that revenue recognition requirements are the same under both US GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 removes inconsistencies and provides a more robust framework for addressing revenue issues. ASU 2014-09 is effective for reporting periods and interim periods beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the impact of ASU 2014-09 on its consolidated financial position, results of operations and cash flows.

In August 2014, the FASB issued ASU 2014-12 "Compensation - Stock Compensation" in order to provide explicit guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Company's Option Scheme does not award options which are dependent on the achievement of performance targets and, accordingly, ASU 2-14-12 is not expected have a material impact on the Company's consolidated financial position, results of operations and cash flows.

In November 214, the FASB issued ASU 2014-16 "Derivatives and Hedging" in order to standardize the determination of whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. ASU 2014-16 requires that all terms and features of the hybrid instrument, including the embedded derivative feature itself, must be taken into account when establishing separate accounting for the embedded derivative. ASU 2014-16 is effective for fiscal years and interim periods beginning on or after December15, 2015. The Company is currently assessing the impact of ASU 2014-16 on its consolidated financial position, results of operations and cash flows.

In January 2015, the FASB issued ASU 2015-01 "Income Statement - Extraordinary and Unusual Items", which eliminates the concept of extraordinary items from U.S. GAAP. ASU 2015-01 is effective for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted provided that it is applied from the beginning of the fiscal year of adoption. Its adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation: Amendments to the Consolidation Analysis" in order to clarify the basis for consolidation of certain legal entities. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. ASU 2015-02 is effective for public business entities for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of ASU 2015-02 on its consolidated financial position, results of operations and cash flows.



Market Overview
The Oil Tanker Market
Over the course of 2014, tanker freight rates increased from low levels in 2013 to levels not seen since 2010. Following three years of remarkable stability in the price of crude oil at around $110 per barrel, the price declined to below $50 per barrel in December 2014, as a result of increased production in the United States, Libya and other producers, coupled with Saudi Arabia and associated OPEC members declining to limit their own production. This caused significant changes in the pattern of oil trade around the world, increasing average trading distances by 3%, which offset the 1% decrease in global oil demand, resulting in a 2% increase in ton-miles. Additionally, fleet productivity decreased by 1-2% leading to an overall 4% increase in tonnage demand. On the supply side, crude oil tanker capacity barely registered any growth at all, and it is estimated that fleet percentage utilization increased by more than 2% to above 85%.

The increase in fleet utilization resulted in 2014 being a much better year for crude oil tankers, with TCE rates for modern VLCCs and Suezmax tankers averaging approximately $30,200 and $24,400 per day, respectively, approximately 30% above average rates in 2013. Most of the strengthening took place in the second half of the year, and in December spot charter rates attaining levels well in excess of those in recent years.

According to industry sources, at the end of 2014 the total orderbook for new VLCCs consisted of 83 vessels, representing approximately 13% of the existing fleet, and the total orderbook for Suezmax tankers consisted of 53 vessels, representing approximately 12% of the existing fleet.


45


The Drybulk Shipping Market
The drybulk shipping market experienced another difficult year in 2014, with average earnings lower than in 2013, although higher than in 2012. Overall, industry sources indicate that tonnage demand for vessels increased by approximately 4%, which was lower than anticipated owing to significant reductions in Chinese coal, bauxite and nickel ore imports. Meanwhile, fleet capacity increased by approximately 5%, leading to a decrease in fleet utilization.

Accordingly, the market for Supramax and Handysize drybulk carriers was generally depressed throughout 2014. The average one-year time charter rates for Supramax and Handysize drybulk carriers were, respectively, $9,800 per day and $7,700 per day, representing decreases from 2013 of 5% and 6%, respectively.

During 2014, contracting for newbuilding drybulk carriers decreased to 67 million dwt from 73 million dwt in 2013, while deliveries of new vessels amounted to 47 million dwt and scrapping removed some 15 million dwt. Thus, fleet capacity increased by 32 million dwt, equivalent to approximately 5% of the overall average fleet size for the year. At the end of 2014, the total orderbook for new drybulk carriers was 146 million dwt, equivalent to 20% of the existing fleet.

The Freight Liner Market (Containerships and Car Carriers)
The container charter market experienced another weak year in 2014, with the influx of 1.5 million TEU of new capacity continuing the general situation of overcapacity. This resulted in average charter rates increasing by only 2% from the very low levels of 2013.

Industry sources indicate that container ship demand increased by slightly over 6% in 2014, while overall capacity grew by a similar percentage to approximately 18.2 million TEU, after deducting 400,000 TEU which was scrapped. Charter rates began the year at low levels, around or below operating cost for owners, and generally remained low throughout the year, with total fleet capacity utilization more or less unchanged from 2013. However, towards the end of the year rates for vessels above 9,000 TEU strengthened, and at the end of the year approximately 230,000 TEU of capacity, around 1.2% of the overall fleet, was reported to be idle, considerably less than the 4.8% idle capacity at the end of 2013.

Contracting for new container vessels in 2014 amounted to around 0.9 million TEU, considerably lower than the high level of 2.1 million TEU in 2013. The bias continues to be towards larger vessels, with more than 80% of the orders being for vessels with capacities of 8,000 TEU and above. At the end of the year, the ratio of outstanding orders to existing fleet capacity decreased from 22% to 18%.

The car carrier market was generally weak in 2014. Despite growing auto sales in the major markets, most of the increased demand was covered by local production and demand for vessel tonnage did not grow. Meanwhile, there were 22 vessels delivered from shipyards in 2014 and 13 vessels removed from the fleet, resulting in fleet capacity growth of 2%. With growth in capacity and no growth in demand, average time-charter rates declined by approximately 6% over the course of the year. At the year end, the orderbook consisted of 55 vessels, equivalent to 10% of existing fleet capacity.

The Offshore Market
From 2011 to 2013, the oil price (Brent crude spot) averaged around $110 per barrel, which was attractive to oil and gas companies and prompted them to substantially increase their investment in offshore exploration and development activity. This resulted in an increase in the supply of mobile offshore drilling units from 642 in 2009 to 823 in 2014, and almost full utilization and record high day rates for those assets. This continued into 2014, despite oil and gas companies becoming increasingly selective in their exploration and development activities, as they sought to demonstrate financial discipline to their shareholders. Over the course of 2014, the substantial reduction in the oil price to below $50 per barrel in December resulted in decidedly weaker demand in the offshore drilling market, and asset utilizations declined by an average of about 4% and global average day rates declined by about 12%.

Industry sources indicate that orders were placed for 47 newbuilding drilling units in 2014, roughly 50% less than in 2013, reflecting the clear deterioration in market fundamentals. The average number of available units in 2014 was 823, a 7% increase on the average of 770 in 2013. Although 99 new units are scheduled to be delivered in 2015, it is clear that owners will have to adjust their fleets through cancellation of newbuildings and removals/scrapping of older units.

The above overviews of the various sectors in which we operate are based on current market conditions. However, market developments cannot always be predicted and may differ from our current expectations.

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Inflation

Most of our time chartered vessels are subject to operating and management agreements that have the charges for these services fixed for the term of the charter. Thus, although inflation has a moderate impact on our corporate overheads and our vessel operating expenses, we do not consider inflation to be a significant risk to direct costs in the current and foreseeable economic environment.  In addition, in a shipping downturn, costs subject to inflation can usually be controlled because shipping companies typically monitor costs to preserve liquidity and encourage suppliers and service providers to lower rates and prices in the event of a downturn.



47


Results of Operations

Year ended December 31, 2014, compared with year ended December 31, 2013

Net income for the year ended December 31, 2014, was $122.8 million, an increase of 38% from the year ended December 31, 2013.

( in thousands of $)
2014

2013

Total operating revenues
327,487

270,860

(Loss)/gain on sale of assets
(1,384
)
18,025

Gain on termination of charters
25,315

—

Total operating expenses
(206,272
)
(171,519
)
Net operating income
145,146

117,366

Interest income
40,451

30,080

Interest expense
(86,081
)
(87,225
)
Other non-operating items (net)
(10,198
)
785

Equity in earnings of associated companies
33,497

28,200

Net income
122,815

89,206


Net operating income in 2014 was $27.8 million higher than in 2013, principally due to the $33.0 million increase in profit sharing revenues (see below). Net income was $33.6 million higher, owing to the increase in net operating income and higher interest income and equity in earnings of associated companies, partly offset by higher net other non-operating costs (see below).
Four ultra-deepwater drilling units (one of which was a newbuilding delivered in February 2014) and two container vessels chartered-in on bareboat charters (until the charters were terminated in the first quarter of 2014) were accounted for under the equity method during 2014 and 2013. The operating revenues of the wholly-owned subsidiaries owning these assets are included under "equity in earnings of associated companies", where they are reported net of operating and non-operating expenses.


Operating revenues
( in thousands of $)
2014

2013

Direct financing and sales-type lease interest income
45,363

59,616

Finance lease service revenues
46,488

54,236

Profit sharing revenues
33,756

770

Time charter revenues
93,052

83,425

Bareboat charter revenues
69,771

61,029

Voyage charter revenues
34,608

9,724

Other operating income
4,449

2,060

Total operating revenues
327,487

270,860

Total operating revenues increased 21% in the year ended December 31, 2014, compared with 2013.

In general, direct financing and sales-type lease interest income reduces over the terms our leases, as progressively a lesser proportion of the lease rental payment is allocated to interest income and a greater proportion is treated as repayment on the lease. The $14.3 million reduction in lease interest income from 2013 to 2014 is due to this effect, and also to the sale in 2014 of three VLCCs ( Front Comanche , Front Commerce and Front Opalia ) and in 2013 of two VLCCs ( Front Champion and Golden Victory ), one Suezmax tanker ( Front Pride ) and one OBO ( Front Guider ), all of which were previously direct financing lease assets chartered to the Frontline Charterers.


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The reduction in finance lease service revenue reflects the above sales of vessels in 2014 and 2013, which had been direct financing lease assets chartered to the Frontline Charterers on a time-charter basis.

Prior to December 31, 2011, the Frontline Charterers paid us profit sharing of 20% of their earnings from our vessels on a time-charter equivalent basis above average threshold charter rates each fiscal year. The amendments to the charter agreements made on December 30, 2011, necessitated by the depressed state of the tanker market, increased the profit sharing percentage to 25% for earnings above those threshold levels, and additionally provided that for the four year period of the temporary reduction in charter rates, the Frontline Charterers will pay us 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel. In 2014 we earned $32.7 million under these new arrangements, none of which related to the 25% profit sharing agreement. In 2013 we had no earnings under these arrangements, due to the poor state of the tanker market during the year. We also have a profit sharing agreement relating to five Handysize drybulk carriers chartered to UFC, which in 2014 earned us $1.1 million, compared with $0.8 million in 2013.

During 2013, time-charter revenues were earned by seven container vessels, 12 drybulk carriers and two car carriers. In 2014, we took delivery of two additional container vessels and two additional drybulk carriers operating under time-charters. The 12% increase in time-charter revenues from 2013 to 2014 is due to these four additional vessels.

Bareboat charter revenues are earned by our vessels which are leased under operating leases on a bareboat basis. In 2013, these consisted of four offshore supply vessels, two chemical tankers, one jack-up drilling rig, and two 1,700 TEU container vessels. In 2014 we took delivery of nine additional container vessels operating under bareboat charters, resulting in an increase of $8.7 million in bareboat charter revenues.

Two of our vessels, the Suezmax tankers Everbright and Glorycrown , were sold under sales-type lease agreements in 2010 and 2009, respectively. Following default by the purchaser, these vessels were returned to us in September 2013, since when we have traded them on a voyage charter basis, earning $34.6 million in voyage charter revenues in 2014 (2013: $9.7 million).

Cash flows arising from direct financing and sales-type leases
The following table analyzes our cash flows from the direct financing and sales-type leases with the Frontline Charterers, Deep Sea and North China Shipping Holdings Co. Ltd., or NCS, during 2014 and 2013, and shows how they are accounted for:
(in thousands of $)
2014

2013

Charterhire payments accounted for as:
Direct financing and sales-type lease interest income
45,363

59,616

Finance lease service revenues
46,488

54,236

Direct financing and sales-type lease repayments
43,120

51,220

Total direct financing and sales-type lease payments received
134,971

165,072

The vessels chartered on direct financing leases to the Frontline Charterers are leased on time-charter terms, where we are responsible for the management and operation of such vessels. This has been effected by entering into fixed price agreements with Frontline Management whereby we pay them management fees of $6,500 per day for each vessel chartered to the Frontline Charterers. Accordingly, $6,500 per day is allocated from each time charter payment received from the Frontline Charterers to cover lease executory costs, and this is classified as "finance lease service revenue". If any vessel chartered on direct financing leases to the Frontline Charterers is sub-chartered on a bareboat basis, then the charter payments for that vessel are reduced by $6,500 per day for the duration of the bareboat sub-charter.

(Loss)/gain on sale of assets

In 2014, losses totaling $1.4 million were recorded on the disposal of three VLCCs ( Front Comanche , Front Commerce and Front Opalia ). In 2013, three VLCCs, one Suezmax tanker and one OBO were sold, with gains totaling $18.0 million.


49


Gain on termination of charters

In 2014, compensation amounting to $25.3 million was received in respect of the early termination of the time charters on four Handysize drybulk carriers. The charters for these newbuilding vessels had been agreed in November 2010, with terms of five years from delivery from the yard. There was no gain on termination of charters in 2013.


Operating expenses
( in thousands of $)
2014

2013

Vessel operating expenses
119,470

105,534

Depreciation
67,393

58,436

Vessel impairment charge
11,800

—

Administrative expenses
7,609

7,549

206,272

171,519


Vessel operating expenses consist of payments to Frontline Management of $6,500 per day for each vessel chartered to the Frontline Charterers, in accordance with the vessel management agreements. In addition, vessel operating expenses include operating and occasional voyage expenses for the container vessels, drybulk carriers and car carriers operated on a time-charter basis and managed by related and unrelated parties, and also voyage expenses for the two Suezmax tankers currently operating on voyage charters.

Vessel operating expenses increased by $13.9 million from 2013 to 2014. The increase was largely due to the $17.0 million increase in voyage and other operating costs of the two Suezmax tankers, which commenced operating on voyage charters in September 2013, and also to the $2.9 million in operating costs for the additional two container vessels and two drybulk carriers operating under time charters in 2014. The increase was partly offset by the $5.9 million reduction in payments to Frontline Management associated with disposals in 2013 and 2014 of five time-chartered VLCCs, one Suezmax tanker and one OBO.

Depreciation expenses relate to the vessels on charters accounted for as operating leases and on voyage charters. The increase from 2013 to 2014 is primarily due to the delivery of 11 container vessels and two drybulk carriers in 2014.

During 2014, a review of the carrying value of long-lived assets indicated that the carrying value of our five 2,800 TEU container vessels was impaired and an impairment charge was taken. No vessel impairment charge was recorded in 2013.

Administrative expenses, which include salaries, office costs, and fees for professional and administrative services, were substantially unchanged from 2013 to 2014.

Interest income

Interest income increased from $30.1 million in 2013 to $40.5 million in 2014, mainly as a result of interest received on refunded shipyard instalment payments relating to four canceled newbuilding contracts, interest receivable on loan notes from Frontline in connection with the termination in November 2013 of the charters on Front Champion and Golden Victory , and interest receivable on the new shareholder's loan to SFL Linus (see Note 16: Investment in Associated Companies).


50


Interest expense
(in thousands of $)
2014

2013

Interest on US$ floating rate loans
25,163

25,816

Interest on NOK floating rate bonds due 2014
1,137

4,246

Interest on NOK floating rate bonds due 2017
6,094

6,981

Interest on NOK floating rate bonds due 2019
6,675

—

Interest on 8.5% Senior Notes due 2013
—

2,963

Interest on 3.75% convertible bonds due 2016
4,688

4,688

Interest on 3.25% convertible bonds due 2018
11,375

10,459

Swap interest
19,486

20,742

Other interest
192

25

Amortization of deferred charges
11,271

11,305

86,081

87,225

At December 31, 2014, the Company and its consolidated subsidiaries had total debt outstanding of $1.7 billion (2013: $1.7 billion) comprised of $196 million (NOK1,464 million) net outstanding principal amount of NOK floating rate bonds (2013: $165 million, NOK1,001 million), $125 million net outstanding principal amount of 3.75% convertible bonds (2013: $125 million), $350 million net outstanding principal amount of 3.25% convertible bonds (2013: $350 million) and $1.1 billion under floating rate secured long term credit facilities (2013: $1.1 billion). The average three-month US$ London Interbank Offered Rate, or LIBOR, was 0.23% in 2014 and 0.27% in 2013. Total interest expense was substantially unchanged from 2013 to 2014, in line with total debt levels.
The decrease in interest payable on the NOK floating rate bonds due 2014 is due to their redemption in April 2014. The decrease in interest payable on the NOK floating rate bonds due 2017 is due to repurchases in 2013, which are being held as treasury bonds. The decrease in interest payable on the 8.5% Senior Notes due 2013 is due to their redemption in March 2013. The increase in interest payable on the NOK floating rate bonds due 2019 and the 3.25% convertible bonds due 2018 is due to their issue dates, in March 2014 and January 2013, respectively.
At December 31, 2014, the Company and its consolidated subsidiaries were party to interest rate swap contracts, which effectively fix our interest rates on $1.3 billion of floating rate debt at a weighted average rate excluding margin of 3.41% per annum (2013: $1.2 billion of floating rate debt fixed at a weighted average rate excluding margin of 3.40% per annum).

As reported above, four ultra-deepwater drilling units and two chartered-in container vessels were accounted for under the equity method in 2014 and 2013. Their non-operating expenses, including interest expenses, are not included above, but are reflected in "Equity in earnings of associated companies" below.

Other non-operating items
Other non-operating items amounted to a net loss of $10.2 million (2013: net gain of $0.8 million). The net loss in 2014 consists of $7.7 million adverse mark-to-market valuation adjustments to financial instruments, $7.2 million cash payments on non-designated interest rate swaps, $1.4 million other costs (mainly bank and loan commitment fees), partly offset by a gain of $6.1 million on disposal of investment in an associated company. The net gain in 2013 consisted of $8.0 million favorable mark-to-market valuation adjustments to financial instruments, offset by $2.7 million cash payments on non-designated interest rate swaps, a loss of $1.2 million on the purchase of 8.5% Senior Notes and NOK denominated bonds, and $3.3 million other costs.

Equity in earnings of associated companies
During 2013 and 2014, the Company had certain wholly-owned subsidiaries accounted for under the equity method, as discussed in Note 16 of the consolidated financial statements included herein. The total equity in earnings of associated companies in 2014 was $5.3 million more than in 2013, due to $12.4 million in earnings from the newbuilding harsh environment jack-up drilling rig West Linus delivered in April 2014, partly offset by reduced direct financing lease income on three ultra-deepwater drilling units and the termination of arrangements for chartering in two container vessels - see Note 16.



51



Year ended December 31, 2013, compared with year ended December 31, 2012

Net income for the year ended December 31, 2013, was $89.2 million, a decrease of 52% from the year ended December 31, 2012.
( in thousands of $)
2013

2012

Total operating revenues
270,860

319,692

Gain on sale of assets
18,025

25,681

Gain on termination of charters
—

21,705

Total operating expenses
(171,519
)
(159,458
)
Net operating income
117,366

207,620

Interest income
30,080

27,174

Interest expense
(87,225
)
(94,851
)
Other non-operating items (net)
785

2,401

Equity in earnings of associated companies
28,200

43,492

Net income
89,206

185,836


Net operating income was $90.3 million lower in 2013, principally due to the $51.4 million decrease in profit sharing revenues (see below), and the absence of gain on termination of charters. Net income was $96.6 million lower in 2013, owing to the decrease in net operating income and reduced equity in earnings of associated companies, partly offset by reduced net interest expense.
Two container vessels chartered in on long-term bareboat charter and four ultra-deepwater drilling units (one of which was a newbuilding delivered in February 2014) were accounted for under the equity method during 2013 and 2012. The operating revenues of the wholly-owned subsidiaries owning these assets are included under "equity in earnings of associated companies", where they are reported net of operating and non-operating expenses.


Operating revenues
( in thousands of $)
2013

2012

Direct financing and sales-type lease interest income
59,616

65,715

Finance lease service revenues
54,236

64,766

Profit sharing revenues
770

52,176

Time charter revenues
83,425

60,258

Bareboat charter revenues
61,029

74,913

Voyage charter revenues
9,724

—

Other operating income
2,060

1,864

Total operating revenues
270,860

319,692

Total operating revenues decreased 15% in the year ended December 31, 2013, compared with 2012.

The $6.1 million reduction in lease interest income from 2012 to 2013 is due to the inherent reduction over time in the amount of total lease receipts which are allocated to lease interest income, and also to the sale in 2013 of two VLCCs ( Front Champion and Golden Victory ), one Suezmax tanker ( Front Pride ) and one OBO ( Front Guider ) and in 2012 of four OBOs, all of which were previously direct financing lease assets chartered to the Frontline Charterers. In addition, two Suezmax tankers ( Glorycrown and Everbright ) were transferred in 2013 from sales-type leases to operating leases, when the purchaser of these vessels defaulted on their payment obligations.

The reduction in finance lease service revenue reflects the above sales of vessels in 2013 and 2012, which had been direct financing lease assets chartered to the Frontline Charterers on a time-charter basis.


52


In 2012 we earned $52.2 million under the profit sharing arrangements with the Frontline Charterers. In 2013 we had no earnings under these arrangements, due to the poor state of the tanker market during the year. We did, however, earn $0.8 million under a new profit sharing agreement relating to four Handysize drybulk carriers chartered to UFC.

During 2012, time charter revenues were earned by seven container vessels, 11 drybulk carriers and two car carriers. Five of the drybulk carriers and the two car carriers were delivered in the 2012, and five of the container vessels were transferred to time charters from bareboat charters in 2012. In 2013, we took delivery of one additional drybulk carrier operating under time charter. The 38% increase in time charter revenues from 2012 to 2013 is due to the additional drybulk carrier operating under a time charter, together with full year earnings on the seven vessels delivered in 2012 and the five container vessels transferred to time charters in 2012.

In 2012, we had four offshore supply vessels, two chemical tankers, one jack-up drilling rig, two 1,700 TEU container vessels, five 2,800 TEU container vessels and three non-double hull VLCCs operating under bareboat charters. The 19% decrease in bareboat charter revenues in 2013 is due to the termination in April 2012 of the bareboat charters on the five 2,800 TEU container vessels and their transfer to time charters, and the disposals of the three non-double hull VLCCs, two in 2012 and one in 2013.

Two of our vessels, the Suezmax tankers Everbright and Glorycrown , were sold under sales-type lease agreements in 2010 and 2009, respectively. Following default by the purchaser, these vessels were returned to us in September 2013, since when we have traded them on a voyage charter basis, earning $9.7 million in voyage charter revenues.

Cash flows arising from direct financing and sales-type leases
The following table analyzes our cash flows from the direct financing and sales-type leases with the Frontline Charterers, Deep Sea and NCS during 2013 and 2012, and shows how they are accounted for:
(in thousands of $)
2013

2012

Charterhire payments accounted for as:
Direct financing and sales-type lease interest income
59,616

65,715

Finance lease service revenues
54,236

64,766

Direct financing and sales-type lease repayments
51,220

58,571

Total direct financing and sales-type lease payments received
165,072

189,052


Gain on sale of assets

Gains of $18.0 million were recorded in 2013 on the disposals of the three VLCCs Edinburgh , Front Champion and Golden Victory , the Suezmax tanker Front Pride and the OBO Front Guider . Two non-double hull VLCCs and four OBOs were sold in 2012, with gains totaling $25.7 million.


Gain on termination of charters

There was no gain on termination of charters in 2013. In 2012, a gain of $21.7 million was recorded, equal to the fair value of the compensation received when we agreed to terminate the long-term bareboat charter agreements with Horizon Lines, LLC relating to five 2,800 TEU container vessels.


Operating expenses
( in thousands of $)
2013

2012

Vessel operating expenses
105,534

94,914

Depreciation
58,436

55,602

Administrative expenses
7,549

8,942

171,519

159,458


53



Vessel operating expenses increased by $10.6 million from 2012 to 2013. The increase was largely due to the additional container vessels, drybulk carriers and car carriers operating under time charters in 2012 and 2013, in addition to the two Suezmax tankers which commenced voyage charters in September 2013. The increase was partly offset by reduced payments to Frontline Management associated with disposals in 2012 and 2013 of time-chartered OBOs and VLCCs.

Depreciation expenses relate to the vessels on charters accounted for as operating leases and on voyage charters. The increase from 2012 to 2013 is primarily due to the delivery of six drybulk carriers in 2012 and 2013, and the acquisition of two car carriers in 2012.

Administrative expenses, which include salaries, office costs, and fees for professional and administrative services, were reduced from 2012 to 2013, primarily due to a decrease in staff related costs, including reduced amortization of stock based compensation.

Interest income

Interest income increased by $2.9 million in 2013, mainly as a result of investments made in 2012 and 2013 in available-for-sale securities, and interest on loan notes received from Horizon Lines, LLC in 2012 and 2013 and from Frontline in 2013.

Interest expense
(in thousands of $)
2013

2012

Interest on US$ floating rate loans
25,816

36,234

Interest on NOK floating rate bonds due 2014
4,246

5,006

Interest on NOK floating rate bonds due 2017
6,981

1,507

Interest on 8.5% Senior Notes due 2013
2,963

23,197

Interest on 3.75% convertible bonds due 2016
4,688

4,688

Interest on 3.25% convertible bonds due 2018
10,459

—

Swap interest
20,742

18,340

Other interest
25

13

Amortization of deferred charges
11,305

5,866

87,225

94,851

At December 31, 2013, the Company and its consolidated subsidiaries had total debt outstanding of $1.7 billion (2012: $1.8 billion) comprised of $165 million (NOK1,001 million) net outstanding principal amount of NOK floating rate bonds (2012: $186 million, NOK1,036 million), $125 million net outstanding principal amount of 3.75% convertible bonds (2012: $125 million), $350 million net outstanding principal amount of 3.25% convertible bonds (2012: $nil) and $1.1 billion under floating rate secured long term credit facilities (2012: $1.3 billion). The $248 million net principal amount of 8.5% Senior Notes outstanding at December 31, 2012, was fully repaid in March 2013. The average three-month US$ LIBOR, was 0.27% in 2013 and 0.43% in 2012. The overall decrease in interest expense is due to reduced debt levels.
The decrease in interest payable on the NOK floating rate bonds due 2014 is due to repurchases during 2012, which were being held as treasury bonds. The decrease in interest payable on the 8.5% Senior Notes is due to their redemption in March 2013. The increase in interest payable on the NOK floating rate bonds due 2017 and the 3.25% convertible bonds is due to their issue dates, in October 2012 and January 2013, respectively.
At December 31, 2013, the Company and its consolidated subsidiaries were party to interest rate swap contracts, which effectively fix our interest rates on $1.2 billion of floating rate debt at a weighted average rate excluding margin of 3.40% per annum (2012: $1.0 billion of floating rate debt fixed at a weighted average rate excluding margin of 3.35% per annum).

Amortization of deferred charges was $5.4 million higher in 2013 than 2012, principally due to the amortization over five years of the $20.7 million equity component of the $350 million convertible bonds issued in January 2013 (see Note 19: Long -term debt). There was also an increase due to some accelerated loan repayments made in 2013.


54


As reported above, four ultra-deepwater drilling units and two chartered-in container vessels were accounted for under the equity method in 2013 and 2012. Their non-operating expenses, including interest expenses, are not included above, but are reflected in "equity in earnings of associated companies" below.

Other non-operating items
Other non-operating items amounted to a net gain of $0.8 million in 2013 (2012: $2.4 million). The net gain in 2013 consists of $8.0 million favorable mark-to-market valuation adjustments to financial instruments, offset by $2.7 million cash payments on non-designated interest rate swaps, a loss of $1.2 million on the purchase of 8.5% Senior Notes and NOK denominated bonds, and $3.3 million other costs, mainly bank and loan commitment fees. The net gain in 2012 consisted of $8.0 million favorable mark-to-market valuation adjustments to financial instruments, offset by $0.2 million cash payments on non-designated interest rate swaps, a long-term asset impairment charge of $3.4 million and $2.0 million of other costs.

Equity in earnings of associated companies
During 2012 and 2013, the Company had certain wholly-owned subsidiaries accounted for under the equity method, as discussed in Note 16 of the consolidated financial statements included herein. The total equity in earnings of associated companies in 2013 was $15.3 million less than in 2012, due to reduced direct financing lease income on three ultra-deepwater drilling units and increased loan interest expenses on related credit facilities.



55


Liquidity and Capital Resources

We operate in a capital intensive industry.  Our purchase of the tankers in the initial transaction with Frontline was financed through a combination of debt issuances, a deemed equity contribution from Frontline and borrowings from commercial banks.  Our subsequent acquisitions have been financed through a combination of our own equity and term loans and revolving credit facilities from commercial banks.  Providers of such borrowings generally require that the loans be secured by mortgages against the assets being acquired, and at December 31, 2014, substantially all of our vessels and drilling units are pledged as security. However, in common with many other companies, we also have unsecured borrowings as shown below. Providers of unsecured financing do so on the basis of the company's assets and liabilities, cash flows, operating results and other factors, all of which affect the terms on which such unsecured financing is available. In general, unsecured financing is more expensive than borrowings secured against collateral.

Our liquidity requirements relate to servicing our debt, funding the equity portion of investments in vessels, funding working capital requirements and maintaining cash reserves against fluctuations in operating cash flows.  Revenues from our time charters and bareboat charters are received 15 days in advance, monthly in advance, or monthly in arrears.  Vessel management and operating fees are payable monthly in advance for vessels chartered to the Frontline Charterers, and as incurred for other time-chartered vessels.

Our funding and treasury activities are conducted within corporate policies to maximize investment returns while maintaining appropriate liquidity for both our short and long term needs. This includes arranging borrowing facilities on a cost-effective basis. Cash and cash equivalents are held primarily in U.S. dollars, with minimal amounts held in Norwegian Kroner and Pound Sterling.

