Petrofac Regulatory News (PFC)

10 Mar 2008 07:01

Petrofac Limited10 March 2008 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)At 31 December 2007 7 EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing the net profit forthe year attributable to ordinary shareholders by the weighted average number ofordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profitattributable to ordinary shareholders, after adjusting for any dilutive effect,by the weighted average number of ordinary shares outstanding during the year,adjusted for the effects of ordinary shares granted under the employee shareaward schemes which are held in trust. The following reflects the income and share data used in calculating basic anddiluted earnings per share: 2007 2006 US$'000 US$'000 Net profit attributable to ordinary shareholders for basic and diluted earnings per share 188,716 120,332 ===================== 2007 2006 Number Number '000 '000 Weighted average number of ordinary shares for basic earnings per share 345,421 344,003Weighted average number of ordinary shares granted undershare-based payment schemes held as treasury shares 3,175 1,117 ---------------------- Adjusted weighted average number of ordinary shares for diluted earnings per share 348,596 345,120 ====================== 8 DIVIDENDS PAID AND PROPOSED 2007 2006 US$'000 US$'000Declared and paid during the yearEquity dividends on ordinary shares:Final dividend for 2005: 1.87 cents per share - 6,425Interim dividend 2006: 2.40 cents per share - 8,249Final dividend for 2006: 6.43 cents per share 22,018 -Interim dividend 2007: 4.90 cents per share 16,756 - ------------------------ 38,774 14,674 ======================== 2007 2006 US$'000 US$'000Proposed for approval at AGM(not recognised as a liability as at 31 December)Equity dividends on ordinary sharesFinal dividend for 2007: 11.50 cents per share (2006: 6.43 cents per share) 39,725 22,228 ======================= 9 PROPERTY, PLANT AND EQUIPMENT Land, buildings Office Oil & and furniture Capital gas Oil & gas leasehold Plant and and work in assets facilities improvements equipment Vehicles equipment progress Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 CostAt 1 January 2006 11,232 124,591 19,283 21,657 12,994 19,486 - 209,243Additions 17,548 149 7,258 10,130 1,127 14,160 9,075 59,447Acquisition of subsidiaries - - - 43 - - - 43Disposals - - (6,652) (11,618) (7,522) (868) - (26,660)Exchange difference - - 1,573 774 85 1,667 - 4,099 -------------------------------------------------------------------------------- At 1 January 2007 28,780 124,740 21,462 20,986 6,684 34,445 9,075 246,172Additions 65,078 631 1,170 6,604 1,092 20,593 21,989 117,157Acquisition of subsidiaries - - - - - 47 - 47Transfer fromintangible oil & gas assets(note 12) 41,657 - - - - - - 41,657Disposals - - (1,642) (4,514) (3,378) (2,187) - (11,721)Exchange difference - - 257 (520) 45 522 - 304 -------------------------------------------------------------------------------- At 31 December 2007 135,515 125,371 21,247 22,556 4,443 53,420 31,064 393,616 -------------------------------------------------------------------------------- DepreciationAt 1 January 2006 - (46,880) (7,472) (16,505) (7,094) (10,861) - (88,812)Charge for the year (802) (13,289) (2,695) (1,659) (2,781) (6,896) - (28,122)Disposals - - 6,167 3,504 5,148 699 - 15,518Exchange difference - - (288) (502) (63) (727) - (1,580) --------------------------------------------------------------------------------- At 1 January 2007 (802) (60,169) (4,288) (15,162) (4,790) (17,785) - (102,996)Charge for the year (8,072) (13,491) (1,321) (1,277) (1,676) (16,464) - (42,301)Disposals - - 1,568 1,637 3,030 2,154 - 8,389Exchange difference - - (19) (247) (31) (174) - (471) --------------------------------------------------------------------------------- At 31 December 2007 (8,874) (73,660) (4,060) (15,049) (3,467) (32,269) - (137,379) --------------------------------------------------------------------------------- Net carryingamount:At 31 December 2007 126,641 51,711 17,187 7,507 976 21,151 31,064 256,237 ================================================================================= At 31 December 2006 27,978 64,571 17,174 5,824 1,894 16,660 9,075 143,176 ================================================================================= No interest has been capitalised within oil & gas facilities during the year(2006: nil) and the accumulated capitalised interest, net of depreciation at 31December 2007, was US$1,929,000 (2006: US$2,427,000). Included in oil & gas assets is US$1,604,000 (2006: US$990,000) of capitaliseddecommissioning costs provided on the PM304 asset in Malaysia. On 22 February 2007, the group completed the acquisition of a 45% interest inthe Chergui gas concession in Tunisia, for a final cash consideration ofUS$31,393,000 including transaction costs, which, after including advancecapital expenditures paid on behalf of the vendor of US$2,846,000, brought thetotal consideration to US$34,239,000. Of the total initial consideration,US$31,393,000 has been recognised during the year as additions to property,plant and equipment and further post acquisition capital expenditure ofUS$22,693,000 was incurred during the year. Of the total charge for depreciation in the income statement, US$37,759,000(2006: US$24,810,000) is included in cost of sales and US$4,542,000 (2006:US$3,312,000) in selling, general and administration expenses. Capital work in progress comprises of expenditures incurred on the constructionof a new office building in Sharjah, United Arab Emirates. 10 BUSINESS COMBINATIONS Acquisitions in 2007 SPD Group Limited On 16 January 2007, the group acquired a 51% interest in the share capital ofSPD Group Limited (SPD), a specialist provider of well operations services. Theconsideration for the acquisition of the 51% interest inclusive of transactioncosts of US$172,000, was US$7,872,000. Consideration of US$7,700,000 (excludingtransaction costs) was settled by a cash payment of US$3,935,000, issuance ofloan notes payable of US$1,765,000 and the balance of US$2,000,000 by issuanceof 274,938 new ordinary shares of the Company at market value on 19 January 2007to the vendor over three years in equal instalments on the anniversary of thetransaction. On 27 December 2007, the outstanding loan notes of US$1,765,000were repaid to the vendors. The terms of the sale and purchase agreement for the remaining 49% interest inthe share capital of SPD which convey call option rights on the acquirer andminority share holder put option rights over these shares and the respectiverights to dividends and share of profits of the two parties are such that thistransaction has been accounted for as a 100% acquisition of the business by thegroup. The discounted deferred consideration for the remaining 49% of the sharecapital of SPD was originally estimated at US$12,025,000 based on the discountedvalue of an agreed multiple of the future earnings of SPD and this has beenreassessed and maintained as an appropriate year end fair value and a charge ofUS$1,455,000 for the unwinding of interest has been reflected in the incomestatement as an interest expense (see note 5). The total consideration for the100% interest therefore, including transaction costs, amounted to US$19,897,000. The 100% fair values of the identifiable assets and liabilities of SPD oncompletion of the acquisition are analysed below: Recognised on Carrying acquisition value US$'000 US$'000 Property, plant and equipment 47 47Intangible assets 2,369 -Trade and other receivables 5,498 5,498Cash and short-term deposits 970 970 ------------------------Total assets 8,884 6,515 ------------------------ Less:Trade and other payables (3,210) (3,210)Income tax payable (10) (10) -------------------------Total liabilities (3,220) (3,220) ------------------------- Fair value of net assets acquired 5,664 3,295 ======Goodwill arising on acquisition 14,233 ----------Consideration 19,897 ========== Cash outflow on acquisition:Cash acquired with subsidiary 970Cash paid on acquisition (3,935)Legal and professional expenses paid on acquisition (172)Loan notes repaid (1,765) --------Net cash outflow on the acquisition of subsidiary (4,902) ======== Intangible assets recognised on acquisition comprise customer contracts whichare being amortised over their remaining economic useful lives on astraight-line basis. The residual goodwill above comprises the fair value of expected futuresynergies and business opportunities arising from the integration of thebusiness in to the group. From the date of acquisition, SPD has contributed a profit of US$391,000 to thenet profit of the group. Acquisitions in 2006 PPS Process Control and Instrumentation Services Limited On 28 April 2006, the group acquired a 100% interest in the share capital of PPSProcess Control and Instrumentation Services Limited (subsequently renamed, andhereafter referred to as, Petrofac (Cyprus) Limited), a company incorporated inCyprus which is also the holding company of the subsidiaries listed below. ThePetrofac (Cyprus) Limited subsidiaries provide operations and maintenancetraining on Sakhalin Island, Russia, and process control and instrumentationservices in Singapore, Malaysia and Indonesia. The total consideration for theacquisition inclusive of transaction costs of US$211,000 and earn-out provisionof US$189,000 was US$2,000,000 and the carrying value of the net assets acquiredwas US$1,332,000. The consideration of US$1,600,000 (excluding transaction costsand earn-out provision) was settled by a cash payment of US$527,000 and theextinguishment of receivables due from the vendor of US$1,073,000. During 2007 adeferred consideration payment of US$64,000 was made to the vendors. The residual goodwill of US$668,000 comprises the fair value of expectedsynergies in the group's Training business arising from the acquisition. Petrofac (Malaysia-PM304) Limited During 2006, contingent consideration of US$4,450,000 was paid in respect of theacquisition of 100% of the issued and outstanding shares of Petrofac(Malaysia-PM304) Limited (formally Amerada Hess (Malaysia-PM304) Limited), whichthe group acquired on 16 June 2004. Petrofac (Malaysia-PM304) Limited held a40.5% interest in a Production Sharing Contract (PSC) in Block PM304 and underpre-emption rights contained within the PSC, Petrofac (Malaysia-PM304) Limitedsold a 10.5% interest in the PSC to one of the partners in the PSC on the samecommercial terms and conditions of the acquisition and received US$1,154,000 ascontingent consideration in 2006. The net cash outflow of these relatedtransactions amounting to US$3,296,000 is shown in the consolidated cash flowstatement within the acquisition of subsidiaries line. 11 GOODWILL A summary of the movements in goodwill is presented below: 2007 2006 US$'000 US$'000 At 1 January 56,732 49,183Acquisitions during the year (note 10) 14,233 668Exchange difference 778 6,881 ----------------------At 31 December 71,743 56,732 ====================== Goodwill acquired through business combinations has been allocated to threegroups of cash-generating units, which are reportable segments, for impairmenttesting as follows: • Facilities Management (comprising Petrofac Facilities Management, Plant Asset Management and SPD) • Training (comprising Petrofac Training and PPS Process Control & Instrumentation) • Energy Developments (comprising Petrofac Energy Developments International Limited) These represent the lowest level within the group at which the goodwill ismonitored for internal management purposes. Facilities Management and Training cash-generating units The recoverable amounts for the Facilities Management and Training units havebeen determined based on value in use calculations, using discounted pre-taxcash flow projections. Management has adopted a ten year projection period toassess each unit's value in use as it considers the life of the goodwill forboth the Facilities Management and Training cash-generating units tosignificantly exceed the five year impairment test period referred to in IAS 36.The cash flow projections are based on financial budgets approved by seniormanagement covering a five year period, extrapolated, thereafter at a growthrate of 5% per annum. Management considers this is a conservative long-termgrowth rate relative to both the economic outlook for the units in theirrespective markets within the oil & gas industry and the growth ratesexperienced in the recent past by each unit. Energy Developments cash-generating unit The recoverable amount of the Energy Developments unit is also determined on avalue in use calculation using discounted pre-tax cash flow projections based onfinancial budgets and economic parameters for the unit approved by seniormanagement and covering a five year period, as referred to in IAS 36. Carrying amount of goodwill allocated to each group of cash-generating units 2007 2006 US$'000 US$'000 Facilities Management unit 44,769 30,091Training unit 24,757 24,424Energy Developments unit 2,217 2,217 --------------------- 71,743 56,732 ===================== Key assumptions used in value in use calculations The calculation of value in use for both the Facilities Management and Trainingunits is most sensitive to the following assumptions: Market share: the assumption relating to market share for the FacilitiesManagement unit is based on the unit re-securing those existing customercontracts in the UK which are due to expire during the projection period; forthe Training unit, the key assumptions relate to management's assessment ofmaintaining the unit's market share in the UK and developing further thebusiness in international markets. Growth rate: estimates are based on management's assessment of market sharehaving regard to macro-economic factors and the growth rates experienced in therecent past by each unit. A growth rate of 5% per annum has been applied for theremaining five years of the ten year projection period. Net profit margins: estimates are based on management's assumption of achievinga level of performance at least in line with the recent past performance of eachof the units. Discount rate: management has used a pre-tax discount rate of 9.8% (2006: 8.0%)per annum which is derived from the estimated weighted average cost of capitalof the group. This discount rate has been calculated using an estimated riskfree rate of return adjusted for the group's estimated equity market riskpremium and the group's cost of debt. The calculation of value in use for the Energy Developments unit is mostsensitive to the following assumptions: Financial returns: estimates are based on the unit achieving returns on existinginvestments (comprising both those that are currently cash flowing and thosewhich are in development and which may therefore be consuming cash) at least inline with current forecast income and cost budgets during the planning period. Discount rate: management has used an estimate of the pre-tax weighted averagecost of capital of the group plus a risk premium to reflect the particular riskcharacteristics of each individual investment. The discount rate used for 2007was 10% for each asset (2006: 10% to 15%). Oil prices: management has used a prudent oil price assumption of US$55 (2006:US$40) per barrel for the impairment testing of its individual oil & gasinvestments. Reserve volumes and production profiles: management has used its internallydeveloped economic models of reserves and production as a basis of calculatingvalue in use. Sensitivity to changes in assumptions With regard to the assessment of value in use of the cash generating units,management believes that no reasonably possible change in any of the above keyassumptions would cause the carrying value of the relevant unit to exceed itsrecoverable amount, after giving due consideration to the macro-economic outlookfor the oil & gas industry and the commercial arrangements with customersunderpinning the cash flow forecasts for each of the units. 12 INTANGIBLE ASSETS 2007 2006 US$'000 US$'000Intangible oil & gas assetsCost:At 1 January 16,788 2,982Additions 49,700 12,926Disposals (8,793) -Transferred to tangible oil & gas assets (note 9) (41,657) -Exchange difference (111) 880 -----------------------At 31 December 15,927 16,788 ----------------------- Accumulated impairment:At 1 January - -Impairment (8,686) - ------------------------At 31 December (8,686) - ------------------------ Net book value of intangible oil & gas assets at 31 December 7,241 16,788 ------------------------ Other intangible assetsCost:At 1 January 1,561 -Additions (note 10) 2,369 1,561 -----------------------At 31 December 3,930 1,561 ----------------------- Accumulated amortisation:At 1 January (390) -Amortisation (1,771) (390) -----------------------At 31 December (2,161) (390) ----------------------- Net book value of other intangible assets at 31 December 1,769 1,171 ----------------------- Total intangible assets 9,010 17,959 ======================= Intangible oil & gas assets On 29 May 2007, the group entered into a farm-in arrangement to acquire a 10%interest in Permit NT/P68 300km north- north-west of Darwin in Australian watersand an option to acquire an interest in any LNG or methanol project in TassieShoal that results from this investment. The terms of the farm-in require thegroup to fund two appraisal wells to a cap of US$13,200,000 and US$12,500,000respectively. This was subject to an option to terminate the agreement withinsixty hours of the decision by the parties to the farm-in arrangement to plugand abandon the primary well. As at 31 December 2007 the group had incurred wellappraisal costs of US$15,927,000 on the primary well and exercised its option toenter the second well appraisal programme on 24 January 2008. However due tocontinuing uncertainties surrounding the commercial outcome of this project animpairment provision of US$8,686,000 has been made against this asset at 31December 2007. On 27 August 2007, the group entered in to an exchange agreement whereby itswapped its 29% interest in the Crawford field with a carrying value ofUS$8,793,000 for a 3.12% interest in the 211/18a Block in West Don (equating toa unit interest of 2%) for nil consideration. Included in oil & gas asset additions above are US$32,673,000 of pre-developmentcapital expenditure incurred during the year on the group's Don assets. Otherintangible oil & gas additions relate to the acquisition of interests in fields. Transfers to tangible oil & gas assets relate to the group's Don interests whichare now considered to be a part of a commercial development (note 9). There were investing cash outflows relating to capitalised intangible oil & gasassets of US$48,604,000 (2006: US$6,187,000) in the current period arising frompre-development activities pertaining to the Don and NT/P68 interests. As at 31December 2007 there were cash and deposits of US$3,582,000 (2006: nil), tradeand other receivables of US$3,106,000 (2006: nil) and trade and other payablesof US$4,840,000 (2006: nil) arising from pre-development activities in thecurrent period. Other intangible assets Other intangible assets comprise the fair values of customer contracts arisingon acquisition (note 10). Customer contracts are being amortised over their remaining estimated economic useful life of threeyears on a straight-line basis and the related amortisation charge included inselling, general and administrative expenses (note 4e). 