SONGA OFFSHORE Annual Report 2006
Directors’ report 2006 Nature of business The Songa Offshore Group (the “Group”) owns 4 semi submersible drilling rigs and 1 drillship, of which 2 rigs and 1 drillship are operated by the Group. Songa Offshore ASA (the “Company”) is the parent company of the Group, and is headquartered in Oslo. The Group was established in April 2005, and listed on the Oslo Stock Exchange 26 January 2006. Throughout 2006, the Group’s main focus has been to finish the upgrading and refurbishments of the rigs, while at the same time working actively to secure contracts for its rig fleet. The positive outlook for the offshore drilling market has persisted throughout the year, and the Group has been active in securing contracts for its rigs. The Group has moved from being an organization focused on refurbishing rigs to operating and marketing the same. Given that the rigs are to be operated in Australia and Africa in the near future, the Board has decided to move most of the functions from the Houston office to Singapore. An office has been established in Perth, Western Australia to support operations of Songa Venus and Songa Mercur and in Malabo, Equatorial Guinea to support Songa Saturn.
Main events in 2006 -
In February, Songa Saturn was awarded a contract with Noble Energy for 3+2 wells offshore Equatorial Guinea.
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In May the Group acquired the rig Stena Dee (renamed Songa Dee) from Stena Drilling for USD 270 million.
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In May, Songa Mercur was awarded a 9 months contract with Chevron Australia.
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In June, Songa Saturn was awarded a further 3 wells contract with Noble Energy.
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In August, Songa Mercur was awarded a 3 months contract extension with Chevron Australia.
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In October, Songa Saturn was awarded a contract with Hess Corp. for 1 well offshore Libya. The contract will commence when the contract with Noble Energy is completed.
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In October, Songa Dee was fixed on a contract for 2 years plus 2 six month options with Marathon Petroleum Company (Norway) and Lundin Petroleum AB.
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In November, the Group sold its 20.187% stake in the Deepsea Bergen.
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In December, the Group entered into a contract to acquire Deepsea Trym from Odfjell Drilling for USD 238.5 million.
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In December, Mr. Asbjørn Vavik was appointed CEO of the Group.
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In December, Mr. Robert J. Scott, the Group’s former CEO, entered the board as an Executive Director.
Mission Statement As stated in the Articles of Association, the mission statement of the Company is acquisition and operation of vessels, rigs and offshore installations, as well as other related business. The Company may also acquire and own shares, securities and ownership interests in other companies. The Group’s mission is to be the provider of safe and superior performance, to our clients and shareholders, in midwater depth floating operations. This will be accomplished with competent and experienced personnel delivering high quality performance to our clients. The main objective of the Group, as a commercial entity, is to increase the economic value of the Group for the owners of the Company, who rely on the Group to provide them with a satisfactory return on capital employed. In achieving this objective, the Group’s goal is to provide services in its field of expertise, in accordance with the highest standards of professional excellence and commercial integrity and in compliance with
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all relevant laws, regulations and guidelines. Consideration must be taken for the rights and interests of others, and the health, safety and job satisfaction of all of Songa employees. The Group will at all times strive to be a good corporate citizen of each country in which it operates, and to obey the laws, respect the customs and beliefs, and preserve the environment and culture of each such country. The Group seeks to understand the aims and objectives of the clients for which the Group performs services, and endeavors at all times to assist its clients to achieve these aims.
Strategy The founders of the Group focused on two primary parameters to optimize shareholder value when investing in the mobile offshore drilling unit (MODU) sector: -
early cash flow
-
top management
The management team is in place and the four semisubmersibles and one drilling ship are well positioned to generate cash flows and returns for the shareholders. The Group is actively evaluating possibilities to continue growing the company, which is consistent with the Group’s positive outlook for the future of this business with strong utilization and exceptional dayrates. With the strong factors that have driven the growth of the rig market, the Group expects that an industry consolidation will take place among the suppliers of MODU’s. The Group will have an opportunistic approach to growth and consolidation. The three rigs the Group has been upgrading are finalized or getting close to being finalized. All rigs have secured their first contracts with major operators, and contracts have already been extended, or discussions are currently being conducted for doing so. We believe this confirms the confidence these customers have to our Group. The Board of Directors summarizes the strategy going forward to these main points: -
Increase the contract coverage
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Further develop a top class commercial and operational management of the Group’s rigs
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Establish a tailored organization for Songa Dee and Deepsea Trym for the Norwegian and British continental shelf
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Refinance the Group
The current contract coverage is limited to approximately 8 months for Songa Venus and one year for each of Songa Saturn and Songa Mercur. For both the Songa Venus and Songa Mercur, clients have options for another one year, while Songa Saturn is open from early 2008. For Deepsea Trym, the rig is open from early 2009. The Board has therefore targeted increased coverage as a major point of focus in 2007. We believe increased earnings visibility will be perceived by our shareholders and the market as enhancing for shareholders’ values. The Group currently operates 2 rigs and 1 drill ship. The best way to market the Group and its rigs is through establishing a good performance record. This secures increased likelihood of contract options being exercised and extensions being awarded; further reputation will help when being considered for new contracts. Focus on human resources is an important element in the mentioned efforts, this is even more so in the current tight labor market. In addition to the general focus on operations, we have started to build up an organization which will manage the rigs Songa Dee and Deepsea Trym from the time they are taken over in early 2009. We assume that both rigs will be operating on the British and Norwegian continental shelves (even though we will market Deepsea Trym for jobs worldwide). The organization will also be involved in preparations for the rigs’ five year special surveys in Q1 2009 and Q3 2007 respectively. We also assume that some Songa personnel will be phased in to the current operations of the rigs several quarters before the Group takes over responsibility. An office will be established initially in Stavanger. As explained above, the Group is transforming from a “refurbishing case” to an operating company during the first few months of 2007. The current financing of the Company was based on the former situation, and we are therefore looking at refinancing the Group in such a way that we will secure more flexibility
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with higher net cash flow. This flexibility may then be used for dividends, share buybacks or growing the Group through mergers and acquisitions. The Board has with the above items defined “internal streamlining” as the most important task for 2007. The current cycle has been so forceful that every element in the industry is stretched - shipyards, suppliers and labor markets. While we will continue to look for growth opportunities, we believe the risk involved whether we consider refurbishing, newbuilds or corporate transactions to be greater than in the past.
Future outlook The demand for drilling rigs continues to be strong in all segments. The midwater segment, where all the Group’s rigs belongs, has shown the strongest improvement in dayrates in 2006. The most apparent change has been the increase in the forward curve for contracts for the period 2009-2012, exemplified by the contract the Group secured for the Songa Dee. With the continued high crude oil prices, both demand for exploration and development drilling offshore is expected to stay strong. Recent reports from the oil production market indicate that non-OPEC production is struggling to stay flat. More or less all oil majors have had to report that they are unable to achieve their production targets. We believe this will increase governmental and shareholder pressure to increase exploration budgets further.
Risk exposure and risk management Operational risk Vessel Operation
The Songa Offshore fleet will be exposed to operational risks associated with its offshore operations.
Political Instability
Some of the areas where the Group has potential business partners and where its rigs may be located are characterized by political instability.
Insurances
Operational risks can cause personal injury, the loss of a rig, operational disruption, off-hire and termination of contract. In order to mitigate these risks the Group has initiated an insurance program in line with market practice and additional insurance is always considered when a specific project is considered to be of a high risk nature.
Requisition, Arrest etc. of the rigs
The rigs could be requisitioned by a government in the case of war or other emergencies or become subject to arrest. This could significantly and adversely affect the earnings of the relevant rigs and the Group as well as the Group’s liquidity going forward.
Accidents
Offshore drilling rigs are working in harsh environments. There are several factors that can contribute to an accident. An accident can have an adverse effect on the Group’s financial condition and there can be no assurance that the Group will have sufficient insurance against such loss and/or expenses.
Credit Risk
Lack of payments from customers/clients will significantly and adversely impair the Group’s liquidity. The Group undertakes due consideration to the credit quality of its potential clients during contract negotiations to minimize the risk of payment delinquency but no assurance can be given that the Group will be able to avoid this risk.
Market Risk The demand for rigs will always fluctuate pending global market drivers such as global oil and gas price levels, political climate, economical climate, operators’ willingness to invest etc. Fluctuations in the oil price have historically been shown to have a significant impact on the demand for services such as those the Group provides. New entrants in the rig market could also have a negative effect on the contractual prices as well as for the market value of the Group’s fleet.
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Fluctuating Value of the Fleet
The value of the rigs owned by the Group may fluctuate with market conditions. A downturn in the market could have a material adverse effect on the Group’s liquidity and may result in breaches of its financial obligations. In such a case, a sale of the Group’s rigs could be forced at prices that represent a potential loss of value.
Financial risks Interest Rate and Currency Fluctuations
USD is the functional currency of the Group. The Group will be exposed to risks due to fluctuations in interest and exchange rates. The Group will attempt to minimize these risks by implementing hedging arrangements as appropriate, but will not be able to avoid these risks. Changes in currency exchange rates relative to the USD will affect the USD value of the Group’s assets and thereby impact materially and adversely upon the Group’s total return on such assets.
Borrowing and Leverage
All of the Group’s interest costs on bank loans are subject to a floating interest rate (LIBOR) plus a margin. Consequently, the Group is exposed to fluctuation in interest rates for USD. The Group will borrow only when it is believed that such borrowings will benefit the Group after taking into account considerations such as the costs of the borrowing and the likely returns on the assets purchased with the borrowed funds, but no assurances can be given that the Group will be successful in this respect.
Liquidity risk
The Group is dependent upon having access to long term funding. There can be no assurance that the Group may not experience net cash flow shortfalls exceeding the Group’s available funding sources nor can there be any assurance that the Group will be able to raise new equity, or arrange new borrowing facilities, on favorable terms and in amounts necessary to conduct its ongoing and future operations, should this be required.
Contracts for the rigs
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Overview of the drilling fleet Songa Mercur
Songa Mercur is fixed on a 360 days contract with Chevron offshore North West Australia with an estimated commencement during Q2 2007. The rig is fixed at a USD 300,000 day rate. Chevron holds the right to exercise two 6 month options. The first option must be exercised within October 2007, while the second must be exercised within April 2008. The day rate of these options is to be determined at market rate.
Songa Venus
Songa Venus is fixed on a 365 days contract with ENI/INPEX offshore North West Australia that commenced 17 November 2006. The rig is fixed at a USD 205,000 day rate. ENI/INPEX holds the right to exercise two 6 month options. The first option must be exercised within mid May 2007, while the second must be exercised within mid November 2007. The rate under these options is set at USD 225,500 per day.
