Final Results - Part 2

Petrofac Limited 16 March 2006 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 13 December 2005 1 CORPORATE INFORMATION The consolidated financial statements of Petrofac Limited (the Company) for the year ended 31 December 2005 were authorised for issue in accordance with a resolution of the directors on 15 March 2006. Petrofac Limited is a limited liability company registered in Jersey under the Companies (Jersey) Law 1991 and is the holding company for the international group of Petrofac subsidiaries (together "the group"). The group's principal activity is the provision of facilities solutions to the oil & gas production and processing industry. A full listing of all group companies, including joint venture companies, is contained in note 30 to these consolidated financial statements. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale financial assets that have been measured at fair value. The functional currency of the consolidated financial statements is United States dollars (US$), as a significant proportion of the group's assets, liabilities, income and expenses are US$ denominated. The consolidated financial statements are presented in US$ and all values are rounded to the nearest thousand (US$'000) except where otherwise stated. Statement of compliance The consolidated financial statements of Petrofac Limited and all its subsidiaries have been prepared in accordance with accounting principles generally accepted in the island of Jersey, incorporating International Financial Reporting Standards (IFRS) and in compliance with the applicable requirements of Jersey law. Basis of consolidation The consolidated financial statements comprise the financial statements of Petrofac Limited and its subsidiaries. The financial statements of subsidiaries are prepared using consistent accounting policies. Where necessary, adjustments are made to bring the accounting policies into line with those of the group. Subsidiaries are consolidated from the date on which control is transferred to the group and cease to be consolidated from the date on which control is transferred out of the group. All intra-group balances and transactions, including unrealised profits, have been eliminated on consolidation. Changes in accounting policies The group has changed its accounting policy for oil & gas assets from the full cost method of accounting for oil & gas assets to the successful efforts method. The group believes this change in accounting policy will enhance the transparency of the financial reporting of future performance. The reported net profit and shareholders' equity for the year ended 31 December 2004 are unaffected by the adoption of this method of accounting for oil & gas assets. There is no impact on the net profit and shareholders' equity for the year ended 31 December 2005. With the exception of accounting for oil & gas assets, the accounting policies adopted are consistent with those of the previous financial year except that the group has adopted new and revised Standards and Interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2005. The principal effects of the adoption of new and amended standards are discussed below: IFRS 2 'Share-Based Payment' IFRS 2 'Share-Based Payment' requires an expense to be recognised where the group buys goods or services in exchange for shares or rights over shares ('equity-settled transactions'). The group has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005. As a result of adopting IFRS 2, the group has recognised an expense in the year of US$897,000 relating to employees' share-based incentives. This expense is classified within selling, general and administration expenses in the income statement. The effect of the adopting this standard on basic and diluted earnings per share is as follows: â€¢ a decrease in basic earnings per share by 0.29 US cents â€¢ a decrease in diluted earnings per share by 0.26 US cents The reported net profit and shareholders' equity for the year ended 31 December 2004 are unaffected by the adoption of this new standard. Standing Interpretations Committee (SIC) 12 'Special Purpose Entities' The Company has adopted the recently amended SIC 12 'Special Purpose Entities'. This requires special purpose entities, formed for the purpose of equity compensation plans, to be consolidated within the financial statements of the group. The adoption of SIC 12 has required the group to consolidate Petrofac ESOP Trustees Limited (Petrofac ESOP) and, consequently, to offset the cost of shares temporarily held by Petrofac ESOP as treasury shares from equity. Prior to adopting SIC 12, Petrofac ESOP was not consolidated and the cost of shares held was disclosed as a current receivable within Total Assets. Total equity as at 1 January 2004 has been reduced by US$106,000 due to the adoption of this amended Standard. This restatement is reflected under the heading 'Treasury shares' within total equity. IFRS 3 'Business Combinations, IAS 36 (revised) 'Impairment of Assets' IFRS 3 applies to accounting for business combinations for which the agreement date is on or after 31 March 2004. The effect of the adoption of IFRS 3 and IAS 36 (revised) has resulted in the group ceasing annual goodwill amortisation and commencing testing for impairment at the cash-generating unit level annually, unless an event occurs during the year which requires the goodwill to be tested more frequently, from 1 January 2005. This revised accounting policy has been applied prospectively, in accordance with the transitional rules of IFRS 3, and therefore the reported net profit and shareholders' equity for the year ended 31 December 2004 are unaffected by the adoption of this new Standard. IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' The group has adopted IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' with effect from 1 January 2005. IFRS 5 requires an operation to be classified as discontinued when the criteria to be classified as held for sale have been met or the group has disposed of the operation. The adoption of this Standard has required the group to separately disclose, on the face of the balance sheet, those assets held for sale within its discontinued operation. In addition, the presentation of the income statement for discontinued operations is no longer required on a line-by-line basis. Instead, the Standard requires the net profit or loss from discontinued operations to be disclosed as a single line item at the foot of the income statement. The comparative figures for the year ended 31 December 2004 have been restated to conform with the presentation required by IFRS 5. These restatements do not affect previously reported net profit or shareholders' equity. Amendment to IAS 21 'The Effects Of Changes In Foreign Exchange Rates - Net Investment in a Foreign Operation' The group has adopted Amendment to IAS 21 'Net Investment in a Foreign Operation' with effect from 1 January 2005. The amendment to IAS 21 requires all exchange differences arising from the group's net investment in subsidiaries to be taken directly to equity, irrespective of which group entity provides the investment. As a result of adopting this Amendment to IAS 21, US$526,000 of translation losses arising in the year from the group's net investment in subsidiaries has been recognised within the foreign currency translation reserve in equity. Prior to adopting this amended Standard this translation loss would have been charged to the income statement. The effect of adopting this amended Standard on basic and diluted earnings per share is as follows: â€¢ an increase in basic earnings per share by 0.17 US cents â€¢ an increase in diluted earnings per share by 0.15 US cents The reported net profit and shareholders' equity for the year ended 31 December 2004 are unaffected by the adoption of this amended Standard. Significant accounting judgements and estimates Judgements In the process of applying the group's accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: â€¢ Petrofac Resources (Ohanet) Jersey Limited (Petrofac Ohanet): the group acquired Petrofac Ohanet on 27 May 2005. Prior to its acquisition, the group consolidated Petrofac Ohanet in its consolidated financial statements as it determined it held significant operating and financial control over the company. â€¢ Revenue recognition on fixed-price engineering, procurement and construction contracts: the group recognises revenue on fixed price engineering, procurement and construction contracts on the percentage-of-completion method, based on surveys of work performed. The group has determined this basis of revenue recognition is the best available measure of progress on such contracts. Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: â€¢ Impairment of goodwill: the group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the group to make an estimate of the expected future cash flows from each cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2005 was US$49,183,000 (2004: US$49,653,000). â€¢ Project cost to complete estimates: at each balance sheet date the group is required to estimate costs to complete on fixed price contracts. Estimating costs to complete on such contracts requires the group to make estimates of future costs to be incurred, based on work to be performed beyond the balance sheet date. Interests in joint ventures The group has a number of contractual arrangements with other parties which represent joint ventures. These take the form of agreements to share control over other entities ('jointly controlled entities') and commercial collaborations ('jointly controlled operations'). The group's interests in jointly controlled entities and operations are accounted for by proportionate consolidation, which involves recognising its proportionate share of the joint venture's assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis. The financial statements of the group's jointly controlled entities and operations are prepared using consistent accounting policies. Where necessary, adjustments are made to bring the accounting policies into line with those of the group. Transactions in foreign currencies In the accounts of individual group companies, transactions in foreign currencies are recorded at the prevailing rate at the date of the transaction. At the year end, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at the balance sheet date. All foreign exchange gains and losses are taken to the income statement with the exception of exchange differences arising on monetary assets and liabilities that form part of the group's net investment in subsidiaries. These are taken directly to equity until the disposal of the net investment at which time they are recognised in the income statement. Foreign group companies The balance sheets of overseas subsidiaries and joint ventures are translated using the closing rate method, whereby assets and liabilities are translated at the rates of exchange ruling at the balance sheet date. The income statements of overseas subsidiaries and joint ventures are translated at average exchange rates for the year. Exchange differences arising on the retranslation of net assets are taken directly to equity. On the disposal of a foreign entity, accumulated exchange differences are recognised in the income statement as a component of the gain or loss on disposal. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided on a straight-line basis at the following rates: Oil & gas facilities 10% - 12.5% Plant and equipment 4% - 33% Buildings and leasehold improvements 5% - 33% Office furniture and equipment 25% - 100% Vehicles 20% - 33% No depreciation is charged on land or assets under construction. Borrowing costs Borrowing costs directly attributable to the construction of qualifying assets, which are assets that necessarily take a substantial period of time to prepare for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised as interest payable in the income statement in the period in which they are incurred. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity at the date of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that such carrying value may be impaired. For the purpose of impairment testing, goodwill acquired is allocated to the related cash-generating units. Each unit to which goodwill is allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes and is not larger than a segment based on either the group's primary or the group's secondary reporting format determined in accordance with IAS14 'Segment Reporting'. Impairment is determined by assessing the recoverable amount of the cash-generating unit to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Oil & gas assets Capitalised costs The group's activities in relation to oil & gas assets are limited to acquisition, appraisal and development. The group does not undertake oil & gas exploration activities. The group follows the successful efforts method of accounting for oil & gas assets, under which expenditure relating to the acquisition and appraisal of oil & gas interests, including an appropriate share of directly attributable overheads and relevant financing costs, are initially capitalised at cost as intangible assets, pending determination of commercial reserves. Intangible oil & gas assets are carried forward, on a field-by-field basis, until declared part of a commercial development, at which point the relevant total cost is transferred to tangible oil & gas assets. All intangible oil & gas assets are assessed for any impairment prior to transfer and any impairment loss is recognised in the income statement. Costs relating to unsuccessful appraisals are charged to the income statement in the period in which the determination is made. Tangible oil & gas assets are depreciated, on a field-by-field basis, using the unit-of-production method based on entitlement to proved reserves, taking account of estimated future development expenditure relating to those reserves. The group utilises proved reserves estimates in performing impairment testing on its oil & gas assets. Changes in unit-of-production factors Changes in factors which affect unit-of-production calculations are dealt with prospectively, not by immediate adjustment of prior years' amounts. Decommissioning Provision for future decommissioning costs is made in full when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made. The amount recognised is the present value of the estimated future expenditure. An amount equivalent to the initial provision for decommissioning costs is capitalised and amortised over the life of the underlying asset on a unit-of-production basis over proved reserves. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the oil & gas asset. The unwinding of the discount of future decommissioning provisions is included as a separate financial item in the income statement under finance costs. Available-for-sale financial assets Investments classified as available-for-sale are initially stated at cost, being the fair value of consideration given, including acquisition charges associated with the investment. After initial recognition, available-for-sale financial assets are measured at their fair value using quoted market rates. Gains and losses are recognised as a separate component of equity until the investment is sold or impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. Impairment of assets (excluding goodwill) At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to assess whether there is an indication that those assets may be impaired. If any such indication exists, the group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows attributable to the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment is treated as a revaluation increase. Inventories Inventories, which comprise raw materials and consumables, are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Work in progress and billings in excess of cost and estimated earnings Work in progress is stated at cost and estimated earnings less provision for any anticipated losses and progress payments received or receivable. Where the payments received or receivable for any contract exceed the cost and estimated earnings less provision for any anticipated losses, the excess is shown as billings in excess of cost and estimated earnings within current liabilities. Trade and other receivables Trade receivables are recognised and carried at original invoice amounts less an allowance for any amounts estimated to be uncollectable. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. A proportion of the group's trading cycle is on average more than twelve months due to the long term nature of the contracts undertaken. Retentions relating to long term contracts are presented as a current asset although they may not be recovered within twelve months of the balance sheet date. Cash and cash equivalents Cash and cash equivalents consist of cash at hand and bank and short-term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Interest-bearing loans and borrowings All interest-bearing loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs directly attributable to the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised in the income statement as a finance cost. Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset) is derecognised where: â€¢ the rights to receive cash flows from the asset have expired; â€¢ the group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or â€¢ the group has transferred its rights to receive cash flows from the asset and either a) has transferred substantially all the risks and rewards of the asset, or b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. If an existing financial liability is replaced by another from the same lender, on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the income statement. Pensions and employees' end-of-service benefits The group has various defined contribution pension schemes in accordance with the local conditions and practices in the countries in which it operates. The amount charged to the income statement in respect of pension costs is the contributions payable in the year. Differences between contributions payable during the year and contributions actually paid are shown as either accrued liabilities or prepaid assets in the balance sheet. Employees' end-of-service benefits are provided in accordance with the labour laws of the countries in which the group operates, further details of which are given in note 23. Share-based payment transactions Employees (including directors) of the group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares ('equity-settled transactions'). Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Petrofac Limited ('market conditions'), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the relevant employees become fully entitled to the award (the 'vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the group's best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. The group has taken advantage of the transitional provisions of IFRS 2 in respect of equity-settled awards and has applied IFRS 2 only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005. Employee Share Ownership Plan (ESOP) Through Petrofac ESOP, the Company temporarily warehouses ordinary shares that are expected, in the foreseeable future, to be offered to new or existing employees (including directors). The cost of shares temporarily held by Petrofac ESOP are reflected as treasury shares and deducted from equity. Petrofac ESOP acquires shares from the Company at fair value, as determined using a net asset based formula, and the Company extends an interest free loan to Petrofac ESOP to acquire these shares. The effects of share issue and repurchase transactions arising within Petrofac ESOP are taken directly to equity. Leases The group has entered into various operating leases the payments under which are treated as rentals and charged to the income statement on a straight-line basis over the lease terms. Revenue recognition Revenue is recognised to the extent that it is probable economic benefits will flow to the group and the revenue can be reliably measured. The following specific recognition criteria also apply: Engineering, procurement and construction services Revenues from fixed-price contracts are recognised on the percentage-of-completion method, based on surveys of work performed when the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Revenues from cost-plus-fee contracts are recognised on the basis of costs incurred during the year plus the fee earned measured by the cost-to-cost method. Provision is made for all losses expected to arise on completion of contracts entered into at the balance sheet date, whether or not work has commenced on these contracts. Incentive payments are included in revenue when the contract is sufficiently advanced and the amount of the incentive payments can be measured reliably. Claims are only included in revenue when negotiations have reached an advanced stage such that it is probable the claim will be accepted and can be measured reliably. Facilities management, engineering and training services Revenues from reimbursable contracts are recognised in the period in which the services are provided based on the agreed contract schedule of rates. Revenues from fixed-price contracts are recognised on the percentage-of-completion method, measured by milestones completed or earned value when the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Incentive payments are included in revenue when the contract is sufficiently advanced and the amount of the incentive payments can be measured reliably. Claims are only included in revenue when negotiations have reached an advanced stage such that it is probable the claim will be accepted and can be measured reliably. Oil & gas activities Oil & gas revenues comprise the group's share of sales from the processing or sale of hydrocarbons on an entitlement basis. Income taxes Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences at the balance sheet date between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with the following exceptions: â€¢ where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; â€¢ in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and â€¢ deferred income tax assets are recognised only to the extent that it is probable that a taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, income tax is recognised in the income statement. Derivative financial instruments and hedging The group uses derivative financial instruments such as forward currency contracts and interest rate caps and swaps to hedge its risks associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate cap and swap contracts is determined by reference to market values for similar instruments. For the purposes of hedge accounting, hedges are classified as: â€¢fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability; or â€¢cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction. Any gains or losses arising from changes in the fair value of derivatives that do not qualify for hedge accounting are taken to the income statement. The treatment of gains and losses arising from revaluing derivatives designated as hedging instruments depends on the nature of hedging relationship, as follows: Fair value hedges For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged; the derivative is remeasured at fair value and gains and losses from both are taken to the income statement. For hedged items carried at amortised cost, the adjustment is amortised through the income statement such that it is fully amortised by maturity. The group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the group revokes the designation. Cash flow hedges For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 3 SEGMENT INFORMATION The group's primary continuing operations are organised on a worldwide basis into three business segments: Engineering & Construction, Operations Services and Resources. The accounting policies of the segments are the same as those described in note 2 above. The group accounts for inter-segment sales as if the sales were to third parties, that is, at current market prices. The group evaluates the performance of its segments and allocates resources to them based on this evaluation. The group's secondary segment reporting format is geographical. Geographical segments are based on the location of the group's assets. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. Business segments The following tables present revenue and profit information and certain asset and liability information relating to the group's business segments for the years ended 31 December 2005 and 2004. Included within the consolidation and eliminations columns are certain balances, which due to their nature, are not allocated to segments. Year ended 31 December 2005 Continuing operations ________________________________________________ Engineering Consolidation & Operations & Discontinued Total Construction Services Resources eliminations Total operations Eliminations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Revenue External sales 833,648 605,493 46,331 - 1,485,472 204 - 1,485,676 Inter-segment sales 24,558 (162) - (24,396) - - - - _______ _______ _______ _______ _______ _______ _______ _______ Total revenue 858,206 605,331 46,331 (24,396) 1,485,472 204 - 1,485,676 ======= ======= ======= ======= ======= ======= ======= ======= Results Segment operating results 52,592 25,250 18,495 740 97,077 (875) - 96,202 Unallocated corporate income / (costs) - - - (8,474) (8,474) - - (8,474) _______ _______ _______ _______ _______ _______ _______ _______ Profit / (loss) from operating activities 52,592 25,250 18,495 (7,734) 88,603 (875) - 87,728 Finance costs (166) (2,043) (986) (5,253) (8,448) - - (8,448) Finance income 4,023 82 129 (1,041) 3,193 60 - 3,253 _______ _______ _______ _______ _______ _______ _______ _______ Profit / (loss) before income tax 56,449 23,289 17,638 (14,028) 83,348 (815) - 82,533 Income tax (expense) / income (1,386) (7,711) 683 463 (7,951) - - (7,951) _______ _______ _______ _______ _______ _______ _______ _______ Net profit / (loss) 55,063 15,578 18,321 (13,565) 75,397 (815) - 74,582 ======= ======= ======= ======= ======= ======= ======= ======= Year ended 31 December 2005 Engineering & Operations Discontinued Consolidation & Total Construction Services Resources operations eliminations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Assets and liabilities Segment assets 700,186 205,160 113,071 2,961 (45,875) 975,503 Inter-segment assets (42,964) (2,774) (33) (104) 45,875 - Investments - - 2,413 - - 2,413 _______ _______ _______ _______ _______ _______ 657,222 202,386 115,451 2,857 - 977,916 Unallocated assets - - - - 3,158 3,158 Income tax assets 603 736 7,750 - (3,513) 5,576 _______ _______ _______ _______ _______ _______ Total assets 657,825 203,122 123,201 2,857 (355) 986,650 ======= ======= ======= ======= ======= ======= Segment liabilities 561,368 133,081 101,112 25,435 (130,157) 690,839 Inter-segment liabilities (1,726) (19,891) (83,776) (24,764) 130,157 - _______ _______ _______ _______ _______ _______ 559,642 113,190 17,336 671 - 690,839 Unallocated liabilities - - - - 95,353 95,353 Income tax liabilities 2,142 5,610 1,861 - (4,282) 5,331 _______ _______ _______ _______ _______ _______ Total liabilities 561,784 118,800 19,197 671 91,071 791,523 ======= ======= ======= ======= ======= ======= Other segment information Capital expenditures: Property, plant and equipment 10,174 3,492 3,812 - 78 17,556 Intangible oil & gas assets - - 4,825 - - 4,825 Goodwill - 5,405 - - - 5,405 ======= ======= ======= ======= ======= ======= Charges: Depreciation 10,948 2,216 14,099 - (672) 26,591 Amortisation - - - - 440 440 Impairment losses - - - 250 - 250 End-of-service benefits 2,206 636 36 - 25 2,903 Share-based payments 685 102 - - 110 897 ======= ======= ======= ======= ======= ======= Year ended 31 December 2004 Continuing operations _________________________________________________ Engineering Consolidation & Operations & Discontinued Total Construction Services Resources eliminations Total operations Eliminations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Revenue External sales 467,116 439,372 45,042 - 951,530 12,624 - 964,154 Inter-segment sales 6,350 755 - (7,105) - 1,126 (1,126) - ______ ______ ______ ______ ______ ______ ______ ______ Total revenue 473,466 440,127 45,042 (7,105) 951,530 13,750 (1,126) 964,154 ====== ====== ====== ====== ====== ====== ====== ====== Results Segment operating results 33,524 17,347 17,164 (550) 67,485 (13,197) - 54,288 Unallocated corporate income / (costs) - - - 798 798 - - 798 ______ ______ ______ ______ ______ ______ ______ ______ Profit / (loss) from operating activities 33,524 17,347 17,164 248 68,283 (13,197) - 55,086 Finance costs (133) (1,127) (1,968) (4,316) (7,544) (5) - (7,549) Finance income 1,969 104 17 (93) 1,997 40 - 2,037 ______ ______ ______ ______ ______ ______ ______ ______ Profit / (loss) before income tax 35,360 16,324 15,213 (4,161) 62,736 (13,162) - 49,574 Income tax (expense) / income (2,260) (6,681) (8,306) 548 (16,699) - - (16,699) Minority interests - - 46 - 46 - - 46 ______ ______ ______ ______ ______ ______ ______ ______ Net profit / (loss) 33,100 9,643 6,953 (3,613) 46,083 (13,162) - 32,921 ====== ====== ====== ====== ====== ====== ====== ====== Year ended 31 December 2004 Engineering & Operations Discontinued Consolidation & Total Construction Services Resources operations eliminations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Assets and liabilities Segment assets 489,663 164,717 119,173 7,385 (64,235) 716,703 Inter-segment assets (63,166) (604) (61) (404) 64,235 - Investments - - 4,104 - - 4,104 _______ _______ _______ _______ _______ _______ 426,497 164,113 123,216 6,981 - 720,807 Unallocated assets - - - - 7,768 7,768 Income tax assets - 780 - - 2 782 _______ _______ _______ _______ _______ _______ Total assets 426,497 164,893 123,216 6,981 7,770 729,357 ======= ======= ======= ======= ======= ======= Segment liabilities 347,316 99,804 100,175 29,044 (108,273) 468,066 Inter-segment liabilities (3,133) (16,751) (61,960) (26,429) 108,273 - _______ _______ _______ _______ _______ _______ 344,183 83,053 38,215 2,615 - 468,066 Unallocated liabilities - - - - 118,026 118,026 Income tax liabilities 712 3,838 - - 157 4,707 _______ _______ _______ _______ _______ _______ Total liabilities 344,895 86,891 38,215 2,615 118,183 590,799 ======= ======= ======= ======= ======= ======= Other segment information Capital expenditures: Property, plant and equipment 11,673 2,931 3,744 - (1,206) 17,142 Intangible oil & gas assets - - 6,721 - - 6,721 Goodwill - 19,118 - - - 19,118 ======= ======= ======= ======= ======= ======= Charges: Depreciation 8,356 1,357 14,809 106 (696) 23,932 Goodwill amortisation - 2,168 316 - - 2,484 Other amortisation - 263 - - 1,209 1,472 End-of-service benefits 1,550 176 35 - 88 1,849 ======= ======= ======= ======= ======= ======= Geographical segments The following tables present revenue, assets and capital expenditure by geographical segments for the years ended 31 December 2005 and 2004. Year ended 31 December 2005 Middle East Former Soviet & Africa Union / Asia Europe Americas Consolidated US$'000 US$'000 US$'000 US$'000 US$'000 Segment revenue Continuing operations 354,326 609,270 518,175 3,701 1,485,472 Discontinued operation - - - 204 204 ______ ______ ______ ______ ______ 354,326 609,270 518,175 3,905 1,485,676 ====== ====== ====== ====== ====== Carrying amount of segment assets 488,164 306,209 185,153 7,124 986,650 ====== ====== ====== ====== ====== Capital expenditure: Tangible fixed assets 3,755 9,920 3,843 38 17,556 Intangible fixed assets - 2,070 2,755 - 4,825 ====== ====== ====== ====== ====== Year ended 31 December 2004 Middle East Former Soviet & Africa Union / Asia Europe Americas Consolidated US$'000 US$'000 US$'000 US$'000 US$'000 Segment revenue Continuing operations 281,678 272,384 392,085 5,383 951,530 Discontinued operation - - - 12,624 12,624 ______ ______ ______ ______ ______ 281,678 272,384 392,085 18,007 964,154 ====== ====== ====== ====== ====== Carrying amount of segment assets 382,100 127,561 207,576 12,120 729,357 ====== ====== ====== ====== ====== Capital expenditure: Tangible fixed assets 5,674 8,851 2,537 80 17,142 Intangible fixed assets - 6,721 - - 6,721 ====== ====== ====== ====== ====== 4 REVENUES AND EXPENSES a. Revenue 2005 2004 US$'000 US$'000 Rendering of services 1,478,187 945,375 Sale of processed hydrocarbons 7,285 6,155 _______ _______ 1,485,472 951,530 ======= ======= b. Other income 2005 2004 US$'000 US$'000 Restated Gain on sale of investments 2,390 2,932 Foreign exchange gains 1,200 2,088 Other income 1,614 1,206 Gain on sale of property, plant and equipment 19 20 _______ _______ 5,223 6,246 ======= ======= c. Other expenses 2005 2004 US$'000 US$'000 Foreign exchange losses 2,302 1,460 Other expenses 189 127 _______ _______ 2,491 1,587 ======= ======= d. Selling, general and administration expenses 2005 2004 US$'000 US$'000 Restated Included in selling, general and administration expenses: Staff costs 40,893 27,910 Depreciation 2,221 1,684 Amortisation and impairment 440 3,956 Other operating expenses 31,374 25,275 _______ _______ 74,928 58,825 ======= ======= In the year ended 31 December 2005, other operating expenses include US$6,311,000 of legal and professional expenses in relation to the Company's listing on the London Stock Exchange in October 2005 (2004: nil). 2005 2004 US$'000 US$'000 Restated Total staff costs: Wages and salaries 359,860 283,915 Social security costs 23,494 22,097 Defined contribution pension costs 7,252 6,823 End-of-service benefit costs (note 23) 2,903 1,849 Expense of share based payments 897 - _______ _______ 394,406 314,684 ======= ======= The average number of persons employed by the group during the year in continuing operations was 6,598 (2004: 5,284). Equity-settled transactions On 29 April 2005 the Company introduced a Long Term Incentive Plan (LTIP) for senior employees (including directors). Under the scheme rules, participatory interests in ordinary shares are granted to eligible employees. Unless varied by the Trustees of the scheme, 25% of the participatory interests in ordinary shares granted vest on award date with the balance vesting equally over the following three years, provided the recipients remain employees of the group. The scheme rules also stipulate participatory interests in ordinary shares will vest immediately on the occurrence of certain events, including the admission of the Company's shares to the Official List and to trading on the London Stock Exchange. In the year to 31 December 2005, 53,000 participatory interests in US$1.00 ordinary shares were granted under the LTIP scheme rules. The fair value of the interests granted, as determined using a net asset based formula, was US$897,000 or US$16.93 per US$1.00 ordinary share. As a result of the Company's listing on the London Stock Exchange on 7 October 2005, as governed by the LTIP scheme rules, all then unvested awards of participatory interests in ordinary shares vested immediately. Consequently, the group recognised a total expense of US$897,000 during the year in relation to these equity-settled transactions (2004: nil). Auditors' remuneration (including out-of-pocket expenses) 2005 2004 US$'000 US$'000 Audit fees 651 564 Fees for other services: Assurance services related to the Company's Initial 2,262 - Public Offering Tax services 154 118 Other 67 105 _______ _______ 3,134 787 _______ _______ 5 FINANCE COSTS / (INCOME) 2005 2004 US$'000 US$'000 Restated Interest payable: Long-term borrowings 5,954 6,608 Other interest, including short-term loans and overdrafts 1,938 936 "A" ordinary shares 556 - _______ _______ Total finance cost 8,448 7,544 _______ _______ Bank interest receivable (2,952) (1,644) Other interest receivable (241) (353) _______ _______ Total finance income (3,193) (1,997) _______ _______ "A" ordinary shares During the year, the conditions allowing the Company to call upon 3i Group plc (3i) to convert its unsecured variable rate loan notes to equity (as "A" ordinary shares) were satisfied (note 22(ix)). Under IAS 32 'Financial Instruments: Disclosure and Presentation', the Company classified the "A" ordinary shares as a financial liability, as the then Articles of Association of the Company provided the shares with priority of dividends, including the right to an annual 5% fixed dividend. The finance cost of US$556,000 in 2005 reflects the 5% dividend accruing on the "A" ordinary shares between the date of issue and the date the "A" ordinary shares were reclassified as ordinary shares (note 20). Other interest receivable Other interest receivable includes shareholder loan interest receivable on loans advanced to employees for the purchase of participatory interests in ordinary shares of the Company (note 16). The offer to purchase participatory interests in ordinary shares was extended through the Petrofac Limited Executive Share Scheme (ESS), which is administered by Petrofac ESOP. The rules of the ESS, unless varied by the Trustee, required a down-payment on acquisition of participatory interests with the balance structured as an interest bearing shareholder loan note, payable over three years. Shareholder loan notes bear interest at rates between 3.4% and 4.5% (2004: between 3.4% and 6.2%) dependent on the year of issue. 