13 INTEREST IN JOINT VENTURES In the normal course of business, the group establishes jointly controlledentities and operations for the execution of certain of its operations andcontracts. A list of these joint ventures is disclosed in note 32. The group'sshare of assets, liabilities, revenues and expenses relating to jointlycontrolled entities and operations are as follows: 2007 2006 US$'000 US$'000Revenue 37,140 92,800Cost of sales (10,990) (71,103) -----------------------Gross profit 26,150 21,697Selling, general and administration expenses (1,246) (1,140)Finance income, net 42 45 -----------------------Profit before income tax 24,946 20,602Income tax (819) (616) -----------------------Net profit 24,127 19,986 ======================= Current assets 46,991 63,009Non-current assets 3,883 4,459 -----------------------Total assets 50,874 67,468 ----------------------- Current liabilities 12,667 40,993Non-current liabilities 323 299 -----------------------Total liabilities 12,990 41,292 -----------------------Net assets 37,884 26,176 ======================= 14 AVAILABLE-FOR-SALE FINANCIAL ASSETS 2007 2006 US$'000 US$'000Shares - listed 1,022 1,212Units in a mutual fund 564 514 ---------------------- 1,586 1,726 ====================== Available-for-sale financial assets consist of investments in the ordinaryshares of quoted companies and units in a mutual fund and therefore have nofixed maturity date or coupon rate. 15 DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER FINANCIAL ASSETS 2007 2006 US$'000 US$'000Non-currentFair value of derivative instruments (note 31) 1,775 1,925 ======================Other financial assets 23 22 ======================CurrentFair value of derivative instruments (note 31) 27,298 7,483 ======================Other financial assetsInterest receivable 1,351 1,479Restricted cash 1,351 883Short-term notes receivable from shareholders - 216Other - 72 ---------------------- 2,702 2,650 ====================== Restricted cash is comprised of deposits with financial institutions securingvarious guarantees and performance bonds associated with the group's tradingactivities. 16 INVENTORIES 2007 2006 US$'000 US$'000 Crude oil 1,173 763Processed hydrocarbons 18 227Stores and spares 732 697Raw materials 333 256 ---------------------- 2,256 1,943 ====================== Included in the income statement are costs of inventories expensed ofUS$23,528,000 (2006: US$7,535,000). 17 WORK IN PROGRESS AND BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS 2007 2006 US$'000 US$'000 Cost and estimated earnings 2,194,088 1,714,647Less: billings (1,923,907) (1,346,778) --------------------------Work in progress 270,181 367,869 ========================== Billings 1,114,500 359,079Less: cost and estimated earnings (906,395) (234,089) --------------------------Billings in excess of cost and estimated earnings 208,105 124,990 ========================== Total cost and estimated earnings 3,100,483 1,948,736 ========================== Total billings 3,038,407 1,705,857 ========================== 18 TRADE AND OTHER RECEIVABLES 2007 2006 US$'000 US$'000 Trade receivables 453,256 293,803Retentions receivable 3,450 4,591Advances 19,154 10,754Prepayments and deposits 19,450 12,323Other receivables 13,715 9,044 ---------------------- 509,025 330,515 ====================== Trade receivables are non-interest bearing and are generally on 30 to 60 days'terms. Trade receivables are reported net of provision for impairment. Themovements in the provision for impairment against trade receivables totallingUS$453,256,000 (2006: US$293,803,000) are as follows: 2007 2006 Specific General Specific General impairment impairment Total impairment impairment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 At 1 January 5,073 364 5,437 3,736 107 3,843Charge for the year 2,948 849 3,797 1,956 245 2,201Amounts written off (3,555) - (3,555) - - -Unused amounts reversed (382) - (382) (640) - (640)Exchange difference 2 3 5 21 12 33 -------------------------------------------------------------At 31 December 4,086 1,216 5,302 5,073 364 5,437 ============================================================= At 31 December, the analysis of trade receivables is as follows: Neither Number of days past due past due nor impaired < 30 30-60 60-90 90-120 120-360 > 360 days days days days days days Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Unimpaired 88,788 240,033 84,184 20,148 5,044 8,273 876 447,346Impaired - 162 745 1,865 1,772 4,653 2,015 11,212 ------------------------------------------------------------------ 88,788 240,195 84,929 22,013 6,816 12,926 2,891 458,558Less: impairment provision - (162) (745) (222) (947) (2,040) (1,186) (5,302) ------------------------------------------------------------------Net trade receivables 2007 88,788 240,033 84,184 21,791 5,869 10,886 1,705 453,256 ================================================================== Unimpaired 85,395 161,406 35,734 5,193 1,419 2,946 1,140 293,233Impaired - 604 3,194 - 406 874 929 6,007 ------------------------------------------------------------------ 85,395 162,010 38,928 5,193 1,825 3,820 2,069 299,240Less: impairment provision - (604) (3,194) - (67) (446) (1,126) (5,437) ------------------------------------------------------------------Net trade receivables 2006 85,395 161,406 35,734 5,193 1,758 3,374 943 293,803 ================================================================== The credit quality of trade receivables that are neither past due nor impairedis assessed by management with reference to externally prepared customer creditreports and the historic payment track records of the counterparties. Advances represent payments made to certain of the group's sub-contractors forprojects in progress, on which the related work had not been performed at thebalance sheet date. All trade and other receivables are expected to be settled in cash. Certain trade and other receivables will be settled in cash using currenciesother than the reporting currency of the group, and will be largely paid inSterling and Kuwaiti Dinars. 19 CASH AND SHORT-TERM DEPOSITS 2007 2006 US$'000 US$'000 Cash at bank and in hand 106,454 120,003Short-term deposits 475,098 337,845 -----------------------Total cash and bank balances 581,552 457,848 ======================= Cash at bank earns interest at floating rates based on daily bank deposit rates.Short-term deposits are made for varying periods of between one day and onemonth depending on the immediate cash requirements of the group, and earninterest at respective short-term deposit rates. The fair value of cash and bankbalances is US$581,552,000 (2006: US$457,848,000). For the purposes of the cash flow statement, cash and cash equivalents comprisethe following: 2007 2006 US$'000 US$'000 Cash at bank and in hand 106,454 120,003Short-term deposits 475,098 337,845Bank overdrafts (note 24) (15,666) (20,442) ----------------------- 565,886 437,406 ======================= 20 SHARE CAPITAL The share capital of the Company as at 31 December was as follows: 2007 2006 US$'000 US$'000Authorised 750,000,000 ordinary shares of US$0.025 each(2006: 750,000,000 ordinary shares of US$0.025 each) 18,750 18,750 ======================= Issued and fully paid 345,434,858 ordinary shares of US$0.025 each(2006: 345,159,920 ordinary shares of US$0.025 each) 8,636 8,629 ======================= The movement in the number of issued and fully paid ordinary shares is asfollows: NumberOrdinary shares: Ordinary shares of US$0.025 each at 1 January 2006 345,159,920Movement during the year - ----------- Ordinary shares of US$0.025 each at 1 January 2007 345,159,920Issued during the year on acquisition of a subsidiary (note 10) 274,938 ----------- Ordinary shares of