Surplus funds may be deployed to acquire equity or debt interests in other companies, with the aim of generating competitive returns. Such investments may also utilize credit facilities arranged specifically to facilitate such investment, such as the $55 million secured securities financing agreement described below.

Our short-term liquidity requirements relate to servicing our debt and funding working capital requirements, including required payments under our management agreements and administrative services agreements.  Sources of short-term liquidity include cash balances, short-term investments, available amounts under revolving credit facilities and receipts from our charters.  We believe that our cash flow from the charters will be sufficient to fund our anticipated debt service and working capital requirements for the short and medium term.

Our long-term liquidity requirements include funding the equity portion of investments in new vessels, and repayment of long-term debt balances, including those relating to the following loan agreements of the Company and its consolidated subsidiaries:
-
3.75% convertible senior unsecured bonds due 2016
-
3.25% convertible senior unsecured bonds due 2018
-
NOK600 million senior unsecured bonds due 2017
-
NOK900 million senior unsecured bonds due 2019
-
$53 million secured term loan facility due 2017
-
$49 million secured term loan and revolving credit facility due 2018
-
$54 million secured term loan facility due 2018
-
$95 million secured term loan and revolving credit facility due 2018
-
$167 million secured term loan and revolving credit facility due 2018
-
$45 million secured term loan and revolving credit facility due 2019
-
$75 million secured term loan facility due 2019
-
$20 million secured term loan facility due 2019
-
$43 million secured term loan facility due 2019
-
$43 million secured term loan facility due 2020
-
$101 million secured term loan facility due 2020
-
$128 million secured term loan facility due 2021
-
$128 million secured term loan facility due 2022
-
$171 million secured loan facility due 2022
-
$39 million secured term loan facility due 2022
-
$55 million secured securities financing agreement

Our long-term liquidity requirements also include repayment of the following long-term loan agreements of our equity-accounted subsidiaries:

56



-
$390 million secured term loan and revolving credit facility due 2018
-
$375 million secured term loan and revolving credit facility due 2019
-
$475 million secured term loan and revolving credit facility due 2019

At December 31, 2014, substantially all of our vessels and rigs were pledged as security against borrowings, apart from two 1,700 TEU container vessels built in 2005.

At April 9, 2015 , we had no remaining contractual commitments relating to newbuilding contracts.

We expect that we will require additional borrowings or issuances of equity in the long term to meet our capital requirements.

As of December 31, 2014, we had cash and cash equivalents of $51 million (2013: $59 million). In the year ended December 31, 2014, we generated cash of $132 million from operations and used $22 million in investing activities and $118 million net in financing activities.

During the year ended December 31, 2014, we paid four dividends totaling $1.63 per common share (2013: three dividends totaling $1.17), or a total of $152 million (2013: $109 million). All dividends paid in 2014 and 2013 were cash payments. Dividends paid in 2012 included an accelerated fourth quarter dividend in addition to the regular third quarter dividend, both of which were paid on December 28, 2012.
Borrowings

As of December 31, 2014, we had total short-term and long-term debt outstanding of $1.7 billion (2013: $1.7 billion).  In addition, as of December 31, 2014, our wholly-owned subsidiaries SFL Deepwater Ltd., or SFL Deepwater, SFL Hercules Ltd., or SFL Hercules, and SFL Linus Ltd., or SFL Linus, had long term debt of $303 million, $284 million, and $451 million, respectively (2013: $387 million, $383 million and $nil, respectively). These three subsidiaries are accounted for using the equity method, as was our previously wholly-owned subsidiary SFL West Polaris Limited, or SFL West Polaris, and their outstanding long-term debt is not included in the long-term debt shown on our consolidated balance sheet.

The following table presents an overall summary of our borrowings as at December 31, 2014:
December 31, 2014
(in millions of $)
Outstanding balance on loan

Net amount available to draw

Unsecured borrowings:
3.75% convertible bonds due 2016
125.0

—

NOK600 million bonds due 2017
76.5

—

3.25% convertible bonds due 2018
350.0

—

NOK900 million bonds due 2019
119.3

—

Total unsecured borrowings
670.8

—

Loan facilities secured with mortgages on vessels and rigs, including newbuildings
1,061.7

112.0

Loan facilities secured against investments in securities
—

—

Total borrowings of Company and consolidated subsidiaries
1,732.5

112.0

Equity accounted subsidiaries: Loan facilities secured with mortgages on vessels and rigs
1,038.3

50.0

Total borrowings
2,770.8

162.0

As of December 31, 2014, there was $112.0 million net available to draw under secured revolving credit facilities. Additionally, our equity-accounted subsidiaries had net amounts of $50.0 million available to draw under secured revolving credit facilities as of December 31, 2014.


57


In April 2006, five subsidiaries entered into a $210 million secured term loan facility with a syndicate of banks.  The proceeds of the facility were used to partly fund the acquisition of five newbuilding container vessels.  The loan agreement was amended and restated in April 2012 in connection with the termination of the original charters of the vessels to Horizon Lines, LLC. The facility bore interest at LIBOR plus a margin, had a term of 12 years from original drawdown and was secured by the subsidiaries' assets. The facility was non-recourse to Ship Finance International Limited, as the holding company did not guarantee this debt.  However, as part of the amended agreement, Ship Finance International Limited indirectly guaranteed that revenues received by the vessel-owning subsidiaries over the remaining term of the loan would achieve certain minimum levels for each vessel, limited to $25 million in aggregate. At December 31, 2014, the outstanding amount under this facility was $171 million, and the performance guarantee had been reduced to $3 million in aggregate. In January 2015, the performance guarantee became exhausted and in February 2015, we reached an agreement with the financing parties whereby the five vessels were transferred to unrelated third parties and we ceased to have any further commitments under this facility.

In February 2008, a subsidiary entered into a $30 million secured revolving credit facility with a bank. The proceeds of the facility were used to partially fund the acquisition of the container vessel SFL Europa . At December 31, 2014, the outstanding amount under this facility was $3 million. The facility bore interest of LIBOR plus a margin and had a term of seven years. In January 2015, we prepaid all outstanding amounts and the facility was canceled.

In March 2008, two subsidiaries entered into a $49 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding chemical tankers. In June 2011, the facility was amended, whereby part of the facility is available on a revolving basis. At December 31, 2014, the outstanding amount under this facility was $28 million, and the available amount under the revolving part of the facility was fully drawn. The facility bears interest of LIBOR plus a margin and has a term of ten years. The facility contains a minimum value covenant and is secured by the subsidiaries' assets. The lenders have limited recourse to Ship Finance International Limited as the holding company only guarantees 30% of the outstanding debt. The facility contains covenants that require us to maintain certain minimum levels of free cash and adjusted book equity ratios.

In February 2010, a subsidiary entered into a $43 million secured term loan facility with a bank. The proceeds of the facility were used to partially finance the Suezmax tanker Glorycrown. At December 31, 2014, the amount outstanding under the facility was $29 million. The facility bears interest of LIBOR plus a margin and originally had a term of approximately five years. In November 2014, the terms of the loan were amended and restated, and the facility now matures in November 2019.
The facility is secured by the subsidiary's assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In March 2010, a subsidiary entered into a $43 million secured term loan facility with a bank. The proceeds of the facility were used to partially finance the Suezmax tanker Everbright . At December 31, 2014, the amount outstanding under this facility was $29 million. The facility bears interest of LIBOR plus a margin and originally had a term of five years. In March 2015, the terms of the loan were amended and restated, and the facility now matures in March 2020. The facility is secured by the subsidiary's assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In March 2010, we entered into a $725 million secured term loan and revolving credit facility with a syndicate of banks for the financing of 26 vessels chartered to Frontline. Twelve of the vessels have since been sold, and at December 31, 2014, the facility related to the remaining 14 vessels. At December 31, 2014, the amount outstanding under this facility was $72 million, and the available amount under the revolving part of the facility was $112 million. The facility bore interest at LIBOR plus a margin and had a term of five years. In February 2015, we prepaid all outstanding amounts and the facility was canceled.

In November 2010, two subsidiaries entered into a $54 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two Supramax drybulk carriers. At December 31, 2014, the amount outstanding under this facility was $38 million. The facility bears interest at LIBOR plus a margin and has a term of eight years. The facility is secured by the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.


58


In February 2011, we issued $125 million senior unsecured convertible bonds due 2016, all of which was outstanding at December 31, 2014. Interest on the bonds is fixed at 3.75% per annum. The bonds are convertible into our common shares at any time up to ten banking days prior to February 10, 2016. The conversion price at the time of issuance was $27.05 per share, representing a 35% premium on the share price at the time. Dividend distributions made since the issuance of the bonds have reduced the conversion price to $17.98 per share.

In February 2011, a subsidiary entered into a $95 million secured term loan and revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of the jack-up drilling rig Soehanah . At December 31, 2014, the amount outstanding under this facility was $58 million, and the available amount under the revolving part of the facility was fully drawn. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility is secured against the subsidiary's assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In March 2011, three subsidiaries entered into a $75 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of three Supramax drybulk carriers. At December 31, 2014, the amount outstanding under this facility was $57 million. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under the charters attached to the vessels or one year prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In May 2011, eight subsidiaries entered into a $171 million secured loan facility with a syndicate of banks. The facility is supported by China Export & Credit Insurance Corporation, or SINOSURE, which has provided an insurance policy in favor of the banks for part of the outstanding loan. The facility is secured by one 1,700 TEU container vessel and seven Handysize drybulk carriers. At December 31, 2014, the amount outstanding under this facility was $134 million. The facility bears interest at LIBOR plus a margin and has a term of approximately ten years from delivery of each vessel. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited.

In June 2011, we entered into a $55 million secured securities financing agreement with a bank. The facility may be used to fund up to 50% of the acquisition cost of securities we may acquire from time to time, subject to certain conditions. The facility bears interest at LIBOR plus a margin and will be secured against the relevant securities. The facility contains a covenant that requires us to maintain a minimum value of the securities held as collateral. At December 31, 2014, there was no amount outstanding under the facility.

In July 2011, five subsidiaries entered into a $167 million secured term loan and revolving credit facility agreement with a syndicate of banks for the financing of five VLCCs chartered to Frontline. Two of the vessels were sold in 2013 and the facility is now secured against the three remaining vessels. At December 31, 2014, the outstanding amount under this facility was $72 million, and the available amount under the revolving part of the facility was fully drawn. The facility bears interest at LIBOR plus a margin and has a term of six years. The facility is secured by the vessel-owning subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains covenants that require us to maintain a minimum aggregate value of the vessels as collateral and also certain minimum levels of free cash, working capital and adjusted book equity ratios.

In October 2012, we issued NOK600 million senior unsecured bonds. The bonds bear interest at the three month Norwegian Interbank Offered Rate, or NIBOR, plus a margin and are redeemable in full in October 2017. Subsequent to the issue of the bonds, we have made net purchases of bonds with principal amounts totaling NOK28 million, which are being held as treasury bonds. At December 31, 2014, the amount outstanding was NOK572 million, equivalent to $77 million. The bonds may, in their entirety, be redeemed at our option from April 19, 2017, upon giving bondholders at least 30 business days notice and paying 100.50% of par value plus accrued interest.

In November 2012, two subsidiaries entered into a $53 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two car carriers. At December 31, 2014, the outstanding amount under this facility was $44 million. The facility bears interest at LIBOR plus a margin and has a term of five years from drawdown. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.


59


In January 2013, we issued $350 million senior unsecured convertible bonds due 2018, all of which was outstanding at December 31, 2014. Interest on the bonds is fixed at 3.25% per annum. The bonds are convertible into our common shares at any time up to two business days prior to February 1, 2018. The conversion price at the time of issuance was $21.945 per share, representing a 33% premium on the share price at the time. Dividend distributions made since the issuance of the bonds have reduced the conversion price to $18.1555 per share. In conjunction with the bond issue, we have loaned up to 6,060,606 of our common shares to an affiliate of one of the underwriters of the issue, in order to assist investors in the bonds to hedge their positions. The shares lent by the Company were borrowed from Hemen Holding Ltd., our largest shareholder.

In March 2014, we issued NOK900 million senior unsecured bonds. The bonds bear interest at NIBOR plus a margin and are redeemable in full in March 2019. Subsequent to the issue of the bonds, we have made net purchases of bonds with principal amounts totaling NOK8 million, which are being held as treasury bonds. At December 31, 2014, the amount outstanding was NOK892 million, equivalent to $119 million. The bonds may, in their entirety, be redeemed at our option from September 19, 2018, upon giving bondholders at least 30 business days notice and paying 100.50% of par value plus accrued interest.

In June 2014, seven subsidiaries entered into a $45 million secured term loan and revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of seven 4,100 TEU container vessels. At December 31, 2014, the amount outstanding under this facility was $45 million, and the available amount under the revolving part of the facility was fully drawn. The facility bears interest at LIBOR plus a margin and has a term of five years. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels, or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In August 2014, six subsidiaries entered into a $101 million secured term loan facility, to refinance a $149 million secured term loan facility which matured in August 2014 and a $77 million secured term loan facility which was due to mature in January 2015. Those two facilities were repaid in full, and the new $101 million facility is secured against the six offshore supply vessels which previously provided security for the repaid facilities. The $101 million facility bears interest at LIBOR plus a margin and has a term of approximately five years. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. At December 31, 2014, the amount outstanding under this facility was $99 million.

In September 2014, two subsidiaries entered into a $20 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two 5,800 TEU container vessels. At December 31, 2014, the amount outstanding under this facility was $20 million. The facility bears interest at LIBOR plus a margin and has a term of five years. The facility is secured against the subsidiaries' assets and a guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is an early termination of any of the charters attached to the vessels. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In September 2014, two subsidiaries entered into a $128 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding 8,700 TEU container vessels, which were delivered in September and November 2014, respectively. At December 31, 2014, the amount outstanding under this facility was $126 million. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or from the fifth anniversary of the drawdown under the facility, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In November 2014, two subsidiaries entered into a $128 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding 8,700 TEU container vessels, which were delivered in January 2015. At December 31, 2014, the amount outstanding under this facility was $nil. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or six months prior to expiry of the charters, whichever falls earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

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In December 2014, two subsidiaries entered into a $39 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two Kamsarmax drybulk carriers. At December 31, 2014, the amount outstanding under this facility was $36 million. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The facility is secured against the subsidiaries' assets and a limited guarantee from Ship Finance International Limited. The facility contains a minimum value covenant, which is only applicable if there is a default under any of the charters attached to the vessels, or 12 months prior to expiry of the charters, whichever fall earlier. The facility also contains covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios.

In May 2013, our equity-accounted subsidiary SFL Hercules entered into a $375 million secured term loan and revolving credit facility with a syndicate of banks. The facility was drawn in June 2013 and the proceeds were used to fund the acquisition of the ultra deepwater drilling rig West Hercules from SFL Deepwater. At December 31, 2014, the amount outstanding under the facility was $284 million, and the available amount under the revolving part of the facility was $50 million. The facility bears interest at LIBOR plus a margin, has a term of six years and is secured against the assets of SFL Hercules. The lenders have limited recourse to Ship Finance International Limited as the holding company only guarantees $85 million of the debt. The new facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. The facility also contains covenants that require Seadrill to maintain certain minimum levels of liquidity, current ratios, interest cover ratios and adjusted equity ratios and a maximum leverage ratio.

In October 2013, our equity-accounted subsidiary SFL Deepwater entered into a $390 million secured term loan and revolving credit facility with a syndicate of banks. The facility was drawn in November 2013 and the proceeds were used to refinance the outstanding balance under a $1.4 billion facility, which had been established in 2008 to partly fund the acquisition of two newbuilding ultra deepwater drilling rigs, West Taurus and West Hercules , and for general corporate purposes. During 2013, West Hercules was transferred to our equity-accounted subsidiary SFL Hercules and the new $390 million facility is secured against the drilling rig West Taurus . At December 31, 2014, the amount outstanding under the new facility was $303 million, and the available amount under the revolving part of the facility was fully drawn. The new facility bears interest at LIBOR plus a margin, has a term of five years and is secured against the subsidiary's assets. The lenders have limited recourse to Ship Finance International Limited as the holding company only guarantees $85 million of the debt. The new facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. The facility also contains covenants that require Seadrill to maintain certain minimum levels of liquidity, current ratios, interest cover ratios and adjusted equity ratios and a maximum leverage ratio.
In October 2013, our equity-accounted subsidiary SFL Linus entered into a $475 million secured term loan and revolving credit facility with a syndicate of banks. The proceeds of the facility were used to finance the acquisition of the newbuilding harsh environment jack-up drilling rig West Linus , which was delivered in February 2014. At December 31, 2014, the amount outstanding under the facility was $451 million, and the available amount under the revolving part of the facility was fully drawn. The facility bears interest at LIBOR plus a margin, has a term of approximately five years and is secured against the subsidiary's assets. The lenders have limited recourse to Ship Finance International Limited as the holding company only guarantees $90 million of the debt. The facility contains a minimum value covenant and covenants that require us to maintain certain minimum levels of free cash, working capital and adjusted book equity ratios. The facility also contains covenants that require Seadrill to maintain certain minimum levels of liquidity, current ratios, interest cover ratios and adjusted equity ratios and a maximum leverage ratio.

We are in compliance with all loan covenants as at December 31, 2014.  Deep Sea Supply Plc., Deep Sea Supply BTG B.V., and Seadrill are also in compliance with all loan covenants in the facilities discussed above as at December 31, 2014. At December 31, 2014, the three-month U.S. dollar LIBOR was 0.256% and the three-month Norwegian kroner NIBOR was 1.48%.


Minimum Value Covenants
Most of our loan facilities are secured with mortgages on vessels and rigs. At December 31, 2014, we had borrowings totaling $1.4 billion with minimum value covenants which are tested on a regular basis, including $1.0 billion borrowings in wholly-owned subsidiaries accounted for under the equity method. These borrowings were secured against 32 vessels and rigs which had combined charter-free market values totaling approximately $2.7 billion. A reduction of 10% in charter-free market values in 2015 would not result in any material reduction in availability on revolving credit facilities, after scheduled loan repayments and prepayments in the year.


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Derivatives
We use financial instruments to reduce the risk associated with fluctuations in interest rates. At December 31, 2014, the Company and its consolidated subsidiaries had entered into interest rate swap contracts with a combined notional principal amount of $1,001 million, whereby variable LIBOR interest rates excluding additional margins are swapped for fixed interest rates between 0.80% per annum and 6.00% per annum. We had also entered into interest rate/ currency swap contracts, related to our bonds denominated in Norwegian kroner, with notional principal amounts of NOK600 million ($105 million) and NOK900 million ($151 million), respectively, whereby variable NIBOR interest rates including additional margin are swapped for fixed interest rates of 6.06% per annum and 6.03% per annum, respectively, and both the payment of interest and eventual settlement of the bonds will have an effective exchange rate of NOK5.69 = $1 and NOK5.96 = $1, respectively. In addition, one equity-accounted subsidiary had entered into interest rate swaps with a combined notional principal amount of $224 million at rates excluding margin of between 1.77% and 2.01% per annum. Approximately $0.2 billion of the above swaps were in excess of related debt at December 31, 2014, as a result of NOK denominated bonds purchased and held as treasury bonds, one of the swaps commencing in December 2016 and another of the swaps commencing in January 2017. Thus, the overall effect of our swaps is to fix the interest rate on approximately $1.3 billion of our floating rate debt at December 31, 2014, at a weighted average interest rate of 5.16% per annum including margin.

The effect of the above swap contracts is to substantially reduce our exposure to interest rate and exchange rate fluctuations, further analysis of which is presented in Item 11 "Quantitative and Qualitative Disclosures about Market Risk".

In addition to the above interest rate and currency swap contracts at December 31, 2014, in January 2015 we entered into an interest rate swap contract with an initial notional principal of $55.3 million which commences in January 2017. At the date of this report, we were not party to any other derivative contracts.


Equity

In 2014, we issued a total of 144,000 new shares in order to satisfy options exercised by three directors, one officer and two employees of the Company. The exercise price of the options averaged $6.44 per share, resulting in a premium on issue of $0.8 million. No other shares were issued and sold in the year ended December 31, 2014.

In November 2006, the Board of Directors approved a share option scheme, permitting the directors to grant options in the Company's shares to employees, officers and directors of the Company or its subsidiaries. The fair value cost of options granted is recognized in the statement of operations, with a corresponding amount credited to additional paid in capital (see Note 22 to the consolidated financial statements). The additional paid in capital arising from share options granted was $29,000 in the year ended December 31, 2014 (2013: $0.2 million).

In 2014, an officer of the Company exercised options and in lieu of issuing new shares the Company made a payment of $1.2 million, equal to the intrinsic value of the options on the date of exercise. These amounts are accounted for as a repurchase of the Company's shares and the payment is recorded as a reduction of additional paid-in capital.

The Company has accounted for the acquisition of vessels from Frontline at Frontline's historical carrying value.  The difference between the historical carrying value and the net investment in the lease (i.e. the fair value of the vessel at the inception of the lease) has been recorded as a deferred deemed equity contribution. This deferred deemed equity contribution is presented as a reduction in the net investment in finance leases in the balance sheet and results from the related party nature of both the transfer of the vessels and the subsequent finance leases.  The deferred deemed equity contribution is amortized as a credit to contributed surplus over the life of the new lease arrangement, as lease payments are applied to the principal balance of the lease receivable. In the year ended December 31, 2014, we credited contributed surplus with $5 million of such deemed equity contributions (2013: $20 million). The unamortized balance of deferred deemed equity contributions at December 31, 2014, is $87 million (2013: $106 million).

Following the above transactions, as of December 31, 2014, our issued and fully paid share capital balance was $93 million, our additional paid in capital was $285 million and our contributed surplus balance was $586 million.

In March 2015, the Company issued a further 39,000 new shares in order to satisfy options exercised by two officers and two employees. The exercise price was $10.71 per share, resulting in a total premium on issue of $0.4 million.


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Contractual Commitments

At December 31, 2014, we had the following contractual obligations and commitments:
Payment due by period
Less than
1 year

1–3
years

3–5
years

After
5 years

Total

(in millions of $)
3.75% unsecured convertible bonds due 2016
—

125.0

—

—

125.0

NOK600 million senior unsecured bonds due 2017
—

76.5

—

—

76.5

3.25% unsecured convertible bonds due 2018
—

—

350.0

—

350.0

NOK900 million senior unsecured bonds due 2019
—

—

119.3

—

119.3

Floating rate long-term debt
182.4

189.9

368.3

321.1

1,061.7

Floating rate long-term debt in unconsolidated subsidiaries
107.2

195.3

589.5

146.3

1,038.3

Total debt repayments
289.6

586.7

1,427.1

467.4

2,770.8

Total interest payments (1)
107.9

172.7

77.7

12.4

370.7

Total vessel purchases (2)
85.0

—

—

—

85.0

Total contractual cash obligations
482.5

759.4

1,504.8

479.8

3,226.5

(1)
Interest payments are based on the existing borrowings of both fully consolidated and equity-accounted subsidiaries. It is assumed that no further refinancing of existing loans takes place and that there is no repayment on revolving credit facilities. Interest rate swaps have not been included in the calculation. The interest has been calculated using the five year U.S. dollar swap of 1.5080%, the five year NOK swap of 1.4478% and the exchange rate of NOK7.9880 = $1 as of April 8, 2015 , plus agreed margins. Interest on fixed rate loans is calculated using the contracted interest rates.
(2)
Vessel purchase commitments relate to the two newbuilding 8,700 TEU container vessels which were delivered in January 2015.

Research and development, patents and licenses etc.

We do not undertake any significant expenditure on research and development, and have no significant interests in patents or licenses.
Trend information

Our charters with the Frontline Charterers provide that daily rates decline over the terms of the charters, as discussed in Item 4.B “Our Fleet”.

Vessel prices have generally declined since their peak in 2008, although there was a brief upturn in the middle of 2010. The high level of ordering in 2013, when building prices for new vessels were low, was followed by a 15% decrease in ordering in 2014. Newbuilding prices increased in the first half of the year, but this increase was reversed in the second half. Accordingly, newbuilding prices remain low by historical standards, and below 2011 levels. Prices for second-hand vessels remained generally at low levels for most of 2014, with fluctuations for different types of vessels reflecting charter rates. Accordingly, during 2014 prices for second-hand drybulk vessels decreased by 15-25%, while prices for modern second-hand oil tankers increased by up to 30%. Prices for second-hand container vessels were on average unchanged.


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The spot market for tanker operators strengthened over the course of 2014, with charter rates in December at their highest since 2010. This strength continued into the first quarter of 2015 and, with fleet growth in 2015 expected to be no more than 2% and some tankers being used for floating storage, it is thought that 2015 could see further increases in fleet utilization and charter rates. However, the oil price has become more volatile than in recent years, and unless global oil demand picks up sufficiently there will have to be a downward adjustment in oil supply, which would adversely impact on charter rates. As ever, the main factor that could improve the fundamentals for the tanker markets is a sustained higher level of growth in the world economy. Our tanker vessels on charter to the Frontline Charterers are subject to long term charters that provide for both a fixed base charter-hire and profit sharing payments that apply once the applicable Frontline Charterer earns daily rates from our vessels that exceed certain levels. If rates for vessels chartered on the spot market increase, our profit sharing revenues will likewise increase for those vessels operated by the Frontline Charterers in the spot market. We also have two Suezmax tankers currently employed in the spot market, which will benefit directly from possible continued strength in spot charter rates.

For drybulk carriers, 2014 was weaker than 2013, although still an improvement on 2012, which saw the weakest market in some 26 years with capacity supply well in excess of demand. Charter rates are expected to remain at low levels in 2015, with both fleet capacity and tonnage demand forecast to increase by around 5%. Although drybulk trade has increased at an average rate in excess of 5% per annum over the past ten years, which includes the financial crisis in 2009, fleet capacity has grown by more than 8% per annum over the same period, as expectations of growth in China and other developing countries, coupled with optimism over the speed of economic recovery in Europe, led to excessive ordering from shipyards. China accounts for approximately 40% of world tonnage demand, and the market for 2015 will depend critically on China's economic growth rate, which in turn is significantly dependent on worldwide economic growth, predicted to be slightly stronger than in 2014.

Charter rates for container vessels continued at low levels for most of 2014, although rates for vessels above 9,000 TEU strengthened towards the end of the year, partly as a result of extra demand from the U.S. linked to West Coast port congestion. With growth in demand predicted to be more or less matched by increased capacity, it is expected that 2015 will be another difficult year for the containership industry. Again, it is a return to higher economic growth rates, particularly in the United States and Europe, which is needed before demand levels can rise sufficiently to reduce the current excess capacity and enable charter rates to increase.

The unexpected reduction in the oil price which occurred in 2014 will clearly reduce demand for offshore drilling units, just at a time when deliveries of newbuildings are scheduled to increase capacity. Many offshore activities will not be viable at the current price of below $60 per barrel, and if the price stays at this level it is inevitable that day rates for drilling units will decline from their recent record high levels. Our units all have long-term fixed rate charters, so we do not expect to be exposed to short and medium-term market fluctuations.

Interest rates have been at historically low levels since 2009, and are expected to remain low throughout 2015, based on the forward interest rate curve. However, as the tentative economic recovery becomes more established, it is thought that interest rates could start increasing from 2016 onwards. We have effectively hedged most of our interest exposure on our floating rate debt through swap agreements with banks. Several of our charter contracts also include interest adjustment clauses, whereby the charter rate is adjusted to reflect the actual interest paid on a deemed outstanding loan relating to the asset, effectively transferring the interest rate exposure to our counterparty under the charter contract.


Off balance sheet arrangements

At December 31, 2014, we are not party to any arrangements which may be considered to be off balance sheet arrangements.




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ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. DIRECTORS AND SENIOR MANAGEMENT

The following table sets forth information regarding our executive officers and directors and the Chief Executive Officer and the Chief Financial Officer of our wholly owned subsidiary Ship Finance Management AS, who are responsible for overseeing our management.

Name
Age
Position
Hans Petter Aas
69
Director, Chairman of the Board and Audit Committee member
Kate Blankenship
50
Director of the Company and Chairperson of the Audit Committee
Cecilie A. Fredriksen
31
Director of the Company
Paul Leand
48
Director of the Company
Harald Thorstein
35
Director of the Company
Ole B. Hjertaker
48
Chief Executive Officer of Ship Finance Management AS
Harald Gurvin
40
Chief Financial Officer of Ship Finance Management AS

Under our constituent documents, we are required to have at least one independent director on our Board of Directors whose consent will be required to file for bankruptcy, liquidate or dissolve, merge or sell all or substantially all of our assets.

Certain biographical information about each of our directors and executive officers is set forth below.

Hans Petter Aas has served as a director of the Company since August 2008 and as Chairman of the Board since January 2009.  He has served on the Audit Committee since 2010. Mr. Aas has a long career as banker in the international shipping and offshore market, and retired from his position as Global Head of the Shipping, Offshore and Logistics Division of DnB NOR in August 2008. He joined DnB NOR (then Bergen Bank) in 1989, and has previously worked for the Petroleum Division of the Norwegian Ministry of Industry and the Ministry of Energy, as well as for Vesta Insurance and Nevi Finance. Mr. Aas is also a director of Deep Sea Supply Plc., Knightsbridge Tankers Ltd., Knutsen Offshore Tankers ASA, Knutsen NYK Offshore Partners, Solvang ASA and Gearbulk Holding Limited.

Kate Blankenship has served as a director of the Company since October 2003. Mrs. Blankenship served as the Company's Chief Accounting Officer and Company Secretary from October 2003 to October 2005. Mrs. Blankenship has served as a director of Frontline since August 2003, Golar LNG Limited since July 2013, Golden Ocean since November 2004, Seadrill since May 2005, Archer Limited since August 2007, Golar LNG Partners LP since September 2007, Independent Tankers Corporation Limited since February 2008, Frontline 2012 Ltd. since December 2011, NADL since February 2011, Seadrill Partners LLC since 2012 and Avance Gas Holdings Limited since October 2013. Mrs. Blankenship is a member of the Institute of Chartered Accountants in England and Wales.