6 INCOME TAX a. Tax on ordinary activities The major components of income tax expense are as follows: 2005 2004 US$'000 US$'000 Current income tax Current income tax charge 13,495 15,576 Adjustments in respect of current income tax of previous years (590) 69 Deferred income tax Relating to origination and reversal of temporary differences (4,929) 1,095 Adjustment in respect of deferred income tax of previous year (25) (41) _______ _______ Income tax expense reported in Consolidated Income Statement 7,951 16,699 _______ _______ b. Reconciliation of total tax charge Under Article 123A of the Income Tax (Jersey) law 1961, as amended, the company has obtained Jersey exempt company status and is therefore exempt from Jersey income tax on non Jersey source income and bank interest (by concession). An annual exempt company fee is payable by the Company. A reconciliation between the income tax expense and the product of accounting profit on continuing operations multiplied by the Company's domestic tax rate is as follows: 2005 2004 US$'000 US$'000 Restated Profit from operating activities before income tax 83,348 62,736 _______ _______ At Jersey's domestic income tax rate of 20% (2004: 20%) 16,670 12,547 Profits exempt from Jersey income tax (16,670) (12,547) Higher income tax rates of other countries, including withholding taxes 17,212 15,834 Adjustments in respect of previous periods (615) (91) Tax effect of utilisation of tax losses not previously recognised (12,030) - Unrecognised tax losses 1,549 - Expenditure not allowable for income tax purposes 2,328 174 Tax recognised on unremitted overseas dividends (381) 618 Other (112) 164 _______ _______ 7,951 16,699 _______ _______ Tax effect of utilisation of tax losses not previously recognised On 6 May 2005, Petrofac (Malaysia-PM304) Limited received formal approval from the Malaysian licensing authorities for the company's field development plan in relation to Block PM304, Malaysia and, as a consequence, recognised commercial oil & gas reserves. As a result of these developments, a tax credit of US$8,943,000 was recognised in the year ended 31 December 2005 relating to losses available within Petrofac (Malaysia-PM304) Limited. In addition, a further US$3,087,000 of project related tax losses, in various jurisdictions, were utilised in the year. These tax losses were previously unrecognised due to the uncertainty of utilisation of the losses. c. Deferred income tax Deferred income tax relates to the following: Consolidated Consolidated Balance Sheet Income Statement 2005 2004 2005 2004 US$'000 US$'000 US$'000 US$'000 Deferred income tax liabilities Unremitted overseas dividends 366 817 (378) 775 Revaluation adjustment 1,746 - - - Other timing differences 1,009 718 363 - _______ _______ Gross deferred income tax liabilities 3,121 1,535 _______ _______ Deferred income tax assets Losses available for offset 9,088 - (9,088) - Group relief (4,853) - 4,853 - Tax assets utilised 33 241 192 61 _______ _______ 4,268 241 Decelerated depreciation for tax purposes 808 423 (485) 108 Other timing differences 500 118 (411) 110 _______ _______ Gross deferred income tax assets 5,576 782 _______ _______ _______ _______ Deferred income tax (credit) / charge (4,954) 1,054 _______ _______ d. Unrecognised tax losses The group has tax losses arising in the US of US$33,883,000 (2004: US$32,978,000) and in the UK of US$4,192,000 (2004: US$36,480,000) that are available for offset against future taxable profits of the companies in which the losses arose, and a further US$1,549,000 (2004: US$3,087,000) of project related tax losses in various jurisdictions. As at 31 December 2005, deferred tax assets have not been recognised in respect of these losses due to the uncertainty of utilisation of these tax losses in future years (2004: nil). 7 DISCONTINUED OPERATIONS On 29 April 2003, the group sold certain assets of Petrofac Inc., a wholly owned subsidiary, for cash consideration. The assets sold comprised substantially all of the operating assets of Petrofac Inc. although the group retained contractual responsibility for the work in hand at the date of the sale. By 31 December 2005, all physical work relating to residual projects within the business of Petrofac Inc. was complete, subject to a number of relatively minor commercial issues, principally relating to ongoing legal disputes. The results of Petrofac Inc. are presented below: 2005 2004 US$'000 US$'000 Revenue 204 13,750 Cost of sales (375) (26,039) _______ _______ Gross loss (171) (12,289) Selling, general and administration expenses (784) (1,043) Other income 80 135 _______ _______ Loss from discontinued operation (875) (13,197) Finance income, net 60 35 _______ _______ Loss before tax from discontinued operation (815) (13,162) Income tax expense - - _______ _______ Net loss attributable to discontinued operation (815) (13,162) _______ _______ The major classes of assets and liabilities comprising the discontinued operation are as follows: 2005 2004 US$'000 US$'000 Property, plant and equipment 28 28 Work in progress 9 347 Trade and other receivables 1,131 1,315 Other current assets - 1,800 Cash and short-term deposits 126 217 _______ _______ 1,294 3,707 Assets classified as held for sale: Freehold land and buildings 1,667 3,678 _______ _______ Total assets 2,961 7,385 _______ _______ Trade and other payables 25,373 28,109 Accrued contract expenses and provisions - 830 Accrued expenses and other liabilities 62 105 _______ _______ Total liabilities 25,435 29,044 _______ _______ Net liabilities of discontinued operation (22,474) (21,659) _______ _______ Trade and other payables include US$24,742,000 (2004: US$26,290,000) payable to the Company. Freehold land and buildings included in assets held for sale are valued at the lower of cost and fair value less costs to sell. An impairment provision of US$250,000 was recognised in the year ended 31 December 2005 (2004: nil) in relation to a freehold property, reflecting its anticipated fair value, net of selling costs. This charge is included within the selling, general and administration expense of US$784,000. Cash flow The cash flows of Petrofac Inc. have been disclosed on the face of the Consolidated Cash Flow Statement. Earnings per share The earnings per share from discontinued operations are as set out below. The weighted average number of shares used for calculating both basic and diluted earnings per share for 2004 have been restated to reflect the Company's 40:1 share split (note 20). 2005 2004 Earnings per share (US cents): Restated Basic from discontinued operations (0.27) (3.77) Diluted from discontinued operations (0.24) (3.22) 8 EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders, after adding interest relating to convertible share warrants, by the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of dilutive warrants and options on ordinary shares. The weighted average number of ordinary shares used for calculating both basic and diluted earnings per share for 2004 have been restated to reflect the Company's 40:1 share split (note 20). The following reflects the income and share data used in calculating basic and diluted earnings per share: Continuing and discontinued operations 2005 2004 US$'000 US$'000 Net profit attributable to ordinary shareholders for 74,582 32,921 basic earnings per share Income statement charge on variable rate unsecured loan 1,873 2,611 notes (note 22 (ix)) _______ _______ Net profit attributable to ordinary shareholders for diluted earnings per share 76,455 35,532 ======= ======= Continuing operations 2005 2004 US$'000 US$'000 Net profit attributable to ordinary shareholders for 75,397 46,083 basic earnings per share Income statement charge on variable rate unsecured loan 1,873 2,611 notes (note 22 (ix)) _______ _______ Net profit attributable to ordinary shareholders for 77,270 48,694 diluted earnings per share ======= ======= 2005 2004 Number Number '000 '000 Restated Weighted average number of ordinary shares for basic 304,141 349,280 earnings per share Convertible share warrants (note 20) 39,361 55,992 Ordinary share option 1,134 3,000 Unvested portion of LTIP shares 166 - _______ _______ Adjusted weighted average number of ordinary shares for diluted earnings per share 344,802 408,272 ======= ======= To calculate discontinued earnings per share, the weighted average number of ordinary shares for both basic and diluted is as set out above. The following reflects the loss figure used as the numerator: 2005 2004 US$'000 US$'000 Net loss attributable to ordinary shareholders from discontinued operations for basic and diluted earnings per share (815) (13,162) ======= ======== 9 DIVIDENDS PAID AND PROPOSED All dividend per ordinary share figures within this note reflect the Company's 40:1 share split (note 20). 2005 2004 US$'000 US$'000 Declared and paid during the year Equity dividends on ordinary shares: Final dividend for 2004: 2.3 cents (2003: 0.4 cents) 6,586 1,315 2005 pre-listing dividend: 3.0 cents 8,657 - _______ _______ 15,243 1,315 ======= ======= On 19 August 2005, a dividend of 40 cents per "A" ordinary share was approved for payment. Under IAS 32, and prior to the reclassification of the "A" ordinary shares to ordinary shares (note 20), the Company classified the "A" ordinary shares as a financial liability rather than as part of equity. As a consequence, the dividend paid on these "A" ordinary shares is recognised in the income statement as a finance cost. 2005 2004 US$'000 US$'000 Proposed for approval at AGM (not recognised as a liability as at 31 December) Equity dividends on ordinary shares Final dividend for 2005: 1.87 cents (2004: 2.30 cents) 6,454 6,586 ======= ======= 10 PROPERTY, PLANT AND EQUIPMENT Land, buildings Office and furniture Oil & gas Oil & gas leasehold Plant and and assets facilities improvements equipment Vehicles equipment Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Cost At 1 January 2004 - 121,076 11,504 17,095 6,425 11,112 167,212 Adjustment to - - - (650) - 650 - opening balances Additions - 2,285 3,316 2,761 3,819 4,961 17,142 Acquisition of - - 9,210 2,431 106 - 11,747 subsidiaries Transfer attributable to discontinued - - (4,382) - - - (4,382) operation Disposals - - - (110) (709) (2,624) (3,443) Exchange - 12 358 134 42 347 893 difference ______ ______ ______ ______ ______ ______ ______ At 1 January 2005 - 123,373 20,006 21,661 9,683 14,446 189,169 Transfers - - - (342) 55 287 - Additions 2,765 1,218 937 1,620 3,940 7,076 17,556 Acquisition of - - - - - 81 81 subsidiaries Transfers from intangible oil & gas assets 8,467 - - - - - 8,467 Disposals - - (376) (401) (627) (1,621) (3,025) Exchange - - (1,284) (881) (57) (783) (3,005) difference ______ ______ ______ ______ ______ ______ ______ At 31 December 11,232 124,591 19,283 21,657 12,994 19,486 209,243 ______ ______ ______ ______ ______ ______ ______ Depreciation At 1 January 2004 - (20,136) (1,884) (11,964) (2,097) (7,965) (44,046) Adjustment to - - - 467 - (467) - opening balances Charge for the - (13,734) (3,017) (2,456) (2,515) (2,210) (23,932) year Acquisition of - - (168) (560) (32) - (760) subsidiaries Transfer attributable to discontinued - - 704 - - - 704 operation Disposals - - - 2 464 2,259 2,725 Exchange - (1) (89) (69) (8) (280) (447) difference ______ ______ ______ ______ ______ ______ ______ At 1 January 2005 - (33,871) (4,454) (14,580) (4,188) (8,663) (65,756) Transfers - - - 110 (3) (107) - Charge for the - (13,009) (3,394) (2,628) (3,432) (4,128) (26,591) year Disposals - - 239 241 503 1,598 2,581 Exchange - - 137 352 26 439 954 difference ______ ______ ______ ______ ______ ______ ______ At 31 December 2005 - (46,880) (7,472) (16,505) (7,094) (10,861) (88,812) ______ ______ ______ ______ ______ ______ ______ Net carrying amount: At 31 December 11,232 77,711 11,811 5,152 5,900 8,625 120,431 2005 ______ ______ ______ ______ ______ ______ ______ At 31 December 2004 - 89,502 15,552 7,081 5,495 5,783 123,413 ______ ______ ______ ______ ______ ______ ______ Oil & gas facilities include capitalised interest, net of depreciation, of US$2,927,000 (2004: US$3,421,000). Of the total charge for depreciation in the income statement for continuing operations, US$24,370,000 (2004: US$22,142,000) is included in cost of sales and US$2,221,000 (2004: US$1,684,000) in selling, general and administration expenses. 