Songa Dee
Songa Dee is fixed on contract with Norsk Hydro until July 2008. The Group has fixed the rig on a bareboat charter to Stena for the same period at a rate of USD 42,000 per day. Norsk Hydro holds the right to exercise a 6 month option that must be declared within 1 January 2008. If declared, the Group will receive the same bareboat rate. Songa Dee is to be taken through special survey at Stena’s cost and risk before redelivery to the Group. Furthermore, Songa Dee is fixed on a contract for 2 years plus 2 six month options with Marathon Petroleum Company (Norway) and Lundin Petroleum AB. The operators may use the Songa Dee in the Norwegian and the UK sectors of the North Sea on an equal time basis. The contract will commence when the rig is released by the current operator (Norsk Hydro), which may be during the fourth quarter of 2008, or the first quarter of 2009. The contract value for the firm period is in excess of USD 310 million. Among other elements, the contract includes cost escalation clauses, and standard provisions for mobilization. The option must be declared within Q1 2010. The day rate for the option period is set to be no less than the current day rate.
Songa Saturn
Songa Saturn is fixed on a 310 days contract and 100 days option with Noble Energy in Equatorial Guinea. The contract is specified on a well-to-well basis including 3 wells at a USD 338,000 day rate, 3 wells at a USD 416,000 day rate and 2 optional wells at a USD 338,000 day rate. The options must be declared 1 well in advance of commencement of the option. Furthermore, Songa Saturn is fixed on a 70 days contract with Hess in Libya with estimated commencement Q1-Q2 2008. The rig is fixed at USD 350,000 + taxes per day, where mobilization and demobilization is fixed at USD 300,000 per day. Mobilization and demobilization is estimated to last for 20 days each. The contract includes no options.
Deepsea Trym
Deepsea Trym is on contract with Norsk Hydro in Norway until February 2008. Commencement date of this contract was prior to the Group’s acquisition from Odfjell Drilling of the rig in December 2006. The rig is fixed by the Group on a bareboat charter at USD 50,000 per day to Odfjell Drilling. The Hydro contract specifies Hydro’s right to exercise three 6 month options. The first option has already been exercised. The second option must be exercised within August 2007, while the third option must be declared within February 2008. Deepsea Trym is to go through a special survey during the summer of 2007 at Odfjell’s risk and cost. The Group will not receive bareboat hire during this period that is estimated to last 30 days.
Contracts going forward
The Board wishes to increase the contract coverage further, and aims to fix new contracts within first half of 2007. On the Songa Venus the operators ENI and Inpex have to declare the first of two sixmonth options by mid May 2007. Chevron will have to do the same for Songa Mercur by October 2007, depending on when Songa Mercur leaves Singapore. The main efforts will therefore be placed on securing new contracts for Songa Saturn and Deepsea Trym. Both these rigs will be marketed worldwide.
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Financing and share capital issues During 2006, Songa Offshore ASA has made two private placements, issued one bond and entered into a total return swap agreement. In connection with the initial capitalization of the Company in May/June 2005, the Company issued 24,444,444 freely tradable subscription rights (warrants) with a term of 3 years from the date of issuance (i.e. until June 2008). Each warrant gives the right to receive one new Share at a subscription price of USD 1.50 per Share. As of 29 March 2007, 18,283,427 warrants have been exercised by the warrant holders, thus 6,161,017 warrants are still outstanding. In accordance with the authorization given by the Annual General Meeting in 2006, the Board has allocated options to subscribe for 1,500,000 Shares to members of the Board. At the extraordinary general meeting 29 December 2006, Mr. Bob Scott was elected board member of the Board of Directors. In February 2007, Mr. Scott was awarded options under the 2006 Options Programme to subscribe for 500,000 shares. Furthermore, in accordance with the authorization given by the Annual General Meeting in 2006, the Board has allocated options to subscribe for up to 1,715,000 Shares to its employees In connection with the acquisition of Songa Dee, the Company issued in March 2006 a USD 75 million bond with 5 years duration at a fixed coupon rate at 9,75%. Also, the Company made a private placement of 6,300,000 shares at a subscription price of NOK 58 per share, raising gross proceeds in the amount of NOK 365.4 million. Following the refinancing of the debt in June and July, the Company increased its debt facility to USD 400 million. In connection with the lease agreement for the Blow Out Preventer (“BOP”) on Songa Mercur, the owners of the investment company for the BOP have an option up until 1 July 2007 to sell their ownership in the investment company to the Company against a consideration amounting to USD 15.3 million and payable in shares in the Company at a share price of NOK 35 per share. Based on the USD / NOK exchange rate 23 March 2007, the number of shares issuable according to this option would be 2,666,571 shares equal to a share capital increase of approximately NOK 2,666,571. On 26 March 2007, Spencer Energy AS (controlled by Mr. Arne Blystad) owned 73% of the shares in BOP 15 Invest AS. In February 2007, Songa Offshore ASA acquired 0.5% in BOP 15 Invest AS for NOK 566,523. In connection with the acquisition of Deepsea Trym in December 2006, the Company conducted a private placement of 3,500,000 shares at a subscription price of NOK 62.50 per share, raising gross proceeds in the amount of NOK 218.75 million. The management has during the beginning of 2007 exercised options to buy shares in Songa Offshore ASA under the options/warrants program of 2005 equal to 2,454,165 shares. The Company entered into a Total Return Swap (TRS) agreement with Carnegie Investment Bank AB Norway on 4 January 2007. The agreement provided for cash settlement and with 2,129,165 shares in Songa Offshore ASA as underlying security. The initial reference price under the swap is NOK 59.50 per share and the swap agreement expires on 29 June 2007. The Company will pay Carnegie Investment Bank AB Norway a sum equal to the latter’s funding cost plus a margin. The Company holds the entire upside and downside on the price development of the underlying securities. The total number of shares at year end 2006 was 81,910,336. Since 1 January 2007, 2,714,465 options/ warrants have been exercised so that the total number of outstanding shares equals 84,624,801. The number of shares on a fully diluted basis is 97,227,389 shares based on USD/NOK 6.10. To the Group’s knowledge, there has not been recorded any shifts in any major shareholders’ position that could negatively affect the interests of the Company’s shareholders.
Health, safety and the environment With the rigs operating in harsh environments, substantial systematic efforts have been put into securing the workplace of all employees in the Group. Health, Safety and the Environment (HSE) are key to the Group’s operations. The Group’s basic vision and policy is that all accidents can be prevented. The Group focuses systematically on training and certification of personnel, as well as integrating instructions, routines and rules so as to prevent situations that could cause injury to personnel or damage to equipment. On the webpage, the management has thoroughly outlined the Quality, Health, Safety and Environment policies of the Group. There have been recorded 2 incidents of injury to personnel (bone fractures) and zero damage to equipment during 2006. Recorded sick leave was less than 1%.
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The number of employees at year end was 186, of which 9.6% were woman. The Group does not discriminate any of its employees or potential employees regarding i.e. the person’s nationality, sex or religion. The work environment is considered to be good. The Board of Directors would like to thank all employees of the Songa Offshore Group for their hard work and high morale in 2006. The Group does not have a research and development department.
Environmental reporting The Group has placed great emphasis so that the rigs meet all statutory requirements for emissions, pollution and environmental impact. The Group complies with all classification society, flag state, national and international regulations, but more importantly the International Maritime Organization (IMO) requirements with regards to Environmental Issues. The Group has also been audited against the International Safety Management Code and received an Interim Document of Compliance by ABS which essentially means the Group’s Safety Management System suffices international requirements of all facets of safety, health and the environment. With regards to the Group’s compliance of these organizations’ regulations, the Group fulfills accepted international standards for environmental considerations. For further information about the Group’s environmental policy, please see the Group’s webpage. There has not been recorded any pollutive incidents during 2006.
Corporate Governance The Group has established a separate Corporate Governance Policy document that is published on the Group’s webpage. The Group has also established a separate Business Code of Ethics document, also published on the webpage. A more detailed discussion on the Group’s fulfillment of the Norwegian Code of Practice for Corporate Governance guidelines is included in the Appendix.
International Financial Reporting Standards The EU Commission has determined that all listed companies within the EU shall prepare their accounts in accordance with the International Financial Reporting Standards (IFRS). Under the EFTA Agreement, Norwegian companies are subject to the same accounting presentation requirements as companies within the EU. Songa Offshore Group has prepared its consolidated financial statements in accordance with the IFRS. When preparing the accounts for Songa Offshore ASA, the Company has applied simplified application in accordance with the Norwegian Accounting Act § 3-9 of IFRS. This means that the IFRS valuation rules are applied, while keeping to the Norwegian Accounting Act and Norwegian generally accepted accounting principles for presentation of the notes.
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Comments related to the financial statements The Songa Offshore Group - Comments related to the financial statements The Songa Offshore Group consolidated result after tax shows a loss for 2006 of USD 20.7 million. Income for 2006 was USD 44.6 million. Income includes a gain on the sale of the 20.187% ownership interest in Deepsea Bergen of USD 19.1 million. Operating expenses for 2006 was USD 34.7 million, of which USD 14.4 million relates to the stock option programme. Net financial expenses for 2006 were USD 24.7 million. The capitalized recommissioning cost for 2006 was USD 214.7 million. In addition USD 18.4 million in borrowing costs has been capitalized for the whole year. During 2006, three major transactions took place. The Group acquired Songa Dee in May for USD 270 million. In November, the Group sold its 20.187% stake in the rig Deepsea Bergen for USD 53.5 million. Furthermore, in December, the Group entered into an agreement to acquire the rig Deepsea Trym for USD 238.5 million. This transaction was completed in January 2007. Net cash flow from operating activities was USD (20.9) million. Net cash flow used in investing activities was USD (450.2) million. The cash flow used in investing activities relates to the acquisition of Songa Dee, as well as completing the recommissioning of the rigs. Net cash flow from financing activities was USD 559.4 million. The cash flow from financing activities comes from issuance of share capital, drawdown of existing bank facilities, and the issuance of a bond and a commercial paper. Net increase in cash and cash equivalents was USD 88.4 million. Total cash and cash equivalents at year-end was USD 90.6 million. The change in Other Equity in the consolidated balance sheet relates mainly to the transfer of funds from share premium to other equity, and the change in Reserves relates to the equity settled employee option program. The change in Bond Loans relates to the USD 75 million bond that was issued in connection with the acquisition of Songa Dee. The change in current bank loan relates mainly to the current portion of the non-current debt that matures during 2007. Please see the consolidated financial statement notes for further information. The Group’s total assets at year-end was USD 865.6 million. As of December 31, 2006, the equity ratio in the Group was 18.7%. Earnings per share (EPS) for 2006 was USD (0.28).
Songa Offshore ASA - Comments related to the financial statements Songa Offshore ASA‘s result after tax shows a profit for 2006 of USD 3.9 million. Operating income for 2006 was USD 39.000 thousand. Operating expenses for 2006 was USD 6.6 million, of which USD 2.4 million relates to employee benefits expense. Net financial income for 2006 was USD 14.0 million. Net cash flow from operating activities was USD (140.2) million, and relates mainly to the financing of the subsidiaries. Net cash flow used in investing activities was USD (1.4) million. Net cash flow from financing activities was USD 221.1 million. The cash flow from financing activities comes from issuance of share capital, proceeds from borrowings, less disbursement of loans to companies in the Group. Net increase in cash and cash equivalents was USD 79.5 million. Total cash and cash equivalents at year-end was USD 81.1 million. The change in Other Equity in the balance sheet for Songa Offshore ASA relates mainly to the transfer of funds from share premium to other equity, increase in share capital from private placements and conversion of warrants. Please see the notes of the financial statement for further information. Songa Offshore ASA’s total assets at year-end was USD 891 million. As of December 31, 2006, the equity ratio in Songa Offshore ASA was 21.6%. The Board does not propose a dividend for 2006. Songa Offshore ASA’s distributable equity was USD 103.0 million at year-end. The net income of the Company of USD 3.9 million has been attributed to Other Equity.