Cecilie Astrup Fredriksen has served as a director of the Company since 2008. Ms. Fredriksen is the daughter of Mr. John Fredriksen and is currently employed by Frontline Corporate Services in London and serves as a director on several boards including Archer Limited, and NADL. Ms. Fredriksen received a BA in Business and Spanish from the London Metropolitan University in 2006.

Paul Leand has served as a director of the Company since 2003.  Mr. Leand is the Chief Executive Officer and Director of AMA Capital Partners LLC, or AMA, an investment bank specializing in the maritime industry. From 1989 to 1998 Mr. Leand served at the First National Bank of Maryland where he managed the Bank's Railroad Division and its International Maritime Division. He has worked extensively in the U.S. capital markets in connection with AMA's restructuring and mergers and acquisitions practices. Mr. Leand serves as a member of American Marine Credit LLC's Credit Committee and served as a member of the Investment Committee of AMA Shipping Fund I, a private equity fund formed and managed by AMA. Mr. Leand is also a director of Seadrill and NADL.


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Harald Thorstein has served as a director of the Company since September 2011. Mr. Thorstein is currently employed by Frontline Corporate Services in London, prior to which he was employed in the Corporate Finance division of DnB NOR Markets, specializing in the offshore and shipping sectors. Mr. Thorstein has an MSc in Industrial Economics and Technology Management from the Norwegian University of Science and Technology. Mr. Thorstein has served as a director of Seadrill Partners LLC since 2012, NADL since 2013, Golden Ocean since 2014, Frontline 2012 since 2014, and as Chairman of the Board of Directors of Deep Sea Supply Plc. since May 2013.

Ole B. Hjertaker has served Ship Finance Management AS as Chief Executive Officer since July 2009, prior to which he served as Chief Financial Officer from September 2006. Mr. Hjertaker also served Ship Finance Management AS as Interim Chief Financial Officer between July 2009 and January 2011. Prior to joining Ship Finance, Mr. Hjertaker was employed in the Corporate Finance division of DnB NOR Markets, a leading shipping and offshore bank. Mr. Hjertaker has extensive corporate and investment banking experience, mainly within the maritime/transportation industries.

Harald Gurvin was appointed as Chief Financial Officer of Ship Finance Management AS in March 2012, prior to which he served as Senior Vice President from August 2008. Before joining Ship Finance in July 2006, Mr. Gurvin spent seven years with the global shipping group of Fortis Bank, specializing in shipping and offshore finance. Mr. Gurvin has an MSc in Shipping, Trade and Finance from the CASS Business School in London and an MSc in Marine Engineering and Naval Architecture from the Norwegian University of Science and Technology.

B. COMPENSATION

During the year ended December 31, 2014, we paid to our directors and executive officers aggregate cash compensation of $3.2 million including an aggregate amount of $0.05 million for pension and retirement benefits.  We reimburse directors for reasonable out of pocket expenses incurred by them in connection with their service to us.

In addition to cash compensation, during 2014 we also recognized an expense of $29,000 relating to stock options issued to certain of our directors and employees. During 2014, 224,000 options were exercised, 10,000 options were forfeited and no options were issued, bringing the total outstanding options at December 31, 2014, to 189,000.  In March 2015, a further 39,000 options were exercised. All outstanding options have vested, and they expire between July 2015 and March 2016. The exercise price of the options is currently between $10.29 and $13.88 per share, and shall be reduced from time to time by the amount of any future dividend declared with respect to the common shares.

C. BOARD PRACTICES
In accordance with our Bye-laws, the number of directors shall be such number not less than two as we may by Ordinary Resolution determine from time to time, and each director shall hold office until the next annual general meeting following his election or until his successor is elected. We currently have five directors.

We currently have an Audit Committee, which is responsible for overseeing the quality and integrity of our financial statements and our accounting, auditing and financial reporting practices, our compliance with legal and regulatory requirements, the independent auditor's qualifications, independence and performance, and our internal audit function. Kate Blankenship is the Chairperson of the Audit Committee and the Audit Committee Financial Expert. Hans Petter Aas is also a member of the Audit Committee.

As a foreign private issuer, we are exempt from certain requirements of the NYSE that are applicable to U.S. listed companies.  For a listing and further discussion of how our corporate governance practices differ from those required of U.S. companies listed on the NYSE, please see Item 16G or visit the corporate governance section of our website at www.shipfinance.bm .

Our officers are elected by our Board of Directors as soon as possible following each Annual General Meeting and shall hold office for such period and on such terms as the Board of Directors may determine.

There are no service contracts between us and any of our directors providing for benefits upon termination of their employment or service.




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D. EMPLOYEES

We currently employ seven persons on a full-time basis. We have contracted with Frontline Management and other third parties for certain managerial responsibilities for our fleet and with Frontline Management for some administrative services, including corporate services.


E. SHARE OWNERSHIP

The beneficial interests of our Directors and officers in our common shares as of April 9, 2015 , are as follows:

Director or Officer
Beneficial interest in Common Shares of
$1.00 each
Additional interest in options to
acquire Common Shares
which have vested
Percentage of
Common Shares
Outstanding
Hans Petter Aas
25,000

—

*
Paul Leand
60,334

—

*
Kate Blankenship
12,711

—

*
Cecilie A. Fredriksen
—

—

*
Harald Thorstein
—

—

*
Ole B. Hjertaker
79,211

80,000

*
Harald Gurvin
—

25,000

*
*    Less than one percent.


Share Option Scheme

In November 2006, our Board of Directors approved the Ship Finance International Limited Share Option Scheme. The subscription price for all options granted under the scheme will be reduced by the amount of all dividends declared by the Company per share in the period from the date of grant until the date the options are exercised. In 2014, three directors, one officer and two employees exercised options to acquire 144,000 shares at prices which averaged $6.44 per share, and we issued 144,000 new shares in order to satisfy the exercised options. Also in 2014, an officer exercised options to acquire 80,000 shares, and in lieu of issuing new shares the Company made a payment to him equal to the intrinsic value of the options on the date of exercise. In March 2015, two officers and two employees exercised options to acquire a total of 39,000 shares at a price of $10.71 per share, and we issued 39,000 new shares to satisfy the exercised options.

Details of options to acquire common shares in the Company by Directors and officers as of April 9, 2015 , were as follows:
Number of options
Director or Officer
Total

Vested

Exercise price
Expiration Date
Ole B. Hjertaker
80,000

80,000

$
13.88

March 2016
Harald Gurvin
25,000

25,000

$
13.88

March 2016




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ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. MAJOR SHAREHOLDERS
Ship Finance International Limited is indirectly controlled by another corporation (see below). The following table presents certain information as at April 9, 2015 , regarding the ownership of our Common Shares with respect to each shareholder whom we know to beneficially own more than five percent of our outstanding Common Shares.

Owner
Number of Common Shares
Percent of Common Shares
Hemen Holding Ltd. (1)
26,179,293

28.02%
Farahead Investment Inc. (1)
7,900,000

8.45%
(1)
Hemen Holding Ltd. is a Cyprus holding company and Farahead Investment Inc. is a Liberian company, both indirectly controlled by trusts established by Mr. John Fredriksen for the benefit of his immediate family. Mr. Fredriksen disclaims beneficial ownership of the above shares of our common stock, except to the extent of his voting and dispositive interests in such shares of common stock. Mr. Fredriksen has no pecuniary interest in the above shares of common stock. Related to our issue in January 2013 of $350 million 3.25% convertible senior unsecured bonds due 2018, Hemen Holding Ltd. has loaned us up to 6,060,606 of its holding in our shares, so that we can in turn lend them to an affiliate of one of the underwriters of the bond issue in order to assist investors in those bonds to hedge their position. These loaned shares are included in the holdings presented in the above table.

The Company's major shareholders have the same voting rights as other shareholders of the Company.

As at April 9, 2015 , the Company had 399 holders of record in the United States. We had a total of 93,443,000 Common Shares outstanding as of April 9, 2015 .

We are not aware of any arrangements, the operation of which may at a subsequent date result in a change in control.

B. RELATED PARTY TRANSACTIONS

The Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was partially spun-off in 2004 and its shares commenced trading on the NYSE in June 2004. A significant proportion of our assets were acquired from Frontline in 2004. The majority of our business continues to be transacted through contractual relationships between us and the following related parties, being companies in which Hemen and companies associated with Hemen have a significant direct or indirect interest:
-
Frontline (including the Frontline Charterers)
-
Frontline 2012 Limited ("Frontline 2012")
-
Seadrill
-
NADL
-
Deep Sea
-
Golden Ocean
-
Golar LNG Limited ("Golar")
-
UFC

From September 2014, Golar ceased to be a related party to the Company, following disassociation through the sale of shares held by a company associated with Hemen.


68


As of April 9, 2015 , we charter 17 double-hull vessels to the Frontline Charterers under long-term capital leases, most of which were given economic effect from January 1, 2004.  At December 31, 2014, the balance of net investments in capital leases to the Frontline Charterers was $682 million (2013: $829 million) of which $30 million (2013: $36 million) represents short-term maturities. On December 30, 2011, amendments were made to the charter agreements relating to these vessels, in terms of which the Company received a compensation payment of $106 million and agreed to a $6,500 per day reduction in the time charter rate of each vessel for the period from January 1, 2012, to December 31, 2015. Thereafter, the charter rates revert to the previously agreed daily amounts. The leases were amended to reflect the compensation payment received and the reduction in future minimum lease payments to be received.

Prior to December 31, 2011, the Frontline Charterers paid the Company a profit sharing rate of 20% of their earnings above average threshold charter rates on a TCE basis from their use of the Company's fleet each fiscal year.  The amendments to the charter agreements made on December 30, 2011, increased the profit sharing percentage to 25% for future earnings above those threshold levels. Of the $106 million compensation payment received, $50 million represents a non-refundable advance relating to the 25% profit sharing agreement. The Company earned and recognized no profit sharing revenue under these arrangements in the years ended December 31, 2014, 2013 and 2012.

The amendments to the charter agreements additionally provide that during the temporary reduction in charter rates, the Frontline Charterers will pay the Company 100% of any earnings on a TCE basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel. In the year ended December 31, 2014, we earned and recognized $33 million revenue under this arrangement, which is also reported under "Profit sharing revenues" (2013: $nil; 2012: $52 million).

As of April 9, 2015 , we charter two of our drilling units to the Seadrill Charterers under long-term capital leases, both of which are owned by equity-accounted subsidiaries. At December 31, 2014, the balance of net investments in capital leases to the Seadrill Charterers was $855 million (2013: $1,479 million), of which $67 million (2013: $169 million) represents short-term maturities.

In July 2013, we entered into an agreement to acquire a harsh environment jack-up drilling rig from a subsidiary of NADL for a total acquisition cost of $600 million. The rig was delivered to us in February 2014 and leased back to a subsidiary of NADL on a bareboat charter in excess of 15 years, which includes four purchase options in favor of the subsidiary and a sale option in our favor at the end of the charter period. At December 31, 2014 the balance of the net investment in the capital lease to the subsidiary was $574 million, of which $44 million represents short-term maturities. The obligations under the bareboat charter were originally guaranteed by NADL. In February 2015, amendments were made to the bareboat charter, whereby Seadrill replaced NADL as charter guarantor.

The ultra deepwater drillship West Polaris is owned by SFL West Polaris, which was a wholly-owned subsidiary accounted for using the equity method. In December 2014, Seadrill advised us of its intention to exercise a purchase option, and the transaction was effected as the sale of that company on December 30, 2014. We recorded a gain of $6.1 million on the sale of our investment in the subsidiary. Ship Finance will continue to guarantee part of the debt in SFL West Polaris relating to the drillship, against a full indemnity from Seadrill. At December 31, 2014, the commitment under the guarantee was $94 million. In January 2015, the commitment under the guarantee reduced to $88 million.

In May 2013, the Company agreed to change the legal entity under the charters for five of the six vessels on charter to subsidiaries of Deep Sea Supply Plc. The new charterer is Deep Sea Supply Shipowning II B.V., a wholly-owned subsidiary of Deep Sea Supply BTG B.V., which is a joint venture owned 50% by Deep Sea Supply Plc. and 50% by BTG Pactual. The new charters became effective on May 31, 2013, and the main terms of the charters remain unchanged. We refer to Deep Sea Supply Plc. and Deep Sea Supply BTG B.V. together as Deep Sea.

As of April 9, 2015 , two of our six offshore supply vessels chartered to subsidiaries of Deep Sea under long-term leases are accounted for as capital leases, with the remaining four being operating leases. At December 31, 2014, the balance of net investments in capital leases to subsidiaries of Deep Sea was $65 million (2013: $74 million), of which $7 million (2013: $9 million) represents short-term maturities. At December 31, 2014, the net book value of operating assets leased to subsidiaries of Deep Sea was $97 million (2013: $107 million).

As of April 9, 2015 , we charter five of our drybulk carriers to subsidiaries of UFC under short-term operating leases. At December 31, 2014, we chartered four drybulk carriers to UFC, and the net book value of operating lease assets leased to subsidiaries of UFC was $102 million (2013: $106 million). The charter agreements for these vessels include profit sharing arrangements, whereby we earn a 50% share of profits earned by the vessels above threshold levels. In the year ended December 31, 2014, we earned and recognized $1.1 million under these arrangements (2013: $0.8 million; 2012: $nil).


69


We pay Frontline Management a management fee of $6,500 per day per vessel for all vessels chartered to the Frontline Charterers, apart from certain vessels where the fee is suspended while they are sub-chartered on a bareboat basis. We also have six container vessels, 14 drybulk carriers, two car carriers and two Suezmax tankers operating on time-charters or in the spot market, for which the supervision of the technical management is sub-contracted to Frontline Management. In the year ended December 31, 2014, management fees payable to Frontline Management amounted to $48 million (2013: $54 million; 2012: $66 million). The management fees are classified as vessel operating expenses.

The operating management of six container vessels and 14 drybulk carriers operating on time-charters is sub-contracted to Golden Ocean. In the year ended December 31, 2014, fees payable to Golden Ocean amounted to approximately $0.8 million (2013: $0.7 million; 2012: $0.5 million).

We have an administrative services agreement with Frontline Management under which they provide us with certain administrative support services, for which we pay our allocation of the actual costs they incur on our behalf, plus a margin. In the year ended December 31, 2014, we paid Frontline Management $0.5 million for these services (2013: $0.4 million; 2012: $0.5 million).

We paid a commission of 1% to Frontline Management in respect of all payments received in respect of the five year sales-type leases on the Suezmax tankers Glorycrown and Everbright. This arrangement ended in September 2013, when the leases were terminated, following which we agreed to pay Frontline a management fee of 1.25% of chartering revenues. In 2014, $0.3 million was paid to Frontline Management pursuant to the new arrangement. Under the old arrangement $0.1 million was paid in 2013 and $0.1 million was paid in 2012.

We pay fees to Frontline Management for the management supervision of some of our newbuildings, which in 2014 amounted to approximately $2.9 million (2013: $2.4 million; 2012: $2.1 million).

In November 2014 we sold the VLCCs Front Comanche , Front Commerce and Front Opalia to an unrelated third party. Termination fees totaling approximately $59 million were received from Frontline for the early termination of the related charters, consisting of approximately $11 million in cash compensation and $48 million in amortizing loan notes bearing interest at 7.25% receivable over the approximately eight remaining years of the cancelled leases. The loan notes were recorded at their initial fair value of approximately $39 million.


C. INTERESTS OF EXPERTS AND COUNSEL

Not Applicable.

ITEM 8.
FINANCIAL INFORMATION

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

See Item 18.

Legal Proceedings

We and our ship-owning subsidiaries are routinely party, as plaintiff or defendant, to claims and lawsuits in various jurisdictions for demurrage, damages, off hire and other claims and commercial disputes arising from the operation of their vessels, in the ordinary course of business or in connection with acquisition activities. We believe that resolution of such claims will not have a material adverse effect on our operations or financial conditions.


Dividend Policy

Our Board of Directors adopted a policy in May 2004 in connection with our public listing, whereby we seek to pay a regular quarterly dividend, the amount of which is based on our contracted revenues and growth prospects. Our goal is to increase our quarterly dividend as we grow the business, but the timing and amount of dividends, if any, is at the sole discretion of our Board of Directors and will depend upon our operating results, financial condition, cash requirements, restrictions in terms of financing arrangements and other relevant factors.


70


We have paid the following cash dividends in 2010, 2011, 2012, 2013 and 2014:
Payment Date
Amount per Share
2010

January 27, 2010
$
0.30

March 30, 2010
$
0.30

June 10, 2010
$
0.33

September 30, 2010
$
0.35

December 30, 2010
$
0.36

2011

March 29, 2011
$
0.38

June 29, 2011
$
0.39

September 29, 2011
$
0.39

December 29, 2011
$
0.39

2012
March 28, 2012
$
0.30

June 28, 2012
$
0.39

September 28, 2012
$
0.39

December 28, 2012
$
0.39

December 28, 2012
$
0.39

(1)
2013
June 28, 2013
$
0.39

September 27, 2013
$
0.39

December 30, 2013
$
0.39

2014
March 28, 2014
$
0.40

June 30, 2014
$
0.41

September 30, 2014
$
0.41

December 30, 2014
$
0.41


(1)
This dividend was an accelerated dividend in respect of the fourth quarter of 2012.

On February 26, 2015, our Board of Directors declared a dividend of $0.42 per share which was paid in cash on March 27, 2015.

B. SIGNIFICANT CHANGES
None

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ITEM 9.
THE OFFER AND LISTING
Not applicable except for Item 9.A.4. and Item 9.C.

The Company's common shares were listed on the NYSE on June 15, 2004, and commenced trading on that date under the symbol "SFL".


The following table sets forth, for each of the five most recent full financial years, the high and low closing prices for the common shares on the NYSE.
Fiscal year ended December 31
High

Low

2014
$
19.82

$
13.11

2013
$
17.78

$
14.35

2012
$
17.56

$
9.34

2011
$
22.43

$
8.66

2010
$
22.84

$
13.81



The following table sets forth, for each full financial quarter for the two most recent fiscal years, the high and low closing prices for the common shares on the NYSE.

Fiscal year ended December 31, 2014
High

Low

First quarter
$
19.20

$
15.95

Second quarter
$
19.26

$
16.80

Third quarter
$
19.82

$
16.92

Fourth quarter
$
17.39

$
13.11


Fiscal year ended December 31, 2013
High

Low

First quarter
$
17.71

$
15.96

Second quarter
$
17.78

$
14.35

Third quarter
$
16.47

$
14.59

Fourth quarter
$
17.15

$
15.36



The following table sets forth, for the most recent six months, the high and low closing prices for the common shares on the NYSE.
High

Low

March 2015
$
15.92

$
14.45

February 2015
$
16.01

$
14.36

January 2015
$
14.85

$
13.91

December 2014
$
16.80

$
13.11

November 2014
$
17.39

$
16.55

October 2014
$
17.19

$
15.18



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ITEM 10.
ADDITIONAL INFORMATION

A. SHARE CAPITAL

Not Applicable.

B. MEMORANDUM AND ARTICLES OF ASSOCIATION

The Memorandum of Association of the Company has previously been filed as Exhibit 3.1 to the Company's Registration Statement on Form F-4 (Registration No. 333-115705) filed with the SEC on May 25, 2004, and is hereby incorporated by reference into this Annual Report.

At our 2013 Annual General Meeting the shareholders voted to amend our Bye-laws, principally those governing General Meetings, proceedings of the Board of Directors and delegation of its powers. These amended Bye-laws of the Company as adopted by shareholders on September 20, 2013, are filed as Exhibit 1.3 to this annual report on Form 20-F.

The purposes and powers of the Company are set forth in Items 6(1) and 7(a) through (h) of our Memorandum of Association and in the Second Schedule of the Bermuda Companies Act of 1981, which is attached as an exhibit to our Memorandum of Association.  These purposes include exploring, drilling, moving, transporting and refining petroleum and hydro-carbon products, including oil and oil products; the acquisition, ownership, chartering, selling, management and operation of ships and aircraft; the entering into of any guarantee, contract, indemnity or suretyship and to assure, support, secure, with or without the consideration or benefit, the performance of any obligations of any person or persons; and the borrowing and raising of money in any currency or currencies to secure or discharge any debt or obligation in any manner.

Bermuda law permits the Bye-laws of a Bermuda company to contain provisions excluding personal liability of a director, alternate director, officer, member of a committee authorized under Bye-law 98, resident representative or their respective heirs, executors or administrators to the company for any loss arising or liability attaching to him by virtue of any rule of law in respect of any negligence, default, breach of duty or breach of trust of which the officer or person may be guilty.  Bermuda law also grants companies the power generally to indemnify directors, alternate directors and officers of the Company and any members of a committee authorized under Bye-law 98, resident representatives or their respective heirs, executors or administrators if any such person was or is a party or threatened to be made a party to a threatened, pending or completed action, suit or proceeding by reason of the fact that he or she is or was a director, alternate director or officer of the Company or member of a committee authorized under Bye-law 98, resident representative or their respective heirs, executors or administrators or was serving in a similar capacity for another entity at the Company's request.

Our shareholders have no pre-emptive, subscription, redemption, conversion or sinking fund rights. Shareholders are entitled to one vote for each share held of record on all matters submitted to a vote of our shareholders. Shareholders have no cumulative voting rights. Shareholders are entitled to dividends if and when they are declared by our Board of Directors, subject to any preferred dividend right of holders of any preference shares. Directors to be elected by shareholder require a majority of votes cast at a meeting at which a quorum is present. For all other matters, unless a different majority is required by law or our Bye-laws, resolutions to be approved by shareholders require approval by a majority of votes cast at a meeting at which a quorum is present.

Upon our liquidation, dissolution or winding up, shareholders will be entitled to receive, ratably, our net assets available after the payment of all our debts and liabilities and any preference amount owed to any preference shareholders. The rights of shareholders, including the right to elect directors, are subject to the rights of any series of preference shares we may issue in the future.

Under our Bye-laws annual meetings of shareholders will be held at a time and place selected by our Board of Directors each calendar year. Special meetings of shareholders may be called by our Board of Directors at any time and must be called at the request of shareholders holding at least 10% of our paid-up share capital carrying the right to vote at general meetings. Under our Bye-laws five days' notice of an annual meeting or any special meeting must be given to each shareholder entitled to vote at that meeting. Under Bermuda law accidental failure to give notice will not invalidate proceedings at a meeting. Our Board of Directors may set a record date at any time before or after any date on which such notice is dispatched.

Special rights attaching to any class of our shares may be altered or abrogated with the consent in writing of not less than 75% of the issued shares of that class or with the sanction of a resolution passed at a separate general meeting of the holders of such shares voting in person or by proxy.


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Our Bye-laws do not prohibit a director from being a party to, or otherwise having an interest in, any transaction or arrangement with the Company or in which the Company is otherwise interested.  Our Bye-laws provide our Board of Directors the authority to exercise all of the powers of the Company to borrow money and to mortgage or charge all or any part of our property and assets as collateral security for any debt, liability or obligation.  Our directors are not required to retire because of their age, and our directors are not required to be holders of our common shares.  Directors serve for one year terms, and shall serve until re-elected or until their successors are appointed at the next annual general meeting.

Our Bye-laws provide that no director, alternate director, officer, person or member of a committee, if any, resident representative, or his heirs, executors or administrators, which we refer to collectively as an indemnitee, is liable for the acts, receipts, neglects, or defaults of any other such person or any person involved in our formation, or for any loss or expense incurred by us through the insufficiency or deficiency of title to any property acquired by us, or for the insufficiency or deficiency of any security in or upon which any of our monies shall be invested, or for any loss or damage arising from the bankruptcy, insolvency, or tortious act of any person with whom any monies, securities, or effects shall be deposited, or for any loss occasioned by any error of judgment, omission, default, or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in relation to the execution of his duties, or supposed duties, to us or otherwise in relation thereto.  Each indemnitee will be indemnified and held harmless out of our funds to the fullest extent permitted by Bermuda law against all liabilities, loss, damage or expense (including but not limited to liabilities under contract, tort and statute or any applicable foreign law or regulation and all reasonable legal and other costs and expenses properly payable) incurred or suffered by him as such director, alternate director, officer, person or committee member or resident representative (or in his reasonable belief that he is acting as any of the above).  In addition, each indemnitee shall be indemnified against all liabilities incurred in defending any proceedings, whether civil or criminal, in which judgment is given in such indemnitee's favor, or in which he is acquitted.  We are authorized to purchase insurance to cover any liability he may incur under the indemnification provisions of our Bye-laws.

C. MATERIAL CONTRACTS

The Company has not entered into any new material contracts since January 1, 2014, other than those entered in the ordinary course of business.

D. EXCHANGE CONTROLS

The Bermuda Monetary Authority, or the BMA, must give permission for all issuances and transfers of securities of a Bermuda exempted company like us. We have received a general permission from the BMA to issue any unissued common shares, and for the free transferability of the common shares as long as our common shares are listed on the NYSE. Our common shares may therefore be freely transferred among persons who are non-residents of Bermuda.

Although we are incorporated in Bermuda, we are classified as non-resident of Bermuda for exchange control purposes by the BMA. Other than transferring Bermuda Dollars out of Bermuda, there are no restrictions on our ability to transfer funds into and out of Bermuda or to pay dividends to U.S. residents who are holders of our common shares or other non-resident holders of our common shares in currency other than Bermuda Dollars.


E. TAXATION

U.S. Taxation
The following discussion is based upon the provisions of the U.S. Internal Revenue Code of 1986, as amended, or the Code, existing and proposed U.S. Treasury Department regulations, or the Treasury Regulations, administrative rulings and pronouncements and judicial decisions, all as of the date of this annual report.  Unless otherwise noted, references to the "Company" include the Company's Subsidiaries.  This discussion assumes that we do not have an office or other fixed place of business in the United States.

Taxation of the Company's Shipping Income: In General
The Company anticipates that it will derive a significant portion of its gross income from the use and operation of vessels in international commerce and that this income will principally consist of freights from the transportation of cargoes, hire or lease from time or voyage charters and the performance of services directly related thereto, which the Company refers to as "shipping income."

74



Shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States will be considered to be 50% derived from sources within the United States.  Shipping income attributable to transportation that both begins and ends in the United States will be considered to be 100% derived from sources within the United States.  The Company is not permitted by law to engage in transportation that gives rise to 100% U.S. source income.

Shipping income attributable to transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States.  Shipping income derived from sources outside the United States will not be subject to U.S. federal income tax.

Based upon the Company's anticipated shipping operations, the Company's vessels will operate in various parts of the world, including to or from U.S. ports. Unless exempt from U.S. federal income taxation under Section 883 of the Code, the Company will be subject to U.S. federal income taxation, in the manner discussed below, to the extent its shipping income is considered derived from sources within the United States.

Application of Section 883 of the Code
Under the relevant provisions of Section 883 of the Code, or Section 883, the Company will be exempt from U.S. federal income taxation on its U.S. source shipping income if:
(i)
It is organized in a "qualified foreign country," which is one that grants an equivalent exemption from tax to corporations organized in the United States in respect of the shipping income for which exemption is being claimed under Section 883, and which the Company refers to as the Country of Organization Requirement; and
(ii)
It can satisfy any one of the following two stock ownership requirements for more than half the days during the taxable year:
•
the Company's stock is "primarily and regularly traded on an established securities market" located in the United States or a "qualified foreign country," which the Company refers to as the Publicly-Traded Test; or
•
more than 50% of the Company's stock, in terms of value, is beneficially owned by any combination of one or more individuals who are residents of a "qualified foreign country" or foreign corporations that satisfy the Country of Organization Requirement and the Publicly-Traded Test, which the Company refers to as the 50% Ownership Test.

The U.S. Treasury Department has recognized Bermuda, the country of incorporation of the Company and certain of its subsidiaries, as a "qualified foreign country." In addition, the U.S. Treasury Department has recognized Liberia, Panama, the Isle of Man, Singapore, the Marshall Islands, Malta and Cyprus, the countries of incorporation of certain of the Company's vessel-owning subsidiaries, as "qualified foreign countries."  Accordingly, the Company and its vessel-owning subsidiaries satisfy the Country of Organization Requirement.

Therefore, the Company's eligibility to qualify for exemption under Section 883 is wholly dependent upon being able to satisfy one of the stock ownership requirements.

As discussed below, for the 2014 taxable year we believe the Company satisfied the Publicly-Traded Test, since on more than half the days in the taxable year we believe the Company's common shares were primarily and regularly traded on an established securities market in the United States, namely the NYSE.

As to the Publicly-Traded Test, the Treasury Regulations under Section 883 provide, in pertinent part, that stock of a foreign corporation will be considered to be "primarily traded" on an established securities market in a country if the number of shares of each class of stock that is traded during any taxable year on all established securities markets in that country exceeds the number of shares in each such class that is traded during that year on established securities markets in any other single country.


75


The Publicly-Traded Test also requires our common shares be "regularly traded" on an established securities market.  Under the Treasury Regulations, our common shares are considered to be "regularly traded" on an established securities market if shares representing more than 50% of our outstanding common shares, by both total combined voting power of all classes of stock entitled to vote and total value, are listed on the market, referred to as the "listing threshold." The Treasury Regulations further require that with respect to each class of stock relied upon to meet the listing threshold (i) such class of stock is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year or 1/6 of the days in a short taxable year, which is referred to as the "trading frequency test", and (ii) the aggregate number of shares of such class of stock traded on such market during the taxable year is at least 10% of the average number of shares of such class of stock outstanding during such year (as appropriately adjusted in the case of a short taxable year), which is referred to as the "trading volume test."  Even if we do not satisfy both the trading frequency and trading volume tests, the Treasury Regulations provide that the trading frequency and trading volume tests will be deemed satisfied if our common shares are traded on an established securities market in the United States and such stock is regularly quoted by dealers making a market in our common shares.

Notwithstanding the foregoing, our common shares will not be considered to be regularly traded on an established securities market for any taxable year in which 50% or more of the vote and value of the outstanding common shares are owned, actually or constructively under certain stock attribution rules, on more than half the days during the taxable year by persons who each own 5% or more of the value of our common shares, which we refer to as the 5 Percent Override Rule.