11 BUSINESS COMBINATIONS Plant Asset Management On 20 October 2005, the group acquired the remaining 49% minority interest stake in Plant Asset Management Limited (Plant Asset Management) for a total consideration of US$1,644,000 including transaction cost of US$52,000. The consideration was settled in cash. The difference between the consideration paid and the fair value of assets acquired has been allocated as goodwill and is included in the Facilities Management cash-generating unit for the purposes of impairment testing. Included in the US$1,644,000 of goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured due to their nature. Prior to acquisition, the group did not carry a minority interest balance in relation to Plant Asset Management as the company had net liabilities and the group had no rights of recovery against the minority shareholders. Petrofac Ohanet On 27 May 2005, following the group's voluntary prepayment of non-recourse project finance provided by GE Structured Finance in relation to the Ohanet project (note 22), the group exercised its option to acquire Petrofac Resources (Ohanet) Jersey Limited (Petrofac Ohanet) for US$2,400,000. The consideration was settled in cash. The option to acquire Petrofac Ohanet was established in May 2002 as part of the group's corporate reorganisation and the investment by 3i (note 22). Prior to exercising the option, the group consolidated the financial results of Petrofac Ohanet in its consolidated financial statements as the group held significant operating and financial control over the company. The consideration paid to exercise the option has been taken to equity. Rubicon Response On 28 January 2005, the group acquired 100% of the issued and outstanding shares of Rubicon Response Limited (Rubicon Response), a leading provider of emergency response management consultancy and training services to the upstream oil & gas exploration and production markets. Total consideration for the acquisition of the shares inclusive of transaction costs of US$82,000, was US$6,326,000. The fair value of the net assets acquired was US$2,565,000. The fair value and carried value of the identifiable net assets and liabilities acquired were as follows: US$'000 Property, plant and equipment 81 Trade and other receivables 1,083 Cash and short-term deposits 2,253 ______ Total assets 3,417 Less: Deferred tax liability (11) Trade and other payables (841) ______ Total liabilities (852) ______ Fair value of net assets acquired 2,565 Goodwill arising on acquisition (note 12) 3,761 ______ 6,326 ====== Cash outflow on acquisition: Net cash acquired with the subsidiary 2,253 Cash paid on acquisition (6,326) ______ (4,073) ====== Included in the US$3,761,000 of goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured due to their nature. From the date of acquisition, Rubicon Response has contributed US$399,000 to net profit for the group. If the combination had taken place at the beginning of the year, net profit for the group would have been US$74,608,000 and revenue from continuing operations would have been US$1,485,655,000. Chrysalis On 1 April 2003, the group acquired the entire trade and assets and liabilities of Chrysalis Learning Limited (Chrysalis), a UK provider of training services, for consideration of US$29,000. The net liabilities of Chrysalis acquired on the date of acquisition were US$344,000. On 26 August 2004, the group paid an additional US$695,000 as earn-out consideration. Petrofac (Malaysia-PM304) Limited On 16 June 2004, the group acquired 100% of the issued and outstanding shares of Amerada Hess (Malaysia-PM304) Limited. Subsequent to the acquisition, the company name was changed to Petrofac (Malaysia-PM304) Limited (PM304). At the date of acquisition, PM304 held a 40.5% interest in a Production Sharing Contract (PSC) in Block PM304, Malaysia. The consideration for the acquisition was US$3,418,000 in cash with further cash consideration of US$4,450,000 due (note 24), contingent on the commercial production of oil from the block. No goodwill arose on this acquisition. Under pre-emption rights contained within the PSC, PM304 entered into a sale and purchase agreement with a partner in the PSC for the sale of 10.5% of the PSC on, pro rata, the same commercial terms and conditions associated with the acquisition from Amerada Hess. The total consideration payable by the partner for the 10.5% share of the PSC is US$2,040,000 of which US$1,154,000 is deferred, contingent on commercial production of oil from the block. The fair value of the identifiable assets and liabilities acquired, net of the pre-emption disposal, were as follows: US$'000 Intangible oil & gas asset 5,828 Inventories 369 Trade and other receivables 11 Cash and short-term deposits 4 ______ Total assets 6,212 Less: Trade and other payables (20) Other current liabilities (364) ______ Total liabilities (384) ______ Fair value of net assets acquired 5,828 _______ Petrofac Training On 12 February 2004, the group acquired 100% of the issued and outstanding shares of RGIT Montrose Holdings Limited, a leading provider of training and consultancy services to the upstream oil & gas exploration and production markets. Following the acquisition, the company changed its name to Petrofac Training Holdings Limited (Petrofac Training). Total consideration for the acquisition of the shares, inclusive of transaction costs of US$562,000, was US$17,236,000. The fair value of the identifiable net assets and liabilities of Petrofac Training acquired were as follows: US$'000 Property, plant and equipment 10,987 Goodwill 4,707 Other non-current assets 386 Trade and other receivables 7,259 Other current assets 2,508 Cash and short-term deposits 609 ______ Total assets 26,456 Less: Non-current interest-bearing loan notes (8,678) Deferred tax liability (580) Trade and other payables (8,938) Current interest-bearing loan notes (1,159) Other current liabilities (3,409) ______ Total liabilities (22,764) ______ Fair value of net assets acquired 3,692 Goodwill arising on acquisition (note 12) 13,544 ______ 17,236 ====== Included in the goodwill recognised above are certain intangible assets that cannot be individually separated and reliably measured due to their nature. Cash outflow on acquisition: US$'000 Net cash acquired with the subsidiary 609 Cash paid on acquisition (9,728) ______ (9,119) ====== The consideration was settled by a combination of cash and the issue of bank guaranteed loan notes. Interest is payable on the loan notes at UK LIBOR less 1% (note 22). Kyrgyz Petroleum Company On 29 January 2004, Petrofac Resources International Limited (PRIL), acquired a 50% interest in Kyrgyz Petroleum Company (KPC) from its subsidiary Kyrgoil Holding Corporation (KHC). PRIL indirectly held a 32.1% interest in KPC during 2004 to the date of acquisition, through its 64.2% investment in KHC. The agreed consideration for the acquisition was the cancellation of 50 million shares held in KHC and a cash payment of US$1,000,000. The fair value of the shares at the date of cancellation was US$3,562,000. 12 GOODWILL With effect 1 January 2005, following the prospective adoption of IFRS 3, the group has ceased to amortise goodwill and hereafter tests for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that goodwill may be impaired. A summary of the movements in goodwill is presented below: 2005 2004 US$'000 US$'000 At 1 January, net of amortisation 49,653 26,376 Acquisitions during the year 5,405 19,118 Amortisation charge - (2,484) Exchange difference (5,875) 6,643 _______ _______ At 31 December, net of amortisation 49,183 49,653 ======= ======= Goodwill acquired through business combinations has been allocated to three individual cash-generating units, which are reportable segments, for impairment testing as follows: â€¢ Facilities Management cash-generating unit (comprising Petrofac Facilities Management and Plant Asset Management) â€¢ Training cash-generating unit (comprising Petrofac Training, Chrysalis Learning and Rubicon Response) â€¢ Resources cash-generating unit (comprising Petrofac Resources International Limited) These represent the lowest level within the group at which the goodwill is monitored for internal management purposes. Facilities Management and Training cash-generating units The recoverable amounts for the Facilities Management and Training units have been determined based on value in use calculations, using discounted pre-tax cash flow projections. Management has adopted a 10 year projection period to assess each unit's value in use as it considers the life of the goodwill for both the Facilities Management and Training cash-generating units to significantly exceed the 5 year impairment test period referred to in IAS 36. The cash flow projections are based on financial budgets approved by senior management covering a three-year period, extrapolated, thereafter at a growth rate of 5% per annum. Management considers this a conservative long-term growth rate relative to both the economic outlook for the units in their respective markets within the oil & gas industry and the growth rates experienced in the recent past by each unit. Resources cash-generating unit The recoverable amount of the Resources unit is also determined on a value in use calculation using discounted pre-tax cash flow projections based on financial budgets and economic parameters for the unit approved by senior management and covering a five-year period, as recommended under IAS 36. Carrying amount of goodwill allocated to each of the cash-generating units 2005 2004 US$'000 US$'000 Facilities Management unit 26,117 27,849 Training unit 20,849 19,587 Resources unit 2,217 2,217 _______ _______ At 31 December 49,183 49,653 ======= ======= Key assumptions used in value in use calculations The calculation of value in use for both the Facilities Management and Training units is most sensitive to the following assumptions: â€¢ Market share â€¢ Growth rate â€¢ Net profit margins; and â€¢ Discount rate Market share: The assumption relating to market share for the Facilities Management unit is based on the unit re-securing those existing customer contracts in the UK which are due to expire during the projection period; for the Training unit, the key assumptions relate to management's assessment of maintaining the unit's market share in the UK and developing further the business in international markets. Growth rate: estimates are based on management's assessment of market share having regard to macro-economic factors and the growth rates experienced in the recent past by each unit. A growth rate of 5% per annum has been applied for the remaining 7 years of the 10 year projection period. Net profit margins: estimates are based on management's assumption of achieving a level of performance at least in line with the recent past performance of each of the units. Discount rate: management has used a discount rate of 9.1% per annum throughout the assessment period, reflecting the estimated weighted average cost of capital of the group. This discount rate has been calculated using an estimated risk free rate of return adjusted for the group's estimated equity market risk premium and the group's cost of debt. The calculation of value in use for the Resources unit is most sensitive to the following assumptions: â€¢ Financial returns; and â€¢ Discount rate Financial returns: estimates are based on the unit achieving returns on existing investments (comprising both those that are currently cash flowing and those which are in development and which may therefore be consuming cash) at least in line with current forecast income and cost budgets during the planning period; Discount rate: management has used an estimate of the pre-tax weighted average cost of capital of the group plus a risk premium to reflect the particular risk characteristics of each individual investment. The discount rates range between 9.9% and 17.0%. 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 changes in any of the above key assumptions would cause the carrying value of the relevant unit to exceed its recoverable amount, after giving due consideration to the macro-economic outlook for the oil & gas industry and the commercial arrangements with customers underpinning the cash flow forecasts for each of the units. 13 INTANGIBLE ASSETS Intangible oil & gas assets 2005 2004 US$'000 US$'000 At 1 January 6,721 - Additions 4,825 6,721 Transferred to tangible oil & gas assets (8,467) - Exchange difference (97) - ______ ______ At 31 December 2,982 6,721 ====== ====== On 6 May 2005, Petrofac (Malaysia-PM304) Limited received formal approval from the Malaysian licensing authorities for the company's field development plan in relation to Block PM304, Malaysia and, as a consequence, recognised commercial oil & gas reserves. As a result of this development, the carrying value of intangible assets associated with Block PM304 was transferred from intangible oil & gas assets to tangible oil & gas assets. Intangible oil & gas assets at 31 December 2005 relate to the group's interest in two UK offshore oil & gas licences. 