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Going concern In accordance with the Accounting Act § 3-3a we confirm that the Financial Statements have been prepared under the assumption of going concern. This assumption is based on income forecasts for the year 2007 and the Group and the Company’s long-term strategic forecasts. The Group and the Company’s economic and financial position is sound. The Board believes that the annual report provides a correct outline of the Group and the Company’s assets and debt, financial position and result.
Oslo, 29 March 2007
Arne Blystad
Jon Chr. Syvertsen
(Chairman)
(Board member)
Einar J. G (Board member)
Gunnar Hvammen
(Board member)
(Board member)
Asbjørn Vavik (Chief Executive Officer)
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Board Composition Arne Blystad (52), Chairman, born 1955. Mr. Blystad is an independent investor, who owns and operates shipping and investment activities through a group of companies. Mr. Blystad is a Norwegian citizen and resides in Oslo, Norway. Jon Chr. Syvertsen (46), Board Member, born 1961, Mr. Syvertsen is employed with Arne Blystad AS. Previously, Mr. Syvertsen was a commercial officer and vice president in Frontline Ltd. and an executive director in Umoe AS. Syvertsen is a civil engineer from NTNU and holds an MBA from IESE (Barcelona). Mr. Syvertsen is a Norwegian citizen and resides in Bærum, Norway. Einar J. Greve (46), Board member, born 1960, Mr. Greve has been a partner in the law firm Wikborg, Rein & Co in Oslo since 1993. Mr. Greve holds various board positions in Norwegian listed and unlisted companies. Mr. Greve is a Norwegian citizen and resides in Oslo, Norway. Gunnar Hvammen (43), Board member, born 1963, Independent investor. Founder of Offshore Heavy Transport ASA. Senior corporate partner in Fondsfinans ASA. Background as a rig S/P broker from PF Bassøe/Loosbrock and Normarine Offshore Consultants, which he co-founded. Robert J. Scott (65), Board member, born 1942. Prior to becoming member of the board, Mr. Scott acted as CEO of Songa Offshore ASA until 31 December 2006. Prior to this, Mr. Scott was Senior Vice President of Operations for Transocean for 35 years. Mr. Scott launched his career as a drilling crew member then advanced through the ranks to higher levels of responsibility to senior management of the world’s largest offshore driller. Mr. Scott is also the co-inventor of Transocean’s patented dual activity Drillship.
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Songa Offshore Group Consolidated Income Statement For the year ended 31 December 2006 (USD '000) Note Revenue
10
Investment revenue
6,10
2006
2005
25 133
1 207
19 464
-
Employee benefits expense
12
(23 805)
(1 028)
Other operating expenses
11
(10 931)
(4 677)
Depreciation Finance income
18 13
(13 812) 2 713
(6) 461
Finance costs
13
(27 377)
(25 287)
(28 615)
(29 330)
Loss before tax Tax income
14
Loss for the year
7 874
4 384
(20 741)
(24 946)
(20 741)
(24 946)
Attributable to: Equity holders of the parent company
Earnings per share: (USD)
2006
2005
- Basic
15
(0,28)
(0,47)
- Diluted
15
(0,28)
(0,47)
Songa Offshore Group Consolidated Balance Sheet at 31 December 2006 (USD '000)
ASSETS Non-current assets Rigs, machinery and equipment Investments Deferred tax assets Total non-current assets
Note
31/12/06
31/12/05
18,20
712 332
222 462
6,19 14
12 388 724 720
34 056 4 384 260 902
Current assets Trade and other receivables Prepayments Other assets Cash and cash equivalents Total current assets
17 17 17 16
TOTAL ASSETS
11
20 2 26 90 140
824 654 743 621 842
1 039 417 962 2 220 4 638
865 562
265 540
Songa Offshore Group Consolidated Balance Sheet at 31 December 2006 (USD '000)
EQUITY AND LIABILITIES Capital and reserves Issued capital Share premium Paid in not registered share capital Reserves Other equity Total equity Non-current liabilities Bank loan Bond loans Other liabilities Total non-current liabilities
Note
31/12/06
31/12/05
22 22 22 22 22
12 791 27 469 14 838 106 500 161 598
9 254 75 984 276 (24 946) 60 568
21 21 21
211 167 6 385
45 108 11 165
389 889 024 302
902 142 106 150
Current liabilities Bank loan 21 246 142 19 840 Going Trade andconcern other payables 6 714 5 303 financial instruments 23 13 919 Statements have 7 248 InDerivative accordance with the Accounting Act § 3-3a we confirm that the Financial been Deferredunder revenues 056 on income forecastsprepared the assumption of going concern. This assumption is 26 based for the year 2007 and the Group and the Company’s long-term strategic forecasts. The Group and Interest payable 15 352 3 675 the Company’s report Other liabilitieseconomic and financial position is sound. The Board believes 10 479 that the annual 3 756 provides a correct outline of the Group and the Company’s assets and and Total current liabilities 318debt, 662 financial position 39 822 result. Total liabilities 703 964 204 972 TOTAL EQUITY AND LIABILITIES
Oslo, 29 March 2007
865 562
265 540
Oslo, 29 March 2007
_______________________ Arne Blystad Arne Blystad Chairman of the Board
_______________________ Robert J. Scott
(Chairman) _______________________ Gunnar Hvammen
_______________________ Jon C. Syvertsen
Jon Chr. Syvertsen (Board member)
_______________________ Einar J. Greve
_______________________ Asbjørn Vavik Chief Executive Officer
Einar J. G (Board member)
(Board member)
Gunnar Hvammen
Asbjørn Vavik
(Board member)
(Chief Executive Officer)
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Songa Offshore Group Statement of changes in equity for the year ended 31 December 2006 (USD '000)
Note
Share capital
Balance as at 18 April 2005 (inception)
Share Paid in, not premium registered share capital
Equitysettled employee benefits reserve
Other equity
Total equity
158
842
-
-
-
1 000
9 096
65 514
276
-
-
74 886
9 628
-
-
-
9 628
-
-
-
-
(24 946)
(24 946)
Balance as at 31 December 2005
9 254
75 984
276
-
(24 946)
60 568
Balance as at 1 January 2006
9 254
75 984
276
-
(24 946)
60 568
-
-
-
-
(711)
(711)
Issue of share capital Issue of warrants Loss for the period
Exchange differences arising from translation of foreign operations Translation adjustments
-
Net expenses recognised directly in equity
-
-
(210)
(210)
-
-
-
-
(921)
(921)
(20 741)
(20 741)
-
-
-
-
(21 662)
(21 662)
Loss for the year Total recognised expense for the year 22
Issue of share capital
1 546
87 315
(276)
-
-
88 585
22
Conversion of warrants Jan Dec Recognition of pension plan Recognition of share-based payments
1 991
17 281
-
-
-
19 272
-
14 838
(3) -
(3) 14 838
(153 111)
-
-
153 111
-
27 469
-
14 838
106 500
161 598
25 24 22
Transfer of funds from Share premium to other equity Balance as at 31 December 2006
12 791
-
13
Songa Offshore Group Consolidated statement of cash flows for the year ended 31 December 2006 (USD '000) Note Cash flow from operating activities: Loss before tax
2006
2005
(28 615)
(29 330)
Adjustments for: -
9 900
Finance cost
13
17 992
-
Depreciation
18
13 812
-
6,10
(19 022)
-
Share based payment expense
24
14 838
-
Fair value loss on BOP option
23
Non cash expense from redemption of bond loan
Gain on sale of available for sale investment
6 671 (47 803)
Change in receivables
10 689
Change in payables Change in other liabilities Prepaid revenue
5 609 (2 419) 10 179
5 129
-
26 056
-
Interest paid
(20 605)
-
Net cash flow from operating activities
(20 858)
(6 061)
(503 682)
(222 461)
Cash flows from investing activities: Proceeds from sale of rig, machinery and equipment Purchase of rig, machinery and equipment
15 300 18
Proceeds from sale of available-for-sale investment
6
Purchase of available-for-sale investment
53 500
-
-
(34 056)
(450 182)
Net cash flow used in investing activities
(241 217)
Cash flows from financing activities: Proceeds from issue of share capital
22
107 857
74 614
Proceeds from borrowings
21
451 536
173 884
559 393
248 498
88 353
1 220
2 220
1 000
Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period
16
Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at the end of the period
14
48 16
90 621
2 220
Notes to the consolidated financial statements for the year ended 31 December 2006 Note 1 General information Songa Offshore ASA (“the Company”) and its subsidiaries (together, “the Group”) are engaged in the business of owning and operating offshore drilling rigs and other vessels to be used in the exploration and production of crude oil. The Group operates four semisubmersible rigs and one drill ship. With a highly experienced management team, the Company’s vision is to provide a flexible and reliable drilling service to its customers. The Group is headquartered in Oslo, Norway, and the rig operations are run from Singapore, Perth - Australia, Houston - USA and Malabo – Equatorial Guinea. Per 31 December 2006 the Group had operations in the North Sea, offshore West Africa and offshore Western Australia. The Company has been listed on Oslo Stock Exchange since 26 January 2006. Ticker: “SONG”. Songa Offshore ASA is a public limited company, incorporated in Norway, the address of the registered headquarters is: Haakon VIIs gate 1, 0161 Oslo, Norway. Enterprise no. 874 761 362 Songa Offshore ASA was established 18 April 2005. All financial information presented in “2005” columns represents the period from inception to year end unless otherwise stated. These group consolidated financial statements were authorised for issue by the Board of Directors on 29 March 2007.
Note 2 Adoption of new and revised Standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January 2006. The adoption of these new and revised Standards and Interpretations have not affected the amounts reported for the current or prior years. In addition, the Group has elected to adopt IFRIC 11 “IFRS 2 – Group and Treasury Share Transactions”. The interpretation clarifies the application of IFRS 2 Share-based Payment to certain share-based payment arrangements involving the entity’s own equity instruments and to arrangements involving equity instruments of the entity’s parent. The following is a list of new and revised Standards and Interpretations in issue and effective as at December 2006: IFRIC 4 “Determining whether an Arrangement contains a Lease” IFRIC 5 “Rights to Interest arising from Decommissioning, Restoration and Environmental Rehabilitation Funds”. IFRIC 6 “Liabilities arising from Participation in a Specific Market – Waste Electrical and Electronic Equipment” (Effective for accounting periods beginning on or after 1 December 2005). IFRS 6 “Exploration for and Evaluation of Mineral Resources”. Amendment to IAS 19 “Actuarial Gains and Losses, Group Plans and Disclosures”. Amendment to IAS 21 “Net Investment in a Foreign Operation”. Amendment to IAS 39 “Cash Flow Hedge Accounting of Forecast Intragroup Transactions”. Amendment to IAS 39 “The Fair Value Option”. Amendment to IAS 39 & IFRS 4 “Financial Guarantee Contracts”.
