Petrofac Regulatory News (PFC)

5 Mar 2007 07:04

Petrofac Limited02 March 2007 PART 3 30 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 2006, the group had letters of credit of US$16,920,000 (2005:US$10,899,000) and outstanding letters of guarantee, including performance andbid bonds, of US$573,185,000 (2005: US$385,556,000) against which the group hadpledged or restricted cash balances of, in aggregate, US$883,000 (2005:US$1,648,000). At 31 December 2006, the group had outstanding forward exchange contractsamounting to US$221,188,000 (2005: US$381,003,000). These commitments consist offuture obligations to either acquire or sell designated amounts of foreigncurrency at agreed rates and value dates (note 32). Leases The group has financial commitments in respect of non-cancellable operatingleases for office space and equipment. These non-cancellable leases haveremaining non-cancellable lease terms of between one and ten years and, forcertain property leases, are subject to renegotiation at various intervals asspecified in the lease agreements. The future minimum rental commitments underthese non-cancellable leases are as follows: 2006 2005 US$'000 US$'000 Within one year 16,679 7,159 After one year but not more than five years 24,748 15,382 More than five years 13,500 8,501 --------------------- 54,927 31,042 ===================== Minimum lease payments recognised as an operating lease expense during the yearamounted to US$8,643,000 (2005: US$7,212,000). Capital commitments At 31 December 2006, the group had capital commitments of US$21,819,000 (2005:US$3,410,000). Included in the above are commitments for the construction of a new officebuilding in Sharjah, United Arab Emirates amounting to US$20,577,000 (2005:nil). 31 RELATED PARTY TRANSACTIONS The consolidated financial statements include the financial statements ofPetrofac Limited and the subsidiaries listed in note 34. Petrofac Limited is theultimate parent entity of the group. The following table provides the total amount of transactions which have beenentered into with related parties: Sales to Purchases Amounts owed Amounts owed related from parties related by related to related parties parties parties US$'000 US$'000 US$'000 US$'000 Joint ventures 2006 4,520 3,282 7,725 133 2005 8,194 2,674 28,402 1,333 Other directors' 2006 - 49 - 49interests 2005 - 30 - 2 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 2006 will be settled in cash. Purchases in respect of other directors' interests of US$49,000 comprise ofmarket rate based costs of chartering the services of an aeroplane used for thetransport of senior management and directors of the Company on company business,which is owned by an offshore trust of which the Chief Executive of the Companyis one of the beneficiaries. Other directors' interest in 2005 relates to payments made to a related partyfor services provided to the group by the then director of the Company. In 2002, the Company extended an option to a director of the Company to acquireup to 75,000 ordinary shares of US$1.00 each at US$25.00 per share. On 18 May2005, this option agreement was cancelled. At the time of appointment in 2002, an agreement was reached between a directorof the Company and 3i Group plc (3i), pursuant to which the director received acash payment of US$1,422,000 from 3i following the Company's listing on theLondon Stock Exchange in 2005. Compensation of key management personnel The following details remuneration of key management personnel of the groupcomprising of executive and non-executive directors of the Company and othersenior personnel. Further information relating to the individual directors isprovided in the Directors' Remuneration report on pages 29 to 36. 2006 2005 US$'000 US$'000 Short-term employee benefits 4,412 4,249Other long term employment benefits 40 51Share-based payments 288 169Fees paid to non-executive directors 416 266 --------------------- 5,156 4,735 ===================== 32 FINANCIAL INSTRUMENTS Risk management objectives and policies The group's principal financial instruments, other than derivatives, comprisebank loans, loan notes, non-recourse structured finance, cash and short-termdeposits. The main purpose of these financial instruments is to finance thegroup's operations. The group has various other financial instruments such astrade receivables and trade payables, which arise directly from its operations. The group also uses derivative transactions, principally interest rate swaps andcaps, and forward currency contracts to manage the interest rate and currencyrisks arising from the group's operations and its sources of finance. It is thegroup's policy that no trading in financial instruments be undertaken. The main risks arising from the group's financial instruments are interest raterisk, foreign currency risk, credit risk and liquidity risk. Interest rate risk The group's exposure to market risk for changes in interest rates relatesprimarily to the group's long-term variable rate debt obligations and its cashand bank balances. The group's policy is to manage its interest cost using a mixof fixed and variable rate debt and specifically to keep between 60% and 80% ofits borrowings at fixed or capped rates of interest. At 31 December 2006, aftertaking into account the effect of interest rate swaps and caps, approximately64.8% (2005: 84.7%) of the group's term borrowings are at a fixed or capped rateof interest. Foreign currency risk 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 hedge derivatives to match the terms of the hedgeditem to maximise hedge effectiveness. Credit risk The group trades only with recognised, creditworthy third parties. Receivablebalances are monitored on an ongoing basis with the result that the group'sexposure to bad debts is not considered significant. At 31 December 2006, thegroup's five largest customers accounted for 66.3% of outstanding tradereceivables and work in progress (2005: 69.8%). 