US$0.025 each at 31 December 2007 345,434,858 =========== 21 TREASURY SHARES For the purpose of making awards under its employee share schemes, the Companyacquires its own shares which are held by the Petrofac Employee Benefit Trust.In addition at 31 December 2007, Petrofac ESOP held 40,000 ordinary shares(2006: 40,000) of US$0.025 each in the Company with a carrying value ofUS$17,000 (2006: US$17,000). All these shares have been classified in thebalance sheet as treasury shares within equity. The movements in total treasury shares are shown below: 2007 2006 Number US$'000 Number US$'000 At 1 January 1,500,135 8,144 40,000 17Acquired during the year 2,551,889 21,698 1,460,135 8,127 ------------------------------------------At 31 December 4,052,024 29,842 1,500,135 8,144 ========================================== 22 SHARE-BASED PAYMENT PLANS Performance Share Plan (PSP) Under the Performance Share Plan of the Company, share awards are granted toexecutive Directors and a restricted number of other senior executives of thegroup. The shares cliff vest at the end of three years subject to continuedemployment and the achievement of certain pre-defined non-market and marketbased performance conditions. The non-market based condition governing thevesting of 50% of the total award, is subject to achieving between 15% and 25%earning per share (EPS) growth targets over a three year period. The fair valuesof the equity-settled award relating to the EPS part of the scheme are estimatedbased on the quoted closing market price per Company share at the date of grantwith an assumed vesting rate per annum built into the calculation (subsequentlytrued up at year end based on the actual leaver rate during the period fromaward date to year end) over the three year vesting period of the plan. The fairvalue and assumed vesting rates of the EPS part of the scheme are shown below: Fair Trued up value vesting per rate share 2007 award 415p 98.6%2006 award 353p 97.7% The remaining 50% market performance based part of these awards is dependent onthe total shareholder return (TSR) of the group compared to an index composed ofselected relevant companies. The fair value of the shares vesting under thisportion of the award is determined by an independent valuer using a Monte Carlosimulation model taking into account the terms and conditions of the plan rulesand using the following assumptions at the date of grant: 2007 2006 award awardExpected share price volatility 29.0% 28.0% (based on median of comparator group's three yearvolatilities)Share price correlation with comparator group 17.0% 10.0%Risk-free interest rate 5.2% 4.6%Expected life of share award 3 years 3 yearsFair value of TSR portion 245p 234p The number of ordinary shares awarded in the year in relation to the PSP was449,537 (2006: 431,194). 864,181 (2006: 431,194) of the 2006 and 2007 awardswere still outstanding but not exercisable at 31 December 2007. The chargerecognised in the current year amounted to US$1,497,000 (2006: US$536,000). Deferred Bonus Share Plan (DBSP) Executive Directors and selected employees are eligible to participate in thisscheme although the Remuneration Committee decided during 2007 that executiveDirectors should no longer participate. Participants may be invited to elect orin some cases, be required, to receive a proportion of any bonus in ordinaryshares of the Company ("Invested Awards"). Following such award, the Companywill generally grant the participant an additional award over a number of sharesbearing a specified ratio to the number of his or her invested shares ("MatchingShares"). The 2006 awards vest on the third anniversary of the grant dateprovided that the participant did not leave the group's employment, subject to alimited number of exceptions. However, a change in the rules of the DBSP schemewas approved by shareholders at the Annual General Meeting of the Company on 11May 2007 such that for the March 2007 share awards and for any awards madethereafter, the invested and matching shares would, unless the RemunerationCommittee of the Board of Directors determined otherwise, vest 33.33% on thefirst anniversary of the date of grant, a further 33.33% after year two and thefinal 33.34% of the award after the end of year three. At the year end the values of the bonuses settled by shares cannot be determineduntil all employees have confirmed the voluntary portion of their bonus theywish to be settled by shares rather than cash and until the RemunerationCommittee has approved the mandatory portion of the employee bonuses to besettled in shares. Once the voluntary and mandatory portions of the bonus to besettled in shares are determined, the final bonus liability to be settled inshares is transferred to the reserve for share-based payments. The costsrelating to the matching shares are recognised over the relevant vesting periodand the fair values of the equity-settled matching shares granted to employeesare based on the quoted closing market price at the date of grant adjusted forthe trued up percentage vesting rate of the plan. For details of the fair valuesand assumed vesting rates of the DBSP scheme see table below: Weighted Trued up average vesting fair rate value per share 2007 awards 415p 94.7%2006 awards 353p 92.4% During the year 791,083 (2006: 597,167) Invested Awards and 791,083 (2006:548,214) Matching Shares were granted to the participants in the scheme and1,058,413 of the original 2006 awards and 1,500,298 of the 2007 awards (2006awards: 1,104,503) were outstanding but not exercisable at 31 December 2007. Thecharge recognised in the 2007 income statement in relation to matching shareawards amounted to US$2,393,000 in respect of 2007 awards and US$1,018,000 inrespect of the second year of the 2006 awards (2006 year one awards charge:US$666,000). Share Incentive Plan (SIP) All UK employees, including UK resident Directors, are eligible to participatein the scheme. Employees may invest up to GBP1,500 per tax year of gross salary(or, if less, 10% of salary) to purchase ordinary shares in the Company. Thereis no holding period for these shares. Restricted Share Plan (RSP) Under the Restricted Share Plan scheme, employees are granted shares in theCompany over a discretionary vesting period which may or may not be, at thedirection of the Remuneration Committee of the Board of Directors, subject tothe satisfaction of performance conditions. At present there are no performanceconditions applying to this scheme nor is there currently any intention tointroduce them in the future. The fair values of the awards granted under theplan at various grant dates during the year are based on the quoted market priceat the date of grant adjusted for an assumed vesting rate over the relevantvesting period. For details of the fair values and assumed vesting rate of theRSP scheme, see table below: Weighted Trued up average vesting fair rate value per share 2007 awards 456p 100.0%2006 awards 278p 96.3% The Company awarded 239,567 (2006: 161,101) shares to participants in the schemeduring the year and recognised a charge of US$504,000 in the current year incomestatement (2006: US$79,000). At 31 December 2007, there were 394,216 (2006:161,101) share awards outstanding but not exercisable. The group has recognised a total charge of US$5,412,000 (2006: US$1,281,000) inthe income statement during the year relating to the above employee share-basedschemes (see note 4f) which has been transferred to the reserve for share-basedpayments along with US$6,105,000 of the bonus liability accrued for the yearended 31 December 2006 which has been voluntarily elected or mandatorily obligedto be settled in shares granted during the year (2006: US$3,363,000). 23 OTHER RESERVES Net unrealised gains/(losses) Net on unrealised available-for- (losses) / Foreign Reserve for sale-financial gains on currency share-based assets derivatives translation payments Total US$'000 US$'000 US$'000 US$'000 US$'000 Balance at 1 January 2006 1,347 (11,213) (2,560) - (12,426) Foreign currency translation - - 7,449 - 7,449 Net gains on maturity of cashflow hedges recognised in income statement - (2,378) - - (2,378) Net changes in fair value of derivatives - 22,931 - - 22,931 Realised gains on the sale ofavailable-for-salefinancial assets recognised in income statement (1,671) - - - (1,671) Changes in fair value ofavailable-for-salefinancial assets 1,062 - - - 1,062 Share-based payments charge (note 22) - - - 1,281 1,281 Transfer during the year (note 22) - - - 3,363 3,363 --------------------------------------------------------- Balance at 1 January 2007 738 9,340 4,889 4,644 19,611 Foreign currency translation - - (72) - (72) Net gains on maturity of cashflow hedges recognised in income statement - (22,183) - (22,183) Net changes in fair value of derivatives - 41,734 - - 41,734Changes in fair value ofavailable-for-salefinancial assets (140) - - - (140) Share-based payments charge (note 22) - - - 5,412 5,412 Transfer during the year (note 22) - - - 6,105 6,105 --------------------------------------------------------- Balance at 31 December 2007 598 28,891 4,817 16,161 50,467 ========================================================= Nature and purpose of other reserves Net unrealised gains / (losses) on available-for-sale financial assets This reserve records fair value changes on available-for-sale financial assetsheld by the group net of deferred tax effects. Realised gains and losses on thesale of available-for-sale financial assets are recognised as other income orexpenses in the income statement. Net unrealised gains / (losses) on derivatives The portion of gains or losses on cash flow hedging instruments that aredetermined to be effective hedges are included within this reserve net ofrelated deferred tax effects. When the hedged transaction occurs or is no longerforecast to occur the gain or loss is transferred out of equity to the incomestatement. Realised net gains amounting to US$21,475,000 (2006: US$1,963,000)relating to foreign currency forward contracts have been recognised in cost ofsales and realised net gains of US$708,000 (2006: US$415,000) relating tointerest rate derivatives have been classified as a net interest expense. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differencesarising from the translation of the financial statements in foreignsubsidiaries. It is also used to record exchange differences arising on monetaryitems that form part of the group's net investment in subsidiaries. Reserve for share-based payments The reserve for share-based payments is used to record the value of equitysettled share-based payments awarded to employees and transfers out of thisreserve are made upon vesting of the original share awards. The transfer during the year reflects the transfer from accrued expenses withintrade and other payables of the bonus liability relating to the year ended 2006of US$6,105,000 (2005 bonus of US$3,363,000) which has been voluntarily electedor mandatorily obliged to be settled in shares during the year (see note 22 forfurther information on this share-based payment scheme). 24 INTEREST-BEARING LOANS AND BORROWINGS The group had the following interest-bearing loans and borrowings outstanding: 31 December 31 December Effective 2007 2006 Actual Actual interest Maturity 2007 2006 interest interest rate% rate% rate% US$'000 US$'000CurrentRevolving credit (i) US LIBOR + US LIBOR + US LIBOR + 2008 6,500 -facility 0.875% 0.875% 0.875% Short term loan (ii) KD Discount KD Discount KD Discount 2008 3,627 6,033 Rate + 1.50% Rate + 1.50% Rate + 1.50% Bank overdrafts (iii) UK LIBOR + UK LIBOR + UK LIBOR + 0.875%, US 0.875%, US 0.875%, US LIBOR + LIBOR LIBOR + 0.875%,KD +0.875%,KD 0.875%,KD Discount Rate Discount Discount Rate on demand 15,666 20,442 + 1.50% Rate + 1.50% + 1.50%Other loans:Current portion (iv) US/UK LIBOR + - 4.95% to 2,662 -of term loan 0.875%- 5.84% (2006: 5.39% to 6.26%) -------------- 28,455 26,475 ==============Non-currentRevolving credit (v) US/UK LIBOR + US/UK LIBOR 4.97% to 2013 8,953 8,864facility 0.875% + 0.875% 5.62% (2006: 5.73% to 6.04%)Revolving credit (i) US LIBOR + US LIBOR + (2006: 5.18%) 2008 - 6,500facility 0.875% 0.875% Term loan (iv) US/UK LIBOR + US/UK LIBOR 4.95% to 2008-2013 75,019 77,111 0.875% + 0.875% 5.84% (2006: 5.39% to 6.26%) --------------- 83,972 92,475 Less:Debt acquisitioncosts,net ofaccumulated (2,332) (1,770) ---------------amortisation 81,640 90,705 =============== Details of the group's interest-bearing loans and borrowings are as follows: (i) Revolving credit facilities This facility, provided by The Royal Bank of Scotland / Halifax Bank of Scotland(RBOS/HBOS), is committed until 30 September 2008 and subject to annual review. (ii) Short term loan The short term loan is denominated in Kuwaiti Dinars (KD) and relates to fundingprovided for a project in Kuwait. The loan was partially settled during 2007 andsubject to annual review thereafter. (iii) Bank overdrafts Bank overdrafts are drawn down in US dollars, Kuwaiti Dinars and Sterlingdenominations to meet the group's working capital requirements. These arerepayable on demand. (iv) Term loan The term loan with RBOS/HBOS at 31 December 2007 comprised drawings ofUS$35,310,000 (2006: US$35,310,000) denominated in US$ and US$42,371,000 (2006:US$41,801,000) denominated in Sterling. Both elements of the loan are repayableover a period of five years commencing 31 December 2008 to 30 September 2013. (v) Revolving credit facility The drawings against this facility, which is also provided by RBOS/HBOS, will beconverted to a term loan on 30 September 2010 to be repaid over a period ofthree years ending 30 September 2013. The drawing at 31 December 2007 comprisedUS$2,400,000 (2006: US$2,400,000) denominated in US$ and US$6,553,000 (2006:US$6,464,000) denominated in Sterling. The group's credit facilities and debt agreements contain covenants relating tocash flow cover, cost of borrowings cover, dividends and various other financialratios. With the exception of Petrofac International Ltd, which under itsexisting bank covenants, is restricted from making upstream cash payments inexcess of 70 per cent. of its net income in any one year, none of the Company'ssubsidiaries is subject to any material restrictions on their ability totransfer funds in the form of cash dividends, loans or advances to the Company. 25 PROVISIONS Other long- term employment benefits Provision for provision decommissioning Total US$'000 US$'000 US$'000 At 1 January 2007 11,366 1,132 12,498Additions during the year 6,605 637 7,242Unused amounts reversed (753) - (753)Unwinding of discount - 59 59 ----------------------------------------At 31 December 2007 17,218 1,828 19,046 ======================================== Other long- term employment benefits provision Labour laws in certain countries in which the group operates require employersto provide for other long- term employment benefits. These benefits are payableto employees at the end of their period of employment. The provision for theselong- term benefits is calculated based on the employees' last drawn salary atthe balance sheet date and length of service, subject to the completion of aminimum service period in accordance with the local labour laws of thejurisdictions in which the group operates. Provision for decommissioning The decommissioning provision primarily relates to the Company's obligation forthe removal of facilities and restoration of the site at the PM304 field inMalaysia. The liability is discounted at the rate of 3.5% and the unwinding ofthe discount is classified as a finance cost (note 5). The Company estimatesthat the cash outflow against this provision will arise in 2014. 26 OTHER FINANCIAL LIABILITIES 2007 2006 US$'000 US$'000Other financial liabilities - non-currentDeferred consideration 13,622 7,373Fair value of derivative instruments (note 31) 130 -Other 118 - ---------------------- 13,870 7,373 ======================Other financial liabilities - currentInterest payable 812 172Fair value of derivative instruments (note 31) 52 - ---------------------- 864 172 ====================== 27 TRADE AND OTHER PAYABLES 2007 2006 US$'000 US$'000 Trade payables 187,417 122,683Advances received from customers 61,744 118,117Accrued expenses 136,514 83,125Other taxes payable 16,885 15,696Other payables 5,457 7,085 ----------------------- 408,017 346,706 ======================= Trade payables are non-interest bearing and are normally settled on terms ofbetween 30 and 60 days. Advances from customers represent payments received for contracts on which therelated work had not been performed at the balance sheet date. Included in other payables are retentions held against subcontractors ofUS$4,292,000 (2006: US$1,532,000). Certain trade and other payables will be settled in currencies other than thereporting currency of the group, mainly in Sterling, Euros and Kuwaiti Dinars. 