15
At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: IFRIC 7 “Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies”. Effective for annual periods beginning on or after 1 March 2006. IFRIC 8 “Scope of IFRS2”. Effective for annual periods beginning on or after May 2006. IFRIC 9 “Reassessment of Embedded Derivatives”. Effective for annual periods beginning on or after 1 June 2006. IFRIC 10 “Interim Financial Reporting and Impairment”. Effective for annual periods beginning on or after 1 November 2006. IFRIC 12 “Service Concession Arrangements”. Effective for annual periods beginning on or after 1 January 2008. IFRS 7 “Financial Instruments: Disclosures” and the complementary Amendment to IAS 1, “Presentation of Financial Statements – Capital Disclosures”. Effective for annual periods beginning on or after 1 January 2007 IFRS 8 “Operating Segments”. Effective for annual periods beginning on or after 1 January 2009. Amendment to IAS 1 “Capital Disclosures”. Effective for annual periods beginning on or after 1 January 2007. Amendment to IFRS 4 “Revised Guidance on Implementing IFRS 4”. Effective for periods beginning on or after 1 January 2007. Amendment to IAS 23 “Borrowing Costs”. Effective for periods beginning on or after 1 January 2009. The directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Group. Note 3 Significant accounting policies Basis of preparation The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements of the Songa Offshore Group have been prepared in accordance with International Financial Reporting Standards (IFRS). The consolidated financial statements have been prepared under the historical cost convention, except for: Loans stated at amortised cost. (Note 21); Derivative financial instruments stated at fair value. (Note 23) The financial statements have been prepared on a going concern basis. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intragroup transactions, balances, income and expenses are eliminated in full on consolidation.
16
Business combinations Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 “Business combinations” are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 “Non-currents Assets Held for Sale and Discontinued Operations”, which are recognised and measured at fair value less costs to sell. Investment in associates An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. At year end 2006 the Group had no investments in associates. Interests in joint ventures A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control, which is when the strategic financial and operational policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control. Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities. The Group reports its interest in jointly controlled entities using proportionate consolidation. The Group’s share of the assets, liabilities, income and expenses of jointly controlled entities are combined with the equivalent items in the consolidated financial statements on a line-by-line basis. During the year the Company has acquired the remaining 50% in (Songa Management AS) the joint venture with Songa Drilling AS, see note 6. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group’s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. Revenue derived from charter-hire contracts or other service contracts is recognised in the period that services are rendered at rates established in the relevant contracts. Certain contracts include mobilisation fees payable at the start of the contract. In cases where the fee covers a general upgrade of a rig or equipment which increases the value of the rig or equipment beyond the contract period, the fee is recognised as revenue over the firm contract period whereas the investment is depreciated over the remaining lifetime of the asset. In cases where the fee covers specific upgrades or equipment specific to the contract, the mobilisation fees are recognised as revenue over the firm contract period. The related investment is depreciated over the firm contract period. In cases where the fee covers specific operating expenses at the start up of the contract the fees are recognised in the same period as the expenses. Foreign currency The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in United States Dollar (USD), which is the functional currency of the Company and the presentation currency for the consolidated financial statements. For consolidation purposes, the balance sheet figures for subsidiaries with a different functional currency are translated at the rate applicable at the balance sheet date and their income statements are translated at the exchange rate prevailing at the date of transaction. Exchange differences are recognised in equity. Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognized in profit or loss in the period in which they are incurred.
17
Pension plans The Company and certain subsidiaries operate various pension schemes. The schemes are generally funded through payments to insurance companies, determined by periodic actuarial calculations. The Group has both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Group pays contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, year of service and compensation. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% or the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. Past service costs are recognized immediately in profit and loss, unless the changes to the pension plan are conditional on the employees remaining in service for specified period to time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. For defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. Prepaid contributions are recognised as an asset to the extent that a cash refund or reduction in the future payments is available. Share-based compensation The Group operates a number of equity-settled, share-based compensation plans. Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of the Black & Scholes option pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects on non-transferability, exercise restrictions and behavioural considerations. Further details on how the fair value of the equity-settled share-based transactions has been determined can be found in note 24. The fair value determined at grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Taxation Currently there is no tax payable. The tax income consists of changes to deferred tax. Deferred tax/tax assets are calculated on all taxable temporary differences. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
18
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items credited or debited directly to equity, in which case the tax is also recognised directly in equity, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost. Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed assets and modifications includes the cost of material, direct labour and other direct attributable cost to bring the asset to a working condition for its intended use. Where components of an item of property, plant and equipment have different useful lives, they are accounted for separately. Subsequent expenditures are capitalised when it is probable that they will give rise to future economic benefits. Other costs are recognised in the income statement as incurred. Depreciation is charged to the income statement on a straight-line basis over the estimated useful life of each component of property, plant and equipment. The estimated useful lives, residual values and decommissioning costs are reviewed at each financial year end. No decommissioning costs have been recorded to date, and the presence of any obligations is reviewed at each financial year end. There is no decommissioning liability on the drill ship or the drilling rigs as there is no legal or constructive obligation to dismantle or restore the assets. In practice, assets of this nature are rebuilt when no longer useful, laid up in dry dock or scrapped. For a standard vessel, specialised demobilising yards pay for a vessel to be scrapped per light displacement tonne (ldt) of the vessel. Any changes are accounted for prospectively as a change in accounting estimate. The estimated useful lives are as follows: Rigs and drill ship; 5 to 30 years Fixtures and equipment; 3 to 10 years The useful lives of the assets are reviewed at each year end. Management has reviewed each of the rigs by expected usage and considered the scheduled 5 years class renewal surveys (RS) going forward. Costs for special periodic surveys/class renewal surveys (SPS/RS) on offshore units required by classification societies are capitalised and depreciated over the anticipated period between surveys, generally five years. Other maintenance and repair costs are expensed as incurred. The Group categorizes spare parts into two groups, spare parts and spare assets. A spare part is a consumable that is not depreciated, but expensed when used against repair and maintenance cost. A spare asset is a larger spare item that is recorded as a rig component and depreciated. Consumables are recorded at cost.
The residual value is reviewed at each year end, with any change in estimate accounted for as a change in estimate and therefore prospectively. The most common method to estimate residual values for ships is to use the scrap price which is publicly noted by brokers in USD per ldt of a complete vessel with all normal machinery and equipment on board. This method is used to determine the residual value for the drill ship Songa Saturn. The estimated residual
19
value for Songa Saturn as at 31 December 2006 is USD 4.8 million. Drilling rigs are much more complicated to scrap than ships and have much less metal and scrapable/recoverable material due to their construction, design and nature. The price that could be recovered from scrapping of drilling rigs is estimated to approximate the cost of extracting this scrap metal. Therefore, no residual value is recorded given the assumption that if the assets were disposed of in their expected ages and conditions at the end of their useful lives, at current prices, no material net amount would be recovered. Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. When considering impairment indicators, the Group considers both internal (e.g. adverse changes in performance) and external sources (e.g. adverse changes in the business environment). These are analyzed by reviewing day rates and broker valuations. The recoverable amount of an asset is the higher of its fair value less costs to sell and value in use. The value in use is calculated as the present value of the expected future cash flows for the individual units. An impairment loss is recognised if the carrying amount of an asset exceeds the recoverable amount. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Trade receivables When a trade receivable is uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. Financial liabilities and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Financial liabilities are classified as either financial liabilities at Fair Value Through Profit and Loss (FVTPL) or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.
Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.
20
Further details of derivative financial instruments are disclosed in note 23 to the financial statements. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents include cash, bank deposits and other short-term highly liquid assets that are readily convertible to known amounts of cash and which are subject to insignificant changes in value.
Events after the balance sheet date New information on the ‘Group’s positions at the balance sheet date is taken into account in the annual financial statements. Events after the balance sheet date that do not affect the Group’s position at the balance sheet date but which will affect the Group’s position in the future are stated if significant.
Note 4. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group’s accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The following are the critical judgements and estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in financial statements:
Impairment of long lived assets At each balance sheet date judgement is used to determine whether there is any indication of impairment of the Group fleet of rigs and the drill ship. If any such indication exists, the asset’s recoverable amount is estimated. When considering impairment indicators, the Group considers both internal (e.g. adverse changes in performance) and external sources (e.g. adverse changes in the business environment). These are analysed by reviewing day rates and broker valuations. If an indicator of impairment is noted, further management estimate is required to determine the amount, if any, of impairment. In order to measure for potential impairment, the carrying amount of the rigs and drill ship would be compared to the recoverable amount, which is the value in use. The value in use is calculated as the present value of the expected future cash flows for the individual units, requiring significant management estimates of the proper discount rates as well as the length and amounts of cash flows. An impairment loss would then be recognised to the extent the carrying amount exceeds the recoverable amount.
Useful lives for depreciation of fixed assets Depreciation of rigs and drilling equipment is computed using the straight line method over estimated useful lives. The depreciable amount is determined after deducting the residual value of the asset. To support management’s estimate for residual value, considerations provided by an independent third party have been used. The cost of rigs has been categorised separately by its main components, and useful lives have been determined for each component. The primary portion of the rigs is depreciated over 30 years, while other
21
components are depreciated over their useful lives, ranging from 5 to 30 years. That part of the rig’s cost which relates to special periodic surveys, which take place every 5 years, is depreciated over the 5 year period. Estimates of useful lives, residual values and methods of depreciation are reviewed at each financial year end, and adjusted if appropriate. Any changes are accounted for prospectively as a change in accounting estimate. The estimated useful life of the rigs could change, resulting in different depreciation amounts in the future.
Valuation of share based-options The company uses share-based incentive programs (note 24) and has an agreement where a Single Purpose Entity (SPE) has the option to call shares (note 23). Share-based options are valued at fair value at the grant date using the Black & Scholes option pricing model. The company carefully reviews the assumptions used in the Black & Scholes option pricing model, and uses an external third party to do the calculations of the fair value for each quarter. However changes in the assumptions, and especially expected volatility could change the calculated fair value of the options significantly.
Note 5. Financial risk management Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes borrowings (note 21), cash and cash equivalents (note 16) and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. The Group will balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt. The Group’s overall financing strategy remains unchanged from 2005. The gearing ratios at 31 December 2006 and 2005 were as follows:
2006
2005
Total borrowings Less: cash and cash equivalents
625,419 (90,621)
187,545 (2,220)
Net debt Total equity
534,798 161,598
185,325 60,568
Total capital
696,396
245,893
77%
75%
Gearing ratio
The Company’s future capital requirements and level of expenses will depend on numerous factors, including the timing and terms on which drilling unit contracts and other contracts can be negotiated, the amount of cash generated from operations, the level of demand for its services and general industry conditions. Songa Offshore will further be exposed to credit risk, interest rate risk, foreign currency risk and liquidity risk in its operations. Credit risk Due to the nature of the Group’s operations, revenues and related receivables are typically concentrated amongst a relatively small customer base of international oil and gas companies. The Group continually evaluates the credit risk associated with customers and, when considered necessary, requires certain guarantees, either in the form of parent company guarantees, bank guarantees or cash collateral. The Group’s short term investments are limited to reputable money market funds and cash deposits in the Group’s relationship banks. Derivative financial instruments are normally entered into with the Group’s main relationship banks. As such, the Group considers its exposure to credit risk to be low.