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. Fair values of financial assets and liabilities The fair value of the group's financial instruments as compared to theircarrying amounts included within the group's balance sheet are set out below: Carrying amount Fair value 2006 2005 2006 2005 US$'000 US$'000 US$'000 US$'000Financial assetsCash and short-term deposits 457,848 208,896 457,848 208,896Restricted cash 883 1,648 883 1,648Available-for-sale financial assets 1,726 2,413 1,726 2,413Interest rate caps and swaps 568 672 568 672Forward currency contracts 8,840 - 8,840 -Forward currency purchase option - 461 - 461 =========================================== Financial liabilitiesInterest-bearing loans and borrowings 117,180 106,870 117,180 106,870Deferred consideration 7,373 4,450 7,373 4,450Interest rate swaps - 147 - 147Forward currency contracts - 11,452 - 11,452 ============================================ Market values have been used to determine the fair values of available-for-salefinancial assets and forward currency contracts. The fair values of interestrate swaps and caps have been calculated by discounting the expected future cashflows at prevailing interest rates. The Company considers that the carryingamounts of trade and other receivables, trade and other payables, other currentand non-current financial assets and liabilities approximate their fair valuesand are therefore excluded from the above table. Interest rate risk Interest rate risk arises from the possibility that changes in interest rateswill affect the value of the group's interest-bearing financial liabilities andassets. The following table indicates the years over which these financialliabilities and assets will reprice or mature: Year ended 31 December 2006 Within 1-2 2-3 3-4 4-5 More than 1 year years years years years 5 years Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Financial liabilitiesFloating ratesRevolving credit facilities - 6,500 443 1,994 6,427 15,364Short term loan 6,033 - - - - - 6,033Bank overdrafts 20,442 - - - - - 20,442Term loan - 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 457,848 - - - - - 457,848Restricted cash balances 883 - - - - - 883 --------------------------------------------------------- 458,731 - - - - - 458,731 ========================================================= Year ended 31 December 2005 Within 1-2 2-3 3-4 4-5 More 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 8,900 - 404 1,817 2,827 3,029 16,977Short term loan 6,228 - - - - - 6,228Bank overdrafts 6,055 - - - - - 6,055Project term loan 7,000 - - - - - 7,000Term loan 2,500 10,000 11,250 15,625 18,750 13,897 72,022 --------------------------------------------------------- 30,683 10,000 11,654 17,442 21,577 16,926 108,282 ========================================================= Financial assetsFloating ratesCash and short-term deposits 208,896 - - - - - 208,896Restricted cash balances 1,648 - - - - - 1,648 --------------------------------------------------------- 210,544 - - - - - 210,544 ========================================================= Financial liabilities in the above table are disclosed gross of debt acquisitioncosts of US$1,770,000 (2005: US$1,412,000). Interest on financial instruments classified as floating rate is repriced atintervals of less than one year. The other financial instruments of the groupthat are not included in the above tables are non-interest bearing and aretherefore not subject to interest rate risk. Derivative instruments designated as cash flow hedges At 31 December 2006, the group held the following derivative instruments,designated as cash flow hedges in relation to floating rate interest-bearingloans and borrowings: Fair value asset/ (liability) Date 2006 2005Instrument Period to commenced US$'000 US$'000 maturity UK LIBOR interest rate 2 years and 9 31 December 2004 77 (147)swap monthsUK interest rate cap 1 year 31 December 2004 4 5US LIBOR interest rate swap 1 year 31 December 2004 487 667 Foreign currency risk The group is exposed to foreign currency risk on sales, purchases and borrowingsthat are entered into in a currency other than US Dollars. The group usesforward foreign exchange contracts to hedge its foreign currency risk, whenconsidered appropriate. At 31 December 2006, the group had foreign exchangecontracts designated as cash flow hedges with a fair value gain of US$8,840,000(2005: fair value loss US$11,452,000) as follows: Net unrealised Contract value Fair value gain/(loss) 2006 2005 2006 2005 2006 2005 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Euro currency purchases 203,908 344,107 212,694 332,689 8,786 (11,418)Sterling currency purchases 3,901 36,896 4,098 36,862 197 (34)Yen currency purchases 13,379 - 13,236 - (143) - ---------------- 8,840 (11,452) ================ The above foreign exchange contracts mature between January 2007 and February2008 (2005: between January 2006 and June 2007). During 2005, the group acquired an option from a bank to purchase Euro currencyequivalent to US$31,368,000 by paying a premium of US$689,000. At 31 December2005, the fair value of the option was US$461,000 with an unrealised lossdeferred in equity of US$228,000. In October 2006, the option was exercised anda gain of US$105,000 was recognised in the income statement. 