14 INTEREST IN JOINT VENTURES In the normal course of business, the group establishes jointly controlled entities and operations for the execution of certain of its operations and contracts. The group's share of assets, liabilities, revenues and expenses relating to jointly controlled entities and operations, which are proportionately consolidated within these consolidated financial statements, are as follows: 2005 2004 US$'000 US$'000 Revenue 159,041 229,237 Cost of sales (150,802) (251,690) ______ ______ Gross profit / (loss) 8,239 (22,453) Selling, general and administration expenses (883) (742) Finance costs, net 21 46 ______ ______ Profit / (loss) before income tax 7,377 (23,149) Income tax (373) (224) ______ ______ Net profit / (loss) 7,004 (23,373) ====== ====== Current assets 96,266 99,154 Non-current assets 12,314 16,970 ______ ______ Total assets 108,580 116,124 ______ ______ Current liabilities 100,276 112,776 Non-current liabilities 290 132 ______ ______ Total liabilities 100,566 112,908 ______ ______ Net assets 8,014 3,216 ====== ====== 15 AVAILABLE-FOR-SALE FINANCIAL ASSETS 2005 2004 US$'000 US$'000 Shares - listed 2,413 4,104 ====== ====== Available-for-sale financial assets consist of investments in ordinary shares and therefore have no fixed maturity date or coupon rate. 16 OTHER FINANCIAL ASSETS 2005 2004 US$'000 US$'000 Other financial assets - non-current Fair value of derivative instruments 672 6,394 Notes receivable from shareholders - 3,342 Restricted cash - 91 Other 8 1,378 ______ ______ 680 11,205 ====== ====== Other financial assets - current Restricted cash 1,648 17,587 Fair value of derivative instruments 461 17,371 Short-term notes receivable from shareholders 414 2,057 Other 1,978 828 ______ ______ 4,501 37,843 ====== ====== Restricted cash is comprised of deposits with financial institutions securing various guarantees and performance bonds associated with the group's trading activities. 17 WORK IN PROGRESS AND BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS 2005 2004 US$'000 US$'000 Cost and estimated earnings 1,453,455 820,360 Less: Billings (1,218,408) (711,323) ______ ______ Work in progress 235,047 109,037 ====== ====== Billings 210,582 148,334 Less: Cost and estimated earnings (140,806) (76,179) ______ ______ Billings in excess of cost and estimated earnings 69,776 72,155 ====== ====== 18 TRADE AND OTHER RECEIVABLES 2005 2004 US$'000 US$'000 Contract receivables 290,313 194,919 Retentions receivable 5,408 2,190 Advances 18,256 4,329 Prepayments and deposits 9,213 9,866 Other receivables 2,526 5,492 ______ ______ 325,716 216,796 ====== ====== Contract receivables are non-interest bearing and are generally on 30 to 60 days' terms. Advances represent payments made to certain of the group's sub-contractors for projects in progress, on which the related work had not been performed at the balance sheet date. 19 CASH AND SHORT-TERM DEPOSITS 2005 2004 US$'000 US$'000 Cash at bank and in hand 91,339 45,169 Short-term deposits 117,557 98,365 ______ ______ Total cash and bank balances 208,896 143,534 ====== ====== 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 one month depending on the immediate cash requirements of the group, and earn interest at respective short-term deposit rates. The fair value of cash and bank balances is US$208,896,000 (2004: US$143,534,000). For the purposes of the cash flow statement, cash and cash equivalents comprise the following: 2005 2004 US$'000 US$'000 Cash at bank and in hand 91,339 45,169 Short-term deposits 117,557 98,365 Bank overdrafts (note 22) (6,055) (15,711) ______ ______ 202,841 127,823 ====== ====== 20 SHARE CAPITAL On 15 September 2005, conditional upon listing on the London Stock Exchange, the shareholders of the Company approved the reclassification of the issued "A" ordinary shares as ordinary shares and, immediately following the reclassification, a 40:1 share split for all ordinary shares then authorised such that the nominal value of ordinary shares reduced from US$1.00 per share to US$0.025 per share. The shareholders also conditionally approved the redemption of the "B" deferred share at its nominal value. On 7 October 2005 the Company's shares were admitted to the Official List and to trading on the London Stock Exchange, at which time the reclassification of the "A" ordinary shares and the subsequent share split became unconditional, and the "B" deferred share was redeemed at its nominal value. The share capital of the Company as at 31 December was as follows: 2005 2004 US$'000 US$'000 Authorised 750,000,000 ordinary shares of US$0.025 each (2004: 15,000,000 ordinary shares of US$1.00 each) 18,750 15,000 ====== ====== Nil "A" ordinary shares of US$1.00 each (2004: 3,750,000 "A" ordinary shares of US$1.00 each) - 3,750 ====== ====== Nil deferred ordinary share of US$1.00 each (Class "B") (2004: 1 ordinary share Class "B") - - ====== ====== Issued and fully paid 345,159,920 ordinary shares of US$0.025 each (2004: 7,166,330 ordinary shares of US$1.00 each) 8,629 7,166 Nil deferred ordinary share of US$1.00 each (Class "B") (2004: 1 ordinary share Class "B") - - _______ _______ 8,629 7,166 ======= ======= The movement in the number of issued and fully paid ordinary shares and "A" ordinary shares is as follows: Number Ordinary shares: Balance of ordinary shares of US$1.00 each at 1 January 2004 9,066,401 Issued during the year 346,617 Repurchased and cancelled during the year (2,246,688) _________ Balance of ordinary shares of US$1.00 each at 31 December 7,166,330 2004 Issued in period to 7 October 2005 47,486 Reclassification of "A" ordinary shares of US$1.00 each as ordinary shares of US$1.00 each 1,397,557 _________ Balance of ordinary shares of US$1.00 each at 7 October 2005 and immediately prior to share split 8,611,373 _________ Balance of ordinary shares of US$0.025 each following the Company's 40:1 share split 344,454,920 Issued during the period 7 October 2005 to 31 December 2005 705,000 _________ Balance of ordinary shares of US$0.025 each at 31 December 345,159,920 2005 ========= "A" ordinary shares: Balance at 1 January 2005 - Issued during the year 1,397,557 Reclassification as ordinary shares of US$1.00 each (1,397,557) _________ Balance at 31 December 2005 - ========= During 2005, the Company issued 47,486 ordinary shares of US$1.00 each and 705,000 ordinary shares of US$0.025 each to Petrofac ESOP for a combined consideration of US$1,102,000. Between 21 June 2005, being the date of issue, and 7 October 2005, being the date of reclassification, the "A" ordinary shares were classified as a financial liability (see share options note below). During 2004, the Company issued 115,000 ordinary shares of US$1.00 each to the senior executives of Petrofac Training for a total consideration of US$1,511,000 and 231,617 ordinary shares of US$1.00 each to Petrofac ESOP for a total consideration of US$3,043,000. On 21 October 2004, the Company repurchased 2,246,688 ordinary shares from two retiring senior executives for a total consideration of US$30,760,000. The premium on the share buy-back of US$28,513,000 has been deducted from the share premium account. The shares repurchased were cancelled. Petrofac ESOP Through Petrofac ESOP, the Company temporarily warehouses ordinary shares that are expected, in the foreseeable future, to be offered to new or existing employees (including directors). The movements in the warehousing of ordinary shares are noted below: 2005 2004 Number Number Share transactions prior to the Company's 40:1 share split New issue of US$1.00 ordinary shares of the Company 47,486 231,617 acquired by Petrofac ESOP ======= ======= Existing US$1.00 ordinary shares of the Company acquired 185,989 176,569 by Petrofac ESOP ======= ======= US$1.00 ordinary shares of the Company sold by Petrofac (198,100) (418,100) ESOP ======= ======= US$1.00 ordinary shares granted under LTIP awards by (35,375) - Petrofac ESOP ======= ======= Share transactions after the Company's 40:1 share split New issue of US$0.025 ordinary shares of the Company 705,000 - acquired by Petrofac ESOP ======= ======= Existing US$0.025 ordinary shares of the Company acquired 40,000 - by Petrofac ESOP ======= ======= US$0.025 ordinary shares granted under LTIP awards by (705,000) - Petrofac ESOP ======= ======= The net difference between the acquisition (including new shares issued and acquired by Petrofac ESOP) and sales cost of US$1,398,000 (2004: US$2,784,000) has been credited to the share premium account of the Company. At 31 December 2005, Petrofac ESOP held 40,000 ordinary shares of US$0.025 each in the Company and, in respect of which, had an indebtedness to the Company of US$17,000 (31 December 2004: nil shares and indebtedness of nil). Share options In 2002 the Company extended an option to a director of the Company to acquire up to 75,000 ordinary shares of US$1.00 each at US$25.00 per share. On 18 May 2005, this option agreement was cancelled. As part of an investment agreement entered into in May 2002 (note 22), 3i was issued one "B" ordinary share. The Company also granted an option to 3i to acquire shares representing 13.0% of the Company's share capital, as so enlarged (the Option Shares), subject to adjustment to 20.0% in the event of the 3i variable rate unsecured loan notes remaining unpaid. On 21 October 2004, this option was amended, providing 3i with a revised right to acquire shares representing 16.2% of the Company's share capital, as so enlarged, subject to adjustment to 23.2% in the event of the 3i variable rate unsecured loan notes remaining unpaid. The option was exercisable by 3i at any time until 30 June 2009 and by the Company upon the fulfilment of certain conditions. During the year, the conditions allowing the Company to call upon 3i to subscribe for the Options Shares were satisfied and, on 21 June 2005, the aggregate subscription amount was satisfied by the cancellation of the loan notes and the issue of 1,397,557 "A" ordinary shares to 3i. In addition, and as part of the consideration for the Option Shares, the one "B" ordinary share held by 3i was converted to a deferred ordinary share (Class "B"). This deferred ordinary share had no right to receive notice of general meetings of the Company or rights to attend or vote at general meetings and on 7 October 2005 was redeemed at its nominal value. Under IAS 32, the Company classified the "A" ordinary shares as a financial liability, as the then Articles of Association of the Company provided the shares with priority of dividends, including the right to an annual 5% fixed dividend. The then Articles of Association of the Company also provided that certain matters, including the approval of certain ordinary share dividends, the conversion of "A" ordinary shares to ordinary shares and the approval of certain ordinary share transfers, required the approval of the holders of 75% or more of the "A" ordinary shares. Employee Share Schemes On 13 September 2005, conditional upon listing on the London Stock Exchange, the Company approved the establishment of three new employee share schemes, details of which are contained within the Directors' Remuneration Report. There have been no awards or commitments made in relation to these schemes either in the year or since the reporting date and before the completion of these financial statements. 21 OTHER RESERVES Net gains on available- Net for-sale (losses) / Foreign financial gains on currency assets derivatives translation Total US$'000 US$'000 US$'000 US$'000 Balance at 1 January 2004 1,127 (1,020) (1,910) (1,803) Foreign currency translation - - 3,598 3,598 Net loss on maturity of cash flow hedges recognised in income statement - 486 - 486 Net changes in fair value of - 23,498 - 23,498 derivatives Changes in fair value of available-for-sale financial assets 1,268 - - 1,268 _________ _________ _________ _________ Balance at 31 December 2004 2,395 22,964 1,688 27,047 Foreign currency translation - - (4,248) (4,248) Net gain on maturity of cash flow hedges recognised in income statement - (5,628) - (5,628) Net changes in fair value of - (28,549) - (28,549) derivatives Changes in fair value of available-for-sale financial assets (1,048) - - (1,048) _________ _________ _________ _________ Balance at 31 December 2005 1,347 (11,213) (2,560) (12,426) ========= ========= ========= ========= Nature and purpose of other reserves Net gains on available-for-sale financial assets This reserve records fair value changes on available-for-sale financial assets held by the group. Net gains / (losses) on derivatives The portion of gains or losses on hedging instruments in cash flow hedges that are determined to be effective hedges are included within this reserve. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements in foreign subsidiaries. It is also used to record exchange differences arising on monetary items that form part of the group's net investment in subsidiaries. 