Final Results - Part Three
Petrofac Limited
02 March 2007
PART 3
30 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 2006, the group had letters of credit of US$16,920,000 (2005:
US$10,899,000) and outstanding letters of guarantee, including performance and
bid bonds, of US$573,185,000 (2005: US$385,556,000) against which the group had
pledged or restricted cash balances of, in aggregate, US$883,000 (2005:
US$1,648,000).
At 31 December 2006, the group had outstanding forward exchange contracts
amounting to US$221,188,000 (2005: US$381,003,000). These commitments consist of
future obligations to either acquire or sell designated amounts of foreign
currency at agreed rates and value dates (note 32).
Leases
The group has financial commitments in respect of non-cancellable operating
leases for office space and equipment. These non-cancellable leases have
remaining non-cancellable lease terms of between one and ten years and, for
certain property leases, are subject to renegotiation at various intervals as
specified in the lease agreements. The future minimum rental commitments under
these non-cancellable leases are as follows:
2006 2005
US$'000 US$'000
Within one year 16,679 7,159
After one year but not more than five years 24,748 15,382
More than five years 13,500 8,501
---------------------
54,927 31,042
=====================
Minimum lease payments recognised as an operating lease expense during the year
amounted to US$8,643,000 (2005: US$7,212,000).
Capital commitments
At 31 December 2006, the group had capital commitments of US$21,819,000 (2005:
US$3,410,000).
Included in the above are commitments for the construction of a new office
building in Sharjah, United Arab Emirates amounting to US$20,577,000 (2005:
nil).
31 RELATED PARTY TRANSACTIONS
The consolidated financial statements include the financial statements of
Petrofac Limited and the subsidiaries listed in note 34. Petrofac Limited is the
ultimate parent entity of the group.
The following table provides the total amount of transactions which have been
entered into with related parties:
Sales to Purchases Amounts owed Amounts owed
related from
parties related by related to related
parties parties parties
US$'000 US$'000 US$'000 US$'000
Joint ventures 2006 4,520 3,282 7,725 133
2005 8,194 2,674 28,402 1,333
Other directors' 2006 - 49 - 49
interests 2005 - 30 - 2
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.
All related party balances at 31 December 2006 will be settled in cash.
Purchases in respect of other directors' interests of US$49,000 comprise of
market rate based costs of chartering the services of an aeroplane used for the
transport of senior management and directors of the Company on company business,
which is owned by an offshore trust of which the Chief Executive of the Company
is one of the beneficiaries.
Other directors' interest in 2005 relates to payments made to a related party
for services provided to the group by the then director of the Company.
In 2002, the Company extended an option to a director of the Company to 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.
At the time of appointment in 2002, an agreement was reached between a director
of the Company and 3i Group plc (3i), pursuant to which the director received a
cash payment of US$1,422,000 from 3i following the Company's listing on the
London Stock Exchange in 2005.
Compensation of key management personnel
The following details remuneration of key management personnel of the group
comprising of executive and non-executive directors of the Company and other
senior personnel. Further information relating to the individual directors is
provided in the Directors' Remuneration report on pages 29 to 36.
2006 2005
US$'000 US$'000
Short-term employee benefits 4,412 4,249
Other long term employment benefits 40 51
Share-based payments 288 169
Fees paid to non-executive directors 416 266
---------------------
5,156 4,735
=====================
32 FINANCIAL INSTRUMENTS
Risk management objectives and policies
The group's principal financial instruments, other than derivatives, 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 2006, after
taking into account the effect of interest rate swaps and caps, approximately
64.8% (2005: 84.7%) 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 manage 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 2006, the
group's five largest customers accounted for 66.3% of outstanding trade
receivables and work in progress (2005: 69.8%).
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 of financial assets and liabilities
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
2006 2005 2006 2005
US$'000 US$'000 US$'000 US$'000
Financial assets
Cash and short-term deposits 457,848 208,896 457,848 208,896
Restricted cash 883 1,648 883 1,648
Available-for-sale financial assets 1,726 2,413 1,726 2,413
Interest rate caps and swaps 568 672 568 672
Forward currency contracts 8,840 - 8,840 -
Forward currency purchase option - 461 - 461
===========================================
Financial liabilities
Interest-bearing loans and borrowings 117,180 106,870 117,180 106,870
Deferred consideration 7,373 4,450 7,373 4,450
Interest rate swaps - 147 - 147
Forward currency contracts - 11,452 - 11,452
============================================
Market values have been used to determine the fair values of available-for-sale
financial assets and forward currency contracts. The fair values of interest
rate swaps and caps have been calculated by discounting the expected future cash
flows at prevailing interest rates. The Company considers that the carrying
amounts of trade and other receivables, trade and other payables, other current
and non-current financial assets and liabilities approximate their fair values
and are therefore excluded from the above table.