22
Interest rate risk The Group is exposed to fluctuations in interest rates for USD. The Group has a satisfactory mix of exposure to fixed and floating interest rate on its debt instruments. During the recent year, the Group has had between 27% and 29% of its interest expenses based on fixed rate loans. As at 31 December 2006, the Group’s USD denominated interest bearing debt amounted to USD 625 million, of which USD 168 million is based on fixed interest rates. USD 96 million is related to a fixed rate (9%) 5 year bond loan and USD 72 million is related to a fixed rate (9,75%) 5 year bond loan. The remaining portion of the USD debt, amounting to USD 457 million, is based on floating interest rates (USD LIBOR) plus a margin. USD 394 million is related to a bank loan facility, USD 40 million is related to a 6 months commercial paper, USD 16 million is related to a Total Return Swap where parts of the fixed bonds mentioned above have been swapped from fixed to floating interest rates and USD 7 million is related to a bank loan facility in a Special Purpose Entity consolidated in accordance with SIC 12.
Foreign currency risk The Group is exposed to foreign currency risks related to its operations. The Group’s financial statements are denominated in United States Dollar (USD) and some of the subsidiaries use Australian Dollar (AUD) and Singapore Dollar (SGD) as their functional currency. The Group’s expenses are primarily in USD, SGD and NOK. As such, the Group’s earnings are exposed to fluctuations in the foreign currency market. The Group uses the foreign currency spot market to buy foreign currencies.
Liquidity risk Prudent liquidity risk management includes maintaining sufficient cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Group Treasury maintains flexibility in funding by maintaining availability under committed credit lines.
Note 6 Changes in the Group’s structure In October 2005, Songa Offshore ASA acquired 90% of the shares in KS Bjørgvin Offshore and 100% in its complementary company Bjørgvin Offshore AS which ownes the remaining 10% of the shares in KS Bjørgvin Offshore. KS Bjørgvin owned 20.187% of the rig Deep Sea Bergen through KS Deep Sea Drilling Company II (DSDC II). The acquisition cost was USD 19.4 million plus acquired debt of USD 15.0 million. The investment was treated as a financial instrument as defined in IAS 32 and 39 on the basis that Songa Offshore ASA did not have significant influence in the company owned by KS Bjørgvin Offshore. The investment was classified as a financial investment available for sale and recorded at fair value. Changes in fair value were recorded in equity until the investment was sold. Upon sale the changes recorded in equity were reversed and recognised in profit and loss as investment revenue.
In November 2006, Songa Offshore ASA announced a plan for the sale of its 20.187% interest in the rig Deepsea Bergen. The sale was carried through in December 2006. Total net proceeds from the sale were USD 53.5 million. A profit of USD 19.1 million was recognised during the fourth quarter of 2006.
On 8 June 2006, Songa Offshore ASA acquired the remaining 50% of Songa Management AS (SM), at a price of NOK 75,000 from Songa Drilling AS (SD), later renamed KCA Deutag Drilling AS, and became sole owner of SM. Simultaneously with this aquisition, the Group has entered into an agreement with SD to provide management services until the upgrading of the jack-up rigs owned by SD are finalised. This work is expected to be finalised in Q2 2007.
In 2005, the Company acquired a “blow-out preventer” (BOP) for use offshore. In order to finance the BOP, the Company entered into a sale-leaseback transaction with BOP 15 Invest AS, a special purpose financing entity. Songa purchased the BOP for USD 15 million and subsequently sold the BOP to BOP 15 Invest AS for USD 15,3 million. The condition for the sale was that Songa entered into a lease for a maximum period of 3 years with BOP 15 Invest AS. SIC-12 provides explicit guidance on the extent to which special purpose entities should be consolidated. The purpose of the arrangement with BOP 15 Invest AS is to obtain long-term financing of the BOP and that the Company retains all risks and rewards related to the BOP. In 2005 the BOP was 23accounted for as a financial lease agreement. Given the fact that in January 2006 the Chairman of the Company took over the majority of the shares (73%)
15 Invest AS for USD 15,3 million. The condition for the sale was that Songa entered into a lease for a maximum period of 3 years with BOP 15 Invest AS. SIC-12 provides explicit guidance on the extent to which special purpose entities should be consolidated. The purpose of the arrangement with BOP 15 Invest AS is to obtain long-term financing of the BOP and that the Company retains all risks and rewards related to the BOP. In 2005 the BOP was accounted for as a financial lease agreement. Given the fact that in January 2006 the Chairman of the Company took over the majority of the shares (73%) in BOP 15 Invest AS and evaluating the indicators provided by SIC-12 paragraph 10 again, the Company has decided to consolidate the special purpose entity. In connection with the lease agreement for the Blow Out Preventer ("BOP") Songa Offshore ASA has agreed that the owners of the investment company for the BOP up until 1 July 2007 have an option to sell their ownership in the investment company to Songa Offshore ASA against a consideration amounting to USD 15.3 million and payable in shares in Songa Offshore ASA at a share price of NOK 35 per share.
Note 7 Segment information The Group only operates rigs and drill ships in the mid water segment so the exposure for risks and returns are the same for all the rigs and drill ships, and thereby indicating that there is only one distinguishable segment. For the rigs, the drilling services provided are the same, the drilling operations are the same and the customers approached are the same. The Group is marketing the rigs all over the world and is basically exposed to the same risks and returns no matter where the rigs are employed: Risks The credit risk does not vary with the geographical location of the rigs. The customers are the major oil companies of the world and their ability to pay, and to pay on time, is not affected by where they have engaged us. With regards to external and political conditions, the cost of operating may vary with local conditions but the contracts are in general negotiated so that earnings after operating expenses and tax are comparable. Regarding competition and mobility, the market truly is world wide and there are no limitations to where the rigs might operate. Every rig is unique in the way it is built and where it is most fit to work. But again it is the market that decides where it will operate. A good example is the Group's own rig Songa Mercur which is winterised but currently employed in Australia. The client took the cost of upgrading the rig to the warm climate of Australia with air conditioning etc. The Group is not exposed to any exchange control regulations and has no major underlying currency risks since almost all its business is done in US dollars. Returns The margin the offshore drilling companies are able to achieve are based on when the contracts are agreed and not where. A good example is the Group's own rig Songa Dee, currently employed in the North Sea at a bare boat rate of USD 42,000/day. From the first quarter of 2009 the same rig is employed in the North Sea at a time charter rate of USD 425,000/day. There is no relationship between operations in different areas and proximity does not matter. Further, it makes little sense to group the rigs in geographical segments since the rigs will stay in that segment / area only for a limited period of time. Discussion with investors and analysts has also proven that they are interested in the margins and not where the rigs are employed. The internal reporting to the CEO and Board of directors are not done with any split on neither business segments nor geographical segments. This supports the conclusion that there is only one business segment and only one geographical segment. When evaluating business segments and geographical segments it becomes evident that the group has only one business segment; mid water, and only one geographical segment; the whole world. To identify reportable segments and primary and secondary reporting format has no value since all activities are included in both the business segment and the geographical segment.
24
Note 8 List of subsidiaries The following entities are included in the consolidated financial statements as at 31 December 2006: Company Songa Management AS !
Country of registration Norway
Main operations
Ownership share
Voting share
100 %
100 %
100 100 100 100 100 100 100 100
100 100 100 100 100 100 100 100
Songa Offshore AS Songa Venus AS Songa Mercur AS Songa Saturn AS Songa Dee AS KS Bjørgvin Offshore" Bjørgvin Offshore AS Songa Offshore Pte Ltd
Norway Norway Norway Norway Norway Norway Norway Singapore
Management services Offshore drilling Offshore drilling Offshore drilling Offshore drilling Offshore drilling Offshore drilling Offshore drilling Offshore drilling and management services
Songa Saturn Chartering Pte Ltd
Singapore
Offshore drilling
100 %
100 %
Management services
100 %
100 %
USA
Offshore drilling
100 %
100 %
Norway
Financial leasing
0%
0%
Songa Pty Ltd Songa Management Inc
BOP 15 Invest AS #
Australia
% % % % % % % %
!Joint Venture up to 8 June 2006 (See to Note 6) # Special Purpose Entity consolidated with reference to SIC 12 (See to Note 6) " KS Bjørgvin Offshore is owned 90% directly and 10% through Bjørgvin Offshore AS
Note 9 Exchange rates Currency/USD
Exchange rates Average 1/1/2006 exchange rates 2006
Norwegian Krone (NOK) ! Singapore Dollar (SGD) " Australian Dollar (AUD) #
6,76870 -
1,30959
Exchange rates 31/12/2006
6,22510 1,53397 1,26374
! For NOK no average exchange rate has been used. All transactions are translated using the actual exchange rates. " SGD no average exchange rate has been used. All transactions are translated using the actual exchange rates. There were no transactions at 1/1/2006. # For AUD there were no transactions at 1/1/2006.
Note 10 Revenue and investment revenue USD '000 Mobilisation Time Charter Revenue Bare Boat Revenue Management fee Other income Total revenue USD '000 Gain on disposal of investments (see note 6) Investment revenue
2006 3 612 10 581 9 937 964 39 25 133 2006
19 464 19 464
25
2005 1 207 1 207 2005
-
% % % % % % % %
Note 11 Other operating costs USD '000 Legal and consulting fees ! Other office costs Travel expenses Other expenses Other operating costs
2006
2005
4 127 1 735 647 4 422 10 931
3 717 500 460 4 677
!Including remuneration to auditors Fees paid to the auditors Deloitte AS (Norway) and cooperating companies are split as follows (VAT is not included in the auditor's fee): USD '000
2006
2005
Statutory audit Other assurance services Other non-assurance services Tax consultant services Total
118 36 63 48 265
45 30 52 127
Note 12 Employee benefit expense USD '000 Salary Share options (Note 23) Social security Director's fee (Note 28) Pension costs defined benefit plans (Note 24) Other social costs Total employee benefit expense
Man years Number of man years employed by the Group during the financial year
2006
2005
3 783 14 373 1 133 128 32 4 356 23 805
563 465 1 028
2006
2005
186
150
Note 13 Finance income and finance costs USD '000 Interest income Foreign exchange gains Total finance income
Interest expense Foreign exchange losses Recognised expense from redemption of bond loan Change in fair value BOP option Other financial expenses Less: amounts included in the cost of qualifying assets Total finance costs
2006
2005
1 380 1 333 2 713
461 461
2006
2005
35 064 2 034 6 671 2 007 (18 399) 27 377
6 959 158 11 941 5 609 620 25 287
For 2006 the weighted average capitalisation rate on funds borrowed generally is 8.9% per annum (2005: 8.9%).