In order to determine the persons who actually or constructively own 5% or more of our common shares, or 5% Shareholders, we are permitted to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with the U.S. Securities and Exchange Commission as having a 5% or more beneficial interest in our common shares. In addition, an investment company identified on a Schedule 13G or Schedule 13D filing which is registered under the Investment Company Act of 1940, as amended, will not be treated as a 5% Shareholder for such purposes.

For our 2014 taxable year, we do not believe that we were subject to the 5 Percent Override Rule and, therefore, we believe that we satisfied the Publicly-Traded Test. There are, however, factual circumstances beyond our control that could cause the Company to lose the benefit of the Section 883 exemption and thereby become subject to U.S. federal income tax on its U.S. source shipping income.  For example, Hemen owned approximately 36% of our outstanding common shares as of December 31, 2014.  There is, therefore, a risk that the Company could no longer qualify for exemption under Section 883 for a particular taxable year if other 5% Shareholders were, in combination with Hemen, to own 50% or more of the outstanding common shares of the Company on more than half the days during the taxable year. Due to the factual nature of the issues involved, there can be no assurances as to the tax-exempt status of the Company or any of its subsidiaries.

In the event the 5 Percent Override Rule is triggered, the 5 Percent Override Rule will nevertheless not apply if we can establish that among the closely-held group of 5% Shareholders, there are sufficient 5% Shareholders that are considered to be "qualified shareholders" for purposes of Section 883 to preclude non-qualified 5% Shareholders in the closely-held group from owning 50% or more of our common shares for more than half the number of days during the taxable year.
In any year that the 5 Percent Override Rule is triggered with respect to us, we are eligible for the exemption from tax under Section 883 only if we can nevertheless satisfy the Publicly-Traded Test (which requires, among other things, showing that the exception to the 5 Percent Override Rule applies) or if we can satisfy the 50% Ownership Test. In either case, certain substantiation and reporting requirements regarding the identity of our shareholders must be satisfied in order to qualify for the Section 883 exemption. These requirements are onerous and there is no assurance that we would be able to satisfy them.
Taxation in Absence of the Section 883 Exemption
To the extent the benefits of Section 883 are unavailable with respect to any item of U.S. source income, the Company's U.S. source shipping income, to the extent not considered to be "effectively connected" with the conduct of a U.S. trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of the Code on a gross basis, without the benefit of deductions, which we refer to as the "4% gross basis tax regime." Since, under the sourcing rules described above, no more than 50% of the Company's shipping income would be treated as being derived from U.S. sources, the maximum effective rate of U.S. federal income tax on the Company's shipping income, to the extent not considered to be "effectively connected" with the conduct of a U.S. trade or business, would never exceed 2% under the 4% gross basis tax regime.

76


To the extent the benefits of the Section 883 exemption are unavailable and our U.S. source shipping income is considered to be "effectively connected" with the conduct of a U.S. trade or business, as described below, any such "effectively connected" U.S. source shipping income, net of applicable deductions, would be subject to the U.S. federal corporate income tax currently imposed at rates of up to 35%. In addition, we may be subject to the 30% "branch profits" tax on earnings "effectively connected" with the conduct of such U.S. trade or business, as determined after allowance for certain adjustments, and on certain interest paid or deemed paid attributable to the conduct of such U.S. trade or business.

Our U.S. source shipping income would be considered "effectively connected" with the conduct of a U.S. trade or business only if:

•
we had, or were considered to have, a fixed place of business in the United States involved in the earning of U.S. source shipping income; and
•
substantially all of our U.S. source shipping income were attributable to regularly scheduled transportation, such as the operation of a vessel that followed a published schedule with repeated sailings at regular intervals between the same points for voyages that begin or end in the United States, or, in the case of income from the chartering of a vessel, were attributable to a fixed place of business in the United States.

We do not have, nor will we permit circumstances that would result in having, any vessel sailing to or from the United States on a regularly scheduled basis. Based on the foregoing and on the expected mode of our shipping operations and other activities, we believe that none of our U.S. source shipping income is or will be "effectively connected" with the conduct of a U.S. trade or business.
Gain on Sale of Vessels

Regardless of whether we qualify for exemption under Section 883, we will not be subject to U.S. federal income taxation with respect to gain realized on a sale of a vessel, provided the sale is considered to occur outside of the United States under U.S. federal income tax principles.  In general, a sale of a vessel will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect to the vessel, pass to the buyer outside of the United States.  It is expected that any sale of a vessel by us will be considered to occur outside of the United States.

U.S. Taxation of Our Other Income

In addition to our shipping operations, we charter drillrigs to third parties who conduct drilling operations in various parts of the world.  Since we are not engaged in a trade or business in the United States, we do not expect to be subject to U.S. federal income tax on any of our income from such charters.
Taxation of U.S. Holders

The following is a discussion of the material U.S. federal income tax considerations relevant to an investment decision by a U.S. Holder, as defined below, with respect to our common shares.  This discussion does not purport to deal with the tax consequences of owning our common shares to all categories of investors, some of which may be subject to special rules.  You are encouraged to consult your own tax advisors concerning the overall tax consequences arising in your own particular situation under U.S. federal, state, local or foreign law of the ownership of our common shares.

As used herein, the term U.S. Holder means a beneficial owner of our common shares that (i) is a U.S. citizen or resident, a U.S. corporation or other U.S. entity taxable as a corporation, an estate, the income of which is subject to U.S. federal income taxation regardless of its source, or a trust if a court within the United States is able to exercise primary jurisdiction over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, (ii) owns our common shares as a capital asset, generally, for investment purposes, and (iii) owns less than 10% of our common shares for U.S. federal income tax purposes.

If a partnership holds our common shares, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership.  If you are a partner in a partnership holding our common shares, you are encouraged to consult your own tax advisor regarding this issue.

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Distributions

Subject to the discussion below of passive foreign investment companies, or PFICs, any distributions made by us with respect to our common shares to a U.S. Holder will generally constitute dividends, which may be taxable as ordinary income or "qualified dividend income" as described in more detail below, to the extent of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.  Distributions in excess of our earnings and profits will be treated first as a nontaxable return of capital to the extent of the U.S. Holder's tax basis in his common shares on a dollar-for-dollar basis and thereafter as capital gain.  Because we are not a U.S. corporation, U.S. Holders that are corporations will not be entitled to claim a dividends-received deduction with respect to any distributions they receive from us.

Dividends paid on our common shares to a U.S. Holder who is an individual, trust or estate, which we refer to as a U.S. Individual Holder, will generally be treated as "qualified dividend income" that is taxable to such U.S. Individual Holders at preferential tax rates provided that (1) the common shares are readily tradable on an established securities market in the United States (such as the NYSE, on which our common shares are listed); (2) we are not a PFIC for the taxable year during which the dividend is paid or the immediately preceding taxable year (see discussion below); and (3) the U.S. Individual Holder has owned the common shares for more than 60 days in the 121-day period beginning 60 days before the date on which the common shares become ex-dividend.

There is no assurance that any dividends paid on our common shares will be eligible for these preferential rates in the hands of a U.S. Individual Holder.  Any dividends paid by the Company which are not eligible for these preferential rates will be taxed as ordinary income to a U.S. Individual Holder.

Sale, Exchange or other Disposition of Common Shares
Assuming we do not constitute a PFIC for any taxable year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common shares in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder's tax basis in such common shares.  Such gain or loss will be treated as long-term capital gain or loss if the U.S. Holder's holding period in the common shares is greater than one year at the time of the sale, exchange or other disposition.  Otherwise, it will be treated as short-term capital gain or loss.  A U.S. Holder's ability to deduct capital losses is subject to certain limitations.
Passive Foreign Investment Company Status and Significant Tax Consequences
Special U.S. federal income tax rules apply to a U.S. Holder that holds stock in a foreign corporation classified as a PFIC for U.S. federal income tax purposes.  In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in which such holder held our common shares, either at least 75% of our gross income for such taxable year consists of "passive income" ( e.g., dividends, interest, capital gains and rents derived other than in the active conduct of a rental business), or at least 50% of the average value of the assets held by the corporation during such taxable year produce, or are held for the production of, "passive income."

For purposes of determining whether we are a PFIC, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of our subsidiary corporations in which we own at least 25% of the value of the subsidiary's stock.  Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income.  By contrast, rental income would generally constitute "passive income" unless we were treated under specific rules as deriving our rental income in the active conduct of a trade or business.

Although there is no legal authority directly on point, we believe that, for purposes of determining whether we are a PFIC, the gross income we derive or are deemed to derive from the time chartering activities of our wholly-owned subsidiaries more likely than not constitutes services income, rather than rental income.  Correspondingly, we believe that such income does not constitute "passive income," and the assets that we or our wholly-owned subsidiaries own and operate in connection with the production of such income, in particular, the vessels, do not constitute passive assets for purposes of determining whether we are a PFIC.  We believe there is substantial legal authority supporting our position consisting of case law and Internal Revenue Service, or IRS, pronouncements concerning the characterization of income derived from time charters and voyage charters as services income for other tax purposes. This position is principally based upon the positions that (1) our time charter income will constitute services income, rather than rental income, and (2) Frontline Management, which provides services to most of our time-chartered vessels, will be respected as a separate entity from the Frontline Charterers, with which it is affiliated.


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We intend to take the position that we were not treated as a PFIC for our 2014 taxable year. For the 2015 taxable year and future taxable years, depending upon the relative amount of income we derive from our various assets as well as their relative fair market values, it is possible that we may be treated as a PFIC.

We note that there is no direct legal authority under the PFIC rules addressing our current and proposed method of operation. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future.  Accordingly, no assurance can be given that the IRS or a court of law will accept our position, and there is a significant risk that the IRS or a court of law could determine that we are a PFIC.

As discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different taxation rules depending on whether the U.S. Holder makes an election to treat us as a "Qualified Electing Fund", which election we refer to as a QEF Election. As an alternative to making a QEF election, a U.S. Holder should be able to make a "mark-to-market" election with respect to our common shares, as discussed below, and which election we refer to as a Mark-to-Market Election. In any event, if we were to be treated as a PFIC for any taxable year ending on or after December 31, 2014, a U.S. Holder would be required to file an annual report with the Internal Revenue Service for that year with respect their holding in our common shares.

Taxation of U.S. Holders Making a Timely QEF Election
If a U.S. Holder makes a timely QEF Election, which U.S. Holder we refer to as an Electing Holder, the Electing Holder must report each year for U.S. federal income tax purposes its pro rata share of our ordinary earnings and our net capital gain, if any, for our taxable year that ends with or within the taxable year of the Electing Holder, regardless of whether or not distributions were received from us by the Electing Holder.  The Electing Holder's adjusted tax basis in the common shares will be increased to reflect taxed but undistributed earnings and profits.  Distributions of earnings and profits that had been previously taxed will result in a corresponding reduction in the adjusted tax basis in the common shares and will not be taxed again once distributed.  A U.S. Holder would make a QEF Election with respect to any taxable year that we are a PFIC by filing one copy of IRS Form 8621 with its U.S. federal income tax return.  To make a QEF Election, a U.S. Holder must receive annually certain tax information from us.  There can be no assurances that we will be able to provide such information annually.  An Electing Holder would generally recognize capital gain or loss on the sale, exchange or other disposition of our common shares.


Taxation of U.S. Holders Making a Mark-to-Market Election

Alternatively, if we were to be treated as a PFIC for any taxable year and, as we anticipate, our common shares are treated as "marketable stock," a U.S. Holder would be permitted to make a Mark-to-Market Election with respect to our common shares, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury Regulations.  If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess, if any, of the fair market value of the common shares at the end of the taxable year over such holder's adjusted tax basis in the common shares.  The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder's adjusted tax basis in the common shares over its fair market value at the end of the taxable year, but only to the extent of the net amount previously included in income as a result of the Mark-to-Market Election.  A U.S. Holder's tax basis in its common shares would be adjusted to reflect any such income or loss amount.  Gain realized on the sale, exchange or other disposition of our common shares would be treated as ordinary income, and any loss realized on the sale, exchange or other disposition of the common shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market gains previously included in income by the U.S. Holder.

Taxation of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
Finally, if we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF Election or a Mark-to-Market Election for that year, whom we refer to as a Non-Electing Holder, would be subject to special rules with respect to (1) any excess distribution ( i.e., the portion of any distributions received by the Non-Electing Holder on our common shares in a taxable year in excess of 125 % of the average annual distributions received by the Non-Electing Holder in the three preceding taxable years, or, if shorter, the Non-Electing Holder's holding period for the common shares), and (2) any gain realized on the sale, exchange or other disposition of our common shares.  Under these special rules:


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•
the excess distribution or gain would be allocated ratably over the Non-Electing Holders' aggregate holding period for the common shares;
•
the amount allocated to the current taxable year and any taxable years before the Company became a PFIC would be taxed as ordinary income; and
•
the amount allocated to each of the other taxable years would be subject to tax at the highest rate of tax in effect for the applicable class of taxpayer for that year, and an interest charge for the deemed deferral benefit would be imposed with respect to the resulting tax attributable to each such other taxable year.

These penalties would not apply to a pension or profit sharing trust or other tax-exempt organization that did not borrow funds or otherwise utilize leverage in connection with its acquisition of our common shares.  If we were a PFIC, and a Non-Electing Holder who is an individual died while owning our common shares, such holder's successor generally would not receive a step-up in tax basis with respect to such common shares.


Taxation of Non-U.S. Holders
A beneficial owner of common shares (other than a partnership) that is not a U.S. Holder is referred to herein as a Non-U.S. Holder.
Dividends on Common Shares

Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on dividends received from us with respect to our common shares, unless that dividend is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States.  If the Non-U.S. Holder is entitled to the benefits of a U.S. income tax treaty with respect to those dividends, that income is taxable, or taxable at the full rate, only if it is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States.

Sale, Exchange or Other Disposition of Common Shares
Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on any gain realized upon the sale, exchange or other disposition of our common shares, unless:
•
the gain is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States (and, if the Non-U.S. Holder is entitled to the benefits of an income tax treaty with respect to that gain, that gain is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States); or
•
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition and other conditions are met.

If the Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal income tax purposes, the income from the common shares, including dividends and the gain from the sale, exchange or other disposition of the common shares, that is effectively connected with the conduct of that trade or business will generally be subject to regular U.S. federal income tax in the same manner as discussed in the previous section relating to the taxation of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder, your earnings and profits that are attributable to the effectively connected income, subject to certain adjustments, may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income tax treaty.

Backup Withholding and Information Reporting

In general, dividend payments, or other taxable distributions, made within the United States to you will be subject to information reporting requirements.  Such payments will also be subject to "backup withholding" if you are a non-corporate U.S. Holder and you:

•
fail to provide an accurate taxpayer identification number;
•
are notified by the IRS that you have failed to report all interest or dividends required to be shown on your U.S. federal income tax returns; or
•
in certain circumstances, fail to comply with applicable certification requirements.

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Non-U.S. Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on an applicable IRS Form W-8.

If you are a Non-U.S. Holder and you sell your common shares to or through a U.S. office of a broker, the payment of the proceeds is subject to both U.S. backup withholding and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or otherwise establish an exemption.  If you sell your common shares through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then information reporting and backup withholding generally will not apply to that payment.  However, U.S. information reporting, but not backup withholding, will apply to a payment of sales proceeds, including a payment made to you outside the United States, if you sell your common shares through a non-U.S. office of a broker that is a U.S. person or has some other contacts with the United States. Such information reporting requirements will not apply, however, if the broker has documentary evidence that you are a non-U.S. person and certain other conditions are met, or you otherwise establish an exemption.

Backup withholding is not an additional tax.  Rather, you generally may obtain a refund of any amounts withheld under backup withholding rules that exceed your income tax liability by filing a refund claim with the IRS.

Pursuant to recently enacted legislation, individuals who are U.S. Holders (and to the extent specified in applicable Treasury regulations, certain individuals who are Non-U.S. Holders and certain U.S. entities) who hold "specified foreign financial assets" (as defined in Section 6038D of the Code) are required to file IRS Form 8938 with information relating to the asset for each taxable year in which the aggregate value of all such assets exceeds $75,000 at any time during the taxable year or $50,000 on the last day of the taxable year (or such higher dollar amount as prescribed by applicable Treasury regulations).  Specified foreign financial assets would include, among other assets, our common shares, unless the shares are held through an account maintained with a U.S. financial institution. Substantial penalties apply to any failure to timely file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not due to willful neglect. Additionally, in the event an individual U.S. Holder (and to the extent specified in applicable Treasury regulations, an individual Non-U.S. Holder or a U.S. entity) that is required to file IRS Form 8938 does not file such form, the statute of limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close until three years after the date that the required information is filed.  U.S. Holders (including U.S. entities) and Non-U.S. Holders are encouraged to consult their own tax advisors regarding their reporting obligations under this legislation.

Bermuda Taxation

Under current Bermuda law, we are not subject to tax on income or capital gains. We have received from the Minister of Finance under The Exempted Undertaking Tax Protection Act 1966, as amended, an assurance that, in the event that Bermuda enacts legislation imposing tax computed on profits, income, any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance, then the imposition of any such tax shall not be applicable to us or to any of our operations or shares, debentures or other obligations, until March 31, 2035. We could be subject to taxes in Bermuda after that date. This assurance is subject to the proviso that it is not to be construed to prevent the application of any tax or duty to such persons as are ordinarily resident in Bermuda or to prevent the application of any tax payable in accordance with the provisions of the Land Tax Act 1967 or otherwise payable in relation to any property leased to us. We and our subsidiaries incorporated in Bermuda pay annual government fees to the Bermuda government.

F. DIVIDENDS AND PAYING AGENTS
Not Applicable.

G. STATEMENT BY EXPERTS
Not Applicable.

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H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange Act of 1934, or the Exchange Act, as amended. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this annual report and the accompanying exhibits, may be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operation of the public reference room by calling 1 (800) SEC-0330, and you may obtain copies at prescribed rates from the public reference facilities maintained by the SEC at its principal office in Washington, D.C. 20549.  The SEC maintains a website (http://www.sec.gov.) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. In addition, documents referred to in this annual report may be inspected at our principal executive offices at Par-la-Ville Place, 14 Par-la-Ville Road, Hamilton, Bermuda HM 08. Our filings are also available on our website at www.shipfinance.bm . This web address is provided as an inactive textual reference only. Information on our website does not constitute part of this annual report.

I. SUBSIDIARY INFORMATION
Not Applicable.


ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including interest rates and foreign currency fluctuations. We use interest rate swaps to manage interest rate risk and currency swaps to manage currency risks. We may enter into derivative instruments from time to time for speculative purposes.

At December 31, 2014, the Company had entered into combined currency and interest rate swap contracts with a total notional principal of NOK600 million ($105 million), to hedge against fluctuations in interest and exchange rates on our NOK600 million floating rate unsecured bonds due 2017. Under these contracts, variable NIBOR interest rates including additional margin is swapped for fixed interest at an average of 6.06%, and both the payment of interest and eventual settlement of the bonds will have an effective exchange rate of NOK5.69 = $1. These contracts expire in October 2017 and we estimate that we would pay $30 million to terminate them as of December 31, 2014 (2013: $9 million).

Similarly, at December 31, 2014, the Company had entered into combined currency and interest rate swap contracts with a total notional principal of NOK900 million ($151 million), to hedge against fluctuations in interest and exchange rates on our NOK900 million floating rate unsecured bonds due 2019. Under these contracts, variable NIBOR interest rates including additional margin is swapped for fixed interest at an average of 6.03%, and both the payment of interest and eventual settlement of the bonds will have an effective exchange rate of NOK5.96 = $1. These contracts expire in March 2019 and we estimate that we would pay $35 million to terminate them as of December 31, 2014 (2013: $nil).

At December 31, 2014, the Company and its consolidated subsidiaries had entered into interest rate swap contracts with a combined notional principal amount of $1,001 million at rates excluding margin over LIBOR of between 0.80% per annum and 6.00% per annum. In addition, one equity-accounted subsidiary had entered into interest rate swaps with a combined notional principal amount of $224 million at rates excluding margin over LIBOR of between 1.77% per annum and 2.01% per annum. The swap agreements mature between March 2015 and April 2023, and we estimate that we would pay $41 million to terminate these agreements as of December 31, 2014 (2013: pay $35 million).

Approximately $0.2 billion of the above swaps were in excess of related debt at December 31, 2014, as a result of NOK bonds purchased and held as treasury bonds, one of the swaps commencing in December 2016 and another of the swaps commencing in January 2017. Thus, the overall effect of our swaps is to fix the interest rate on approximately $1.3 billion of our floating rate debt at December 31, 2014, at a weighted average interest rate of 5.16% per annum including margin.

Several of our charter contracts contain interest adjustment clauses, whereby the charter rate is adjusted to reflect the actual interest paid on the outstanding loan, effectively transferring the interest rate exposure to the counterparty under the charter contract. At December 31, 2014, a total of $1.1 billion of our floating rate debt was subject to such interest adjustment clauses, including our equity accounted subsidiaries. Of this, approximately $0.2 billion was also subject to interest rate swaps entered into for the benefit of the charterer, with the balance of $0.9 billion remaining on a floating rate basis.


82


At December 31, 2014, our net exposure, including equity-accounted subsidiaries, to interest rate fluctuations on our outstanding debt was $86 million, compared with $207 million at December 31, 2013. Our net exposure to interest fluctuations is based on our total of $2.3 billion floating rate debt outstanding at December 31, 2014, less the $1.3 billion notional principle of our interest rate swaps and the $0.9 billion outstanding floating rate debt subject to interest adjustment clauses under charter contracts. A one per-cent change in interest rates would thus increase or decrease interest expense by $0.9 million per year as of December 31, 2014 (2013: $2.1 million).

In addition to the above interest rate and currency swap contracts at December 31, 2014, in January 2015, we entered into an interest rate swap contract with an initial notional principal of $55.3 million which commences in January 2017. At the date of this report, we were not party to any other derivative contracts.

The Company may in the future enter into short-term TRS arrangements relating to our own shares and bonds or securities in other companies.

Apart from our NOK600 million and NOK900 million floating rate bonds, which have been hedged, the majority of our transactions, assets and liabilities are denominated in U.S. dollars, our functional currency.


ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not Applicable.


83


PART II
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Neither we nor any of our subsidiaries have been subject to a material default in the payment of principal, interest, a sinking fund or purchase fund installment or any other material default that was not cured within 30 days. In addition, the payments of our dividends are not, and have not been in arrears or have not been subject to material delinquency that was not cured within 30 days.
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

ITEM 15.
CONTROLS AND PROCEDURES
a)
Disclosure Controls and Procedures

Pursuant to Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act, management assessed the effectiveness of the design and operation of the Company's disclosure controls and procedures as of December 31, 2014. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the evaluation date.

b)
Management's annual report on internal controls over financial reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) promulgated under the Exchange Act.
Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of Company's management and directors; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted the evaluation of the effectiveness of the internal controls over financial reporting using the control criteria framework issued by the Committee of Sponsoring Organizations of the Treadway Commission published in its report entitled Internal Control-Integrated Framework (2013).
Our management with the participation of our Principal Executive Officer and Principal Financial Officer assessed the effectiveness of the design and operation of the Company's internal controls over financial reporting pursuant to Rule 13a-15 of the Exchange Act, as of December 31, 2014. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Company's internal controls over financial reporting are effective as of December 31, 2014.

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c)
Attestation report of the registered public accounting firm

MSPC, Certified Public Accountants and Advisors, a Professional Corporation, our independent registered public accounting firm, has issued their attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2014. Such report appears on page F-2.


d)
Changes in internal control over financial reporting

There were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that our Audit Committee has one Audit Committee Financial Expert. Kate Blankenship is an independent Director and is the Audit Committee Financial Expert.

ITEM 16B.
CODE OF ETHICS

We have adopted a Code of Ethics that applies to all entities controlled by us and our employees, directors, officers and agents of the Company. We have posted our code of ethics on our website at www.shipfinance.bm . We will provide any person, free of charge, with a copy of our code of ethics upon written request to our registered office.

ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES

Our principal accountant for 2014 and 2013 was MSPC. The following table sets forth the fees related to audit and other services provided by MSPC.

2014

2013

Audit Fees (a)
$
540,000

$
564,500

Audit-Related Fees (b)
$
117,000

$
107,000

Tax Fees (c)
—

—

All Other Fees (d)
$
50,149

$
52,336

Total
$
707,149

$
723,836


(a)
Audit Fees
Audit fees represent professional services rendered for the audit of our annual financial statements and services provided by the principal accountant in connection with statutory and regulatory filings or engagements.
(b)
Audit -Related Fees
Audit-related fees consisted of assurance and related services rendered by the principal accountant related to the performance of the audit or review of our financial statements which have not been reported under Audit Fees above.
(c)
Tax Fees
Tax fees represent fees for professional services rendered by the principal accountant for tax compliance, tax advice and tax planning.
(d)
All Other Fees
All other fees include services other than audit fees, audit-related fees and tax fees set forth above.

85


(e)
Audit Committee's Pre-Approval Policies and Procedures
Our Board of Directors has adopted pre-approval policies and procedures in compliance with paragraph (c) (7)(i) of Rule 2-01 of Regulation S-X, that require the Board of Directors to approve the appointment of our independent auditor before such auditor is engaged and approve each of the audit and non-audit related services to be provided by such auditor under such engagement by the Company. All services provided by the principal auditor in 2014 and 2013 were approved by the Board of Directors pursuant to the pre-approval policy.


ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E.
PURCHASE OF EQUITY SECURITIES BY ISSUER AND AFFILIATED PURCHASERS

No shares have been repurchased by the Company since January 2006.

ITEM 16F.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT

Not applicable

ITEM 16G.
CORPORATE GOVERNANCE

Pursuant to an exception under the NYSE listing standards available to foreign private issuers, we are not required to comply with all of the corporate governance practices followed by U.S. companies under the NYSE listing standards.  The significant differences between our corporate governance practices and the NYSE standards applicable to listed U.S. companies are set forth below.

Executive Sessions. The NYSE requires that non-management directors meet regularly in executive sessions without management. The NYSE also requires that all independent directors meet in an executive session at least once a year.  As permitted under Bermuda law and our Bye-laws, our non-management directors have not regularly held executive sessions without management, and we do not expect them to do so in the future.

Nominating/Corporate Governance Committee . The NYSE requires that a listed U.S. company have a nominating/corporate governance committee of independent directors and a committee charter specifying the purpose, duties and evaluation procedures of the committee. As permitted under Bermuda law and our Bye-laws, we do not currently have a nominating or corporate governance committee.

Audit Committee . The NYSE requires, among other things, that a listed U.S. company have an audit committee with a minimum of three members. As permitted by Rule 10A-3 under the Exchange Act, our audit committee consists of two independent members of our Board of Directors.

Corporate Governance Guidelines . The NYSE requires U.S. companies to adopt and disclose corporate governance guidelines. The guidelines must address, among other things: director qualification standards, director responsibilities, director access to management and independent advisers, director compensation, director orientation and continuing education, management succession and an annual performance evaluation. We are not required to adopt such guidelines under Bermuda law and we have not adopted such guidelines.

ITEM 16H.
MINE SAFETY DISCLOSURE

Not applicable.


86


PART III

ITEM 17.
FINANCIAL STATEMENTS

See Item 18.

ITEM 18.
FINANCIAL STATEMENTS

The following financial statements listed below and set forth on pages F-1 through F-44 are filed as part of this annual report:

Financial Statements: Ship Finance International Limited





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ITEM 19.               EXHIBITS

Number
Description of Exhibit
1.1*
Memorandum of Association of Ship Finance International Limited (the "Company"), incorporated by reference to Exhibit 3.1 of the Company's Registration Statement, SEC File No. 333-115705, filed on May 21, 2004 (the "Original Registration Statement").
1.2*
Amended and Restated Bye-laws of the Company, as adopted on September 28, 2007, incorporated by reference to Exhibit 1 of the Company's 6-K filed on October 22, 2007.
1.3
Amended and Restated Bye-laws of the Company, as adopted on September 20, 2013.
2.1*
Form of Common Stock Certificate of the Company, incorporated by reference to Exhibit 4.1 of the Company's Original Registration Statement.
4.1*
Form of Performance Guarantee dated January 1, 2004, issued by Frontline Ltd, incorporated by reference to Exhibit 10.3 of the Company's Original Registration Statement.
4.2*
Amendment No. 4 to Performance Guarantee dated January 1, 2004, incorporated by reference to Exhibit 4.3 of the Company's 2009 Annual Report as filed on Form 20-F on April 1, 2010.
4.3*
Form of Time Charter, incorporated by reference to Exhibit 10.4 of the Company's Original Registration Statement.
4.4*
Form of Vessel Management Agreements, incorporated by reference to Exhibit 10.5 of the Company's Original Registration Statement.
4.5*
Form of Charter Ancillary Agreement dated January 1, 2004, incorporated by reference to Exhibit 10.6 of the Company's Original Registration Statement.
4.6*
Addendum No. 6 to Charter Ancillary Agreement dated January 1, 2004, incorporated by reference to Exhibit 4.8 of the Company's 2009 Annual Report as filed on Form 20-F on April 1, 2010.
4.7*
Amendments dated August 21, 2007, to the Charter Ancillary Agreements, incorporated by reference to Exhibit 4.8 of the Company's 2007 Annual Report as filed on Form 20-F on March 17, 2008.
4.8*
New Administrative Services Agreement dated November 29, 2007, incorporated by reference to Exhibit 4.10 of the Company's 2007 Annual Report as filed on Form 20-F on March 17, 2008.
4.9*
Share Option Scheme, incorporated by reference to Exhibit 2.2 of the Company's 2006 Annual Report as filed on Form 20-F on July 2, 2007.
4.10*
Bond Agreement relating to Ship Finance International Limited Callable Senior Unsecured Bond Issue 2010/2014, dated October 6, 2010 incorporated by reference to Exhibit 4.11 of the Company's 2010 Annual Report filed on Form 20-F on March 25, 2011.
4.11*
Bond Agreement relating to Ship Finance International Limited Senior Unsecured Callable Convertible Bond Issue 2011/2016, dated February 11, 2011 incorporated by reference to Exhibit 4.12 of the Company's 2010 Annual Report filed on Form 20-F on March 25, 2011.
4.12*
Addendum No. 7 to Charter Ancillary Agreement dated January 1, 2004, incorporated by reference to Exhibit 4.13 of the Company's 2011 Annual Report filed on Form 20-F on April 27, 2012.
4.13*
Addendum No. 3 to Charter Ancillary Agreement dated June 20, 2005, incorporated by reference to Exhibit 4.14 of the Company's 2011 Annual Report filed on Form 20-F on April 27, 2012.
4.14*
Indenture by and among the Company, U.S. Bank National Association and Deutsche Bank Trust Company Americas, dated January 30, 2013, incorporated by reference to the Company's report on Form 6-K filed on February 4, 2013.
4.15*
First Supplemental Indenture by and among the Company, U.S. Bank National Association and Deutsche Bank Trust Company Americas, dated January 30, 2013, incorporated by reference to the Company's report on Form 6-K filed on February 7, 2013.
4.16*
Bond Agreement relating to Ship Finance International Limited Callable Senior Unsecured Bond Issue 2012/2017, dated October 16, 2012, incorporated by reference to the Company's Annual Report filed on Form 20-F on March 28, 2014.