22 INTEREST-BEARING LOANS AND BORROWINGS The group had the following interest-bearing loans and borrowings outstanding: Effective interest rate% Maturity 2005 2004 US$'000 US$'000 Current Loan notes (i) UK LIBOR - 1.00% 2005 - 7,699 Revolving credit facility (ii)(a) US LIBOR + 1.50% on demand 2,400 3,250 Revolving credit facility (ii)(b) US LIBOR + 1.75% 2006 6,500 - Short term loan (iii) KD Discount Rate 2006 6,228 - + 2.00% Bank overdrafts (iv) UK LIBOR + 1.25% on demand 6,055 15,711 Other loans: Project term loan (v) US LIBOR + 2.00% 2006 7,000 - Non-recourse structured finance (vi) US LIBOR + 3.00% 2005 - 24,031 Current portion of term (vii) 5.48% to 6.20% 2006 2,500 - loan (2004: 5.38% to 6.31%) _______ _______ 30,683 50,691 ======= ======= Non-current Revolving credit facility (viii) US/UK LIBOR 2008 8,077 - +1.75% Term loan (vii) 5.48% to 6.20% 2007-2011 69,522 68,838 (2004: 5.38% to 6.31%) Variable rate unsecured (ix) n/a n/a loan notes (2004: 7.66%) (2007-2009) - 40,250 Other loans: Project term loan (v) US LIBOR + 2.00% 2006 - 7,000 _______ _______ 77,599 116,088 Less: Debt acquisition costs, net of accumulated (1,412) (3,334) amortisation Warrants, net of - (1,967) accumulated amortisation _______ _______ 76,187 110,787 ======= ======= Details of the group's interest-bearing loans and borrowings are as follows: (i) Loan notes The loan notes related to deferred consideration associated with the acquisition of Petrofac Training. Interest accrued at the current prevailing 3 month UK LIBOR rate less 1.00%. On 30 June 2005 the loan notes were repaid in full using the group's term loan facility (vii). (ii) Revolving credit facilities (a) This revolving credit borrowing relates to US$ denominated borrowings. (b) This facility, provided by The Royal Bank of Scotland / Halifax Bank of Scotland (RBOS/HBOS), is committed until 30 September 2006 and subject to annual review thereafter. Until 1 September 2005, the revolving credit facility was secured by a floating charge over certain of the group's assets. On 1 September 2005, this charge was released. (iii) Short term loan The short term loan is denominated in Kuwaiti Dinars (KD) and relates to funding provided for a project in Kuwait. The loan is committed until 30 June 2006 and subject to annual review thereafter. (iv) Bank overdrafts Bank overdrafts are denominated in Sterling. Until 1 September 2005, the bank overdrafts were secured by a floating charge over certain of the group's assets. On 1 September 2005, this charge was released. (v) Project term loan The project term loan relates to project funding provided for the group's Ohanet investment in Algeria and is repayable in full in April 2006. (vi) Non-recourse structured finance The group's non-recourse structured finance related to funding provided by GE Structured Finance for the Ohanet project in Algeria. This project facility was voluntarily prepaid in full on 7 April 2005. (vii) Term loan In October 2004, the group secured new term loan facilities with RBOS/HBOS. The term loan at 31 December 2005 comprised drawings of US$35,310,000 denominated in US$ and US$36,712,000 denominated in Sterling. Both elements of the loan are repayable over a period of five years commencing 31 December 2006. Until 1 September 2005, the term loan was secured by a floating charge over certain of the group's assets. On 1 September 2005, this charge was released. (viii) Revolving credit facility The drawings against this facility, which is also provided by RBOS/HBOS, will be converted to a term loan on 30 September 2008 to be repaid over a period of three years ending 30 September 2011. The drawing at 31 December 2005 comprised US$2,400,000 denominated in US$ and US$5,677,000 denominated in Sterling. Until 1 September 2005, the revolving credit facility was secured by a floating charge over certain of the group's assets. On 1 September 2005, this charge was released. (ix) Variable rate unsecured loan notes In May 2002, the group entered into an investment agreement with 3i pursuant to which 3i subscribed for US$40,250,000 of variable rate unsecured loan notes. Through the issuance of warrants associated with this investment agreement, the group granted an option to 3i to acquire shares representing 16.2% of the Company's share capital, as so enlarged, subject to adjustment to 23.2% in the event of the 3i variable rate unsecured loan notes remaining unpaid. The option was exercisable by 3i at any time until 30 June 2009 and by the Company upon the fulfilment of certain conditions. During the year the conditions allowing the Company to call upon 3i to convert the variable rate unsecured loan notes to equity were satisfied. On 21 June 2005, the aggregate subscription amount was satisfied by the cancellation of the loan notes and the issue of "A" ordinary shares to 3i. The group's credit facilities and debt agreements contain covenants relating to cash flow cover, cost of borrowings cover, dividends and various other financial ratios. With the exception of Petrofac International Ltd, which under its existing bank covenants is restricted from making upstream cash payments in excess of 70 per cent. of its net income in any one year, none of the Company's subsidiaries is subject to any material restrictions on their ability to transfer funds in the form of cash dividends, loans or advances to the Company. 23 PROVISIONS End-of-service benefits US$'000 At 1 January 2005 5,912 Arising during the year 2,903 Utilised (531) _______ At 31 December 2005 8,284 ======= End-of-service benefits Labour laws in certain countries in which the group operates require employers to provide for end-of-service benefits. These benefits are payable to employees at the end of their period of employment. The provision for end-of-service benefits is calculated based on the employees' final salary and length of service, subject to the completion of a minimum service period in accordance with the local labour laws of the jurisdictions in which the group operates. 24 OTHER FINANCIAL LIABILITIES 2005 2004 US$'000 US$'000 Other financial liabilities - non-current Fair value of derivative instruments 1,097 210 Deferred consideration on acquisitions - 4,450 Other 125 2,217 _______ _______ 1,222 6,877 ======= ======= Other financial liabilities - current Fair value of derivative instruments 10,502 12 Deferred consideration on acquisitions 4,450 - Interest payable 858 1,263 _______ _______ 15,810 1,275 ======= ======= 25 TRADE AND OTHER PAYABLES 2005 2004 US$'000 US$'000 Trade payables 91,490 99,927 Advances received from customers 64,170 12,327 Accrued expenses 49,652 30,897 Other taxes payable 9,936 10,649 Other payables 4,177 4,134 _______ _______ 219,425 157,934 ======= ======= Trade payables are non-interest bearing and are normally settled on between 30-day and 60-day terms. Advances from customers represent payments received for contracts on which the related work had not been performed at the balance sheet date. Included in other payables are retentions held against subcontractors of US$3,197,000 (2004: US$933,000). 26 ACCRUED CONTRACT EXPENSES 2005 2004 US$'000 US$'000 Accrued contract expenses 362,609 174,731 Reserve for contract losses 861 4,277 _______ _______ 363,470 179,008 ======= ======= 27 COMMITMENTS AND CONTINGENCIES Commitments In the normal course of business the group will obtain surety bonds, letters of credit and guarantees, which are contractually required to secure performance, advance payment or in lieu of retentions being withheld. Some of these facilities are secured by issue of corporate guarantees by the Company in favour of the issuing banks. At 31 December 2005, the group had letters of credit of US$10,899,000 (2004: US$34,081,000) and outstanding letters of guarantee, including performance and bid bonds, of US$385,556,000 (2004: US$219,590,000) against which the group had pledged or restricted cash balances of, in aggregate, US$1,648,000 (2004: US$17,678,000). At 31 December 2005, the group had outstanding forward exchange contracts amounting to US$381,003,000 (2004: US$185,619,000). These commitments consist of future obligations to either acquire or sell designated amounts of foreign currency at agreed rates and value dates (note 29). Leases The group has financial commitments in respect of non-cancellable operating leases for office space and equipment. These non-cancellable leases have remaining non-cancellable lease terms of between one and ten years and, for certain property leases, are subject to renegotiation at various intervals as specified in the lease agreements. The future minimum rental commitments under these non-cancellable leases are as follows: 2005 2004 US$'000 US$'000 Within one year 7,159 4,667 After one year but not more than five years 15,382 13,963 More than five years 8,501 10,717 _______ _______ 31,042 29,347 ======= ======= Minimum lease payments recognised as an operating lease expense during the year amounted to US$7,212,000 (2004: US$4,255,000). Capital commitments At 31 December 2005, the group had capital commitments of US$3,410,000 (2004: nil). On 24 January 2006, the group approved a commitment to construct a new office building in Sharjah, United Arab Emirates. The total value of this commitment, including the cost of land, is US$34,060,000. 28 RELATED PARTY TRANSACTIONS The consolidated financial statements include the financial statements of Petrofac Limited and the subsidiaries listed in note 30. Petrofac Limited is the ultimate parent entity of the group. The following table provides the total amount of transactions which have been entered into with related parties: Sales to Purchases from Amounts owed Amounts owed related parties related by related to related parties parties parties US$'000 US$'000 US$'000 US$'000 Joint ventures 2005 8,194 2,674 28,402 1,333 2004 11,656 14 20,361 1,428 Directors' loans 2005 - - - - 2004 - - 528 - Other directors' 2005 - 30 - 2 interests 2004 - 252 - 25 All sales to and purchases from joint ventures are made at normal market prices and the pricing policies and terms of these transactions are approved by the group's management. Directors' loans Directors' loans receivable include the following items: 2005 2004 US$'000 US$'000 Loans advanced to directors for the purchase of participatory interests in ordinary shares - 528 ======= ======= The loans advanced to directors of the Company for the purchase of participatory interests in ordinary shares in the Company through the Petrofac ESS carried interest at rates between 3.4% and 3.8%, dependent on the year of grant. The loans were repaid in full during 2005. Directors' interests in share options In 2002 the Company extended an option to a director of the Company to acquire up to 75,000 ordinary shares of US$1.00 each at US$25.00 per share. On 18 May 2005, this option agreement was cancelled. Other Directors' interests During the year the following payments were made to a related party for services provided to the group by a director of the Company: 2005 2004 US$'000 US$'000 Purchases from related party 30 252 ======= ======= Amount owed by the group at 31 December 2 25 ======= ======= Other Directors' transactions At the time of appointment in 2002, an agreement was reached between a director of the Company and 3i, pursuant to which the director received a cash payment of US$1,422,000 from 3i following the Company's listing on the London Stock Exchange. On 21 October 2004, the Company repurchased 1,730,211 ordinary shares from a retiring director of the Company for a total consideration of US$23,652,000. Petrofac Ohanet Certain of the Company's directors held direct or beneficial interests in the holding company of Petrofac Ohanet. On 27 May 2005 the group acquired Petrofac Ohanet from its parent for cash consideration of US$2,400,000. The amount received in aggregate by the directors, either directly or beneficially, as a result of this transaction was US$1,437,000. The acquisition price was determined by a fixed price option that was established in May 2002. Compensation of key management personnel 2005 2004 US$'000 US$'000 Short-term employee benefits 4,249 2,993 End-of-service benefits 51 46 Share-based payments 169 - Fees paid to non-executive directors 266 92 ________ ________ 4,735 3,131 ======== ======== 29 FINANCIAL INSTRUMENTS Risk management objectives and policies The group's principal financial instruments, other than derivatives, comprise bank loans, loan notes, non-recourse structured finance, cash and short-term deposits. The main purpose of these financial instruments is to finance the group's operations. The group has various other financial instruments such as trade receivables and trade payables, which arise directly from its operations. The group also uses derivative transactions, principally interest rate swaps and caps, and