26
Note 14 Tax income and deferred taxes USD '000
2006
2005
Tax payable Changes in deferred tax Tax income
7 874 7 874
4 384 4 384
A reconciliation of the effective rate of tax and the nominal tax rate in Songa Offshore ASA’s country of registration, Norway:
28 %
28 %
2006
2005
(28 615)
(29 330)
8 012
8 212
Non-taxable income Non-deductible expenses Issue expenses recorded to equity Tax income recognised in consolidated income statement
5 326 (6 023) 558 7 874
(4 342) 514 4 384
Effective tax rate
27,5 %
14,9 %
2006
2005
Loss carried forward Deferred tax assets - gross
114 107 114 107
16 302 16 302
Property, plant and equipment Other Deferred tax liabilities - gross
99 227 2 622 101 849
11 129 789 11 918
130
-
12 388
4 384
2006
2005
6 671 (19 022) 14 838 (1 994) 493
5 608 (1 834) 9 900 13 674
354 382 9 365 363 747
39 746 2 820 42 566
(407 525) (407 525)
(58 222) (58 222)
363 747 (407 525) (43 778)
42 566 (58 222) (15 656)
Pre-tax profit Tax assessed at the nominal tax rate in Songa Offshore ASA’s country of registration, Norway: 28%
Deferred tax assets and deferred tax liabilities:
Adjustment recognised in current year in relation to the deferred tax assets of prior years Net recognised deferred tax assets
The deferred tax asset and deferred tax assets are explained as follows: Permanent differences: Change in fair value of BOP option Gain on sale of limited partnership Employee options Issue expenses Valuation of warrants regarding refinance of bond loan Total
Temporary differences: Property plant and equipment Interest bearing debt Total
Losses carried forward: Loss carried forward Total
Net temporary differences: Positive differences Negative differences Net temporary differences
27
Loss carried forward Total
(407 525) (407 525)
(58 222) (58 222)
363 747 (407 525) (43 778)
42 566 (58 222) (15 656)
130
-
(12 388)
(4 384)
Net temporary differences: Positive differences Negative differences Net temporary differences Adjustment recognised in current year in relation to the deferred tax assets of prior years 28% Tax Tax losses carried forward have no expiry date.
At year end the deferred tax asset can be recognised even though there has been a history of recent loss. This is based on the fact that from inception until the end of 2006 the rigs have been refurbished making them ready for intended use resulting in loss carried forward, but by the fourth quarter of 2006 all the rigs are on contract, and by the second quarter of 2007 they will be generating income. The Group expects to generate net income that can be offset against the deferred tax assets in the near future. Note 15 Earnings per share USD
2006
2005
Basic earnings per share
-0,28
-0,47
Diluted earnings per share
-0,28
-0,47
Basic earnings per share: The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: USD '000 Profit for the year Weighted average number of ordinary shares for the purposes of basic earnings per share (share '000)
2006
2005
(20 741)
(24 946)
74 021
51 462
All the potential dilutive instruments will only affect the denominator and are therefore anti dilutive and not included. See list below: Shares in '000 BOP 15 Invest AS' right to call shares BoD and employee options Warrants Total
2006
2 5 6 14
732 669 421 822
2005
2 959 550 19 269 22 778
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: warrants and share options. The warrants are assumed to have been converted into ordinary shares. For the share options, a calculation is done to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Companies shares) based on the monetary value of the rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options. Potential ordinary shares that are antidilutive are excluded from the calculation.
28
Note 16 Cash and cash equivalents USD '000 Cash at the bank and in hand Time deposit Cash collateral on Total Return Swap Escrow account regarding employee's tax Total cash and cash equivalents
2006
2005
12 569 75 000 2 452 600 90 621
2 220 2 220
Note 17 Other assets There are no provisions for loss on trade receivables as of year end 2006 and 2005. No loss on trade receivables has been recorded during the year. The average credit period on sales of drilling services is 30 days upon receipt. Interest is charged on the receivables in accordance with the contract with the customer. Other receivables include an escrow / joint account with Odfjell Drilling AS, the seller of the rig Deepsea Trym (USD 23.9 million). The sale was carried through in January 2007. See note 27 for more information.
Note 18 Property, plant and equipment USD '000
Year ended 31 December 2005 Opening net book amount Purchase Additions Depreciation charge Closing net book amount
Rigs and drill Fixtures and ship equipment 188 602 33 708 158 (6) 222 310 152
Total 188 602 33 866 (6) 222 462
At 31 December 2005 Cost Accumulated depreciation Net carrying amount
222 310 222 310
Year ended 31 December 2006 Opening net book amount Additions Book value before depreciations Total depreciation charge Closing net book amount
222 503 725 (13 711
310 063 373 663) 710
152 619 771 (149) 622
222 503 726 (13 712
At 31 December 2006 Cost Accumulated depreciation Net carrying amount
725 373 (13 663) 711 710
777 (155) 622
726 150 (13 818) 712 332
Estimated lifetime Depreciation rates Depreciation method
5-30 years 3%-20% Linear
158 (6) 152
222 468 (6) 222 462
462 682 144 812) 332
3-10 year 10%-30% Linear
Rigs and drill ship includes the two rigs Songa Venus and Songa Mercur, acquired in June 2005. Both rigs have been undergoing refitting and contract preparation work at Galveston, Texas and Singapore since the acquisition. Included is also the drill ship Songa Saturn and the rig Songa Dee. Songa Saturn was acquired in November 2005. The drill ship has been undergoing refurbishment in Tuzla, Turkey. Songa Dee was acquired in May 2006 and is currently working on the Troll field for Norsk Hydro. Depreciation of the rigs and drill ship start when they are ready for intended use. By year end Songa Venus and Songa Dee were depreciated. There are no indications of possible impairment for any of the Group's units. Borrowing costs capitalised on qualifying assets equals USD 18,4 million in 2006, no amount in 2005. The rate of capitalisation ranges from 15% - 20% depending on the amount spent on each rig.
29
Note 19 Investments
USD '000
2006
2005
-
34 056 34 056
Share of a limited partnership - unlisted Total investments
The limited partnership share relates to a 20.187% share in the rig Deepsea Bergen that was sold during the year. The investment was classified as held for sale, and the carrying amount was equal to fair value. See note 6 for more information.
Note 20 Assets pledged as security Assets with the following carrying amounts have been pledged to secure borrowings of the Group (see note 21): USD '000 Songa Venus Songa Mercur Songa Saturn Songa Dee Rigs and drill ship
2006 145 140 167 257 711
2005
808 445 478 979 710
87 195 90 575 44 540 222 310
Note 21 Borrowings
Current (USD '000)
2006
2005
190 000 16 327 206 327
19 840 2 555 22 395
2006
2005
96 206 204 682 6 707 71 684 379 279
45 902 108 142 11 106 165 150
2006
2005
Secured: Bank loan (i) Financial lease liability (ii) Bank loan (iii) Bank loan (iv) Current secured debt Non current (USD '000) Secured: Bank loan (v) Bond loan (vi) Financial lease liability (vii) Bank loan (viii) Bank loan (ix) Bond loan (x) Non current secured debt Current (USD '000) Unsecured: Commercial paper (xi) Current unsecured debt
39 814 39 814
-
(i) Bank loan facility with interest Libor + 2%. Repaid in 2006. (ii) Current portion of non current lease liability, see item (vii). (iii) Current portion of non current bank loan, see item (viii). (iv) Total Return Swap (TRS) where parts of the fixed bonds mentioned in item (vi) and (x) have been swapped from fixed to floating interest rates. The Company has to put up 15% cash collateral on every acquisition, which is entered into the TRS. Interest paid is USD LIBOR + a margin of 1.5% per annum on the swapped amount. Interest received is USD LIBOR minus 12.5 basis points on the cash deposit. 30 Further the Company receive the 9% and 9.75% interest on the bonds put into the TRS. The
(ii) Current portion of non current lease liability, see item (vii). (iii) Current portion of non current bank loan, see item (viii). (iv) Total Return Swap (TRS) where parts of the fixed bonds mentioned in item (vi) and (x) have been swapped from fixed to floating interest rates. The Company has to put up 15% cash collateral on every acquisition, which is entered into the TRS. Interest paid is USD LIBOR + a margin of 1.5% per annum on the swapped amount. Interest received is USD LIBOR minus 12.5 basis points on the cash deposit. Further the Company receive the 9% and 9.75% interest on the bonds put into the TRS. The agreement matures in December 2007, with option to terminate the TRS on three days notice any time until December 2007. Interest is calculated every 3 months beginning 27 March 2007. Stated at amortised cost. Effective interest rate for the TRS is 6.6% per annum. (v) Two bank loan facilities, with interest Libor + 1.87% and Nibor + 2%. Repaid in 2006.
(vi) USD 110 m bond loan, 9% interest, issued 8 September 2005. Main terms: 5 years, fixed rate, no warrants, not convertible and no options. Main Terms: The outstanding amount under the senior bank loan discussed in section (viii) is redeemed with at least USD 10 million per year. The Company shall not make or distribute dividend payments to the Company’s shareholders that constitutes more than, on a consolidated basis 50% of the Company’s net profit after taxes for the previous financial year. Stated at amortised cost. Effective interest rate per annum is 9.16%. (vii) Lease debt in relation to lease of a blowout preventer from BOP 15 Invest AS. In 2005 BOP 15 Invest AS was not consolidated and accordingly the lease obligation was recognised in the balance sheet. See note 6 for more information. (viii) USD 400 million Bank loan. Main terms: Installments in the amount of USD 47.5 million are due on 31 March, 30 June, 30 September and 31 December 2007. Thereafter follows four quarterly installments of USD 22.5 million each, and finally USD 98.6 million on the final maturity date in 31 March 2009. Minimum value of the rigs at any time at least 250% of the loan. Cash to be minimum USD 5 million per rig or vessel. Not to make any distribution or to pay any dividends to or make any loan to or issue any guarantee on behalf of any of its shareholders without the prior written consent of the Banks. 3 years, Libor + margin (1.90%/1.75%), no warrants, not convertible. Option: The borrower is entitled to repay the loan in full or in part. Stated at amortised cost. Effective interest rate is 8.28% per annum. For current part see section (iii). (ix) External loan in BOP 15 Invest AS. The entity BOP 15 Invest AS is a special purpose entity consolidated in accordance with SIC 12 (see note 6). The entity holds a bank loan of USD 7.5 million, floating rate, margin 1.5%, 3 years.
(x) USD 75 million bond loan, issued 24 March 2006. Main terms: 5 years, 9.75% fixed rate, no warrants, not convertible. Option: The Company may redeem, partly or wholly, the remaining loan as follows: (a) On March 24 2009 at 106% of par value plus accrued interest (b) on 24 March 2010 at 105% of par value plus accrued interest. The Company shall not make or distribute dividend payments to the Company’s shareholders that constitutes more than, on a consolidated basis 50% of the Company’s net profit after taxes for the previous financial year. The outstanding amount under the senior bank loan discussed in section (viii) is redeemed with at least USD 15 million in both 2009 and 2010. Stated at amortised cost. The effective interest rate per annum is 9.96%. (xi) USD 40 million commercial paper, issued 22 December 2006. Main terms: 6 months, 8.375% fixed rate. Book equity shall on each balance sheet date not be less than 15% of total assets as of such date according to IFRS. Stated at amortised cost. Effective interest rate per annum is 9.19%.