88


4.17*
Bond Agreement relating to Ship Finance International Limited Callable Senior Unsecured Bond Issue 2014/2019, dated March 17, 2014, incorporated by reference to the Company's Annual Report filed on Form 20-F on March 28, 2014.
8.1
Subsidiaries of the Company.
12.1
Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
12.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
13.1
Certification of the Principal Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2
Certification of the Principal Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1
Consent of Independent Registered Public Accounting Firm.
101.INS
XBRL Instance Document
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Schema Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Schema Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Schema Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Schema Presentation Linkbase Document

* Incorporated herein by reference.

89


SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

SHIP FINANCE INTERNATIONAL LIMITED
(Registrant)
Date:
April 9, 2015
By:
/s/ Harald Gurvin
Harald Gurvin
Principal Financial Officer

90


Ship Finance International Limited
Index to Consolidated Financial Statements

F-1


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Ship Finance International Limited
We have audited the accompanying consolidated balance sheets of Ship Finance International Limited and subsidiaries (the "Company") as of December 31, 2014 and 2013 , and the related consolidated statements of operations, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2014 . We also have audited the Company's internal control over financial reporting as of December 31, 2014 , based on criteria established in Internal Control— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's annual report on internal controls over financial reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ship Finance International Limited and subsidiaries as of December 31, 2014 and 2013 , and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014 , in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014 , based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/S/ MSPC
Certified Public Accountants and Advisors,
A Professional Corporation
New York, New York
April 9, 2015

F-2


Ship Finance International Limited

CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 2014 , 2013 and 2012
(in thousands of $, except per share amounts)
2014

2013

2012

Operating revenues
Direct financing lease interest income - related parties
45,363

55,385

59,214

Direct financing and sales-type lease interest income - other
—

4,231

6,501

Finance lease service revenues - related parties
46,488

52,390

64,766

Finance lease service revenues - other
—

1,846

—

Profit sharing revenues - related parties
33,756

770

52,176

Time charter revenues - related parties
10,039

5,647

—

Time charter revenues - other
83,013

77,778

60,258

Bareboat charter revenues - related parties
16,364

18,324

20,701

Bareboat charter revenues - other
53,407

42,705

54,212

Voyage charter revenues - other
34,608

9,724

—

Other operating income
4,449

2,060

1,864

Total operating revenues
327,487

270,860

319,692

Gain on sale of assets and termination of charters, net
23,931

18,025

47,386

Operating expenses



Vessel operating expenses - related parties
49,170

54,916

66,455

Vessel operating expenses - other
70,300

50,618

28,459

Depreciation
67,393

58,436

55,602

Vessel impairment charge
11,800

—

—

Administrative expenses - related parties
965

439

471

Administrative expenses - other
6,644

7,110

8,471

Total operating expenses
206,272

171,519

159,458

Net operating income
145,146

117,366

207,620

Non-operating income / (expense)



Interest income – related parties, associated companies
24,464

19,575

19,575

Interest income – related parties, other
4,029

482

—

Interest income - other
11,958

10,023

7,599

Interest expense - other
(86,081
)
(87,225
)
(94,851
)
Loss on purchase of  bonds
(21
)
(1,218
)
(122
)
Gain on sale of investment in associated company
6,055

—

—

Long-term investment impairment charge
—

—

(3,353
)
Other financial items, net
(16,232
)
2,003

5,876

Net income before equity in earnings of associated companies
89,318

61,006

142,344

Equity in earnings of associated companies
33,497

28,200

43,492

Net income
122,815

89,206

185,836

Per share information:



Basic earnings per share
$
1.32

$
1.00

$
2.31

Weighted average number of shares outstanding, basic
93,331

89,508

80,594

Diluted earnings per share
$
1.24

$
0.99

$
2.22

Weighted average number of shares outstanding, diluted
116,747

95,424

85,868

Cash dividend per share declared and paid
$
1.63

$
1.17

$
1.86

The accompanying notes are an integral part of these consolidated financial statements.

F-3


Ship Finance International Limited
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31, 2014 , 2013 and 2012
(in thousands of $)
2014

2013

2012

Comprehensive income, net of tax
Net income
122,815

89,206

185,836

Fair value adjustments to hedging financial instruments
(351
)
41,827

(18,407
)
Fair value adjustments to hedging financial instruments in associated companies
(5
)
2,897

19,561

Reclassification into net income of previous fair value adjustments to hedging financial instruments
(4,504
)
2,102

27

Fair value adjustments to available for sale securities
(8,355
)
699

896

Other items of comprehensive (loss)/income
(179
)
(58
)
67

Other comprehensive income, net of tax
(13,394
)
47,467

2,144

Comprehensive income
109,421

136,673

187,980

The accompanying notes are an integral part of these consolidated financial statements.

F-4


Ship Finance International Limited
CONSOLIDATED BALANCE SHEETS
as of December 31, 2014 and 2013
(in thousands of $)
2014

2013

ASSETS
Current assets
Cash and cash equivalents
50,818

58,641

Available for sale securities
73,656

76,925

Trade accounts receivable
3,253

8,362

Due from related parties
152,491

13,249

Other receivables
10,488

79,301

Inventories
6,927

6,607

Prepaid expenses and accrued income
5,075

3,971

Investment in direct financing and sales-type leases, current portion
37,517

45,148

Total current assets
340,225

292,204

Vessels and equipment, net
1,377,133

1,089,616

Newbuildings
87,567

126,008

Investment in direct financing and sales-type leases, long-term portion
709,014

858,260

Investment in associated companies
53,457

40,987

Loans to related parties - associated companies, long-term
346,031

530,715

Loans to related parties - others, long-term
79,294

48,847

Other long-term assets
8,581

1,235

Deferred charges
36,958

41,478

Financial instruments (long-term): at fair value
3,294

16,633

Total assets
3,041,554

3,045,983

LIABILITIES AND STOCKHOLDERS' EQUITY


Current liabilities


Current portion of long-term debt
182,415

389,888

Trade accounts payable
2,432

3,502

Due to related parties
1,109

13,965

Accrued expenses
18,190

13,832

Financial instruments (short-term): at fair value
517

5,705

Other current liabilities
9,092

5,548

Total current liabilities
213,755

432,440

Long-term liabilities


Long-term debt
1,550,044

1,346,991

Financial instruments (long-term): at fair value
106,679

56,490

Other long-term liabilities
17,584

18,129

Total liabilities
1,888,062

1,854,050

Commitments and contingent liabilities




Stockholders' equity


Share capital ($1 par value; 125,000,000 shares authorized at December 31, 2014 and 2013); (93,404,000 shares issued and outstanding at December 31, 2014; 93,260,000 shares issued and outstanding at December 31, 2013).
93,404

93,260

Additional paid-in capital
285,248

285,632

Contributed surplus
586,089

581,569

Accumulated other comprehensive loss
(48,240
)
(34,851
)
Accumulated other comprehensive loss – associated companies
(2,284
)
(2,279
)
Retained earnings
239,275

268,602

Total stockholders' equity
1,153,492

1,191,933

Total liabilities and stockholders' equity
3,041,554

3,045,983

The accompanying notes are an integral part of these consolidated financial statements.

F-5


Ship Finance International Limited
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 2014 , 2013 and 2012
(in thousands of $)
2014

2013

2012

Operating activities



Net income
122,815

89,206

185,836

Adjustments to reconcile net income to net cash provided by operating activities:



Depreciation
67,393

58,436

55,602

Vessel impairment charge
11,800

—

—

Long-term investment impairment charge
—

—

3,353

Amortization of deferred charges
11,271

11,305

5,866

Amortization of seller's credit
(1,903
)
(1,983
)
(1,942
)
Equity in earnings of associated companies
(33,497
)
(28,200
)
(43,492
)
Gain on sale of assets and termination of charters
(23,931
)
(18,025
)
(47,386
)
Gain on sale of investment in associated company
(6,055
)
—

—

Adjustment of derivatives to fair value recognized in net income
7,699

(7,950
)
(7,959
)
Loss/(gain) on repurchase of bonds
21

1,218

122

Interest receivable in form of notes
(3,197
)
(2,767
)
(1,779
)
Other, net
(458
)
(1,396
)
(364
)
Changes in operating assets and liabilities



Trade accounts receivable
5,109

(4,313
)
(7,787
)
Due from related parties
(20,634
)
49,189

(51,623
)
Other receivables
(9,418
)
(740
)
(1,067
)
Inventories
(320
)
(3,656
)
(97
)
Prepaid expenses and accrued income
(1,104
)
(3,236
)
(190
)
Trade accounts payable
(1,095
)
2,047

774

Accrued expenses
4,358

271

3,206

Other current liabilities
3,547

718

(4,503
)
Net cash provided by operating activities
132,401

140,124

86,570

Investing activities



Repayments from investments in direct financing and sales-type leases
43,120

51,220

58,571

Additions to newbuildings
(202,333
)
(109,337
)
(90,612
)
Purchase of vessels
(192,864
)
—

(76,936
)
Proceeds from sale of vessels and termination of charters
199,429

83,583

100,733

Net amounts (paid to)/received from associated companies
88,585

(81,308
)
56,443

Proceeds from repayment of investment loan (included in other receivables)
50,000

—

—

Purchase of available for sale securities
(7,877
)
(18,140
)
(13,890
)
Net cash (used in)/provided by investing activities
(21,940
)
(73,982
)
34,309

Financing activities



Proceeds from shares issued, net of issuance costs
927

128,880

89,596

Payments in lieu of issuing shares for exercised share options
(1,196
)
(448
)
(1,477
)
Repurchase of bonds
(75,262
)
(254,132
)
(28,096
)
Proceeds from issuance of short-term and long-term debt
733,632

705,347

259,097

Repayments of short-term and long-term debt
(616,783
)
(530,186
)
(318,374
)
Debt fees paid
(7,460
)
(8,390
)
(3,989
)
Cash dividends paid
(152,142
)
(109,114
)
(152,009
)
Net cash used in financing activities
(118,284
)
(68,043
)
(155,252
)
Net (decrease)/increase in cash and cash equivalents
(7,823
)
(1,901
)
(34,373
)
Cash and cash equivalents at start of the year
58,641

60,542

94,915

Cash and cash equivalents at end of the year
50,818

58,641

60,542

Supplemental disclosure of cash flow information:



Interest paid, net of capitalized interest
82,524

77,630

86,692

The accompanying notes are an integral part of these consolidated financial statements.

F-6


Ship Finance International Limited
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
for the years ended December 31, 2014 , 2013 and 2012
(in thousands of $, except number of shares)
2014

2013

2012

Number of shares outstanding
At beginning of year
93,260,000

85,225,000

79,125,000

Shares issued
144,000

8,035,000

6,100,000

At end of year
93,404,000

93,260,000

85,225,000

Share capital



At beginning of year
93,260

85,225

79,125

Shares issued
144

8,035

6,100

At end of year
93,404

93,260

85,225

Additional paid-in capital



At beginning of year
285,632

144,258

61,670

Payments in lieu of issuing shares
(1,196
)
(448
)
(1,477
)
Amortization of stock based compensation
29

220

569

Shares issued
783

120,880

83,496

Equity component of convertible bond issuance, net
—

20,722

—

At end of year
285,248

285,632

144,258

Contributed surplus



At beginning of year
581,569

561,372

548,354

Amortization of deferred equity contributions
4,520

20,197

13,018

At end of year
586,089

581,569

561,372

Accumulated other comprehensive loss



At beginning of year
(34,851
)
(79,421
)
(62,004
)
(Gain)/loss on hedging financial instruments reclassified into earnings
(4,504
)
2,102

27

Fair value adjustments to hedging financial instruments
(351
)
41,827

(18,407
)
Fair value adjustments to available for sale securities
(8,355
)
699

896

Other comprehensive income/(loss)
(179
)
(58
)
67

At end of year (for breakdown see below)
(48,240
)
(34,851
)
(79,421
)
Accumulated other comprehensive loss – associated companies



At beginning of year
(2,279
)
(5,176
)
(24,737
)
Fair value adjustment to hedging financial instruments
(5
)
2,897

19,561

At end of year (consists entirely of fair value adjustments to hedging financial instruments)
(2,284
)
(2,279
)
(5,176
)
Retained earnings



At beginning of year
268,602

288,510

254,683

Net income
122,815

89,206

185,836

Dividends declared
(152,142
)
(109,114
)
(152,009
)
At end of year
239,275

268,602

288,510

Total stockholders' equity
1,153,492

1,191,933

994,768

Accumulated other comprehensive loss
2014

2013

2012

Fair value adjustments to hedging financial instruments
(40,965
)
(36,110
)
(80,039
)
Fair value adjustments to available for sale securities
(7,087
)
1,268

569

Other items
(188
)
(9
)
49

Accumulated other comprehensive loss
(48,240
)
(34,851
)
(79,421
)
The accompanying notes are an integral part of these consolidated financial statements.

F-7


SHIP FINANCE INTERNATIONAL LIMITED
Notes to the Consolidated Financial Statements
1.
GENERAL
Ship Finance International Limited ("Ship Finance" or the "Company") is an international ship and offshore asset owning and chartering company, incorporated in October 2003 in Bermuda as a Bermuda exempted company under Bermuda Companies Law of 1981. The Company's common shares are listed on the New York Stock Exchange under the symbol "SFL". The Company is primarily engaged in the ownership, operation and chartering out of vessels and offshore related assets on medium and long-term charters.

As of December 31, 2014 , the Company owned 12 very large crude oil carriers ("VLCCs"), seven Suezmax crude oil carriers, five Supramax drybulk carriers, seven Handysize drybulk carriers, two Kamsarmax drybulk carriers, 20 container vessels, two car carriers, two jack-up drilling rigs, two ultra-deepwater drilling units, six offshore supply vessels and two chemical tankers. The two ultra-deepwater drilling units and one of the jack-up drilling rigs referred to above are owned by wholly-owned subsidiaries of the Company that are accounted for using the equity method (see Note 16: Investment in Associated Companies). In addition, as at December 31, 2014 , the Company had contracted to acquire two newbuilding container vessels, which were delivered in January 2015.
Since its incorporation in 2003 and public listing in 2004, Ship Finance has established itself as a leading international ship and offshore asset owning and chartering company, expanding both its asset and customer base.

2.
ACCOUNTING POLICIES
Basis of Accounting
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). The consolidated financial statements include the assets and liabilities and results of operations of the Company and its subsidiaries. All inter-company balances and transactions have been eliminated on consolidation. Where necessary, comparative figures for previous years have been reclassified to conform to changes in presentation in the current year.
Consolidation of variable interest entities
A variable interest entity is defined in Accounting Standards Codification ("ASC") Topic 810 "Consolidation" ("ASC 810") as a legal entity where either (a) the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated support; (b) equity interest holders as a group lack either i) the power to direct the activities of the entity that most significantly impact on its economic success, ii) the obligation to absorb the expected losses of the entity, or iii) the right to receive the expected residual returns of the entity; or (c) the voting rights of some investors in the entity are not proportional to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest.
ASC 810 requires a variable interest entity to be consolidated by its primary beneficiary, being the interest holder, if any, which has both (1) the power to direct the activities of the entity which most significantly impact on the entity's economic performance, and (2) the right to receive benefits or the obligation to absorb losses from the entity which could potentially be significant to the entity.
We evaluate our subsidiaries, and any other entities in which we hold a variable interest, in order to determine whether we are the primary beneficiary of the entity, and where it is determined that we are the primary beneficiary we fully consolidate the entity.

F-8


Investments in associated companies
Investments in companies over which the Company exercises significant influence but which it does not consolidate are accounted for using the equity method. The Company records its investments in equity-method investees on the consolidated balance sheets as "Investment in associated companies" and its share of the investees' earnings or losses in the consolidated statements of operations as "Equity in earnings of associated companies." At December 31, 2014, two ultra-deepwater drilling units and one jack-up drilling rig are owned by three wholly-owned subsidiaries of the Company that are accounted for using the equity method.

Use of accounting estimates
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign currencies
The Company's functional currency is the U.S. dollar as the majority of revenues are received in U.S. dollars and the majority of the Company's expenditures are made in U.S. dollars. The Company's reporting currency is also the U.S. dollar. Most of the Company's subsidiaries report in U.S. dollars. Transactions in foreign currencies during the year are translated into U.S. dollars at the rates of exchange in effect at the date of the transaction. Foreign currency monetary assets and liabilities are translated using rates of exchange at the balance sheet date. Foreign currency non-monetary assets and liabilities are translated using historical rates of exchange. Foreign currency transaction gains or losses are included under "Other financial items" in the consolidated statements of operations.
Revenue and expense recognition
Revenues and expenses are recognized on the accrual basis.

The Company generates its revenues from the charter hire of its vessels and offshore related assets, and freight billings. Revenues are generated from time charter hire, bareboat charter hire, direct financing lease interest income, sales-type lease interest income, finance lease service revenues, profit sharing arrangements and freight billings, where contracts exist, the charter and voyage rates are predetermined, service is provided and the collection of the revenue is reasonably assured.

Each charter agreement is evaluated and classified as an operating or a capital lease. Rental receipts from operating leases are recognized in income as it is earned ratably on a straight line basis over the duration of the period of each charter as adjusted for off-hire days.
Rental payments from capital leases, which are either direct financing leases or sales-type leases, are allocated between lease service revenue, if applicable, lease interest income and repayment of net investment in leases. The amount allocated to lease service revenue is based on the estimated fair value, at the time of entering the lease agreement, of the services provided which consist of ship management and operating services.

Voyage revenues are recognized ratably over the estimated length of each voyage, and accordingly are allocated between reporting periods based on the relative transit time in each period. Voyage expenses are recognized as incurred. Probable losses on voyages are provided for in full at the time such losses can be estimated.

Vessel operating expenses are expensed as incurred. Under a time charter, specified voyage costs such as fuel and port charges are paid by the charterer and other non-specified voyage expenses, such as commissions, are paid by the Company. Vessel operating costs include crews, voyage costs not applicable to the charterer, maintenance and insurance and are paid by the Company. Under a bareboat charter, the charterer assumes responsibility for all voyage and vessel operating costs and risks of operation. If payment is received in advance from charterers, it is recorded as deferred charter revenue and recognized as revenue over the period to which it relates.

Amounts receivable from profit sharing arrangements with Frontline Shipping Limited ("Frontline Shipping") and Frontline Shipping II Limited ("Frontline Shipping II"), which are related parties, are accrued based on amounts earned at the reporting date. Profit share income has two elements:


F-9


- 25% profit sharing: Prior to December 31, 2011, Frontline Shipping and Frontline Shipping II paid the Company profit sharing of 20% of their earnings on a time-charter equivalent basis from their use of the Company's fleet above average threshold charter rates each fiscal year. The amendments to the charter agreements made on December 30, 2011, increased the profit sharing percentage to 25% for future earnings above those threshold levels as from January 1, 2012. In December 2011, the Company received a $106 million compensation payment from Frontline Ltd. ("Frontline"), of which $50 million represents a non-refundable advance relating to the 25% profit sharing agreement.

- Cash sweep: The amendments to the charter agreements additionally provide that for the four year period commencing January 1, 2012, of the temporary $6,500 per day per vessel reduction in charter rates, Frontline Shipping and Frontline Shipping II will pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel.
All contingent elements of rental income, such as profit share, cash sweep and interest rate adjustments, are recognized when the contingent conditions have materialized.
Cash and cash equivalents
For the purposes of the consolidated statements of cash flows, all demand and time deposits and highly liquid, low risk investments with original maturities of three months or less are considered equivalent to cash.
Available for sale securities
Available for sale securities held by the Company consist of listed and unlisted corporate bonds, which earn interest income. Any premium paid on acquisition is amortized over the life of the bond. Available for sale securities are recorded at fair value, with unrealized gains and losses recorded as a separate component of other comprehensive income. The fair value of unlisted corporate bonds is determined from an analysis of projected cash flows, based on factors including the terms, provisions and other characteristics of the bonds, credit ratings and default risk of the issuing entity, the fundamental financial and other characteristics of that entity, and the current economic environment and trading activity in the debt market.

Trade accounts receivable

The amount shown as trade accounts receivable at each balance sheet date includes receivables due from customers for hire of vessels and offshore related assets, net of allowance for doubtful balances. At each balance sheet date, all potentially uncollectable accounts are assessed individually to determine any allowance for doubtful receivables. At December 31, 2014 and 2013, no provision was made for doubtful receivables.
Inventories
Inventories are comprised principally of fuel and lubricating oils and are stated at the lower of cost and market value. Cost is determined on a first-in first-out basis.

Vessels and equipment (including operating lease assets)
Vessels and equipment are recorded at historical cost less accumulated depreciation and, if appropriate, impairment charges. The cost of these assets less estimated residual value is depreciated on a straight-line basis over the estimated remaining economic useful life of the asset. The estimated economic useful life of our offshore assets, including drilling rigs and drillships, is 30 years and for all other vessels it is 25 years.
Where an asset is subject to an operating lease that includes fixed price purchase options, the projected net book value of the asset is compared to the option price at the various option dates. If any option price is less than the projected net book value at an option date, the initial depreciation schedule is amended so that the carrying value of the asset is written down on a straight line basis to the option price at the option date. If the option is not exercised, this process is repeated so as to amortize the remaining carrying value, on a straight line basis, to the estimated scrap value or the option price at the next option date, as appropriate.
This accounting policy for fixed assets has the effect that if an option is exercised there will be either a) no gain or loss on the sale of the asset or b) in the event that the option is exercised at a price in excess of the net book value at the option date, a gain will be reported in the statement of operations at the date of delivery to the new owners, under the heading "gain on sale of assets and termination of charters".

F-10



Office equipment is depreciated at 20% per annum on a reducing balance basis.


Newbuildings
The carrying value of vessels under construction ("newbuildings") represents the accumulated costs to the balance sheet date which the Company has paid by way of purchase installments and other capital expenditures together with capitalized loan interest and associated finance costs. No charge for depreciation is made until a newbuilding is put into operation.


Capitalized interest

Interest expense is capitalized during the period of construction of newbuilding vessels based on accumulated expenditures for the applicable vessel at the Company's capitalization rate of interest. The amount of interest capitalized in an accounting period is determined by applying an interest rate ("the capitalization rate") to the average amount of accumulated expenditures for the vessel during the period. The capitalization rate used in an accounting period is based on the average three month London Interbank Offered Rate ("LIBOR"). The Company does not capitalize amounts in excess of actual interest expense incurred in the period.


Investment in Capital Leases
Leases (charters) of our vessels where we are the lessor are classified as either capital leases or operating leases, based on an assessment of the terms of the lease. For charters classified as capital leases, the minimum lease payments (reduced in the case of time-chartered vessels by projected vessel operating costs) plus the estimated residual value of the vessel are recorded as the gross investment in the capital lease.
For capital leases that are direct financing leases, the difference between the gross investment in the lease and the carrying value of the vessel is recorded as unearned lease interest income. The net investment in the lease consists of the gross investment less the unearned income. Over the period of the lease each charter payment received, net of vessel operating costs if applicable, is allocated between "lease interest income" and "repayment of investment in lease" in such a way as to produce a constant percentage rate of return on the balance of the net investment in the direct financing lease. Thus, as the balance of the net investment in each direct financing lease decreases, a lower proportion of each lease payment received is allocated to lease interest income and a greater proportion is allocated to lease repayment. For direct financing leases relating to time chartered vessels, the portion of each time charter payment received that relates to vessel operating costs is classified as "lease service revenue".
For capital leases that are sales-type leases, the difference between the gross investment in the lease and the present value of its components, i.e. the minimum lease payments and the estimated residual value, is recorded as unearned lease interest income. The discount rate used in determining the present values is the interest rate implicit in the lease. The present value of the minimum lease payments, computed using the interest rate implicit in the lease, is recorded as the sales price, from which the carrying value of the vessel at the commencement of the lease is deducted in order to determine the profit or loss on sale. As is the case for direct financing leases, the unearned lease interest income is amortized to income over the period of the lease so as to produce a constant periodic rate of return on the net investment in the lease.

Where a capital lease relates to a charter arrangement containing fixed price purchase options, the projected carrying value of the net investment in the lease is compared to the option price at the various option dates. If any option price is less than the projected net investment in the lease at an option date, the rate of amortization of unearned lease interest income is adjusted to reduce the net investment to the option price at the option date. If the option is not exercised, this process is repeated so as to reduce the net investment in the lease to the un-guaranteed residual value or the option price at the next option date, as appropriate.
This accounting policy for investments in capital leases has the effect that if an option is exercised there will either be a) no gain or loss on the exercise of the option or b) in the event that an option is exercised at a price in excess of the net investment in the lease at the option date, a gain will be reported in the statement of operations at the date of delivery to the new owners.


F-11


If the terms of an existing lease are agreed to be amended, other than by renewing the lease or extending its term, in a manner that would have resulted in a different classification of the lease had such amended terms been in effect at the lease inception, the amended lease agreement shall be considered to be a new lease agreement over the remainder of its term. If the terms of a capital lease are amended in a way that does not result in it being treated as a new operating lease agreement, the remaining minimum lease payments and, if appropriate, the estimated residual value will be amended to reflect the revised terms, with a corresponding increase or decrease in unearned income.
Other Long-Term Investments
Other long-term investments are measured at fair value using the best available value indicators, and are included in "Other long-term assets" in the Consolidated Balance Sheets. The Company currently has two long-term investments.

One long-term investment consists of shares in a container vessel owner/operator which are not publicly traded, and the best estimate available for the valuation of this investment is the cost basis. When using this basis of valuation, the Company carries out regular reviews for possible impairment adjustments. Following such a review, an impairment adjustment was made to the carrying value of this asset in 2012, which is reported in the Consolidated Statements of Operations under "Long-term investment impairment charge" (see Note 5).

The other long-term investment consists of warrants to purchase shares in a U.S. company, which were received in 2012, together with other assets, as part of the consideration for the Company agreeing to terminate certain long-term charter agreements (see Note 9). Although shares in the U.S. company are traded on the over-the-counter market, the warrants are not listed. The Company considers that the best method of establishing the fair value of the warrants is to calculate their value in relation to the current market price of the underlying shares, taking into account the terms, restrictions and other features of the warrants, the fundamental financial and other characteristics of the issuing company, trading characteristics of the issuing company's shares, and actual sale transactions of comparable securities completed in secondary markets. The Company carries out regular reviews of the value of this investment, and adjusts the carrying value accordingly. If it is considered that the initial value of the warrants may not be recoverable, the Company records an impairment adjustment in the Consolidated Statements of Operations. Other changes in their value, which the Company believes to be temporary, are recorded as a separate component of other comprehensive income. In 2012, the Company concluded that the initial value of the warrants may not be recoverable and recorded an impairment charge, which is reported in the Consolidated Statement of Operations under "Long-term investment impairment charge" (see Note 5).
Deemed Equity Contributions
The Company has accounted for the acquisition of vessels from Frontline at Frontline's historical carrying value. The difference between the historical carrying value and the net investment in the lease has been recorded as a deferred deemed equity contribution. This deferred deemed equity contribution is presented as a reduction in the net investment in direct financing leases in the balance sheet. This results from the related party nature of both the transfer of the vessel and the subsequent direct financing lease. The deferred deemed equity contribution is amortized as a credit to contributed surplus over the life of the new lease arrangement, as lease payments are applied to the principal balance of the lease receivable.
Impairment of long-lived assets, including other long-term investments
The carrying value of long-lived assets, including other long-term investments, that are held by the Company are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For vessels, such indicators may include historically low spot charter rates and second hand vessel values. The Company assesses recoverability of the carrying value of the asset by estimating the future net cash flows expected to result from the asset, including eventual disposition, taking into account the possibility of any existing medium and long-term charter arrangements being terminated early. If the future expected net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the carrying value of the asset and its fair value. In addition, long-lived assets to be disposed of are reported at the lower of carrying amount and fair value less estimated costs to sell. The Company carried out a review of the carrying value of its vessels, drilling rigs and long-term investments in the year ended December 31, 2014, and concluded that the carrying values of five container vessels were impaired, and charges were taken against those assets. In the year ended December 31, 2012, reviews of the carrying value of long-lived assets indicated that the Company's long-term investments in shares in a container vessel owner/operator and warrants to purchase shares in a U.S. company were impaired, and charges were taken against those assets. No impairment loss was recorded in the year ended December 31, 2013.

F-12


Deferred charges
Loan costs, including debt arrangement fees, are capitalized and amortized on a straight line basis over the term of the relevant loan. The straight line basis of amortization approximates the effective interest method in the Company's statement of operations. Amortization of loan costs is included in interest expense. If a loan is repaid early, any unamortized portion of the related deferred charges is charged against income in the period in which the loan is repaid. Similarly, if a portion of a loan is repaid early, the corresponding portion of the unamortized related deferred charges is charged against income in the period in which the early repayment is made.