Interest rate risk
Interest rate risk arises from the possibility that changes in interest rates
will affect the value of the group's interest-bearing financial liabilities and
assets. The following table indicates the years over which these financial
liabilities and assets will reprice or mature:
Year ended 31 December 2006
Within 1-2 2-3 3-4 4-5 More
than
1 year years years years years 5 years Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Financial liabilities
Floating rates
Revolving credit facilities - 6,500 443 1,994 6,427 15,364
Short term loan 6,033 - - - - - 6,033
Bank overdrafts 20,442 - - - - - 20,442
Term loan - 2,500 10,000 11,250 15,625 37,736 77,111
---------------------------------------------------------
26,475 9,000 10,000 11,693 17,619 44,163 118,950
=========================================================
Financial assets
Floating rates
Cash and short-term deposits 457,848 - - - - - 457,848
Restricted cash balances 883 - - - - - 883
---------------------------------------------------------
458,731 - - - - - 458,731
=========================================================
Year ended 31 December 2005
Within 1-2 2-3 3-4 4-5 More
than
1 year years years years years 5 years Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'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 deposits 208,896 - - - - - 208,896
Restricted cash balances 1,648 - - - - - 1,648
---------------------------------------------------------
210,544 - - - - - 210,544
=========================================================
Financial liabilities in the above table are disclosed gross of debt acquisition
costs of US$1,770,000 (2005: US$1,412,000).
Interest on financial instruments classified as floating rate is repriced at
intervals of less than one year. The other financial instruments of the group
that are not included in the above tables are non-interest bearing and are
therefore not subject to interest rate risk.
Derivative instruments designated as cash flow hedges
At 31 December 2006, the group held the following derivative instruments,
designated as cash flow hedges in relation to floating rate interest-bearing
loans and borrowings:
Fair value asset/
(liability)
Date 2006 2005
Instrument Period to commenced US$'000 US$'000
maturity
UK LIBOR interest rate 2 years and 9 31 December 2004 77 (147)
swap months
UK interest rate cap 1 year 31 December 2004 4 5
US LIBOR interest rate
swap 1 year 31 December 2004 487 667
Foreign currency risk
The group is exposed to foreign currency risk on sales, purchases and 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 2006, the group had foreign exchange
contracts designated as cash flow hedges with a fair value gain of US$8,840,000
(2005: fair value loss US$11,452,000) as follows:
Net unrealised
Contract value Fair value gain/(loss)
2006 2005 2006 2005 2006 2005
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
Euro currency purchases 203,908 344,107 212,694 332,689 8,786 (11,418)
Sterling currency purchases 3,901 36,896 4,098 36,862 197 (34)
Yen currency purchases 13,379 - 13,236 - (143) -
----------------
8,840 (11,452)
================
The above foreign exchange contracts mature between January 2007 and February
2008 (2005: between January 2006 and June 2007).
During 2005, the group 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. In October 2006, the option was exercised and
a gain of US$105,000 was recognised in the income statement.
33 EVENTS AFTER THE BALANCE SHEET DATE
SPD Group Limited
On 16 January 2007, the group acquired a 51% interest in the share capital of
SPD Group Limited (SPD), a specialist provider of well operations services. The
consideration for the acquisition of the 51% interest inclusive of estimated
transaction costs of US$172,000 was US$7,872,000. Consideration of US$7,700,000
(excluding transaction costs) was settled by a cash payment of US$3,935,000,
issuance of loan notes payable of US$1,765,000 and the balance of US$2,000,000
by issuance of 274,938 new ordinary shares of the Company at market values at
the date of issue to the vendor over three years in equal instalments on the
anniversary of the transaction.