33 EVENTS AFTER THE BALANCE SHEET DATE 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 estimatedtransaction costs of US$172,000 was US$7,872,000. Consideration of US$7,700,000(excluding transaction costs) was settled by a cash payment of US$3,935,000,issuance of loan notes payable of US$1,765,000 and the balance of US$2,000,000by issuance of 274,938 new ordinary shares of the Company at market values atthe date of issue to the vendor over three years in equal instalments on theanniversary of the transaction. 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 has been estimated at US$12,025,000 and this will be reassessedeach year to fair value and any adjustment to the deferred consideration arisingwill be reflected in goodwill except for the unwinding of interest which will bereflected in the income statement as an interest expense. The totalconsideration for the 100% interest therefore, including transaction costs,amounts to US$19,897,000. 33 EVENTS AFTER THE BALANCE SHEET DATE The 100% fair values of the identifiable assets and liabilities of SPD GroupLimited at the date of acquisition are analysed below and these are provisionalpending final agreement with the vendor. Recognised on Carrying acquisition Value US$'000 US$'000 Property, plant and equipment 47 47Intangible assets 2,369 -Trade and other receivables 5,559 5,559Cash and short-term deposits 970 970 -----------------------Total assets 8,945 6,576 ----------------------- 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 5,725 3,356 ========Goodwill arising on acquisition 14,172 --------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) -------Net cash outflow on the acquisition of subsidiary (3,137) ======= Intangible assets recognised on acquisition comprise customer contracts whichwill be amortised over their remaining economic useful lives on a straight linebasis. The residual goodwill above comprises the fair value of expected futuresynergies and business opportunities arising from the integration of thebusiness in to the group. Chergui gas concession, Tunisia 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$27,323,000 which after including advance capital expenditure paid on behalfof the vendor of US$2,846,000 (note 10), brought the total consideration for thetransaction to US$30,169,000. 34 SUBSIDIARIES AND JOINT VENTURES At 31 December 2006, 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 group Trading subsidiaries 2006 2005 Petrofac Inc. USA *100 *100Petrofac International Ltd Jersey *100 *100Petrofac Resources Limited England *100 *100Petrofac Resources International 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 n/aAtlantic Resourcing Limited Scotland 100 100Monsoon Shipmanagement Limited Cyprus 100 100Petrofac Alger URAL Algeria 100 100Petrofac Engineering India Private Limited India 100 100Petrofac Engineering Limited England 100 100Petrofac Offshore Management Limited Jersey 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 100RGIT Montrose Inc. USA 100 100RGIT Montrose (Trinidad) Limited Trinidad 100 100Monsoon Shipmanagement Limited Jersey 100 100Petrofac E&C International Limited United Arab Emirates 100 100Rubicon Response Limited Scotland 100 100Petrofac Resources (Ohanet) Jersey Limited Jersey 100 100Petrofac Resources (Ohanet) LLC USA 100 100PKT Technical Services Ltd Russia 50% n/aPKT Training Services Ltd Russia 100% n/aPt PCI Indonesia Indonesia 80% n/aProcess Control and Instrumentation Singapore 100% n/aServices Pte LtdProcess Control and Instrumentation Malaysia 100% n/aSendirian BerhadSakhalin Technical Training Centre Russia 80% n/aPetrofac Norge AS Norway 100% n/a * Directly held by Petrofac Limited 34 SUBSIDIARIES AND JOINT VENTURES Proportion of nominal value of issued sharesName of Company Country of controlled by the incorporation group Joint Ventures 2006 2005 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 Sakha Limited England *100 *100Petrofac Saudi Arabia Limited Saudi Arabia 100 100ASJV Venezuela SA Venezuela 100 100Joint Venture International Limited Scotland 100 100Montrose Park Hotels Limited Scotland 100 100Montrose Scota Limited Scotland 100 100Petrofac Resources (Palmyra) Limited Jersey 100 100RGIT Ethos Health & Safety Limited Scotland 100 100Scota Limited Scotland 100 100 * Directly held by Petrofac Limited SHAREHOLDER INFORMATIONAs at 31 December 2006 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 Street, St HelierBeckenham Jersey JE4 9WGKent BR3 4TU Legal Advisers to the Company As to English Law As to Jersey Law Norton Rose OgierKempson House Whiteley ChambersCamomile Street Don Street, St HelierLondon EC3A 7AN 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 2007 Financial Calendar Date* Activity 11 May 2007 Annual general meeting17 May 2007 Final dividend payment5 September 2007 Interim results announcementNovember 2007 Interim dividend payment * Dates correct at time of print, but subject to change This information is provided by RNS The company news service from the London Stock Exchange