Convertible bonds

The Company accounts for debt instruments with convertible features in accordance with the details and substance of the instruments at the time of their issuance. For convertible debt instruments issued at a substantial premium to equivalent instruments without conversion features, or those that may be settled in cash upon conversion, it is presumed that the premium or cash conversion option represents an equity component. Accordingly, the Company determines the carrying amounts of the liability and equity components of such convertible debt instruments by first determining the carrying amount of the liability component by measuring the fair value of a similar liability that does not have an equity component. The carrying amount of the equity component representing the embedded conversion option is then determined by deducting the fair value of the liability component from the total proceeds from the issue. The resulting equity component is recorded, with a corresponding offset to debt discount which is subsequently amortized to interest cost using the effective interest method over the period the debt is expected to be outstanding as an additional non-cash interest expense. Transaction costs associated with the instrument are allocated pro-rata between the debt and equity components.

For conventional convertible bonds which do not have a cash conversion option or where no substantial premium is received on issuance, it may not be appropriate to split the bond into the liability and equity components.
Derivatives
Interest rate and currency swaps
The Company enters into interest rate swap transactions from time to time to hedge a portion of its exposure to floating interest rates. These transactions involve the conversion of floating interest rates into fixed rates over the life of the transactions without an exchange of underlying principal. The Company also enters into currency swap transactions from time to time to hedge against the effects of exchange rate fluctuations on loan liabilities. Currency swap transactions involve the exchange of fixed amounts of other currencies for fixed US dollar amounts over the life of the transactions, including an exchange of underlying principal. The Company may also enter into a combination of interest and currency swaps "cross currency interest rate swaps". The fair values of the interest rate and currency swap contracts, including cross currency interest rate swaps, are recognized as assets or liabilities, and for certain of the Company's swaps the changes in fair values are recognized in the consolidated statements of operations. When the interest rate and/or currency swap or combination, qualifies for hedge accounting under ASC Topic 815 "Derivatives and Hedging" ("ASC 815"), and the Company has formally designated the swap as a hedge to the underlying loan, and when the hedge is effective, the changes in the fair value of the swap are recognized in other comprehensive income. If it becomes probable that the hedged forecasted transaction to which these swaps relate will not occur, the amounts in other comprehensive income will be reclassified into earnings immediately.
Financial Instruments
In determining the fair value of its financial instruments, the Company uses a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments, including most derivatives and long-term debt, standard market conventions and techniques such as options pricing models are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.


Drydocking provisions
Normal vessel repair and maintenance costs are charged to expense when incurred. The Company recognizes the cost of a drydocking at the time the drydocking takes place, that is, it applies the "expense as incurred" method.

F-13


Earnings per share
Basic earnings per share ("EPS") is computed based on the income available to common stockholders and the weighted average number of shares outstanding for basic EPS. Diluted EPS includes the effect of the assumed conversion of potentially dilutive instruments.
Share-based compensation
The Company accounts for share-based payments in accordance with ASC Topic 718 "Compensation – Stock Compensation" ("ASC 718"), under which the fair value of stock options issued to employees is expensed over the period in which the options vest. The Company uses the simplified method for making estimates of the expected term of stock options.


3.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2014, the FASB issued Accounting Standards Update ("ASU") 2014-08 "Presentation of Financial Statements and Property, Plant and Equipment" in order to clarify and change the criteria for reporting discontinued operations. Under ASU 2014-08, the disposal of a component or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has, or will have, a major effect on the entity's operations and financial results. Additionally, ASU 2014-08 improves the definition of discontinued operations and requires expanded disclosures for discontinued operations. ASU 2014-08 is effective for annual reporting periods and interim periods beginning on or after December 15, 2014. Its adoption is not expected to have a material impact on the Company's disclosures or consolidated financial position, results of operations and cash flows.

In May 2014, the FASB issued ASU 2014-09 "Revenue from Contracts with Customers" in order to ensure that revenue recognition requirements are the same under both US GAAP and International Financial Reporting Standards ("IFRS"). ASU 2014-09 removes inconsistencies and provides a more robust framework for addressing revenue issues. ASU 2014-09 is effective for reporting periods and interim periods beginning on or after December 15, 2016. Early adoption is not permitted. The Company is currently assessing the impact of ASU 2014-09 on its consolidated financial position, results of operations and cash flows.

In August 2014, the FASB issued ASU 2014-12 "Compensation - Stock Compensation" in order to provide explicit guidance on accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Company's Option Scheme does not award options which are dependent on the achievement of performance targets and, accordingly, ASU 2-14-12 is not expected have a material impact on the Company's consolidated financial position, results of operations and cash flows.

In November 214, the FASB issued ASU 2014-16 "Derivatives and Hedging" in order to standardize the determination of whether the host contract in a hybrid financial instrument issued in the form of a share is more akin to debt or to equity. ASU 2014-16 requires that all terms and features of the hybrid instrument, including the embedded derivative feature itself, must be taken into account when establishing separate accounting for the embedded derivative. ASU 2014-16 is effective for fiscal years and interim periods beginning on or after December15, 2015. The Company is currently assessing the impact of ASU 2014-16 on its consolidated financial position, results of operations and cash flows.

In January 2015, the FASB issued ASU 2015-01 "Income Statement - Extraordinary and Unusual Items", which eliminates the concept of extraordinary items from U.S. GAAP. ASU 2015-01 is effective for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted provided that it is applied from the beginning of the fiscal year of adoption. Its adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation: Amendments to the Consolidation Analysis" in order to clarify the basis for consolidation of certain legal entities. ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. Specifically, ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, (iii) affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (iv) provides a scope exception from consolidation guidance for reporting entities with interests in certain legal entities. ASU 2015-02 is effective for public business entities for fiscal years and interim periods beginning on or after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact of ASU 2015-02 on its

F-14


consolidated financial position, results of operations and cash flows.





4.
SEGMENT INFORMATION
The Company has only one reportable segment. The Company's assets operate on a world-wide basis and the Company's management does not evaluate performance by geographical region or by asset type, as they believe that any such information would not be meaningful.


5.
LONG-TERM INVESTMENT IMPAIRMENT CHARGE

The Company monitors events and trends which could indicate that the carrying amount of its long-term investments may not be recoverable. In the year ended December 31, 2012, the Company recorded a long-term investment impairment charge of $3.4 million in respect of two investments. No long-term investment impairment charges were recorded in the year ended December 31, 2014 (2013: $ nil ).

During the first quarter of 2012, the Company determined that its investment in the shares of a company which is not publicly traded would not generate sufficient future cash flows to ensure that its carrying value would be fully recoverable. An impairment charge of $2.9 million was recorded, equal to the difference between the carrying value of the investment and its estimated fair value of $ nil . The carrying value of this investment at December 31, 2014, is $ nil (2013: $ nil ).

During the second quarter of 2012, the Company received warrants to purchase shares in a U.S. company, together with other assets, as part of the consideration for the Company agreeing to terminate certain long-term charter agreements (see Note 9). Although shares in the U.S. company are traded on the over-the-counter market, the warrants are not listed. The Company considers that the best method of establishing the fair value of the warrants is to calculate their value in relation to the current market price of the underlying shares, taking into account the terms, restrictions and other features of the warrants, the fundamental financial and other characteristics of the issuing company, trading characteristics of the issuing company's shares, and actual sale transactions of comparable securities completed in secondary markets. The initial fair value of these warrants was $1.7 million at the time of acquisition. A review of the fair value of this investment at the end of the second quarter of 2012 identified an impairment loss of $0.5 million , and the Company adjusted the carrying value accordingly. Subsequent reviews of the fair value of this investment have not resulted in any further impairment adjustments and the carrying value of this investment at December 31, 2014, was $1.2 million (2013: $1.2 million ).


6.
TAXATION
Bermuda
Under current Bermudan law, the Company is not required to pay taxes in Bermuda on either income or capital gains. The Company has received written assurance from the Minister of Finance in Bermuda that, in the event of any such taxes being imposed, the Company will be exempted from taxation until the year 2035.
United States
The Company does not accrue U.S. income taxes as, in the opinion of U.S. counsel, the Company is not engaged in a U.S. trade or business and is exempted from a gross basis tax under Section 883 of the U.S. Internal Revenue Code.
A reconciliation between the income tax expense resulting from applying statutory income tax rates and the reported income tax expense has not been presented herein, as it would not provide additional useful information to users of the financial statements as the Company's net income is subject to neither Bermuda nor U.S. tax.

F-15


Other Jurisdictions
Certain of the Company's subsidiaries and branches in Norway and the United Kingdom are subject to income tax in their respective jurisdictions. The tax paid by subsidiaries of the Company that are subject to income tax is not material.



7.
EARNINGS PER SHARE
The computation of basic EPS is based on the weighted average number of shares outstanding during the year and the consolidated net income of the Company. Diluted EPS includes the effect of the assumed conversion of potentially dilutive instruments.
The components of the numerator for the calculation of basic and diluted EPS are as follows:
Year ended December 31
(in thousands of $)
2014

2013

2012

Basic:
Net income available to stockholders
122,815

89,206

185,836

Diluted:



Net income available to stockholders
122,815

89,206

185,836

Interest paid on 3.75% convertible bonds
5,060

5,092

4,688

Interest paid on 3.25% convertible bonds
17,371

—

—

145,246

94,298

190,524


The components of the denominator for the calculation of basic and diluted EPS are as follows:
Year ended December 31
(in thousands)
2014

2013

2012

Basic earnings per share:
Weighted average number of common shares outstanding
93,331

89,508

80,594

Diluted earnings per share:



Weighted average number of common shares outstanding
93,331

89,508

80,594

Effect of dilutive share options
84

163

168

Effect of dilutive convertible debt
23,332

5,753

5,106

116,747

95,424

85,868

The 3.25% convertible bonds issued in January 2013 were not dilutive at December 31, 2013.

F-16
F-17



8.
OPERATING LEASES
Rental income
The minimum future revenues to be received under the Company's non-cancelable operating leases on its vessels as of December 31, 2014 , are as follows:
(in thousands of $)
Year ending December 31,
2015
176,872

2016
160,500

2017
156,990

2018
117,070

2019
83,401

Thereafter
112,947

Total minimum lease revenues
807,780


The cost and accumulated depreciation of vessels leased to third parties on operating leases at December 31, 2014 and 2013 were as follows:
(in thousands of $)
2014

2013

Cost
1,715,510

1,360,605

Accumulated depreciation
338,377

270,989

Vessels and equipment, net
1,377,133

1,089,616


An impairment charge of $11.8 million was recorded against the carrying value of five container vessels in the year ended December 31, 2014 (2013: $ nil ).


9.
GAIN ON SALE OF ASSETS AND TERMINATION OF CHARTERS

The Company has recorded gains on sale of assets and termination of charters as follows:
Year ended December 31
(in thousands)
2014

2013

2012

(Loss)/ gain on sale of assets
(1,384
)
18,025

25,681

Gain on termination of charters
25,315

—

21,705

Total gain on sale of assets and termination of charters
23,931

18,025

47,386


The Company distinguishes between gains on termination of charters, where ownership of the underlying vessel is retained, and gains on sale of assets, where the vessel is disposed of and there may be an associated charter termination fee paid or received for early termination of the underlying charter.











F-17


Loss on sale of vessels

During the year ended December 31, 2014, the Company realized the following losses on sales of vessels:
( in thousands of $)
Vessel
Sales price

Book value

Loss

Front Comanche
38,835

39,235

(400
)
Front Commerce
37,884

38,371

(487
)
Front Opalia
39,363

39,860

(497
)
116,082

117,466

(1,384
)
The VLCCs Front Comanche , Front Commerce and Front Opalia were accounted for as direct financing lease assets, and were sold to an unrelated party in November 2014. The above sales prices each include compensation received for early termination of the charters (see Note 23: Related Party Transactions).
During the year ended December 31, 2013, the Company sold one oil/bulk/ore carrier ("OBO"), one single-hull VLCC, two double-hull VLCCs and one Suezmax tanker to unrelated parties and realized gains of $18.0 million on their disposal.

During the year ended December 31, 2012, the Company sold four OBOs and two single-hull VLCCs to unrelated parties and realized gains of $25.7 million on their disposal.


Gain on termination of charters

In September 2010, the Company agreed five year time-charters at a net rate of approximately $14,000 per day per vessel for four 34,000 dwt Handysize drybulk carriers, which were under construction at the time. The vessels were delivered from the shipyard in the second half of 2011 and the first half of 2012, and duly commenced the agreed time-charters. In July 2012, however, the charterer stopped paying the agreed charter hire and the vessels were returned to the Company. Proceedings were initiated against the charterer to recover unpaid charter hire and the matter was settled in the year ended December 31, 2014. A gain on termination of charters amounting to $25.3 million was recorded in the year ended December 31, 2014, net of legal and other costs.

In April 2012, the Company agreed to terminate the long-term bareboat charter agreements with Horizon Lines, LLC relating to five container vessels. The Company received termination compensation consisting of second lien notes in Horizon Lines, LLC with a face value of $40.0 million , warrants exercisable into 10% of the common stock in the parent company Horizon Lines, Inc., and inventory remaining on board the vessels at the time of their redelivery. The $21.7 million aggregate fair value of these assets was recorded as a gain on termination of charters in the year ended December 31, 2012. The second lien loan notes, with an initial face value of $40.0 million , bear interest, which can be paid in cash, in the form of additional notes or a combination of cash and additional notes at the option of Horizon Lines, LLC, and mature in full in October 2016, unless previously redeemed. The notes are not listed and their estimated fair value at the time of acquisition was materially less than their face value. The fair value of the notes is determined from an analysis of projected cash flows, based on factors including the terms, provisions and other characteristics of the bonds, credit ratings and default risk of the issuing entity, the fundamental financial and other characteristics of that entity, and the current economic environment and trading activity in the debt market. The notes are being held as available for sale securities at fair value. The warrants can be exercised at any time between their issue and the 25th anniversary of the issue date. Although shares in Horizon Lines, Inc. are traded on the over-the-counter market, the warrants are not listed. The warrants are being held as a long-term investment at fair value.












F-18


10.
OTHER FINANCIAL ITEMS
Other financial items comprise the following items:
Year ended December 31
(in thousands of $)
2014

2013

2012

Net increase/(decrease) in fair value of non-designated derivatives
(7,636
)
7,726

6,493

Net cash payments on non-designated derivatives
(7,196
)
(2,653
)
(179
)
Net increase/(decrease) in fair value of designated derivatives (ineffective portion)
(63
)
224

1,466

Other items
(1,337
)
(3,294
)
(1,904
)
Total other financial items
(16,232
)
2,003

5,876

The net movement in the fair values of non-designated derivatives and net cash payments thereon relate to non-designated, terminated or de-designated interest rate swaps and cross currency interest rate swaps. The net movement in the fair values of designated derivatives relates to the ineffective portion of interest rate swaps and cross currency interest rate swaps that have been designated as cash flow hedges. Changes in the fair values of the effective portion of interest rate swaps that are designated as cash flow hedges are reported under "Other comprehensive income". The above net increase/ (decrease) in valuation of non-designated derivatives in the year ended December 31, 2014 , includes $(4.5) million ( 2013 : $2.1 million ; 2012 : $27,000 ) reclassified from "Other comprehensive income", as a result of certain interest rate swaps relating to loan facilities no longer being designated as cash flow hedges.
Other items in the year ended December 31, 2014 , include a net loss of $109,000 arising from foreign currency translation (2013: $507,000 net loss; 2012: $8,000 net gain). Other items also include bank charges and fees relating to loan facilities.


11.
AVAILABLE FOR SALE SECURITIES
Marketable securities held by the Company are debt securities considered to be available-for-sale securities.
(in thousands of $)
2014

2013

Amortized cost
80,743

75,657

Accumulated net unrealized (loss)/gain
(7,087
)
1,268

Carrying value
73,656

76,925

The Company's investment in marketable securities consists of investments in secured notes which mature between 2016 and 2019. The net unrealized loss on available-for-sale securities included in other comprehensive income as at December 31, 2014, was $7.1 million (2013: gain $1.3 million ).

The above available for sale securities consist of listed and unlisted corporate bonds with a total carrying value of $49.9 million (2013: $56.4 million ) and unlisted second lien interest-bearing loan notes with carrying value $23.7 million (2013: $20.5 million ). The second lien loan notes include accumulated interest receivable, have a total face value of $59.4 million (2013: $51.4 million ), and were issued by Horizon Lines, LLC as part of compensation received on termination of charters (see Note 9: Gain on sale of assets and termination of charters).



F-19



12.
TRADE ACCOUNTS RECEIVABLE AND OTHER RECEIVABLES

Trade accounts receivable
Trade accounts receivable are presented net of allowances for doubtful debts. The allowance for doubtful trade accounts receivable was $nil at both December 31, 2014 and 2013 . Trade accounts receivable represents charter hire outstanding, and at December 31, 2013 , included a balance of $5.0 million due from a charterer which was in dispute, but which was subsequently received. As at December 31, 2014 , the Company has no reason to believe that any amount included in trade accounts receivable will not be recovered through due process or negotiation.

Other receivables

Other receivables are presented with no allowance for doubtful accounts as of December 31, 2014 and 2013 . The total balance at December 31, 2013, included $50.0 million investment loans relating to the financing of the container vessels CMA CGM Magellan and CMA CGM Corte Real , which were chartered-in by wholly-owned subsidiaries accounted for using the equity method (see Note 16: Investment in Associated Companies). These loans were included in "Other receivables" at December 31, 2013, due to CMA CGM S.A. ("CMA CGM") exercising their options to acquire the vessel owning entities, upon which the loans become repayable. These loans were repaid in the first quarter on 2014. In addition, the total balance at December 31, 2013, included $24.9 million receivable on the cancellation in December 2013 of the newbuilding contract for a container vessel, which was also received in the first quarter of 2014.


13.
VESSELS AND EQUIPMENT, NET
( in thousands of $)
2014

2013

Cost
1,715,510

1,360,605

Accumulated depreciation
338,377

270,989

Vessels and equipment, net
1,377,133

1,089,616

During 2014 , the Company took delivery of two second-hand drybulk carriers at an aggregate cost of $61.8 million , nine second-hand container vessels at an aggregate cost of $127.9 million , and two newbuilding container vessels at an aggregate cost of $173.8 million . During 2013 , the Company took delivery of one newbuilding drybulk carrier at an aggregate cost of $27.8 million and transferred two Suezmax tankers with a combined book value of $93.6 million from sales-type lease assets to operating lease assets.

An impairment charge of $11.8 million was recorded against the carrying value of five container vessels in the year ended December 31, 2014 (2013: $ nil ). The five vessels were disposed of in February 2015 (see Note 27: Subsequent Events).
Depreciation expense was $67.4 million for the year ended December 31, 2014 (2013: $58.4 million ; 2012: $55.6 million ).


14.
NEWBUILDINGS

The carrying value of newbuildings represents the accumulated costs which the Company has paid in purchase installments and other capital expenditures, together with capitalized loan interest. Interest capitalized in the cost of newbuildings amounted to $290,000 in 2014 (2013: $257,000 ; 2012: $332,000 ).
At December 31, 2014 , there were two ( 2013 : seven ) newbuilding contracts, all for container vessels, with accumulated costs of $87.6 million ( 2013 : $126.0 million ). During 2014 , two container vessels were delivered and the contracts for the acquisition of three newbuilding 4,800 TEU container vessel were cancelled. No new contracts for newbuilding vessels were agreed in the year ended December 31, 2014 .




F-20


15.
INVESTMENTS IN DIRECT FINANCING LEASES
As at December 31, 2014 , most (i.e. 17 ) of the Company's VLCCs and Suezmaxes were chartered to Frontline Shipping and Frontline Shipping II on long-term, fixed rate time charters which extend for various periods depending on the age of the vessels, ranging from approximately three to twelve years. Frontline Shipping and Frontline Shipping II are subsidiaries of Frontline, a related party, and the terms of the charters do not provide them with an option to terminate the charter before the end of its term.
Additionally, one of the Company's offshore supply vessels is chartered on a long-term bareboat charter to DESS Cyprus Limited, a wholly owned subsidiary of Deep Sea Supply Plc., a related party. Another of the Company's offshore supply vessels is chartered on a long-term bareboat charter to Deep Sea Supply Shipowning II B.V., a wholly-owned subsidiary of Deep Sea Supply BTG B.V., which is a joint venture owned 50% by Deep Sea Supply Plc. and 50% by BTG Pactual Oil & Gas Empreendimentos e Particapacoes S.A. ("BTG Pactual"). We refer to Deep Sea Supply Plc. and Deep Sea Supply BTG B.V. together as Deep Sea. The terms of the charters provide the charterer with various call options to acquire the vessels at certain dates throughout the charters, which expire in 2020.

The above 19 of the Company's assets were accounted for as direct financing leases at December 31, 2014 (2013: 22 ), all of which are leased to related parties.
The following lists the components of the investments in direct financing leases as at December 31, 2014 , and December 31, 2013 :
(in thousands of $)
2014

2013

Total minimum lease payments to be received
1,174,327

1,490,111

Less : amounts representing estimated executory costs including profit thereon, included in total minimum lease payments
(330,056
)
(432,463
)
Net minimum lease payments receivable
844,271

1,057,648

Estimated residual values of leased property (un-guaranteed)
239,002

278,152

Less : unearned income
(243,419
)
(318,910
)
839,854

1,016,890

Less : deferred deemed equity contribution
(86,585
)
(106,377
)
Less : unamortized gains
(6,738
)
(7,105
)
Total investment in direct financing and sales-type  leases
746,531

903,408

Current portion
37,517

45,148

Long-term portion
709,014

858,260

746,531

903,408

The minimum future gross revenues to be received under the Company's non-cancellable direct financing and sales-type leases as of December 31, 2014 , are as follows:
(in thousands of $)
Year ending December 31
2015
117,479

2016
155,562

2017
154,626

2018
147,931

2019
135,690

Thereafter
463,039

Total minimum lease revenues
1,174,327







F-21


16.
INVESTMENT IN ASSOCIATED COMPANIES
The Company has certain wholly-owned subsidiaries which are accounted for using the equity method, as it has been determined under ASC 810 that they are variable interest entities in which Ship Finance is not the primary beneficiary.
At December 31, 2014 , 2013 and 2012 , the Company had the following participation in investments that are recorded using the equity method:
2014

2013

2012

SFL West Polaris Limited
—

100.00
%
100.00
%
SFL Deepwater Ltd
100.00
%
100.00
%
100.00
%
SFL Hercules Ltd
100.00
%
100.00
%
100.00
%
SFL Linus Ltd
100.00
%
100.00
%
—

Bluelot Shipping Company Limited
—

100.00
%
100.00
%
SFL Corte Real Limited
—

100.00
%
100.00
%
The determination that Ship Finance is not the primary beneficiary of SFL Deepwater Ltd. ("SFL Deepwater"), SFL Hercules Ltd. ("SFL Hercules"), and SFL Linus Ltd. ("SFL Linus") is due to these subsidiaries each owning assets on which the underlying leases include both fixed price call options and fixed price put options or purchase obligations.

The determination that Ship Finance was not the primary beneficiary of SFL West Polaris Limited ("SFL West Polaris") was similarly due to this subsidiary owning an asset on which the underlying lease included both fixed price call options and a fixed price put option. Following the exercise of a purchase option, SFL West Polaris was sold in December 2014 - see below.

The determination that Ship Finance was not the primary beneficiary of Bluelot Shipping Company Limited ("Bluelot") and SFL Corte Real Limited ("Corte Real") was due to these subsidiaries, which did not own vessels, each having been incorporated specifically to participate in a three-party lease agreement, which could be effectively terminated by one of the other parties – see below. The three-party lease agreements were terminated in the first quarter of 2014.

SFL West Polaris was a 100% owned subsidiary of Ship Finance, incorporated in 2008 for the purpose of holding an ultra deepwater drillship and leasing that vessel to Seadrill Polaris Ltd. ("Seadrill Polaris"), fully guaranteed by its parent company Seadrill Limited ("Seadrill"), a related party. The vessel was chartered on a bareboat basis and the terms of the charter provided the charterer with various call options to acquire the vessel at certain dates throughout the charter. In addition, SFL West Polaris had a put option to sell the vessel to Seadrill Polaris at a fixed price at the end of the charter, which expired in 2023. Because the main asset of SFL West Polaris was the subject of a lease which includes both fixed price call options and a fixed price put option, it was determined that this subsidiary of Ship Finance was a variable interest entity in which Ship Finance was not the primary beneficiary. In December 2014, the parent company of the charterer advised the Company of its intention to exercise a purchase option, and the transaction was effected on December 30, 2014 as a sale of SFL West Polaris. The Company recorded a gain of $6.1 million on the sale, which was recorded as "Gain on sale of investment in associated company". In December 2012, SFL West Polaris entered into a $420 million five year term loan and revolving credit facility, which was used in January 2013 to refinance the previous $700 million facility established in 2008. At December 31, 2013 , the balance outstanding under the new facility was $387.0 million . Although SFL West Polaris is no longer one of its subsidiaries, the Company continues to guarantee $94.0 million of this debt at December 31, 2014 , for which it receives a guarantee commission (see Note 25: Commitments and Contingent Liabilities).

F-22


SFL Deepwater is a 100% owned subsidiary of Ship Finance, incorporated in 2008 for the purpose of holding two ultra deepwater drilling rigs and leasing those rigs to Seadrill Deepwater Charterer Ltd. and Seadrill Offshore AS, fully guaranteed by their parent company Seadrill. In September 2008, SFL Deepwater entered into a $1,400 million five year term loan facility to partly finance the acquisition of the two rigs. In June 2013, SFL Deepwater transferred one of the rigs and the corresponding lease to SFL Hercules, see below, and repaid the part of the loan facility relating to that rig. Accordingly, SFL Deepwater now holds one ultra deepwater drilling rig which is leased to Seadrill Deepwater Charterer Ltd. In October 2013, SFL Deepwater entered into a $390 million five year term loan and revolving credit facility, which was used in November 2013 to refinance the previous $1,400 million loan facility. At December 31, 2014 , the balance outstanding under the new facility was $303.3 million (2013: $383.3 million ), and the available amount under the revolving part of the facility was fully drawn. The Company guaranteed $85.0 million of this debt at December 31, 2014 (2013: $90.0 million ). The rig is chartered on a bareboat basis and the terms of the charter provide the charterer with various call options to acquire the rig at certain dates throughout the charter. In addition, there is an obligation for the charterer to purchase the rig at a fixed price at the end of the charter, which expires in 2023. Because the main asset of SFL Deepwater is the subject of a lease which includes both fixed price call options and a fixed price purchase obligation, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary.

SFL Hercules is a 100% owned subsidiary of Ship Finance, incorporated in 2012 for the purpose of holding an ultra deepwater drilling rig and leasing that rig to Seadrill Offshore AS, fully guaranteed by its parent company Seadrill. The rig was transferred, together with the corresponding lease, to SFL Hercules from SFL Deepwater in June 2013. In May 2013, SFL Hercules entered into a $375 million six year term loan and revolving credit facility to partly finance its acquisition of the rig from SFL Deepwater. The facility was drawn in June 2013, and at December 31, 2014 , the balance outstanding under this facility was $283.7 million (2013: $361.2 million ). At December 31, 2014, the available amount under the revolving part of the facility was $50.0 million (2013: $nil). The Company guaranteed $85.0 million of this debt at December 31, 2014 (2013: $90.0 million ). Because the main asset of SFL Hercules is the subject of a lease which includes both fixed price call options and a fixed price purchase obligation at the end of the charter, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary.

SFL Linus is a 100% owned subsidiary of Ship Finance, acquired from North Atlantic Drilling Ltd ("NADL"), a related party, in 2013. At December 31, 2013 , SFL Linus held a newbuilding harsh environment jack-up drilling rig which upon delivery in February 2014 was leased to North Atlantic Linus Charterer Ltd., fully guaranteed by its parent company NADL. In October 2013, SFL Linus entered into a $475 million five year term loan and revolving credit facility to partly finance the acquisition of the rig. The facility was not utilized at December 31, 2013 , but was drawn when the rig was delivered to SFL Linus and the charter commenced in February 2014. At December 31, 2014 , the balance outstanding under this facility was $451.3 million , and the available amount under the revolving part of the facility was fully drawn. The Company guaranteed $90.0 million of this debt at December 31, 2014 . In February 2015, amendments were made to the lease, whereby Seadrill replaced NADL as lease guarantor. Because the main asset of SFL Linus is the subject of a lease which includes both fixed price call options and a fixed price put option, it has been determined that this subsidiary of Ship Finance is a variable interest entity in which Ship Finance is not the primary beneficiary.
Bluelot and Corte Real are 100% owned subsidiaries of Ship Finance, each incorporated in 2010 for the purpose of leasing in a 13,800 twenty-foot equivalent units ("TEU") container vessel on a bareboat charter basis, respectively the CMA CGM Magellan and the CMA CGM Corte Real , and leasing the vessel out on a time-charter basis to CMA CGM. In November and December 2013, CMA CGM exercised its options to acquire the two vessel-owning entities, and the charter agreements were terminated in January and March 2014, respectively. The business activities of Bluelot and Corte Real were discontinued upon the re-delivery of their vessels, since when they have been fully consolidated.



F-23


Summarized balance sheet information of the Company's equity method investees is as follows:
As of December 31, 2014
(in thousands of $)
TOTAL

SFL Deepwater

SFL West Polaris

SFL Hercules

SFL Linus

Bluelot

Corte Real

Current assets
127,268

44,297

—

38,619

44,352

—

—

Non-current assets
1,324,765

397,191

—

397,226

530,348

—

—

Total assets
1,452,033

441,488

—

435,845

574,700

—

—

Current liabilities
122,861

38,376

—

32,945

51,540

—

—

Non-current liabilities (2)
1,275,715

371,147

—

391,500

513,068

—

—

Total liabilities
1,398,576

409,523

—

424,445

564,608

—

—

Total shareholders' equity
53,457

31,965

—

11,400

10,092

—

—

As of December 31, 2013
(in thousands of $)
TOTAL

SFL Deepwater

SFL West Polaris

SFL Hercules

SFL Linus

Bluelot

Corte Real

Current assets (1)
205,916

94,981

34,412

56,886

—

9,780

9,857

Non-current assets
1,516,033

432,755

458,558

429,720

195,000

—

—

Total assets
1,721,949

527,736

492,970

486,606

195,000

9,780

9,857

Current liabilities
159,847

85,240

38,337

29,101

—

3,523

3,646

Non-current liabilities (2)
1,521,115

418,554

451,384

453,860

197,317

—

—

Total liabilities
1,680,962

503,794

489,721

482,961

197,317

3,523

3,646

Total shareholders' equity
40,987

23,942

3,249

3,645

(2,317
)
6,257

6,211

(1)
Bluelot and Corte Real current assets at December 31, 2013 , include $6.1 million and $6.0 million due from Ship Finance, respectively (see Note 23: Related party transactions).