28 ACCRUED CONTRACT EXPENSES 2007 2006 US$'000 US$'000 Accrued contract expenses 416,322 432,003Reserve for contract losses 3,226 - ---------------------- 419,548 432,003 ====================== 29 COMMITMENTS AND CONTINGENCIES Commitments In the normal course of business the group will obtain surety bonds, letters ofcredit and guarantees, which are contractually required to secure performance,advance payment or in lieu of retentions being withheld. Some of thesefacilities are secured by issue of corporate guarantees by the Company in favourof the issuing banks. At 31 December 2007, the group had letters of credit of US$8,184,000 (2006:US$16,920,000) and outstanding letters of guarantee, including performance andbid bonds, of US$663,292,000 (2006: US$573,185,000) against which the group hadpledged or restricted cash balances of, in aggregate, US$1,351,000 (2006:US$883,000). At 31 December 2007, the group had outstanding forward exchange contractsamounting to US$326,442,000 (2006: US$221,188,000). These commitments consist offuture obligations to either acquire or sell designated amounts of foreigncurrency at agreed rates and value dates (see note 31). Leases The group has financial commitments in respect of non-cancellable operatingleases for office space and equipment. These non-cancellable leases haveremaining non-cancellable lease terms of between one and seventeen years and,for certain property leases, are subject to renegotiation at various intervalsas specified in the lease agreements. The future minimum rental commitmentsunder these non-cancellable leases are as follows: 2007 2006 US$'000 US$'000Within one year 70,870 16,679 After one year but not more than five years 76,493 24,748 More than five years 52,827 13,500 ----------------------- 200,190 54,927 ======================= Included in the above are commitments relating to the lease of an officebuilding extension in Aberdeen,United Kingdom of US$54,933,000 (2006: nil) andthe lease of a drilling rig for the Don Southwest project of US$43,200,000(2006: nil). Minimum lease payments recognised as an operating lease expense during the yearamounted to US$21,359,000 (2006: US$8,643,000). Capital commitments At 31 December 2007, the group had capital commitments of US$29,630,000 (2006:US$21,819,000). Included in the above are commitments for the construction of a new officebuilding in Sharjah, United Arab Emirates amounting to US$10,260,000 (2006:US$20,577,000) and commitments relating to the further appraisal and developmentof wells as part of the Cendor project in Malaysia amounting to US$11,389,000(2006: nil). 30 RELATED PARTY TRANSACTIONS The consolidated financial statements include the financial statements ofPetrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is theultimate parent entity of the group. The following table provides the total amount of transactions which have beenentered into with related parties: Sales to Purchases related from Amounts owed Amounts owed parties related by related to related parties parties parties US$'000 US$'000 US$'000 US$'000 Joint ventures 2007 180 507 3,147 625 2006 4,520 3,282 7,725 133 Other Directors' 2007 - 614 - 119interests 2006 - 49 - 49 All sales to and purchases from joint ventures are made at normal market pricesand the pricing policies and terms of these transactions are approved by thegroup's management. All related party balances at 31 December 2007 will be settled in cash. Purchases in respect of other Directors' interests of US$614,000 (2006:US$49,000) reflect the market rate based costs of chartering the services of anaeroplane used for the transport of senior management and Directors of the groupon company business, which is owned by an offshore trust of which the ChiefExecutive of the Company is a beneficiary. Compensation of key management personnel The following details remuneration of key management personnel of the groupcomprising of executive and non-executive Directors of the Company and othersenior personnel. Further information relating to the individual Directors isprovided in the Directors' Remuneration report on pages 51 to 64. 2007 2006 US$'000 US$'000 Short-term employee benefits 5,063 4,412Other long -term employment benefits 43 40Share-based payments 906 288Fees paid to non-executive directors 546 415 ---------------------- 6,558 5,155 ====================== 31 FINANCIAL INSTRUMENTS Risk management objectives and policies The group's principal financial assets and liabilities, other than derivatives,comprise trade and other receivables, cash and short -term deposits, interestbearing loans and borrowings, trade and other payables and deferredconsideration. The group's activities expose it to various financial risks particularlyassociated with interest rate risk on its variable rate loans and borrowings andforeign currency risk on both conducting business in currencies other thanreporting currency as well as translation of the assets and liabilities offoreign operations to the reporting currency. These risks are being addressed byusing a combination of various derivative instruments, principally interest rateswaps, caps and forward currency contracts in line with the group's hedgingpolicy. The group has a policy not to enter into speculative trading offinancial derivatives. The Board of Directors of the Company has established an Audit Committee andRisk Committee to help identify, evaluate and manage the significant financialrisks faced by the group and their activities are discussed in detail on pages Xto Y of the financial statements. The other main risks besides interest rate and foreign currency risk arisingfrom the group's financial instruments are credit risk, liquidity risk andcommodity price risk and the policies relating to these risks are discussed indetail below: Interest rate risk Interest rate risk arises from the possibility that changes in interest rateswill affect the value of the group's interest-bearing financial liabilities andassets. The group's exposure to market risk arising from changes in interest ratesrelates primarily to the group's long-term variable rate debt obligations andits cash and bank balances. The group's policy is to manage its interest costusing a mix of fixed and variable rate debt and specifically to keep between 60%and 80% of its term borrowings at fixed or capped rates of interest. At 31December 2007, after taking into account the effect of interest rate swaps andcollars, approximately 69.1% (2006: 64.8%) of the group's term borrowings are ata fixed or capped rate of interest. Interest rate sensitivity analysis The impact on the group's pre-tax profit and equity due to a reasonably possiblechange in interest rates is demonstrated in the table below. The analysisassumes that all other variables remain constant. Pre-tax profit Equity 100 basis 100 basis 100 basis 100 basis point point point point increase decrease increase decrease US$'000 US$'000 US$'000 US$'00031 December 2007 (1,058) 1,058 272 (670)31 December 2006 (1,114) 1,114 1,044 62 The following table reflects the maturity profile of these financial liabilitiesand assets: Year ended 31 December 2007 More Within 1-2 2-3 3-4 4-5 than 1 year years years years years 5 years Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Financial liabilitiesFloating ratesRevolving credit facilities (note 24) 6,500 - 448 2,015 3,134 3,356 15,453Short-term loan (note 24) 3,627 - - - - - 3,627Bank overdrafts (note 24) 15,666 - - - - - 15,666Term loan (note 24) 2,662 10,000 11,250 15,625 18,750 19,394 77,681Interest rate collars (note 31) - 130 - - - - 130 ------------------------------------------------------- 28,455 10,130 11,698 17,640 21,884 22,750 112,557 =======================================================Financial assetsFloating ratesCash and short-term deposits (note 19) 581,552 - - - - - 581,552Restricted cash balances (note 15) 1,351 - - - - - 1,351Interest rate swap (note 31) - 28 - - - - 28 -------------------------------------------------------- 582,903 28 - - - - 582,931 ======================================================== Year ended 31 December 2006 More Within 1-2 2-3 3-4 4-5 than 1 year years years years years 5 years Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Financial liabilitiesFloating ratesRevolving credit facilities (note 24) - 6,500 443 1,994 6,427 15,364Short-term loan (note 24) 6,033 - - - - - 6,033Bank overdrafts (note 24) 20,442 - - - - - 20,442Term loan (note 24) - 2,500 10,000 11,250 15,625 37,736 77,111 -------------------------------------------------------- 26,475 9,000 10,000 11,693 17,619 44,163 118,950 ========================================================Financial assetsFloating ratesCash and short-term deposits (note 19) 457,848 - - - - - 457,848Restricted cash balances (note 15) 883 - - - - - 883Interest rate swaps and cap (note 31) - 491 77 - - - 568 -------------------------------------------------------- 458,731 491 77 - - - 459,299 ======================================================== Financial liabilities in the above table are disclosed gross of debt acquisitioncosts of US$2,332,000 (2006: US$1,770,000). Interest on financial instruments classified as floating rate is repriced atintervals of less than one year. The other financial instruments of the groupthat are not included in the above tables are non-interest bearing and aretherefore not subject to interest rate risk. Derivative instruments designated as cash flow hedges At 31 December 2007, the group held the following derivative instruments,designated as cash flow hedges in relation to floating rate interest-bearingloans and borrowings: Fair value of asset /(liability) Nominal amount Date 2007 2006Instrument (US$ equivalent) Period to commenced US$'000 US$'000 maturity UK LIBOR interest US$9,531,000 1 year and 9 31 December 28 77rate swap months 2004UK interest rate - Matured 31 December - 4cap 2004US LIBOR interest - Matured 31 December - 487rate swap 2004UK LIBOR interest US$42,371,000 2 years 31 December (74) -rate collar 2007US LIBOR interest US$35,310,000 2 years 31 December (56) -rate collar 2007 During 2007 changes in fair value of US$-102,000 (2006: US$501,000) relating tothese derivative instruments were taken to equity and US$708,000 (2006:US$415,000) were recycled from equity into interest expense in the incomestatement. Foreign currency risk The group is exposed to foreign currency risk on sales, purchases, andtranslation of assets and liabilities that are in a currency other than thefunctional currency of its operating units. The group is also exposed to thetranslation of the functional currencies of its units to the US dollar reportingcurrency of the group. The following table summarises the percentage of foreigncurrency denominated revenues, costs, financial assets and financialliabilities, expressed in US dollar terms, of the group totals. Included in theforeign currency analysis below are currencies that are pegged to the US dollarand therefore the group is not exposed to foreign currency risk on theseamounts. 