31
Note 22 Share capital and reserves
USD '000
Number of shares ('000)
Share capital
Share premium
158 7 683 310 332
842 41 317 10 099 8 973 9 900 4 028 2 689
As at 18/04/2005 (inception) Issue of share capital Q2 Issue of share capital Q3 Issue of share capital Q4 Issue of warrants Q2 Conversion of warrants Q3 Conversion of warrants Q4 Paid in not registered at year end Issue expense As at 31/12/2005
1 49 2 2
000 000 000 087 2 996 1 995 59 078
467 304 9 254
As at 01/01/2006 Conversion of warrants not registered at 12/31 2005 Issue of share capital Q1 Issue of share capital Q4 Conversion of warrants Q1 Conversion of warrants Q2 Conversion of warrants Q3 Conversion of warrants Q4 Issue expense Transfer of funds from share premium to other equity As at 31/12/2006
59 078 184 300 500 431 860 375 182 -
6 3 5 6
81 910
Paid in not registered
Total
(1 864) 75 984
276 276
1 000 49 000 10 409 9 305 9 900 4 495 2 993 276 (1 864) 85 514
9 254
75 984
276
85 514 -
28 956 562 816 1 087 60 28 -
248 54 489 34 572 7 331 9 203 502 245 (1 994)
(276) -
12 791
(153 111) 27 469
-
55 445 35 134 8 147 10 290 562 273 (1 994) (153 111) 40 260
At an extraordinary general meeting 29 December 2006 the Shareholders decided to reduce the share capital premium fund in order to obtain a more flexible capital structure. The share capital premium fund was reduced with NOK 957,725,032 (USD 153,111,066) and the amount transferred to “other equity”.
Total authorised number of shares is 124,119,469 (2005: 104,031,653) including warrants and employee options, with a par value of NOK 1 per share (2005: NOK 1 per share). All issued shares are fully paid. All issued shares in the Company are vested with equal shareholder rights in all respects. There is only one class of shares and all shares are freely transferable. At the General Meeting 7 June 2006 the General Assembly granted the Board of Directors authorisation to buy back own shares up to 10% of the share capital. At year end 2006 no shares had been bought back. USD '000
2006
2005
Equity-settled employee benefits reserve Balance at beginning of year Share-based payment Balance at end of year
14 838 14 838
-
The equity-settled employee benefits reserves arises at the grant date of share options to employees and Board of Directors. Further information about share-based payments to employees and Board of Directors is set out in note 24 and 28.
32
20 largest share holders Number of shares in '000:
Owner SPENCER ENERGY AS GOLDMAN SACHS BANK OF NEW YORK LEHMAN BROTHERS INC. MORGAN STANLEY STATE STREET BANK BANK OF NEW YORK SEB ENSKILDA ASA JPMORGAN CHASE BANK DEUTSCHE BANK JPMORGAN CHASE BANK SOLAN CAPITAL AS SKANDINAVISKA ENSKILDA JPMORGAN CHASE BANK FORTIS BANK MELLON BANK PICTET & CIE BANQUIE CREDIT SUISSE VERDIPAPIRFONDET KLP BANK OF NEW YORK Total 20 largest
15 4 3 3 2 2 1 1 1 1 1 1
300 464 237 139 519 454 963 890 483 240 200 130 999 853 827 826 788 773 773 722 46 581
Others Total
35 329 81 910
Ownership interest in %: 18,68 5,45 3,95 3,83 3,08 3,00 2,40 2,31 1,81 1,51 1,47 1,38 1,22 1,04 1,01 1,01 0,96 0,94 0,94 0,88 56,87
% % % % % % % % % % % % % % % % % % % % %
43,13 % 100,00 %
10 largest warrant holders: Number of warrants in '000:
Owner SPENCER ENERGY AS CREDIT SUISSE VESLIK AS MUSLIK AS SYNECO AS SOLAN CAPITAL AS MP PENSJON ADRIAN FINANS AS SØLVBERG ULRIKA KATHARINA WISTH GRETE NICOLE Total 10 largest
2 208 1 667 1 000 619 270 200 144 125 39 35 6 306
Others Total
115 6 421
Ownership interest in %: 34,38 25,96 15,57 9,64 4,20 3,11 2,25 1,95 0,61 0,55 98
% % % % % % % % % % %
1,78 % 100,00 %
In connection with the initial capitalisation of the Company in June 2005, the Company issued 24,444,444 freely tradable subscription rights (warrants) with a term of 3 years from the date of issuance (i.e. until June 2008). Each warrant gives the right to receive one new share at a subscription price of USD 1.50 per Share. The warrants are listed on the Norwegian OTC list under the ticker SONGW. At year end 6,421,317 warrants remained outstanding. Shares, warrants and options owned by the general manager, members of the board and senior management in thousands: Name
Shares
Arne Blystad - Chairman Jon C. Syvertsen - Board member Gunnar Hvammen - Board member Einar J. Greve - Board member Robert J. Scott - CEO Asbjørn Vavik - COO Tom E. Jebsen - CFO Trond Christensen - Regional manager
15 300 82 1 130
77
33
Warrants 2 208 395 200
Options 500 500 500 500 800 300 500
Trond Christensen - Regional manager
500
Arne Blystad holds his shares and warrants through Spencer Energy AS. Jon C. Syvertsen holds his shares and warrants through Syneco AS, Adrian Finans AS and Adrian Shipping AS. Gunnar Hvammen holds his shares and warrants through Solan Capital AS. Robert J. Scott was elected on to the Board of Directors in an extraordinary general meeting held 29 December 2006. Subsequently Asbjørn Vavik took on the position as CEO, formerly being the COO, and Trond Christensen took on the position as COO, formerly being the Regional Operations Manager for Asia and Australia.
Note 23 Financial instruments In 2005, Songa Offshore ASA acquired a “blow-out preventer” (BOP) for use in offshore drilling. In order to finance the BOP, the Company entered into a sale-leaseback transaction with BOP 15 Invest AS, a special purpose financing entity. The Company purchased the BOP at USD 15 million and subsequently sold the BOP to BOP 15 Invest AS for USD 15.3 million. The condition for the sale was that Songa Offshore entered into a lease for a maximum period of 3 years with BOP 15 Invest AS. Additionally, BOP 15 Invest AS has a number of options to put the BOP, or the shares in BOP 15 Invest AS to Songa Offshore during or at the end of the lease period. The option provided to the BOP 15 Invest AS' shareholders to “call” Songa Offshore shares at NOK 35 does not represent a fixed amount of cash for a fixed amount of shares. Furthermore, the option has a settlement alternative in cash. Correspondingly the option does not meet the definition of an equity instrument, and the written call option is accounted for as a derivative instrument. BOP 15 Invest AS has been consolidated in accordance with SIC 12, see note 6. In effect, the BOP is reflected in the financial statements of Songa and the option is recognised at Fair Value Through Profit and Loss (FVTPL). The fair value of the options was calculated using the BlackScholes option pricing model. The inputs and calculations were as follows:
Security Start date End date Type of option Strike NOK Spot share price NOK Value NOK Volatility Risk free rate (USD)
2006
2005
Songa Offshore ASA shares 31/12/06 01/07/07 American 35,00 65,75 31,84 46,80 % 5,50 %
Songa Offshore ASA shares 31/12/05 01/07/07 American 35,00 48,00 16,58 30,00 % 5,00 %
2006
2005
Total amount in USD NOK/USD exchange rate Strike in USD Number of options Value per option in USD
15 300 000 6,2500 5,6000 2 732 143 5,0944
15 300 000 6,7687 5,1709 2 958 889 2,4495
Total value of options in USD
13 918 629
7 247 829
Carrying value of share option to the SPE shareholders at year end recorded as debt was USD 13.9 million. The change in carrying value (USD 6,671 million) is recognised in profit and loss. See note 13. In December 2006 the Company entered into a total return swap (TRS) regarding the Company's two bonds. The effect of the agreement is that the Company will receive all risks and returns regarding the bonds held by the bank, (see note 21 for more information on the bonds). The bank will receive a fixed fee. The Company has to put up 15% cash collateral on every acquisition, which is entered into the TRS. Interest paid is USD LIBOR + a margin of 1.5% per annum on the swapped amount. Interest received is USD LIBOR minus 12.5 basis points on the cash deposit. Further the Company will receive the 9% and 9.75% interest on the bonds put into the TRS. The agreement matures in December 2007, with option to terminate the TRS on three days notice any time until December 2007. Interest is calculated every 3 months beginning 27 March 2007.
34
The fair value is calculated on the amount put into the TRS. The Company has decided not to use the Fair Value Option or to consider the TRS as hedge accounting. The TRS is a derivative that shall be valued at Fair Value Through Profit and Loss. Calculation of fair value on the TRS:
Settlement date 9% USD 110m bond 9,75% USD 75m bond Total
27/12/06 27/12/06
Opening balance Closing balance Credit spread Change in fair value at year end
Settlement amount in USD 2 258 520 14 069 027 16 327 547
Assessed value
Value at year end in USD
104,25 103,75
2 234 589 14 059 537 16 294 126
Credit spread 1,5% 763 5 037 5 800
(16 327 547) 16 294 126 (5 800) (39 221)
The change in fair value is included as other income. (See note 10)
Note 24 Share based payments The Group has ownership-based compensation schemes for the Board of Directors (BoD), executives and senior employees of the Group. Each share option converts into one ordinary share of Songa Offshore ASA on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. For the Board of Directors the options are vested immediately and may be exercised at any time from the date of vesting to the date of their expiry. For management the options vest with 1/12 each month. Equity is the only method of settlement, there is no cash alternative. The Group has two option plans implemented: 1. At the Company’s extraordinary general meeting held on 30 September 2005, the Board of Directors was authorised to issue up to 2,500,000 subscription rights (warrants) in connection with the introduction of a share based incentive program for key individuals of the Songa Offshore Group. Said subscription rights give the holders a right to subscribe for up to 2,500,000 new Shares in the Company for a period up to 1 Jan 2007 at a subscription price of NOK 30 per Share. 2. At the annual general meeting (AGM) on June 7 2006, the Board of Directors was authorised to issue options to subscribe shares in the Company to employees and members of the Board. Of the options to subscribe for 4,500,000 shares, a total of 2,000,000 were reserved for the exclusive allocation to employees. The strike price for the options to the employees has, in accordance with the authorisation given by the AGM, been set at the closing price for the Company's shares on the Oslo Stock Exchange on October 18. This price is determined to be NOK 54.25 per share. The strike price for the options to the members of the Board has been set in accordance with the authorisation given by the AGM to the weighted average of the Company's share price as traded on the Oslo Stock Exchange during the last two days before the AGM and the day the AGM was held. This price is determined to be NOK 53.41 per share.