(2)
SFL Deepwater, SFL Hercules and SFL Linus non-current liabilities at December 31, 2014 , include $100.0 million ( 2013 : $115.2 million ), $135.3 million ( 2013 : $120.1 million ) and $110.7 million ( 2013 : $195.0 million ) due to Ship Finance (see Note 23: Related party transactions). SFL West Polaris non-current liabilities at December 31, 2013 , includes $100.4 million due to Ship Finance (see Note 23: Related party transactions). In the year ended December 31, 2013 , SFL Deepwater and SFL West Polaris paid dividends of $150.0 million (2014:$ nil ; 2012:$ nil ) and $73.0 million (2014: $ nil ; 2012:$ nil ), respectively.


Summarized statement of operations information of the Company's equity method investees is shown below.
Year ended December 31, 2014
(in thousands of $)
TOTAL

SFL Deepwater

SFL West Polaris

SFL Hercules

SFL Linus

Bluelot

Corte Real

Operating revenues
108,632

24,917

22,251

24,565

33,236

1,171

2,492

Net operating revenues
105,567

24,905

22,234

24,544

33,221

232

431

Net income (3)
33,497

8,023

4,643

7,755

12,413

232

431


Year ended December 31, 2013
(in thousands of $)
TOTAL

SFL Deepwater

SFL West Polaris

SFL Hercules

SFL Linus

Bluelot

Corte Real

Operating revenues
122,792

46,145

23,701

13,832

—

19,490

19,624

Net operating revenues
88,121

46,109

23,681

13,808

—

2,261

2,262

Net income (3)
28,200

17,747

2,324

3,645

(38
)
2,261

2,261


F-24


Year ended December 31, 2012
(in thousands of $)
TOTAL

SFL Deepwater

SFL West Polaris

Bluelot

Corte Real

Operating revenues
146,263

69,508

37,421

19,612

19,722

Net operating revenues
111,434

69,485

37,418

2,266

2,265

Net income (3)
43,492

28,243

10,719

2,266

2,264

(3)
The net income of SFL Deepwater, SFL West Polaris, SFL Hercules and SFL Linus in the year ended December 31, 2014 , includes interest payable to Ship Finance amounting to $6.5 million ( 2013 : $9.6 million ; 2012 : $13.1 million ), $6.5 million ( 2013 : $6.5 million ; 2012 : $6.5 million ), $6.5 million ( 2013 : $3.5 million ; 2012 : $ nil ) and $4.9 million (2013: $ nil ; 2012: $ nil ), respectively - see Note 23 "Related party transactions".

SFL Deepwater, SFL West Polaris, SFL Hercules and SFL Linus have loan facilities for which Ship Finance provides limited guarantees, as indicated above. These loan facilities contain financial covenants, with which Ship Finance and Seadrill must comply. As at December 31, 2014 , Ship Finance and Seadrill were in compliance with all of the covenants under these long-term debt facilities.


17.
ACCRUED EXPENSES
(in thousands of $)
2014

2013

Vessel operating expenses
6,305

1,959

Administrative expenses
1,330

799

Interest expense
10,555

11,074

18,190

13,832




18.
OTHER CURRENT LIABILITIES
(in thousands of $)
2014

2013

Deferred charter revenue
4,868

3,744

Prepaid charter income
3,114

822

Employee taxes
899

773

Other
211

209

9,092

5,548






F-25


19.
LONG-TERM DEBT
(in thousands of $)
2014

2013

Long-term debt:
Norwegian kroner 500 million senior unsecured floating rate bonds due 2014
—

71,854

3.75% senior unsecured convertible bonds due 2016
125,000

125,000

Norwegian kroner 600 million senior unsecured floating rate bonds due 2017
76,487

92,843

3.25% senior unsecured convertible bonds due 2018
350,000

350,000

Norwegian kroner 900 million senior unsecured floating rate bonds due 2019
119,277

—

U.S. dollar denominated floating rate debt (LIBOR plus margin) due through 2021
1,061,695

1,097,182

1,732,459

1,736,879

Less : current portion of long-term debt
(182,415
)
(389,888
)
1,550,044

1,346,991



The outstanding debt as of December 31, 2014 , is repayable as follows:
(in thousands of $)
Year ending December 31
2015
182,415

2016
204,218

2017
187,205

2018
582,980

2019
254,591

Thereafter
321,050

Total debt
1,732,459


The weighted average interest rate for floating rate debt denominated in U.S. dollars and Norwegian kroner ("NOK") as at December 31, 2014 , was 4.98% per annum ( 2013 : 4.86% ). These rates take into consideration the effect of related interest rate swaps. At December 31, 2014 , the three month dollar LIBOR was 0.256% ( 2013 : 0.246% ) and the three month Norwegian Interbank Offered Rate ("NIBOR") was 1.48% ( 2013 : 1.69% ).


NOK 500 million senior unsecured bonds due 2014
On October 7, 2010, the Company issued a senior unsecured bond loan totaling NOK 500.0 million in the Norwegian credit markets. The bonds bore quarterly interest at NIBOR plus a margin. Subsequent to their issue, the Company purchased bonds with principal amounts totaling NOK 63.5 million prior to December 31, 2013 , and a further NOK 4.0 million in the first quarter of 2014, which were held as treasury bonds. All outstanding bonds were redeemed in full on April 7, 2014 , partly funded by the issue in March 2014 of NOK 900 million senior unsecured bonds due 2019. The net amount outstanding at December 31, 2014 was NOK nil , equivalent to $ nil ( 2013 : NOK 436.5 million , equivalent to $71.9 million ).

3.75% senior unsecured convertible bonds due 2016
On February 10, 2011 , the Company issued a senior unsecured convertible bond loan totaling $125.0 million . Interest on the bonds is fixed at 3.75% per annum and is payable in cash semi-annually in arrears on February 10 and August 10. The bonds are convertible into Ship Finance International Limited common shares at any time up to 10 banking days prior to February 10, 2016 . The conversion price at the time of issue was $27.05 per share, representing a 35% premium to the share price at the time. Since then, dividend distributions have reduced the conversion price to $17.98 . The Company has the right to call the bonds after March 3, 2014 , if the value of the shares underlying each bond exceeds, for a specified period of time, 130% of the principal amount of the bond.


F-26


NOK 600 million senior unsecured bonds due 2017
On October 19, 2012 , the Company issued a senior unsecured bond loan totaling NOK 600 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and are redeemable in full on October 19, 2017 . The bonds may, in their entirety, be redeemed at the Company's option from April 19, 2017 , upon giving bondholders at least 30 business days notice and paying 100.50% of par value plus accrued interest. Subsequent to their issue, the Company purchased bonds with principal amounts totaling NOK 36.0 million in 2013, of which NOK 8.0 million were re-sold in 2014. The Company holds bonds purchased as treasury bonds. The net amount outstanding at December 31, 2014 , was NOK 572 million , equivalent to $76.5 million ( 2013 : NOK 564 million , equivalent to $92.8 million ).

3.25% senior unsecured convertible bonds due 2018
On January 30, 2013 , the Company issued a senior unsecured convertible bond loan totaling $350.0 million . Interest on the bonds is fixed at 3.25% per annum and is payable in cash quarterly in arrears on February 1, May 1, August 1, and November 1. The bonds are convertible into Ship Finance International Limited common shares at any time up to ten banking days prior to February 1, 2018 . The conversion price at the time of issue was $21.945 per share, representing a 33% premium to the share price at the time. Since then, dividend distributions have reduced the conversion price to $18.1555 per share. In conjunction with the bond issue, the Company loaned up to 6,060,606 of its common shares to an affiliate of one of the underwriters of the issue, in order to assist investors in the bonds to hedge their position. The shares that were lent by the Company were borrowed from Hemen Holding Ltd., the largest shareholder of the Company, for a one-time loan fee of $1.0 million .

As required by ASC 470-20 "Debt with conversion and other options", the Company calculated the equity component of the convertible bond, taking into account both the fair value of the conversion option and the fair value of the share lending arrangement. The equity component was valued at $20.7 million and this amount was recorded as "Additional paid-in capital", with a corresponding adjustment to "Deferred charges" which are amortized to "Interest expense" over the appropriate period. The amortization of this item amounted to $4.1 million in the year ended December 31, 2014 ( 2013 . $3.9 million ).

NOK 900 million senior unsecured bonds due 2019
On March 19, 2014 , the Company issued a senior unsecured bond loan totaling NOK 900 million in the Norwegian credit market. The bonds bear quarterly interest at NIBOR plus a margin and are redeemable in full on March 19, 2019 . The bonds may, in their entirety, be redeemed at the Company's option from September 19, 2018 , upon giving the bondholders at least 30 business days notice and paying 100.50% of par value plus accrued interest. Subsequent to their issue, the Company purchased bonds with principal amounts totaling NOK 8.0 million in 2014, which are being held as treasury bonds. The net amount outstanding at December 31, 2014 , was NOK 892.0 million , equivalent to $119.3 million (2013: NOK nil , equivalent to $ nil ).

$210 million secured term loan facility
In April 2006, five wholly-owned subsidiaries of the Company entered into a $210 million secured term loan facility with a syndicate of banks to partly fund the acquisition of five new container vessels. The terms of the loan were initially linked to long-term charters of the vessels, and the Company did not provide a corporate guarantee for the facility. In April 2012, those long-term charters were terminated and the terms of the loan agreement were amended. Although the facility continues without recourse to the Company, as part of the amended agreement the Company now guarantees that revenues received by the vessel-owning subsidiaries will achieve certain minimum levels for each vessel. This performance guarantee has been reduced to a maximum of $2.7 million in aggregate as of December 31, 2014 . The facility bears interest at LIBOR plus a margin and has a term of twelve years from the date of drawdown for each vessel. The net amount outstanding at December 31, 2014 , was $171.4 million ( 2013 : $174.8 million ). In January 2015, the performance guarantee became exhausted and in February 2015 agreement was reached with the lenders whereby the five vessels were transferred to new unrelated third parties and the Company ceased to have any further commitments under this facility (see Note 27: Subsequent Events).
$149 million secured term loan facility
In August 2007, five wholly-owned subsidiaries of the Company entered into a $149 million secured term loan facility with a syndicate of banks. The proceeds of the facility were used to partly fund the acquisition of five new offshore supply vessels, one of which was sold in January 2008. The facility relating to the remaining four vessels, which bore interest at LIBOR plus a margin and had a term of seven years, was fully repaid in the year ended December 31, 2014 . In August 2014, the Company entered into a new $101 million secured term loan facility partly secured against the four vessels (see below). The net amount outstanding under the $149 million facility at December 31, 2013 , was $73.9 million .



F-27


$77 million secured term loan facility
In January 2008, two wholly-owned subsidiaries of the Company entered into a $77 million secured term loan facility with a syndicate of banks. The proceeds of the facility were used to partly fund the acquisition of two offshore supply vessels. The facility, which bore interest at LIBOR plus a margin and had a term of seven years, was fully repaid in the year ended December 31, 2014 . In August 2014, the Company entered into a new $101 million secured term loan facility partly secured against the two vessels (see below). The net amount outstanding under the $77 million facility at December 31, 2013 , was $39.1 million .
$30 million secured revolving credit facility
In February 2008, a wholly-owned subsidiary of the Company entered into a $30 million secured revolving credit facility with a bank. The proceeds of the facility were used to partly fund the acquisition of a 1,700 TEU container vessel. The facility bears interest at LIBOR plus a margin and has a term of seven years. At December 31, 2014 , the available amount under the facility was fully drawn. The net amount outstanding at December 31, 2014 , was $3.0 million ( 2013 : $5.0 million ). In January 2015, all outstanding amounts were prepaid and the facility was canceled.
$49 million secured term loan and revolving credit facility
In March 2008, two wholly-owned subsidiaries of the Company entered into a $49 million secured term loan facility with a bank. The proceeds of the facility were used to partly fund the acquisition of two newbuilding chemical tankers. The Company has provided a limited corporate guarantee for this facility. The facility bears interest at LIBOR plus a margin and has a term of ten years. In June 2011, the terms of the facility were amended such that part of the loan was transformed into a revolving credit facility. At December 31, 2014 , the amount available under the revolving part of the facility was $ nil (2013: $1.9 million ). The net amount outstanding at December 31, 2014 , was $28.0 million ( 2013 : $25.6 million ).

$43 million secured term loan facility
In February 2010, a wholly-owned subsidiary of the Company entered into a $42.6 million secured term loan facility with a bank, bearing interest at LIBOR plus a margin and with a term of approximately five years. The facility is secured against a Suezmax tanker. In November 2014, the terms of the loan were amended and restated, and the facility now matures in November 2019 . The net amount outstanding at December 31, 2014 , was $29.1 million ( 2013 : $32.0 million ).
$725 million secured term loan and revolving credit facility
In March 2010, the Company entered into a $725 million secured term loan and revolving credit facility with a syndicate of banks, secured against 26 vessels chartered to Frontline. Twelve of the vessels have since been sold, and the facility is secured against the remaining 14 vessels at December 31, 2014 . The facility bears interest at LIBOR plus a margin and is repayable over a term of five years. The net amount outstanding at December 31, 2014 , was $71.5 million ( 2013 : $158.8 million ). The available amount under the revolving part of the facility at December 31, 2014 was $112.0 million ( 2013 : $119.7 million ). In February 2015, all outstanding amounts were prepaid and the facility was canceled.
$43 million secured term loan facility
In March 2010, a wholly-owned subsidiary of the Company entered into a $42.6 million secured term loan facility with a bank, secured against a Suezmax tanker. The facility bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at December 31, 2014 , was $29.1 million ( 2013 : $32.0 million ). In March 2015, the terms of the loan were amended and restated, and the facility now matures in March 2020.
$54 million secured term loan facility
In November 2010, two wholly-owned subsidiaries of the Company entered into a $53.7 million secured term loan facility with a bank, secured against two Supramax drybulk carriers. The Company has provided a limited corporate guarantee for this facility. The facility bears interest at LIBOR plus a margin and has a term of eight years. The net amount outstanding at December 31, 2014 , was $38.0 million ( 2013 : $42.0 million ).






F-28


$95 million secured term loan and revolving credit facility
In February 2011, a wholly-owned subsidiary of the Company entered into a $95 million secured term loan and revolving credit facility with a bank, secured against a jack-up drilling rig. The facility bears interest at LIBOR plus a margin and has a term of seven years. The net amount outstanding at December 31, 2014 , was $57.5 million ( 2013 : $47.5 million ). The available amount under the revolving part of the facility at December 31, 2014 was $ nil (2013: $20.0 million ).
$75 million secured term loan facility
In March 2011, three wholly-owned subsidiaries of the Company entered into a $75.4 million secured term loan facility with a bank, secured against three newbuilding Supramax drybulk carriers delivered in 2011 and 2012. The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The Company has provided a limited corporate guarantee for this facility. The net amount outstanding at December 31, 2014 , was $56.6 million ( 2013 : $62.5 million ).
$171 million secured term loan facility
In May 2011, eight wholly-owned subsidiaries of the Company entered into a $171.0 million secured loan facility with a syndicate of banks. The facility is supported by China Export & Credit Insurance Corporation, or SINOSURE, which provides an insurance policy in favor of the banks for part of the outstanding loan. The facility is secured against a 1,700 TEU container vessel and seven Handysize drybulk carriers. The facility bears interest at LIBOR plus a margin and has a term of approximately ten years from delivery of each vessel. The net amount outstanding at December 31, 2014 , was $134.2 million ( 2013 : $146.3 million ).
$55 million secured securities financing agreement
In June 2011, the Company entered into a $55 million securities financing agreement with a bank. The facility may be used to fund up to 50% of the acquisition cost of securities we may acquire from time to time, subject to certain conditions. The facility bears interest at LIBOR plus a margin and will be secured against the relevant securities. The facility had not been utilized as at December 31, 2014 .
$167 million secured term loan and revolving credit facility
In July 2011, five wholly-owned subsidiaries of the Company entered into a $166.8 million secured term loan and revolving credit facility agreement with a syndicate of banks, secured against five VLCCs chartered to Frontline. The facility bears interest at LIBOR plus a margin and has a term of six years from drawdown. Two of the VLCCs were sold in 2013 and the facility now relates to the three remaining VLCCs. The net amount outstanding at December 31, 2014 was $72.2 million ( 2013 : 74.5 million ). The available amount under the revolving part of the facility at December 31, 2014 was $ nil (2013: $8.0 million ).

$184 million secured term loan facility
In March 2012, four wholly-owned subsidiaries of the Company entered into a $184.0 million secured loan facility with a bank secured against four newbuilding container vessels, bearing interest at LIBOR plus a margin and with a term of approximately 12 years from delivery of each vessel. The facility was for both pre- and post-delivery financing. In December 2013, the contract for one of the newbuilding vessels was cancelled, and in the year ended December 31, 2014 , the contracts for the remaining three newbuilding vessels were cancelled. The net amount outstanding at December 31, 2013 , was $64.4 million , relating to pre-delivery financing of installments paid to the yard for the four vessels. In the year ended December 31, 2014 , the loan was repaid in full as a result of the cancellation of all four newbuilding contracts. All instalments paid to the shipyard were fully reimbursed, together with interest thereon.

$53 million secured term loan facility

In November 2012, two wholly-owned subsidiaries of the Company entered into a $53.2 million secured term loan facility with a bank, secured against two car carriers. The facility bears interest at LIBOR plus a margin and has a term of approximately five years. The net amount outstanding at December 31, 2014 was $44.3 million ( 2013 : $48.8 million ).

F-29



$70 million secured term loan facility
In June 2013, the Company entered into a $70.0 million secured term loan facility with a syndicate of banks in order to partly finance the pre-delivery costs of the harsh-environment jack-up drilling rig West Linus, secured against the newbuilding contract for the rig. The rig was delivered in February 2014 to SFL Linus, a wholly-owned subsidiary of the Company accounted for using the equity method. Upon delivery, the $70.0 million facility was repaid in full and SFL Linus drew down against a $475 million secured term loan facility established to partly finance its acquisition of the rig (see Note 16: Investment in Associated Companies). The $70.0 million facility bore interest at LIBOR plus a margin and had a term of approximately nine months. The net amount outstanding at December 31, 2014 was $ nil ( 2013 : $70.0 million ).

$45 million secured term loan and revolving credit facility
In June 2014, seven wholly-owned subsidiaries of the Company entered into a $45.0 million secured term loan and revolving credit facility with a bank, secured against seven 4,100 TEU container vessels acquired in the year ended December 31, 2014 . The facility bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at December 31, 2014 , was $45.0 million ( 2013 : $ nil ). The available amount under the revolving part of the facility at December 31, 2014 , was $ nil (2013: $ nil ).

$101 million secured term loan facility
In August 2014, six wholly-owned subsidiaries of the Company entered into a $101.4 million secured term loan facility with a syndicate of banks, to refinance the $149 million secured term loan facility which matured in August 2014 and the $77 million secured term loan facility which was due to mature in January 2015 (see above). Those two facilities were repaid in full, and the new $101.4 million facility is secured against the six offshore supply vessels which previously provided security for the repaid facilities. The $101.4 million facility bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at December 31, 2014 , was $98.7 million ( 2013 : $ nil ).

$20 million secured term loan facility
In September 2014, two wholly-owned subsidiaries of the Company entered into a $20.0 million secured term loan facility with a bank, secured against two 5,800 TEU container vessels acquired in the year ended December 31, 2014 . The facility bears interest at LIBOR plus a margin and has a term of five years. The net amount outstanding at December 31, 2014 , was $20.0 million ( 2013 : $ nil ).

$128 million secured term loan facility
In September 2014, two wholly-owned subsidiaries of the Company entered into a $127.5 million secured term loan facility with a bank, for the post-delivery financing of two newbuilding 8,700 TEU container vessels. The vessels were delivered from the shipyard in the year ended December 31, 2014 . The facility bears interest at LIBOR plus a margin and has a term of seven years. The net amount outstanding at December 31, 2014 , was $126.4 million ( 2013 : $ nil ).

$128 million secured term loan facility
In November 2014, two wholly-owned subsidiaries of the Company entered into a $127.5 million secured term loan facility with a bank, for the post-delivery financing of two newbuilding 8,700 TEU container vessels. The vessels were delivered from the shipyard in January 2015. The facility bears interest at LIBOR plus a margin and has a term of seven years. The facility had not been utilized as at December 31, 2014 .

$39 million secured term loan facility
In December 2014, two wholly-owned subsidiaries of the Company entered into a $39.0 million secured term loan facility with a bank, secured against two Kamsarmax drybulk carriers acquired in the year ended December 31, 2014 . The facility bears interest at LIBOR plus a margin and has a term of approximately eight years. The net amount outstanding at December 31, 2014 , was $36.4 million ( 2013 : $ nil ).

The aggregate book value of assets pledged as security against borrowings at December 31, 2014 , was $2,062 million ( 2013 : $1,994 million ).


F-30



Agreements related to long-term debt provide limitations on the amount of total borrowings and secured debt, and acceleration of payment under certain circumstances, including failure to satisfy certain financial covenants. As of December 31, 2014 , the Company is in compliance with all of the covenants under its long-term debt facilities. The $101 million secured term loan facility entered into in August 2014 contains certain financial covenants on Deep Sea Supply Plc. and Deep Sea Supply BTG B.V. As at December 31, 2014 , Deep Sea Supply Plc. and Deep Sea Supply BTG B.V. were in compliance with all covenants under the respective loan agreements.



20.
OTHER LONG-TERM LIABILITIES
(in thousands of $)
2014

2013

Unamortized sellers' credit
15,042

18,125

Other items
2,542

4

17,584

18,129


The Company's six offshore supply vessels were acquired from Deep Sea and were chartered back to Deep Sea under bareboat charter agreements. As part of the purchase consideration, the Company received seller's credits totaling $37.0 million which are being recognized as additional bareboat revenues over the period of the charters.

Other items at December 31, 2014, includes the $2.5 million fair value of the guarantee provided by the Company to the providers of the loan facility to SFL West Polaris, following the sale of that company (see Note 16: Investment in Associated Companies).



21.
SHARE CAPITAL, ADDITIONAL PAID-IN CAPITAL AND CONTRIBUTED SURPLUS
Authorized share capital is as follows:
(in thousands of $, except share data)
2014

2013

125,000,000 common shares of $1.00 par value each
125,000

125,000


Issued and fully paid share capital is as follows:
(in thousands of $, except share data)
2014

2013

93,404,000 common shares of $1.00 par value each (2013: 93,260,000 shares)
93,404

93,260


The Company's common shares are listed on the New York Stock Exchange.

In the year ended December 31, 2014 , the Company issued a total of 144,000 new shares in order to satisfy options exercised by three directors, one officer and two employees (2013: 35,000 new shares issued to satisfy options exercised by two employees). The weighted average exercise price of the options was $6.44 per share (2013: $5.29 per share), resulting in a premium on issue of $0.8 million (2013: $0.2 million ). No other shares were issued and sold in the year ended December 31, 2014 . In the year ended December 31, 2013 , in addition to the shares issued to satisfy options exercised by employees, the Company issued and sold 8,000,000 shares pursuant to a prospectus filed in November 2010. Total proceeds of $128.7 million net of costs were received, resulting in a premium on issue of $120.7 million .

F-31


In November 2006, the Board of Directors approved the Ship Finance International Limited Share Option Scheme (the "Option Scheme"). The Option Scheme permits the Board of Directors, at its discretion, to grant options to employees, officers and directors of the Company or its subsidiaries. The fair value cost of options granted is recognized in the statement of operations, and the corresponding amount is credited to additional paid in capital (see also Note 22). During 2014, one officer exercised options and in lieu of issuing 80,000 new shares the Company made a payment totaling $1.2 million , equal to the intrinsic value of the options on the date of exercise (2013: one officer exercised options and received a payment totaling $0.4 million in lieu of 40,000 shares). These amounts are accounted for as repurchases of the Company's shares and the payments are recorded as reductions in additional paid-in capital.

In January 2013 , the Company issued a senior unsecured convertible bond loan totaling $350 million . The bonds are convertible into common shares at any time up to ten banking days prior to February 1, 2018 . The conversion price at the time of issue was $21.945 per share, representing a 33% premium to the share price at the time. Since then, dividend distributions have reduced the conversion price to $18.1555 per share. As required by ASC 470-20 "Debt with conversion and other options", the Company calculated the equity component of the convertible bond, which was valued at $20.7 million and recorded as "Additional paid-in capital" (see Note 19: Long-term Debt).
The Company has accounted for the acquisition of vessels from Frontline at Frontline's historical carrying value. The difference between the historical carrying values and the net investment in the leases has been recorded as a deferred deemed equity contribution, which is presented as a reduction in net investment in direct financing leases in the balance sheet. This accounting treatment arises from the related party nature of both the initial transfer of the vessels and the subsequent leases.  The deferred deemed equity contribution is amortized to contributed surplus over the life of the lease arrangements, as lease payments are applied to the principal balance of the lease receivable. In the year ended December 31, 2014 , the Company has credited contributed surplus with $4.5 million of such deemed equity contributions ( 2013 : $20.2 million ).


22.
SHARE OPTION PLAN
The Option Scheme adopted in November 2006 will expire in November 2016. The subscription price for all options granted under the scheme will be reduced by the amount of all dividends declared by the Company per share in the period from the date of grant until the date the option is exercised, provided the subscription price shall never be reduced below the par value of the share. Options granted under the scheme will vest at a date determined by the board at the date of the grant. The options granted under the plan to date vest over a period of one to three years and have a five year term. There is no maximum number of shares authorized for awards of equity share options, and either authorized unissued shares of Ship Finance or treasury shares held by the Company may be used to satisfy exercised options.

The following summarizes share option transactions related to the Option Scheme in 2014 , 2013 and 2012 :
2014
2013
2012
Options

Weighted average exercise price $

Options

Weighted average exercise price $

Options

Weighted average exercise price $

Options outstanding at beginning of year
423,000

9.99

498,000

10.27

830,500

11.25

Granted
—

—

—

—

—

—

Exercised
(224,000
)
5.41

(75,000
)
5.29

(260,000
)
7.17

Forfeited
(10,000
)
5.56

—

—

(72,500
)
18.05

Options outstanding at end of year
189,000

13.17

423,000

9.99

498,000

10.27

Exercisable at end of year
189,000

13.17

374,333

9.22

376,668

8.29


The exercise price of each option is progressively reduced by the amount of any dividends declared. The above figures show the average of the reduced exercise prices at the beginning and end of the year for options then outstanding. For options granted, exercised or forfeited during the year, the above figures show the average of the exercise prices at the time the options were granted, exercised or forfeited, as appropriate.

F-32


The fair values of options granted are estimated on the date of the grant, using the Black-Scholes-Merton option valuation model. The fair values are then expensed over the periods in which the options vest. No new options were granted in 2014 , 2013 and 2012 , and all options outstanding at December 31, 2014 , were fully vested.

The total intrinsic value of options exercised in 2014 was $2.9 million on the day of exercise ( 2013 : $0.9 million ; 2012 : $2.3 million ). The intrinsic value of options fully vested but not exercised at December 31, 2014 , is $0.2 million and their average remaining term is 0.91 years.
As of December 31, 2014 , the unrecognized compensation costs relating to non-vested options granted under the Option Scheme was $ nil ( 2013 : $29,100 ).



23.
RELATED PARTY TRANSACTIONS
The Company, which was formed in 2003 as a wholly-owned subsidiary of Frontline, was partially spun-off in 2004 and its shares commenced trading on the New York Stock Exchange in June 2004. A significant proportion of the Company's business continues to be transacted with related parties.

The Company has had transactions with the following related parties, being companies in which our principal shareholders Hemen Holding Ltd. and Farahead Investment Inc. (hereafter jointly referred to as "Hemen") and companies associated with Hemen have a significant direct or indirect interest:
–    Frontline
–
Frontline 2012 Limited ("Frontline 2012")
–    Frontline Shipping, Frontline Shipping II, Frontline Shipping III (collectively Frontline Charterers)
–
Seadrill
–
NADL
–
Golden Ocean Group Limited ("Golden Ocean")
–
United Freight Carriers ("UFC" - which is a joint venture approximately 50% owned by Golden Ocean)
–
Deep Sea
–
Golar LNG Limited ("Golar")

From September 2014, Golar ceased to be a related party to the Company, following disassociation through the sale of shares held by a company associated with Hemen.