2007 2006 % of foreign % of foreign currency currency denominated denominated items itemsRevenues 48.6% 70.1%Costs 68.7% 68.2%Current financial assets 67.9% 74.8%Non-current financial assets 0.6% 2.8%Current financial liabilities 45.8% 48.0%Non-current financial liabilities 44.0% 49.8% The group uses forward currency contracts to manage the currency exposure ontransactions significant to its operations. It is the group's policy not toenter into forward contracts until a firm commitment is in place and tonegotiate the terms of the derivative instruments used for hedging to match theterms of the hedged item to maximise hedge effectiveness. Foreign currency sensitivity analysis The income statements of foreign operations are translated into the reportingcurrency using a weighted average rate of conversion. Foreign currency monetaryitems are translated using the closing rate at the date of the balance sheet.Revenues and costs in currencies other than the functional currency of anoperating unit are recorded at the prevailing rate at the date of thetransaction. The following significant exchange rates applied during the year inrelation to US dollars: 2007 2006 Average Closing Average Closing rate rate rate rate Sterling 2.01 1.99 1.85 1.96Kuwaiti Dinars 3.51 3.66 3.41 3.45Euros 1.38 1.46 1.26 1.32 The following table summarises the impact on the group's pre-tax profit andequity (due to change in the fair value of monetary assets, liabilities andderivative instruments) of a reasonably possible change in US dollar exchangerates with respect to different currencies: Pre-tax profit Equity +10% US -5% US +10% US -5% US dollar dollar dollar dollar rate rate rate rate increase decrease increase decrease US$'000 US$'000 US$'000 US$'000 31 December 2007 (27,285) 13,642 (35,065) 17,53231 December 2006 (25,312) 12,656 (22,691) 11,345 Derivative instruments designated as cash flow hedges At 31 December 2007, the group had foreign exchange forward contracts designatedas cash flow hedges with a fair value gain of US$28,657,000 (2006: US$8,840,000)as follows: Net unrealised Contract value Fair value gain/(loss) 2007 2006 2007 2006 2007 2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Euro currency purchases 321,264 203,908 349,964 212,694 28,700 8,786Sterling currency purchases 4,500 3,901 4,448 4,098 (52) 197Yen currency purchases 678 13,379 687 13,236 9 (143) ----------------- 28,657 8,840 ================= The above foreign exchange contracts mature and will affect income betweenJanuary 2008 and February 2009 (2006: between January 2007 and February 2008). During 2007, changes in fair value of US$41,500,000 (2006: US$22,430,000)relating to these derivative instruments were taken to equity and US$21,475,000(2006: US$1,963,000) were recycled from equity into cost of sales in the incomestatement. Commodity price risk - oil prices The group is exposed to the impact of changes in oil prices on its revenues andprofits generated from sales of crude oil. The group did not hedge this risk inthe current year as the exposure to movements in the price of oil primarilyrelating to the Cendor field in Malaysia were not considered significant.However in late 2007, the group introduced a new oil production hedging strategywhereby on a project by project basis it evaluates the size of the potential oilprice exposure and using the near term forward oil price curve aims to hedge upto 75% of its current year P90 production forecasts. On 23 November 2007, the group entered into a zero premium oil price collar tohedge its exposure to fluctuations in oil prices which mature on a monthly basisfrom 31 January 2008 to 31 December 2008. The collar hedges 240,000 barrels ofoil production with a floor price of US$85.00 per barrel and a capped price ofUS$102.30 per barrel. The fair value of the oil price collar at 31 December 2007was US$336,000 with a corresponding gain recognised in equity. The following table summarises the impact on the group's pre-tax profit andequity (due to a change in the fair value of oil derivative instruments and theoverlifting liability) of a reasonably possible change in the oil price: Pre-tax profit Equity +10 US$/ -10 US$/ +10 US$/ -10 US$/ bbl bbl bbl bbl increase decrease increase decrease US$'000 US$'000 US$'000 US$'000 31 December 2007 (446) 446 (1,739) 74131 December 2006 - - - - Credit risk The group trades only with recognised, creditworthy third parties. DivisionalRisk Review Committees (DRRC) have been set up by the Board of Directors toevaluate the creditworthiness of each individual third party at the time ofentering into new contracts. Limits have been placed on the approval authorityof the DRRC above which the approval of the Board of Directors of the Company isrequired. Receivable balances are monitored on an ongoing basis with the resultthat the group's exposure to bad debts is not considered a key risk. At 31December 2007, the group's five largest customers accounted for 58.0% ofoutstanding trade receivables and work in progress (2006: 66.3%). With respect to credit risk arising from the other financial assets of thegroup, which comprise cash and cash equivalents, available-for-sale financialassets and certain derivative instruments, the group's exposure to credit riskarises from default of the counterparty, with a maximum exposure equal to thecarrying amount of these instruments. Liquidity risk The group's objective is to maintain a balance between continuity of funding andflexibility through the use of overdrafts, revolving credit facilities, projectfinance and term loans to reduce its exposure to liquidity risk. The maturityprofiles of the group's financial liabilities at 31 December 2007 are asfollows: Year ended 31 December 2007 Contractual 6 6-12 1-2 2-5 More undiscounted Carrying months than or less months years years 5 years cash flows amount US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Financial liabilitiesInterest-bearing loans and borrowings 19,293 9,162 10,000 51,222 22,750 112,427 110,095Trade and other payables(excluding advances fromcustomers) 345,833 440 - - - 346,273 346,273Income tax payable 28,658 18,919 - - - 47,577 47,577Due to related parties 744 - - - - 744 744Deferred consideration 1,964 2,088 9,570 - - 13,622 13,622Derivative instruments 52 - 130 - - 182 182Interest payable 812 - - - - 812 812 -------------------------------------------------------------- 397,356 30,609 19,700 51,222 22,750 521,637 519,305 ============================================================== Year ended 31 December 2006 Contractual 6 6-12 1-2 2-5 More undiscounted Carrying months than or less months years years 5 years cash flows amount US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Financial liabilitiesInterest-bearing loans and borrowings 19,317 7,158 9,000 39,312 44,163 118,950 117,180Trade and other payables(excluding advances fromcustomers) 211,722 16,867 - - - 228,589 228,589Income tax payable 8,042 277 1,766 - - 10,085 10,085Due to related parties 182 - - - - 182 182Deferred consideration - 7,210 73 90 - 7,373 7,373Interest payable 172 - - - - 172 172 -------------------------------------------------------------- 239,435 31,512 10,839 39,402 44,163 365,351 363,581 ============================================================== The group uses various funded facilities provided by banks and its own financialassets to fund the above mentioned financial liabilities. Capital management The group's policy is to maintain a healthy capital base to sustain futuregrowth and maximise shareholder value. The group seeks to optimise shareholder returns by maintaining a balance betweendebt and capital and monitors the efficiency of its capital structure on aregular basis. The gearing ratio and return on shareholders' equity is asfollows: 2007 2006 US$'000 US$'000 Cash and short-term deposits 581,552 457,848Interest-bearing loans and borrowings (A) (110,095) (117,180) -------------------------Net cash (B) 471,457 340,668 ========================= Equity attributable to Petrofac Limited shareholders (C) 485,795 324,695 ========================= Profit for the year attributable to Petrofac Limited shareholders (D) 188,716 120,332 ========================= Gross gearing ratio (A/C) 22.7% 36.1% =========================Net gearing ratio (B/C) Net cash Net cash position position =========================Shareholders' return on investment (D/C) 38.8% 37.1% ========================= Fair values of financial assets and liabilities The fair value of the group's financial instruments and their carrying amountsincluded within the group's balance sheet are set out below: Carrying amount Fair value 2007 2006 2007 2006 US$'000 US$'000 US$'000 US$'000 Financial assets Cash and short-term deposits 581,552 457,848 581,552 457,848 Restricted cash 1,351 883 1,351 883 Available-for-sale financial assets 1,586 1,726 1,586 1,726 Oil derivatives 336 - 336 - Interest rate swap 28 568 28 568 Forward currency contracts 28,709 8,840 28,709 8,840 ========================================= Financial liabilities Interest-bearing loans and borrowings 110,095 117,180 110,095 117,180 Deferred consideration 13,622 7,373 13,622 7,373 Interest rate collar 130 - 130 - Forward currency contracts 52 - 52 - ========================================== Market values have been used to determine the fair values of available-for-salefinancial assets and forward currency contracts. The fair values of interestrate swaps, collars and caps have been calculated by discounting the expectedfuture cash flows at prevailing interest rates. The fair values of long-terminterest-bearing loans and borrowings are their amortised costs determined asthe present value of discounted future cash flows using the effective interestrate. The Company considers that the carrying amounts of trade and otherreceivables, trade and other payables, other current and non-current financialassets and liabilities approximate their fair values and are therefore excludedfrom the above table. 32 SUBSIDIARIES AND JOINT VENTURES At 31 December 2007, the group had investments in the following subsidiaries andincorporated joint ventures: Proportion of nominal value of issued sharesName of company Country of controlled by the incorporation groupTrading subsidiaries 2007 2006 Petrofac Inc. USA *100 *100Petrofac International Ltd Jersey *100 *100Petrofac Energy Developments Limited(formally Petrofac Resources Limited) England *100 *100 Petrofac Energy Developments InternationalLimited (formally Petrofac ResourcesInternational Limited) Jersey *100 *100Petrofac UK Holdings Limited England *100 *100Petrofac Facilities Management Jersey *100 *100International LimitedPetrofac Services Limited England *100 *100Petrofac Services Inc. USA *100 *100Petrofac Training International Limited Jersey *100 *100Petroleum Facilities E & C Limited Jersey *100 *100Petrofac ESOP Trustees Limited Jersey *100 *100Petrofac Employee Benefit Trust Jersey *100 *100Atlantic Resourcing Limited Scotland 100 100Petrofac Algeria EURL Algeria 100 100Petrofac Engineering India Private Limited India 100 100Petrofac Engineering Services India India 100 100Private LimitedPetrofac Engineering Limited England 100 100Petrofac Offshore Management Limited Jersey 100 100Petrofac FZE United Arab Emirates 100 100Petrofac Facilities Management Group Scotland 100 100LimitedPetrofac Facilities Management Limited Scotland 100 100Petrofac International Nigeria Ltd Nigeria 100 100Petrofac Pars (PJSC) Iran 100 100Petrofac Iran (PJSC) Iran 100 100Plant Asset Management Limited Scotland 100 100Petrofac Nuigini Limited Papua New Guinea 100 100PFMAP Sendirian Berhad Malaysia 100 100Petrofac Caspian Limited Azerbaijan 100 100Petrofac (Malaysia-PM304) Limited England 100 100Petrofac Training Group Limited Scotland 100 100Petrofac Training Holdings Limited Scotland 100 100Petrofac Training Limited Scotland 100 100Petrofac Training Inc. USA 100 100Petrofac Training (Trinidad) Limited Trinidad 100 100Monsoon Shipmanagement Limited Jersey 100 100Petrofac E&C International Limited United Arab Emirates 100 100Rubicon Response Limited Scotland 100 100Petrofac Energy Developments (Ohanet) Jersey 100 100Jersey LimitedPetrofac Energy Developments (Ohanet) LLC USA 100 100PEDL Limited England 100 n/aPetrofac (Cyprus) Limited Cyprus 100 100PKT Technical Services Ltd Russia 50 50PKT Training Services Ltd Russia 100 100Pt PCI Indonesia Indonesia 80 80Process Control and Instrumentation Singapore 100 100Services Pte LtdProcess Control and Instrumentation Malaysia 100 100Sendirian BerhadSakhalin Technical Training Centre Russia 80 80Petrofac Norge AS Norway 100 100 * Directly held by Petrofac Limited Proportion of nominal value of issued sharesName of Company Country of controlled by the incorporation group Trading subsidiaries (continued) 2007 2006 SPD Group Limited British Virgin Islands 51 n/aSPD UK Limited Scotland 51 n/aSPD FZCO United Arab Emirates 51 n/aSPD LLC United Arab Emirates 25 n/aPetrofac Energy Developments Oceania Limited Cayman Islands 100 n/a Joint Ventures Costain Petrofac Limited England 50 50Kyrgyz Petroleum Company Kyrgyz Republic 50 50MJVI Sendirian Berhad Brunei 50 50Spie Capag - Petrofac International Jersey 50 50LimitedTTE Petrofac Limited Jersey 50 50 Dormant subsidiaries Petrofac Saudi Arabia Limited Saudi Arabia 100 100ASJV Venezuela SA Venezuela 100 100Joint Venture International Limited Scotland 100 100Montrose Park Hotels Limited Scotland 100 100RGIT Ethos Health & Safety Limited Scotland 100 100Scota Limited Scotland 100 100Petrofac Russia Limited England 100 100Monsoon Shipmanagement Limited Cyprus 100 100 OIL AND GAS RESERVES (UNAUDITED) Europe Africa South East Total Asia Oil & Gas Oil & Gas Oil & Gas Oil & Gas Oil NGLs NGLs NGLs NGLs equivalent mmbbl bcf mmbbl bcf mmbbl bcf mmbbl bcf mmboe Proven reservesAt 1 January 2007Developed - - 3.3 - 4.2 - 7.5 - 7.5Undeveloped - - - - - - - - - -----------------------------------------------------------------------Proven - - 3.3 - 4.2 - 7.5 - 7.5 ----------------------------------------------------------------------- Changes during theyear:Revisions - - (0.3) - 0.5 - 0.2 - 0.2Additions 12.2 - - - - - 12.2 - 12.2Acquisitions - - 0.1 26.1 - - 0.1 26.1 4.6Production - - (0.5) - (1.3) - (1.8) - (1.8) At 31 December 2007Developed - - 2.6 24.1 3.2 - 5.8 24.1 9.9Undeveloped 12.2 - - 2.0 0.2 - 12.4 2.0 12.8 ----------------------------------------------------------------------Proven 12.2 - 2.6 26.1 3.4 - 18.2 26.1 22.7 ---------------------------------------------------------------------- Probable reservesAt 1 January 2007 - - - - 1.3 - 1.3 - 1.3 Changes during theyear:Revisions - - - - 0.2 - 0.2 - 0.2Additions 11.4 - - - - - 11.4 - 11.4Acquisitions - - - 6.4 - - - 6.4 1.1Production - - - - - - - - - ----------------------------------------------------------------------At 31 December 2007 11.4 - - 6.4 1.5 - 12.9 6.4 14.0 ---------------------------------------------------------------------- Total proven &probable reservesAt 1 January 2007 - - 3.3 - 5.5 - 8.8 - 8.8 Changes during theyear:Revisions - - (0.3) - 0.7 - 0.4 - 0.4Additions 23.6 - - - - - 23.6 - 23.6Acquisitions - - 0.1 32.5 - - 0.1 32.5 5.7Production - - (0.5) - (1.3) - (1.8) - (1.8) --------------------------------------------------------------------- At 31 December 2007 23.6 - 2.6 32.5 4.9 - 31.1 32.5 36.7 --------------------------------------------------------------------- Notes • These estimates of reserves were prepared by the group's engineers and the group's estimates of its reserves have been audited by a competent, independent third party based on the guidelines of the Petroleum Resources Management System, recently adopted by the Society of Petroleum Engineers, World Petroleum Council, the American Association of Petroleum Geologists and the Society of Petroleum Evaluation Engineers. • The reserves presented are the net entitlement volumes attributable to the company, under the terms of relevant production sharing contracts and assuming future oil prices equal to the average of prevailing prices during 2007. • For the purpose of calculating oil equivalent total reserves, volumes of natural gas have been converted to oil equivalent volumes at the rate of 5,800 standard cubic feet of gas per barrel of oil. Petrofac shares are traded on the London Stock Exchange using code 'PFC.L'. Registrar Company Secretary and registered office Capita Registrars Ogier Corporate Services (Jersey) LimitedThe Registry Whiteley Chambers34 Beckenham Road Don StreetBeckenham St HelierKent BR3 4TU Jersey JE4 9WG Legal Advisers to the Company As to English Law As to Jersey Law Norton Rose LLP Ogier3 More London Place Whiteley ChambersLondon SE1 2AF Don Street St Helier Jersey JE4 9WG Joint Brokers Credit Suisse Lehman Brothers1 Cabot Square 25 Bank StreetLondon E14 4QJ London E14 5LE Auditors Corporate and Financial PR Ernst & Young LLP Bell Pottinger Corporate & Financial1 More London Place 6th Floor Holborn GateLondon SE1 2AF 330 High Holborn London WC1V 7QD Financial Calendar 16 May 2008 Annual General Meeting19 May 2008 Final dividend payment27 August 2008 Interim results announcementNovember 2008 Interim dividend payment Dates correct at time of print, but subject to change The group's investor relations website can be found through www.petrofac.com This information is provided by RNS The company news service from the London Stock Exchange