The terms of the sale and purchase agreement for the remaining 49% interest in
the share capital of SPD which convey call option rights on the acquirer and
minority share holder put option rights over these shares and the respective
rights to dividends and share of profits of the two parties are such that this
transaction has been accounted for as a 100% acquisition of the business by the
group. The discounted deferred consideration for the remaining 49% of the share
capital of SPD has been estimated at US$12,025,000 and this will be reassessed
each year to fair value and any adjustment to the deferred consideration arising
will be reflected in goodwill except for the unwinding of interest which will be
reflected in the income statement as an interest expense. The total
consideration for the 100% interest therefore, including transaction costs,
amounts to US$19,897,000.
33 EVENTS AFTER THE BALANCE SHEET DATE
The 100% fair values of the identifiable assets and liabilities of SPD Group
Limited at the date of acquisition are analysed below and these are provisional
pending final agreement with the vendor.
Recognised
on Carrying
acquisition Value
US$'000 US$'000
Property, plant and equipment 47 47
Intangible assets 2,369 -
Trade and other receivables 5,559 5,559
Cash and short-term deposits 970 970
-----------------------
Total assets 8,945 6,576
-----------------------
Less:
Trade and other payables (3,210) (3,210)
Income tax payable (10) (10)
-----------------------
Total liabilities (3,220) (3,220)
-----------------------
Fair value of net assets acquired 5,725 3,356
========
Goodwill arising on acquisition 14,172
--------
Consideration 19,897
========
Cash outflow on acquisition:
Cash acquired with subsidiary 970
Cash paid on acquisition (3,935)
Legal and professional expenses paid on acquisition (172)
-------
Net cash outflow on the acquisition of subsidiary (3,137)
=======
Intangible assets recognised on acquisition comprise customer contracts which
will be amortised over their remaining economic useful lives on a straight line
basis.
The residual goodwill above comprises the fair value of expected future
synergies and business opportunities arising from the integration of the
business in to the group.
Chergui gas concession, Tunisia
On 22 February 2007, the group completed the acquisition of a 45% interest in
the Chergui gas concession in Tunisia, for a final cash consideration of
US$27,323,000 which after including advance capital expenditure paid on behalf
of the vendor of US$2,846,000 (note 10), brought the total consideration for the
transaction to US$30,169,000.
34 SUBSIDIARIES AND JOINT VENTURES
At 31 December 2006, 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 2006 2005
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
Petrofac Employee Benefit Trust Jersey *100 n/a
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 100 100
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 100 100
Petrofac E&C International Limited United Arab Emirates 100 100
Rubicon Response Limited Scotland 100 100
Petrofac Resources (Ohanet) Jersey Limited Jersey 100 100
Petrofac Resources (Ohanet) LLC USA 100 100
PKT Technical Services Ltd Russia 50% n/a
PKT Training Services Ltd Russia 100% n/a
Pt PCI Indonesia Indonesia 80% n/a
Process Control and Instrumentation Singapore 100% n/a
Services Pte Ltd
Process Control and Instrumentation Malaysia 100% n/a
Sendirian Berhad
Sakhalin Technical Training Centre Russia 80% n/a
Petrofac Norge AS Norway 100% n/a
* Directly held by Petrofac Limited
34 SUBSIDIARIES AND JOINT VENTURES
Proportion of
nominal
value of issued
shares
Name of Company Country of controlled by the
incorporation group
Joint Ventures 2006 2005
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
SHAREHOLDER INFORMATION
As at 31 December 2006
Petrofac shares are traded on the London Stock Exchange using code 'PFC.L'.
Registrar Company Secretary and registered office
Capita Registrars Ogier Corporate Services (Jersey)
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
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 LLP Bell Pottinger Corporate & Financial
1 More London Place 6th Floor, Holborn Gate
London SE1 2AF 330 High Holborn
London WC1V 7QD
2007 Financial Calendar
Date* Activity
11 May 2007 Annual general meeting
17 May 2007 Final dividend payment
5 September 2007 Interim results announcement
November 2007 Interim dividend payment
* Dates correct at time of print, but subject to change
This information is provided by RNS
The company news service from the London Stock Exchange
Latest directors dealings
- 19 minutes ago Xaar
- 49 minutes ago Trainline
- 49 minutes ago Forterra
- 1 hour ago Seplat Energy (DI)
- 2 hours ago Fintel