The Consolidated Balance Sheets include the following amounts due from and to related parties, excluding direct financing lease balances (see Note 15):

F-33


(in thousands of $)
2014

2013

Amounts due from:
Frontline Charterers
30,714

—

Frontline Ltd
9,012

10,016

UFC
232

770

Deep Sea
1,338

—

NADL
—

2,163

Seadrill
111,195

300

Total amount due from related parties
152,491

13,249

Loans to related parties - associated companies, long-term


SFL West Polaris
—

100,383

SFL Deepwater
100,036

115,222

SFL Hercules
135,250

120,110

SFL Linus
110,745

195,000

Total loans to related parties - associated companies, long-term
346,031

530,715

Loans to related parties - others, long-term
Frontline Ltd
79,294

48,847

Total loans to related parties - others, long-term
79,294

48,847

Amounts due to:


Frontline Charterers
196

815

Frontline Management
848

1,011

Bluelot
—

6,064

Corte Real
—

6,018

Other related parties
65

57

Total amount due to related parties
1,109

13,965

SFL Deepwater, SFL Hercules and SFL Linus are wholly-owned subsidiaries which are not fully consolidated but are accounted for under the equity method as at December 31, 2014. In addition, at December 31, 2013, SFL West Polaris, Bluelot and Corte Real were also wholly-owned subsidiaries not fully consolidated but accounted for under the equity method (see Note 16: Investment in Associated Companies). The amounts due to Bluelot and Corte Real as at December 31, 2013, were the balances on the current accounts between those companies and Ship Finance. As described below in "Related party loans", at December 31, 2014 and 2013 , the long-term loans from Ship Finance to SFL Deepwater, SFL Hercules, SFL Linus and SFL West Polaris (2013 only) are presented net of their respective current accounts.
Related party leasing and service contracts
As at December 31, 2014 , 17 of the Company's vessels leased to the Frontline Charterers and two of its offshore supply vessels leased to subsidiaries of Deep Sea are recorded as direct financing leases. In addition, at December 31, 2014 , four offshore supply vessels were leased to subsidiaries of Deep Sea and four drybulk carriers were leased to UFC under operating leases.
At December 31, 2014 , the combined balance of net investments in direct financing leases with the Frontline Charterers and Deep Sea was $839.9 million ( 2013 : $1,016.9 million ) of which $37.5 million ( 2013 : $45.1 million ) represents short-term maturities.
At December 31, 2014 , the net book value of assets leased under operating leases to Deep Sea and UFC was $198.9 million ( 2013 : $212.9 million ).

F-34


A summary of leasing revenues earned from the Frontline Charterers, Seadrill, Deep Sea and UFC is as follows:
(in millions of $)
2014

2013

2012

Operating lease income
26.4

24.0

20.7

Direct financing lease interest income
45.4

55.4

59.2

Finance lease service revenue
46.5

52.4

64.8

Direct financing lease repayments
43.1

47.4

52.8

Profit sharing revenues
33.8

0.8

52.2



In May 2013, the Company agreed to change the legal entity under the charters for five of the six vessels on charter to subsidiaries of Deep Sea Supply Plc. The new charterer is Deep Sea Supply Shipowning II B.V., a wholly-owned subsidiary of Deep Sea Supply BTG B.V., which is a joint venture owned 50% by Deep Sea Supply Plc. and 50% by BTG Pactual. The new charters became effective on May 31, 2013, and the main terms of the charters remain unchanged.

On December 30, 2011, amendments were made to the charter agreements with Frontline Shipping and Frontline Shipping II, which related to 28 vessels accounted for as direct financing leases. Four of those vessels were sold in 2012, four were sold in 2013, and a further three were sold in 2014. In terms of the amending agreements, the Company received a compensation payment of $106 million and agreed to a $6,500 per day reduction in the time charter rate of each vessel for the period January 1, 2012, to December 31, 2015. Thereafter, the charter rates revert to the previously agreed daily amounts. The leases were amended to reflect the compensation payment received and the reduction in future minimum lease payments to be received.
Prior to December 31, 2011, Frontline Shipping and Frontline Shipping II paid the Company profit sharing of 20% of their earnings on a time-charter equivalent basis from their use of the Company's fleet above average threshold charter rates each fiscal year. The amendments to the charter agreements made on December 30, 2011, increased the profit sharing percentage to 25% for future earnings above those threshold levels. Of the $106 million compensation payment received, $50 million represents a non-refundable advance relating to the 25% profit sharing agreement. The Company earned and recognized profit sharing revenue under these arrangements in the year ended December 31, 2014 , of $ nil ( 2013 : $ nil ; 2012 : $ nil ). As at December 31, 2014 , there was $ nil profit share accrued towards the reduction in the $50 million profit sharing advance, which must be reduced to $ nil before the Company can recognize future income under the 25% profit sharing agreement.

The amendments to the charter agreements additionally provide that for the four year period of the temporary reduction in charter rates, Frontline Shipping and Frontline Shipping II will pay the Company 100% of any earnings on a time-charter equivalent basis above the temporarily reduced time charter rates, subject to a maximum of $6,500 per day per vessel. In the year ended December 31, 2014 , the Company earned and recognized $32.7 million revenue under this arrangement (2013: $ nil ; 2012: $52.2 million ), which is also reported under "Profit sharing revenues".

In the event that vessels on charter to the Frontline Charterers are agreed to be sold, the Company may either pay or receive compensation for the termination of the lease. In November 2014, three VLCCs, namely Front Comanche , Front Commerce and Front Opalia , on charter to the Frontline Charterers were sold and their leases cancelled, with agreed termination fees receivable of $49.2 million . Of the termination fees receivable, $10.5 million was received in cash and $38.7 million was received in the form of loan notes receivable over the approximately eight remaining years of the canceled leases. The initial face value of the notes received, on which interest at 7.25% is receivable, was $48.4 million and their initial fair value of $38.7 million was determined from analysis of projected cash flows, based on factors including the terms, provisions and other characteristics of the notes, default risk of the issuing entity, the fundamental financial and other characteristics of that entity, and the current economic environment and trading activity in the debt market. Subsequently, the notes are recorded at amortized cost (based on the fair value of the notes on the date of receipt) less adjustments for valuation losses. Any increase in estimated cash flows will be recorded as adjustments to the accredited yield. At December 31, 2014 , no adjustments were made.


F-35


In January 2013 the non-double VLCC Edinburgh was sold and its lease cancelled, with an agreed termination fee payable of $7.8 million . In February 2013 and March 2013, the Suezmax tanker Front Pride and the OBO Front Guider were sold and their leases cancelled, with agreed termination fees receivable of $2.1 million and $11.7 million , respectively. In November 2013, the VLCCs Golden Victory and Front Champion were sold and their leases cancelled, with agreed termination fees receivable of $37.3 million and $30.4 million , respectively. Of the $67.7 million combined fees receivable for the two VLCCs sold in November 2013, $10.9 million was received in cash and $56.8 million was received in the form of loan notes receivable over the approximately eight remaining years of the cancelled leases. The initial face value of the notes received, on which interest at 7.25% is receivable, was $79.0 million and their initial fair value of $56.8 million was determined on the same basis as that used for the notes received in 2014. No adjustments were made to the valuation of these notes as at December 31, 2014 or December 31, 2013.
In the year ended December 31, 2014, the Company had four drybulk carriers operating on time-charters to UFC, which include profit sharing arrangements whereby the Company earns a 50% share of profits earned by the vessels above threshold levels. In the year ended December 31, 2014 , the Company earned and recognized $1.1 million under this arrangement (2013: $0.8 million ; 2012: $ nil ).

As at December 31, 2014 , the Company was owed a total of $30.7 million (2013: $ nil ) by the Frontline Charterers in respect of leasing contracts and profit share.
At December 31, 2014 , the Company was owed $9.0 million (2013: $10.0 million ) by Frontline in respect of various short-term items, including the $7.8 million (2013: $7.6 million ) carrying value of the short-term portion of loan notes receivable and $0.4 million (2013: $0.5 million ) accrued interest on the loan notes. The Company also had a long-term loan of $79.3 million due from Frontline at December 31, 2014 (2013: $48.8 million ), being the carrying value of the long-term portion of loan notes receivable.

At December 31, 2014 , the Company was owed $0.2 million (2013: $0.8 million ) by UFC in respect of profit share.

At December 31, 2014 , the Company was owed $1.3 million (2013: $0.0 million ) by Deep Sea in respect of leasing contracts.

At December 31, 2013 , the Company was owed $2.2 million by NADL (2014: $ nil ) by NADL in respect of pre-delivery loan charges relating to the harsh environment jack-up drilling rig delivered in February 2014 to the wholly-owned subsidiary SFL Linus, which is accounted for using the equity method (see Note 16). These charges were recoverable from NADL under the terms of the agreement to acquire the rig and lease it to them.

On December 30, 2014, the Company sold SFL West Polaris to Seadrill (see Note 16: Investment in Associated Companies). At December 31, 2014 , the Company was owed $111.2 million by Seadrill in relation to this transaction. At December 31, 2013 , the Company was owed $0.3 million by Seadrill in respect of commission receivable on a guarantee provided by the Company until July 2013 on the loan facility of Rig Finance II Limited, which was a subsidiary sold to Seadrill in June 2011.
The vessels leased to the Frontline Charterers are on time charter terms and for each such vessel the Company pays a management fee of $6,500 per day to Frontline Management (Bermuda) Ltd. ("Frontline Management"), a wholly owned subsidiary of Frontline. An exception to this arrangement is for any vessel leased to the Frontline Charterers which is sub-chartered on a bareboat basis, for which there is no management fee payable for the duration of the bareboat sub-charter. In the year ended December 31, 2014 , the Company also had nine container vessels, fourteen drybulk carriers, two Suezmax tankers and two car carriers operating on time charter or in the spot market, for which the supervision of the technical management was sub-contracted to Frontline Management. In the year ended December 31, 2014 , management fees payable to Frontline Management amounted to $48.4 million ( 2013 : $54.2 million ; 2012 : $65.9 million ).
In the year ended December 31, 2014 , the Company had nine container vessels and fourteen drybulk carriers operating on time-charters, for which part of the operating management was sub-contracted to Golden Ocean. In the year ended December 31, 2014 , management fees payable to Golden Ocean amounted to approximately $0.8 million ( 2013 : $0.7 million ; 2012 : $0.5 million ). Management fees are classified as vessel operating expenses in the consolidated statements of operations.
The Company paid a commission of 1% to Frontline Management in respect of all payments received in respect of the five -year sales-type leases on the Suezmax tankers Glorycrown and Everbright . This arrangement ended in September 2013, when the leases were terminated, following which we agreed to pay Frontline a management fee of 1.25% of chartering revenues. In 2014 , $0.3 million was paid to Frontline Management pursuant to the new arrangement. Under the old arrangement $0.1 million was paid in 2013 and $0.1 million was paid in 2012 .

F-36


The Company also paid $0.5 million in 2014 ( 2013 : $0.4 million , 2012 : $0.5 million ) to Frontline Management for the provision of management and administrative services.
The Company pays fees to Frontline Management for the management supervision of some of its newbuildings, which in 2014 amounted to $2.9 million ( 2013 : $2.4 million , 2012 : $2.1 million ).

The Company paid $0.4 million in 2014 ( 2013 : $0.3 million ; 2012 : $0.4 million ) to Frontline Management AS for the provision of office facilities in Oslo.
As at December 31, 2014 , the Company owes Frontline Management and Frontline Management AS a combined total of $0.8 million ( 2013 : $1.0 million ) for various items, including newbuilding supervision fees, technical supervision fees and office costs.
The Company paid $0.1 million in 2014 ( 2013 : $0.2 million ; 2012 : $0.2 million ) to Golar Management UK Limited for the provision of office facilities in London. Golar Management UK Limited ceased to be a related party in October 2014.

Related party loans – associated companies
Ship Finance has entered into agreements with SFL West Polaris, SFL Deepwater, SFL Hercules and SFL Linus granting them loans of $145.0 million , $145.0 million , $145.0 million and $125.0 million , respectively. The loans to SFL West Polaris, SFL Deepwater and SFL Hercules are fixed interest rate loans, and the loan to SFL Linus was interest free until the newbuilding jack-up drilling rig was delivered to that company, since when it has been a fixed interest rate loan. These loans are repayable in full on July 11, 2023, October 1, 2023, October 1, 2023 and June 30, 2029, respectively, or earlier if the companies sell their drilling units. Ship Finance is entitled to take excess cash from these companies, and such amounts are recorded within their current accounts with Ship Finance. The loan agreements specify that the balance on the current accounts will have no interest applied and will be settled by offset against the eventual repayments of the fixed interest loans. In the year ended December 31, 2014 , the Company received interest income on these loans of $6.5 million from SFL West Polaris ( 2013 : $6.5 million ; 2012 : $6.5 million ), $6.5 million from SFL Deepwater ( 2013 : $9.6 million ; 2012 : $13.1 million ), $6.5 million from SFL Hercules (2013: $3.5 million ; 2012 $ nil ) and $4.9 million from SFL Linus (2013: $ nil , 2012: $ nil ) totaling $24.4 million . SFL West Polaris ceased to be an associated company when it was sold on December 30, 2014.

Related party purchases and sales of vessels – 2014
The ultra deepwater drilling unit West Polaris is owned by SFL West Polaris, which was a wholly-owned subsidiary of Ship Finance accounted for using the equity method (see Note 16: Investment in Associated Companies). In December 2014, Seadrill advised the Company of its intention to exercise a purchase option, and the transaction was effected on December 30, 2014 as the sale of SFL West Polaris. The Company recorded a gain of $6.1 million on the sale, which was recorded as "Gain on sale of investment in associated company".

Related party purchases and sales of vessels – 2013
In July 2013, the Company announced the acquisition of the newbuilding harsh-environment jack-up drilling rig West Linus from a subsidiary of NADL, for a total acquisition cost of $600 million . The rig, which was delivered in February 2014, was leased back to a subsidiary of NADL for a period in excess of 15 years , and the subsidiary was granted four purchase options at dates during and at the end of the charter period. Additionally, Ship Finance has an option to sell the rig back to the subsidiary at the end of the charter period. The rig is owned by SFL Linus, a wholly-owned subsidiary of Ship Finance accounted for using the equity method (see Note 16: Investment in Associated Companies).



F-37


24.
FINANCIAL INSTRUMENTS
In certain situations, the Company may enter into financial instruments to reduce the risk associated with fluctuations in interest rates and exchange rates. The Company has a portfolio of swaps which swap floating rate interest to fixed rate, and which also fix the Norwegian kroner to US dollar exchange rate applicable to the interest payable and principal repayment on the NOK bonds due 2017 and 2019. From a financial perspective these swaps hedge interest rate and exchange rate exposure. The counterparties to such contracts are DNB Bank, Nordea Bank Finland Plc, ABN AMRO Bank N.V., BNP Paribas, NIBC Bank N.V., Scotiabank Europe Plc, Skandinaviska Enskilda Banken AB (publ), ING Bank N.V., Merrill Lynch, Credit Agricole Corporate and Investment Bank, Danske Bank A/S and Swedbank AB (publ). Credit risk exists to the extent that the counterparties are unable to perform under the contracts, but this risk is considered remote as the counterparties are all banks which have provided the Company with loans.
The following tables present the fair values of the Company's derivative instruments that were designated as cash flow hedges and qualified as part of a hedging relationship, and those that were not designated:
(in thousands of $)
2014

2013

Designated derivative instruments -short-term liabilities:
Interest rate swaps
292

2,279

Cross currency interest rate swaps
—

3,358

Non-designated derivative instruments -short-term liabilities:
Interest rate swaps
225

—

Cross currency interest rate swaps
—

68

Total derivative instruments - short-term liabilities
517

5,705

Designated derivative instruments -long-term liabilities:
Interest rate swaps
40,058

44,006

Cross currency interest rate swaps
63,083

8,915

Non-designated derivative instruments -long-term liabilities:


Interest rate swaps
1,565

3,183

Cross currency interest rate swaps
1,973

386

Total derivative instruments - long-term liabilities
106,679

56,490

(in thousands of $)
2014

2013

Designated derivative instruments -long-term assets:
Interest rate swaps
710

6,565

Cross currency interest rate swaps
—

—

Non-designated derivative instruments -long-term assets:
Interest rate swaps
2,584

10,068

Cross currency interest rate swaps
—

—

Total derivative instruments - long-term assets
3,294

16,633


F-38


Interest rate risk management
The Company manages its debt portfolio with interest rate swap agreements denominated in U.S. dollars and Norwegian kroner to achieve an overall desired position of fixed and floating interest rates. At December 31, 2014 , the Company and its consolidated subsidiaries had entered into interest rate swap transactions, involving the payment of fixed rates in exchange for LIBOR or NIBOR, as summarized below. The summary includes all swap transactions, most of which are hedges against specific loans.
Notional Principal (in thousands of $)
Inception date
Maturity date
Fixed interest rate

$122,632 (reducing to $122,632)
March 2010
March 2015
1.96% - 2.22%

$34,364 (reducing to $24,794)
March 2008
August 2018
4.05% - 4.15%

$38,048 (reducing to $23,394)
April 2011
December 2018
2.13% - 2.80%

$56,648 (reducing to $34,044)
May 2011
January 2019
0.80% - 2.58%

$100,000 (remaining at $100,000)
August 2011
August 2021
2.50% - 2.93%

$171,435 (reducing to $153,804)
April 2012
May 2019
6.00
%
$170,200 (terminating at $79,733)
May 2012
August 2022
1.76% - 1.85%

$105,436 (equivalent to NOK600 million)
October 2012
October 2017
5.92% - 6.23%

*
$44,333 (reducing to $32,142)
February 2013
December 2017
0.81% - 0.82%

$100,000 (remaining at $100,000)
March 2013
April 2023
1.85% - 1.97%

$151,008 (equivalent to NOK900 million)
March 2014
March 2019
6.03
%
*
$108,375 (reducing to $70,125)
December 2016
December 2021
1.86% - 3.33%

$55,250 (reducing to $35,063)
January 2017
January 2022
1.73% - 3.09%


*
These swaps relate to the NOK 600 million and the NOK 900 million unsecured bonds, and the fixed interest rates paid are exchanged for NIBOR plus the margin on the bonds. For the remaining swaps the fixed interest rate paid is exchanged for LIBOR, excluding margin on the underlying loans.
The interest rate swap with a notional principal of $108.4 million has an inception date of December 2016 , and the interest rate swap with a notional principal of $55.3 million has an inception date of January, 2017 . The total notional principal amount subject to swap agreements as at December 31, 2014 , excluding those with inception dates in the future, was $1,094.1 million ( 2013 : $1,188.0 million ).
Foreign currency risk management
The Company has entered into currency swap transactions, involving the payment of U.S. dollars in exchange for Norwegian kroner, which are designated as hedges against the NOK 600 million senior unsecured bonds due 2017 and the NOK 900 million senior unsecured bonds due 2019.
Principal Receivable
Principal Payable
Inception date
Maturity date
NOK600 million
US$105.4 million
October 2012
October 2017
NOK900 million
US$151.0 million
March 2014
March 2019
Apart from the NOK 600 million and NOK 900 million senior unsecured bonds due 2017 and 2019, respectively, the majority of the Company's transactions, assets and liabilities are denominated in U.S. dollars, the functional currency of the Company. Other than the corresponding currency swap transactions summarized above, the Company has not entered into forward contracts for either transaction or translation risk. Accordingly, there is a risk that currency fluctuations could have an adverse effect on the Company's cash flows, financial condition and results of operations.

F-39


Fair Values
The carrying value and estimated fair value of the Company's financial assets and liabilities at December 31, 2014 , and 2013 , are as follows:
2014

2014

2013

2013

(in thousands of $)
Carrying value

Fair value

Carrying value

Fair  value

Non-derivatives:
Available for sale securities
73,656

73,656

76,925

76,925

Floating rate NOK bonds due 2014
—

—

71,854

72,032

Floating rate NOK bonds due 2017
76,487

75,210

92,483

93,752

Floating rate NOK bonds due 2019
119,277

108,542

—

—

3.75% unsecured convertible bonds due 2016
125,000

124,375

125,000

130,589

3.25% unsecured convertible bonds due 2018
350,000

335,563

350,000

359,307

Derivatives:
Interest rate/ currency swap contracts – long-term receivables
3,294

3,294

16,633

16,633

Interest rate/ currency swap contracts – short-term payables
517

517

5,705

5,705

Interest rate/ currency swap contracts – long-term payables
106,679

106,679

56,490

56,490


The above short-term payables relating to interest rate/ currency swap contracts at December 31, 2014 , include $0.2 million which relates to non-designated swap contracts ( 2013 : $0.1 million ), with the balance relating to designated hedges. The above long-term payables relating to interest rate/ currency swap contracts at December 31, 2014 , include $3.5 million which relates to non-designated swap contracts ( 2013 : $3.6 million ), with the balance relating to designated hedges. The above long-term receivables relating to interest rate/ currency swap contracts at December 31, 2014 , include $2.6 million which relates to non-designated swap contracts ( 2013 : $10.1 million ), with the balance relating to designated hedges.

In accordance with the accounting policy relating to interest rate and currency swaps (see Note 2 "Accounting Policies: Derivatives – Interest rate and currency swaps"), where the Company has designated the swap as a hedge, and to the extent that the hedge is effective, changes in the fair values of interest rate swaps are recognized in other comprehensive income. Changes in the fair value of other swaps and the ineffective portion of swaps designated as hedges are recognized in the consolidated statement of operations.

F-40


The above fair values of financial assets and liabilities as at December 31, 2014 , are measured as follows:
Fair value measurements using
Total fair value as at December 31, 2014
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
(in thousands of $)
(Level 1)
(Level 2)
(Level 3)
Assets:
Available for sale securities
73,656

49,913

23,743

Interest rate/ currency swap contracts - long-term receivables
3,294

3,294

Total assets
76,950

49,913

3,294

23,743

Liabilities:
Floating rate NOK bonds due 2017
75,210

75,210

Floating rate NOK bonds due 2019
108,542

108,542

3.75% unsecured convertible bonds due 2016
124,375

124,375

3.25% unsecured convertible bonds due 2018
335,563

335,563

Interest rate/ currency swap contracts – short-term payables
517

517

Interest rate/ currency swap contracts – long-term payables
106,679

106,679

Total liabilities
750,886

643,690

107,196

—



The above fair values of financial assets and liabilities as at December 31, 2013 , were measured as follows:
Fair value measurements using
Total fair value as at December 31, 2013
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Unobservable Inputs
(in thousands of $)
(Level 1)
(Level 2)
(Level 3)
Assets:
Available for sale securities
76,925

56,379

20,546

Interest rate/ currency swap contracts – long-term receivables
16,633

16,633

Total assets
93,558

56,379

16,633

20,546

Liabilities:
Floating rate NOK bonds due 2014
72,032

72,032

Floating rate NOK bonds due 2017
93,752

93,752

3.75% unsecured convertible bonds due 2016
130,589

130,589

3.25% unsecured convertible bonds due 2018
359,307

359,307

Interest rate/ currency swap contracts – short-term payables
5,705

5,705

Interest rate/ currency swap contracts – long-term payables
56,490

56,490

Total liabilities
717,875

655,680

62,195

—



F-41


ASC Topic 820 "Fair Value Measurement and Disclosures" ("ASC 820") emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within levels one and two of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within level three of the hierarchy).
Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in level one that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability, other than quoted prices, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the assets or liabilities, which typically are based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Available for sale securities consist of (i) listed and unlisted corporate bonds and (ii) unlisted second lien interest-bearing loan notes. The fair value of the former consists of their aggregate market value as at the balance sheet date. The fair value of the latter is a Level 3 input and is determined from analysis of projected cash flows, based on factors including the terms, provisions and other characteristics of the notes, credit ratings and default risk of the issuing entity, the fundamental financial and other characteristics of that entity, and the current economic environment and trading activity in the debt market. The following table shows the changes in the fair values of the asset with Level 3 valuation during the year ended December 31, 2014 :
(in thousands of $)
Unlisted Available for Sale Securities

Fair values - Level 3 inputs:
Balance as at December 31, 2013
20,546

Interest income, receivable in form of unlisted second lien loan notes - see (a) below
3,197

Balance as at December 31, 2014
23,743


(a) The interest income of $3.2 million is recognized in the Consolidated Statement of Operations under "Interest income - other".
There were no changes to any of the above valuations during the year ended December 31, 2014 , no related realized or unrealized gains or losses recognized in "Other Comprehensive Income" and no transfers of items between Level 3 and other valuation levels.
The estimated fair values for the floating rate NOK bonds due 2014, 2017 and 2019, and the 3.75% and 3.25% unsecured convertible bonds are based on the quoted market prices as at the balance sheet date.
The fair value of interest rate and currency swap contracts is calculated using a well-established independent valuation technique applied to contracted cash flows and LIBOR/NIBOR interest rates as at the balance sheet date.
Concentrations of risk
There is a concentration of credit risk with respect to cash and cash equivalents to the extent that most of the amounts are carried with Skandinaviska Enskilda Banken, ABN AMRO, Nordea, DNB and Credit Agricole Corporate and Investment Bank. However, the Company believes this risk is remote.
Since the Company was spun-off from Frontline in 2004, Frontline has accounted for a significant proportion of our operating revenues. In the year ended December 31, 2014 , Frontline accounted for 37% of our operating revenues ( 2013 : 38% , 2012 : 54% ). There is thus a concentration of revenue risk with Frontline.


F-42


25.
COMMITMENTS AND CONTINGENT LIABILITIES
Assets Pledged
2014
Book value of assets pledged under ship mortgages (see Note 19)
$2,062 million
Other Contractual Commitments
The Company has arranged insurance for the legal liability risks for its shipping activities with Gard P.& I. (Bermuda) Ltd, Assuranceforeningen Skuld (Gjensidig), The Steamship Mutual Underwriting Association Limited, The Korea Shipowner’s Mutual Protection & Indemnity Association, The West of England Ship Owners Mutual Insurance Association (Luxembourg), North of England P&I Association Limited, The Standard Club Europe Ltd and The United Kingdom Mutual Steam Ship Assurance Association (Europe) Limited, all of which are mutual protection and indemnity associations. The Company is subject to calls payable to the associations based on the Company’s claims record in addition to the claims records of all other members of the associations. A contingent liability exists to the extent that the claims records of the members of the associations in the aggregate show significant deterioration, which may result in additional calls on the members.

SFL Deepwater, SFL Hercules and SFL Linus are wholly-owned subsidiaries of the Company, which are accounted for using the equity method. Accordingly, their assets and liabilities are not consolidated in the Company's Consolidated Balance Sheets, but are presented on a net basis under "Investment in associated companies" - see Note 16. As at December 31, 2014, their combined borrowings amounted to $1,038.3 million and the Company guaranteed $260.0 million of this debt.
Following the sale of SFL West Polaris to Seadrill (see Note 16: Investment in Associated Companies) the Company has agreed to continue providing a guarantee on the entity's term loan facility until January 2018, or such earlier date as the facility is repaid in full. At December 31, 2014, the maximum liability under the guarantee mounted to $94.0 million . In January 2015, the amount of the guarantee reduced to $88.0 million . The guarantee is fully indemnified by Seadrill.
At December 31, 2014 , the Company had contractual commitments under newbuilding contracts totaling $85.0 million ( 2013 : $794.8 million ). The commitment as at December 31, 2013, included $405.0 million in respect of the harsh environment jack-up drilling rig West Linus , which was delivered in February 2014 to SFL Linus, a wholly-owned subsidiary accounted for using the equity method. There are no other contractual commitments at December 31, 2014 .

In November 2014, the Company together with other holders of Second Lien Senior Secured Notes in Horizon Lines, LLC signed an agreement to provide a two year $150.0 million senior secured bridging loan facility to The Pasha Group (“Pasha”). The bridging facility is provided in conjunction with the proposed acquisition of Horizon Lines, Inc. by Matson, Inc., which is dependent on Horizon Lines, Inc. selling some of its assets and operations to Pasha, and also subject to approval from U.S. antitrust authorities. The bridging facility, on which interest at fixed rates and also a commitment fee are payable, is provided to enable Pasha to meet its purchase commitments. Upon completion of the above transactions, all of the Company’s holding of Second Lien Notes in Horizon Lines, LLC will be fully repaid, including accumulated interest. The Company’s share of the total $150.0 million commitment under the bridging facility is $61.3 million . At December 31, 2014, no drawdown had been made under the bridging facility.

The Company is routinely party both as plaintiff and defendant to laws suits in various jurisdictions under charter hire obligations arising from the operation of its vessels in the ordinary course of business. The Company believes that the resolution of such claims will not have a material adverse effect on its results of operations or financial position. The Company has not recognized any contingent gains or losses arising from the pending results of any such law suits.



F-43


26.
CONSOLIDATED VARIABLE INTEREST ENTITIES
The Company's consolidated financial statements include 18 variable interest entities, all of which are wholly-owned subsidiaries. These subsidiaries own vessels with existing charters during which related and third parties have fixed price options to purchase the respective vessels, at dates varying from September 2017 to January 2020. It has been determined that the Company is the primary beneficiary of these entities, as none of the purchase options are deemed to be at bargain prices and none of the charters include sales options.
At December 31, 2014 , the vessels of two of these entities are accounted for as direct financing leases with a combined carrying value of $65.0 million , unearned lease income of $16.0 million and estimated residual values of $21.7 million . The outstanding loan balances in these two entities total $28.6 million , of which the short-term portion is $4.8 million .
The other 16 fully consolidated variable interest entities own vessels which are accounted for as operating lease assets, with a total net book value at December 31, 2014 , of $373.1 million . The outstanding loan balances in these entities total $197.5 million , of which the short-term portion is $18.8 million .

27.
SUBSEQUENT EVENTS

In January 2015, the Company took delivery of two newbuilding 8,700 TEU container vessels, San Fernando and San Francisca , which immediately commenced seven year time-charters to Hamburg Süd. The vessel-owning subsidiaries drew down in full against the $128 million facility secured against the two vessels.

In January 2015, the Company purchased bonds with principal amounts totaling NOK 7.0 million of its NOK 600 million senior unsecured bonds due 2017, which are being held as treasury bonds.

In February 2015, the Company purchased bonds with principal amounts totaling NOK 36.0 million of its NOK 900 million senior unsecured bonds due 2019, which are being held as treasury bonds.

In January 2015, the indirect limited performance guarantee provided by Ship Finance International Limited in respect of the $210 million secured term loan facility relating to five container vessels became exhausted (see Note 19: Long-term Debt). In February 2015, the Company signed an agreement with the lenders under the loan facility whereby ownership of the vessels together with associated working capital was transferred to unrelated third parties, and Ship Finance International Limited and its subsidiaries have no future interest in the vessels or obligations under the loan facility. An impairment charge of $11.8 million was recorded against the five vessels in the fourth quarter of 2014.

On February 26, 2015, the Board of Ship Finance declared a dividend of $0.42 per share which was paid in cash on March 27, 2015.

In March 2015, two officers and two employees of the Company exercised options to acquire a total of 39,000 shares at a price of $10.71 per share, and 39,000 new shares were issued to satisfy the exercised options.




F-44
TABLE OF CONTENTS