forward currency contracts to manage the interest rate and currency risks arising from the group's operations and its sources of finance. It is the group's policy that no trading in financial instruments be undertaken. The main risks arising from the group's financial instruments are interest rate risk, foreign currency risk, credit risk and liquidity risk. Interest rate risk The group's exposure to market risk for changes in interest rates relates primarily to the group's long-term variable rate debt obligations and its cash and bank balances. The group's policy is to manage its interest cost using a mix of fixed and variable rate debt and specifically to keep between 60% and 80% of its borrowings at fixed or capped rates of interest. At 31 December 2005, after taking into account the effect of interest rate swaps and caps, approximately 84.7% (2004: 67.6%) of the group's term borrowings are at a fixed or capped rate of interest. Foreign currency risk The group uses forward currency contracts to eliminate the currency exposure on transactions significant to its operations. It is the group's policy not to enter into forward contracts until a firm commitment is in place and to negotiate the terms of the hedge derivatives to match the terms of the hedged item to maximise hedge effectiveness. Credit risk The group trades only with recognised, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result that the group's exposure to bad debts is not considered significant. At 31 December 2005, the group's five largest customers accounted for 69.8% of outstanding trade receivables and work in progress (2004: 62.6%). With respect to credit risk arising from the other financial assets of the group, which comprise cash and cash equivalents, available-for-sale financial assets and certain derivative instruments, the group's exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. Liquidity risk The group's objective is to maintain a balance between continuity of funding and flexibility through the use of overdrafts, revolving credit facilities, project finance and term loans. Fair values The fair value of the group's financial instruments as compared to their carrying amounts included within the group's balance sheet are set out below: Carrying amount Fair value 2005 2004 2005 2004 US$'000 US$'000 US$'000 US$'000 Financial assets Cash and short-term deposits 208,896 143,534 208,896 143,534 Restricted cash 1,648 17,678 1,648 17,678 Available-for-sale financial assets 2,413 4,104 2,413 4,104 Interest rate caps and swaps 672 53 672 53 Forward currency contracts - 23,712 - 23,712 Forward currency purchase option 461 - 461 - Other non-current financial assets 8 4,720 8 4,720 Other current financial assets 2,392 2,885 2,392 2,885 ====== ====== ====== ====== Financial liabilities Interest-bearing loans and borrowings 106,870 161,478 106,870 162,404 Deferred consideration 4,450 4,450 4,450 4,450 Interest rate swaps 147 210 147 210 Forward currency contracts 11,452 12 11,452 12 Other non-current financial liabilities 125 2,217 125 2,217 Other current financial liabilities 858 1,263 858 1,263 ====== ====== ====== ====== Market values have been used to determine the fair values of available-for-sale financial assets and forward currency contracts. The fair values of interest rate swaps and caps have been calculated by discounting the expected future cash flows at prevailing interest rates. Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the value of the group's interest-bearing financial liabilities and assets. The following table indicates the years over which these financial liabilities and assets will reprice or mature: Year ended 31 December 2005 Within 1-2 2-3 3-4 4-5 More Total than 1 year years years years years 5 years US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Financial liabilities Floating rates Revolving credit facilities 8,900 - 404 1,817 2,827 3,029 16,977 Short term loan 6,228 - - - - - 6,228 Bank overdrafts 6,055 - - - - - 6,055 Project term loan 7,000 - - - - - 7,000 Term 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 assets Floating rates Cash and short-term 208,896 - - - - - 208,896 deposits Restricted cash balances 1,648 - - - - - 1,648 _____ _____ _____ _____ _____ _____ _____ 210,544 - - - - - 210,544 ===== ===== ===== ===== ===== ===== ===== Year ended 31 December 2004 Within 1-2 2-3 3-4 4-5 More Total than 1 year years years years years 5 years US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Financial liabilities Floating rates Loan notes 7,699 - - - - - 7,699 Revolving credit facilities 3,250 - - - - - 3,250 Bank overdrafts 15,711 - - - - - 15,711 Non-recourse structured 24,031 - - - - - 24,031 finance Project term loan - 7,000 - - - - 7,000 Unsecured loan notes - 13,417 13,417 13,416 - - 40,250 Term loan - 2,500 10,000 11,250 15,625 29,463 68,838 _____ _____ _____ _____ _____ _____ _____ 50,691 22,917 23,417 24,666 15,625 29,463 166,779 ===== ===== ===== ===== ===== ===== ===== Financial assets Floating rates Cash and short-term 143,534 - - - - - 143,534 deposits Restricted cash balances 17,587 91 - - - - 17,678 _____ _____ _____ _____ _____ _____ _____ 161,121 91 - - - - 161,212 ===== ===== ===== ===== ===== ===== ===== Financial liabilities in the above table are disclosed gross of debt acquisition costs of US$1,412,000 (2004: US$3,334,000) and warrant debt discount of nil (2004: US$1,967,000). Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. The other financial instruments of the group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. Derivative instruments designated as cash flow hedges At 31 December 2005, the group held the following derivative instruments, designated as cash flow hedges in relation to floating rate interest-bearing loans and borrowings: Fair value asset/ (liability) Date 2005 2004 Instrument Duration Commenced US$'000 US$'000 UK LIBOR interest rate 4 years and 9 31 December 2004 (147) (70) swap months UK interest rate cap 3 years 31 December 2004 5 50 US LIBOR interest rate 3 years 31 December 2004 667 (140) swap US interest rate cap 3 years and 4 31 January 2002 - 3 months Foreign exchange risk The functional currency of the group is US dollars. The group is exposed to foreign currency risk on sales, purchases and borrowings that are entered into in a currency other than US dollars. The group uses forward foreign exchange contracts to hedge its foreign currency risk, when considered appropriate. At 31 December 2005, the group had foreign exchange contracts designated as cash flow hedges with a fair value loss of US$11,452,000 (2004: fair value gain US$23,700,000) as follows: Net unrealised Contract value Fair value (loss)/gain 2005 2004 2005 2004 2005 2004 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Euro currency purchases 344,107 179,125 332,689 202,676 (11,418) 23,551 Sterling currency purchases 36,896 6,494 36,862 6,643 (34) 149 ______ ______ (11,452) 23,700 ====== ====== The group has also acquired an option from a bank to purchase Euro currency equivalent to US$31,368,000 by paying a premium of US$689,000. At 31 December 2005, the fair value of the option was US$461,000 with an unrealised loss deferred in equity of US$228,000. The above foreign exchange contracts mature between January 2006 and June 2007 (2004: between January 2005 and April 2006). 30 SUBSIDIARIES AND JOINT VENTURES At 31 December 2005, the group had investments in the following subsidiaries and incorporated joint ventures: Proportion of nominal value of issued shares Name of company Country of controlled by the incorporation group Trading subsidiaries 2005 2004 Petrofac Inc. USA *100 *100 Petrofac International Ltd Jersey *100 *100 Petrofac Resources Limited England *100 *100 Petrofac Resources International Limited Jersey *100 *100 Petrofac UK Holdings Limited England *100 *100 Petrofac Facilities Management Jersey *100 *100 International Limited Petrofac Services Limited England *100 *100 Petrofac Services Inc. USA *100 *100 Petrofac Training International Limited Jersey *100 *100 Petroleum Facilities E & C Limited Jersey *100 *100 Petrofac ESOP Trustees Limited Jersey *100 *100 Atlantic Resourcing Limited Scotland 100 100 Monsoon Shipmanagement Limited Cyprus 100 100 Petrofac Alger URAL Algeria 100 100 Petrofac Engineering India Private Limited India 100 100 Petrofac Engineering Limited England 100 100 Petrofac Offshore Management Limited Jersey 100 100 Petrofac Facilities Management Group Scotland 100 100 Limited Petrofac Facilities Management Limited Scotland 100 100 Petrofac International Nigeria Ltd Nigeria 100 100 Petrofac Pars (PJSC) Iran 100 100 Petrofac Iran (PJSC) Iran 100 100 Plant Asset Management Limited Scotland 100 51 Petrofac Nuigini Limited Papua New Guinea 100 100 PFMAP Sendirian Berhad Malaysia 100 100 Petrofac Caspian Limited Azerbaijan 100 100 Petrofac (Malaysia-PM304) Limited England 100 100 Petrofac Training Group Limited Scotland 100 100 Petrofac Training Holdings Limited Scotland 100 100 Petrofac Training Limited Scotland 100 100 RGIT Montrose Inc. USA 100 100 RGIT Montrose (Trinidad) Limited Trinidad 100 100 Monsoon Shipmanagement Limited Jersey 100 n/a Petrofac E&C International Limited United Arab Emirates 100 n/a Rubicon Response Limited Scotland 100 n/a Petrofac Resources (Ohanet) Jersey Limited Jersey 100 n/a Petrofac Resources (Ohanet) LLC USA 100 n/a * Directly held by Petrofac Limited Proportion of nominal value of issued shares Name of Company Country of controlled by the incorporation group Joint Ventures 2005 2004 Costain Petrofac Limited England 50 50 Kyrgyz Petroleum Company Kyrgyz Republic 50 50 MJVI Sendirian Berhad Brunei 50 50 Spie Capag - Petrofac International Jersey 50 50 Limited TTE Petrofac Limited Jersey 50 50 Dormant subsidiaries Petrofac Sakha Limited England *100 *100 Petrofac Saudi Arabia Limited Saudi Arabia 100 100 ASJV Venezuela SA Venezuela 100 100 Joint Venture International Limited Scotland 100 100 Montrose Park Hotels Limited Scotland 100 100 Montrose Scota Limited Scotland 100 100 Petrofac Resources (Palmyra) Limited Jersey 100 100 RGIT Ethos Health & Safety Limited Scotland 100 100 Scota Limited Scotland 100 100 * Directly held by Petrofac Limited 31 COMPARATIVE AMOUNTS Certain of the corresponding figures in the balance sheet for 2004 have been reclassified in order to conform with the presentation for the current year, primarily to reflect the separate disclosure of financial assets and financial liabilities and the reclassification of end-of-service benefits to provisions. Such reclassifications do not affect previously reported totals of non-current assets, current assets, non-current liabilities or current liabilities, nor do they affect previously reported net profit or shareholders' equity. The table below summarises the reclassifications between the balance sheet line items affected. As reported Restated 2004 Reclassification 2004 US$'000 US$'000 US$'000 Other financial assets - non-current - 11,205 11,205 Other non-current assets 11,205 (11,205) - Trade and other receivables 200,042 16,754 216,796 Other current assets 54,597 (54,597) - Other financial assets - current - 37,843 37,843 ______ ______ ______ Total 265,844 - 265,844 ====== ====== ====== Other financial liabilities - non-current - 6,877 6,877 Provisions - 5,912 5,912 Other non-current liabilities 12,789 (12,789) - Trade and other payables 114,873 43,061 157,934 Accrued expenses and other liabilities 44,336 (44,336) - Other financial liabilities - current - 1,275 1,275 ______ ______ ______ Total 171,998 - 171,998 ====== ====== ====== Petrofac shares are traded on the London Stock Exchange using code 'PFC.L'. Registrar Company Secretary and registered office Capita Registrars Ogier Secretaries (Jersey) Limited The Registry Whiteley Chambers 34 Beckenham Road Don Street, St Helier Beckenham Jersey JE4 9WG Kent BR3 4TU Legal Advisers to the Company As to English Law As to Jersey Law Norton Rose Ogier & Le Masurier Kempson House Whiteley Chambers Camomile Street Don Street, St Helier London EC3A 7AN Jersey JE4 9WG Joint Brokers Credit Suisse Lehman Brothers 1 Cabot Square 25 Bank Street London E14 4QJ London E14 5LE Auditors Corporate and Financial PR Ernst & Young Bell Pottinger Corporate & Financial 1 More London Place 6th Floor, Holburn Gate London SE1 2AF 330 High Holburn London WC1V 7QD 2006 Financial Calendar Date* Activity 19 May 2006 Annual general meeting 31 May 2006 Final dividend payment 18 September 2006 Interim results announcement November 2006 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

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Petrofac Ltd. (PFC)

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