Option series
1 Employee 2 BoD 3 Employee
Number
Grant date
27/02/2006 and 2 454 167 18/10/2006* 1 500 000 21/09/2006 1 715 000 18/10/2006
Expiry date
31/01/2006 31/01/2007 31/01/2007
Exercise price
Average fair value at grant date
NOK 30.00 NOK 53.41 NOK 54.25
NOK 30.60 NOK 10.16 NOK 12.28
* 54.167 options were granted 18/10/2006. Options were priced using Black & Scholes option pricing model. Where relevant, the expected life used in the model has been adjusted based on management’s best estimate for the effects of nontransferability, exercise restrictions, and behavioral considerations. Inputs into the model Grant date share price (close) Average expected life Volatility Excercise price Dividends Risk free rate (see table below)
Series 1
Series 2
Series 3
NOK 59.50 and 54.25 NOK 53.41 NOK 54.25 11 and 3 months 1.25 years 1.25 years 47,00 % 47,00 % 47,00 % NOK 30.00 NOK 50.25 NOK 54.25 -
35
Volatility Series 1: The expected volatility is found by looking at comparable entities. The average volatility of the “similar entities” was 39,5 %. The comparable entities are not directly comparable to Songa Offshore as expected size, life phase, riskisprofile, company etc might differ.The Weaverage expect the Volatility Series ASA 1: The volatility found by lookingstrategy, at comparable entities. future expected volatility to be higher than the average volatility of the comparable entities. Hence, 47 volatility of the “similar entities” was 39,5 %. The comparable entities are not directly comparable to % is used in all the calculations on Grant Date 27 February 2006. Songa Offshore ASA as size, life phase, risk profile, company strategy, etc might differ. We expect the future expected volatility to be higher than the average volatility of the comparable entities. Hence, 47 % is usedSeries in all the calculations Grant Date 27 in February 2006. by looking at comparable entities Volatility 2: The expected on volatility is found a combination and looking at the volatility of the Songa share price over the most recent period that is generally commensurate theexpected expected volatility option term, at Grant Date. The comparable are not directly Volatility Serieswith 2: The is found in a combination by lookingentities at comparable entities comparable Offshore ASASonga as size, life phase, risk the profile, company strategy, might differ. and looking to at Songa the volatility of the share price over most recent period thatetc is generally The average volatility of expected the comparable 40,4 %. The volatility of the commensurate with the option entities term, atwas Grant Date. Thehistoric comparable entities areSonga not directly Offshore ASA share from January 2006 – 21.09.2006 was 53% (period is shorter than the comparable to Songa Offshore ASA as size, life phase, risk profile, company strategy, etc options might differ. life). We expect the future expected volatility to be higher than the average volatility of the The average volatility of the comparable entities was 40,4 %. The historic volatility of the Songa comparable entities, and that the historic volatility of the Songa Offshore share will decrease. Hence, Offshore ASA share from January 2006 – 21.09.2006 was 53% (period is shorter than the options 47 % is also used in all the calculations on Grant Date 21 September 2006. life). We expect the future expected volatility to be higher than the average volatility of the comparable entities, and that the historic volatility of the Songa Offshore share will decrease. Hence, Volatility Series 3: in The volatilityonisGrant foundDate in a combination by looking at comparable entities 47 % is also used allexpected the calculations 21 September2006. and looking at the volatility of the Songa share price over the most recent period that is generally commensurate theexpected expected volatility option term, at Grant Date. The comparable are not directly Volatility Serieswith 3: The is found in a combination by lookingentities at comparable entities comparable Offshore ASASonga as size, life phase, risk the profile, company strategy, might differ. and looking to at Songa the volatility of the share price over most recent period thatetc is generally The average volatility of expected the comparable 41 %. The historic volatility of the are Songa commensurate with the option entities term, atwas Grant Date. The comparable entities notShare directly from January 2006 – 18.10.2006 was 51% (period is shorter than the options life). We expect thediffer. comparable to Songa Offshore ASA as size, life phase, risk profile, company strategy, etc might future expected volatility to be higher than the average the comparable andShare that The average volatility of the comparable entities was 41volatility %. The of historic volatility ofentities, the Songa the historic volatility of the Songa Offshore share will decrease. Hence, 47 % is also used in all the from January 2006 – 18.10.2006 was 51% (period is shorter than the options life). We expect the calculations on Grant Date 18 October 2006. future expected volatility to be higher than the average volatility of the comparable entities, and that the historic volatility of the Songa Offshore share will decrease. Hence, 47 % is also used in all the Rates from Norges Bank on grant date that are used in the calculations: calculations on Grant Date 18 October 2006. (Interpolation is used to achieve a comparable term.) 1 Month 1 Year Rates from Norges Bank on grant date that are used3inYears the calculations: (Interpolation is used to achieve a comparable term.) Series 1 % 2,99 % 3,21 % 12,57 Month 1 Year 3 Years Series 2 3,43 % 3,86 % 3,92 % Series 1 2,57 % % 2,99 % % 3,21% % Series 3 3,58 3,77 3,96 Series 2 3,43 % 3,86 % 3,92 % Series 3,58 % 3,77 % 3,96 % Option 3activity:
Option activity:
2006 2006
Outstanding at Outstanding at the the beginning beginning of of the the period period Granted Granted Exercised Exercised Terminated Terminated Forfeited Forfeited Expired Expired Outstanding at Outstanding at the the end end of of period period Vested options Vested options Weighted average fair value of options granted during the Weighted average fair value of options granted during the period period
Outstanding options
Exercise price NOK 0-20 20-30 30-40 40-50 50-60 60-
Weighted average Outstanding remaining options 31/12/2006 contractual life 2 454 167 3 215 000 5 669 167
0,08 1,08 0,65
Weighted Weighted average average Options exerciseprice price Optionsexercise --55669 669167 167 NOK NOK43.53 43.53 --------55669 167 NOK 43.53 669 167 NOK 43.53 4 199 183 NOK 39.78 4 199 183 NOK 39.78 5 669 167 NOK 19.65 5 669 167 NOK 19.65
Vested options Weighted average exercise price 30,00 53,86 43,53
Vested Weighted options average 31/12/2006 exercise price 2 454 167 1 745 016 4 199 183
30,00 53,53 39,78
Carrying value of the share-based incentives recorded in equity at year end was USD 14.8 million. The change in carrying value during the year (USD 14.373 million) has been recognised in profit and loss. See note 12.
36
Note 25 Retirement benefit plans Defined contribution plan The Group operates a defined contribution retirement benefit plan for all qualifying employees of Songa Offshore AS. The assets of the plans are held separately from those of the Group in funds under the control of trustees. Where employees leave the plans prior to full vesting of the contributions, the contributions payable by the Group are reduced by the amount of forfeited contributions. The only obligation of the Group with respect to the retirement benefit plan is to make the specified contributions. The plan covers full-time employees in Songa Offshore AS being Norwegian citizens and members of the National Insurance (Folketrygden). At year end there were two employees in the plan. No expense was recognised in the income statement at year end, the first invoice is expected to be received in 2007. The plan was entered into 15 January 2007 and covers the employees from the time they joined in 2006. Defined benefit plan The Group operates a funded defined benefit plan for qualifying employees of Songa Management AS. The plan was established in 2006. Under the plan, the employees are entitled to retirement benefits of 70% of final salary on attainment of a retirement age of 67. No other post-retirement benefits are provided to these employees. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 31 December 2006 by Vital Pekon AS. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method. The plan covers full-time employees in Songa Management AS being Norwegian citizens and members of the National Insurance (Folketrygden). At year end there were four people in the plan.
The Group is obligated to follow the Norwegian Act on Mandatory company pensions. Both the Group's pension schemes follows the requirement as set out in the above mentioned Act. For the defined benefit plan the principal assumptions used for the purpose of the actuarial valuations were as follows: Economic assumptions
31/12/2006
Discount rate Expected return on plan assets Expected rate of salary increase
4,35 % 5,40 % 4,50 %
Adjustment of base amount in national insurance (G) Pension adjustment
4,25 % 1,60 %
Actuarial assumptions
31/12/2006
Expected voluntary retirement before age of retirement Before 40 years After 40 years Disability rate Death rate Probability of marriage
2% 0% IR02-level K63 K63
Amounts recognised in profit or loss in respect of the defined benefit plan is as follows: USD '000
31/12/2006
Current service cost Interest on obligation Expected return on plan assets
28 0 (0)
37
Administration cost
3
Total pension cost
32
The charge for the year is included in the salary costs in the income statement. The amount included in the balance sheet arising from the entity's obligation in respect of its defined benefit plan is as follows: USD '000 Projected benefit obligation Plan assets at market value Funded status Unrecognised net experience loss/(gain) Net liability for defined benefit obligations
2006 59 (15) 44 (26) 18
Movements in the present value of the defined benefit obligations in the current period were as follows: USD '000
2006
Opening defined benefit obligation Current service cost Interest cost
3 28 0
Closing defined benefit obligation - estimated Closing defined benefit obligation - used (best estimate)
31 59
Movements in the present value of the plan assets in the current period were as follows: USD '000 Opening fair value of plan assets Benefits paid Expected return on plan assets Administration costs
2006 16 0 (3)
Closing fair value of plan assets - estimated
12
Closing fair value of plan assets - used (best estimate)
15
Major categories of plan assets were as follows: USD '000 Shares Bonds and other security Cash / Money market Bonds held to maturity Properties and real estate Other short term financial asstes Total
2006 29,7 20,6 4,5 30,0 12,6 2,6 100,0
% % % % % % %
Note 26 Transactions with related parties The major shareholder of Songa Offshore ASA is Spencer Energy AS, controlled by the Chairman Arne Blystad with 18.8 % of the shares outstanding at year end. Spencer Energy AS, acquired 2,000,000 shares in Songa Offshore ASA on December 29, 2006, at an average price of NOK 63.94 per share. The shares were registered in the Norwegian Registry of Securities on 2 January 2007. After this Mr Blystad controls 17,300,197 shares, or 21.12% of the issued shares and votes in the Company. Further Spencer Energy AS controls 2,207,666 warrants of the 6,421,317 warrants outstanding. Spencer Energy AS also holds 73% in BOP 15 Invest AS. This investment entitles Spencer Engergy AS to convert an investment equal to USD 11,169,000 into shares in the Company at a conversion price of NOK 35 per share. At the year end the NOK / USD rate of 6.22510 equals 38a 100% basis BOP 15 Invest AS may approximately 1,986,518 shares in the Company. On convert its investment into 2,721,258 shares in the Company. The warrants and the investment
an average price of NOK 63.94 per share. The shares were registered in the Norwegian Registry of Securities on 2 January 2007. After this Mr Blystad controls 17,300,197 shares, or 21.12% of the issued shares and votes in the Company. Further Spencer Energy AS controls 2,207,666 warrants of the 6,421,317 warrants outstanding. Spencer Energy AS also holds 73% in BOP 15 Invest AS. This investment entitles Spencer Engergy AS to convert an investment equal to USD 11,169,000 into shares in the Company at a conversion price of NOK 35 per share. At the year end the NOK / USD rate of 6.22510 equals approximately 1,986,518 shares in the Company. On a 100% basis BOP 15 Invest AS may convert its investment into 2,721,258 shares in the Company. The warrants and the investment in BOP 15 Invest AS are explained in the Listing Prospectus dated 25 January 2006. Conversion of the warrants and BOP interests may take place at any time up until June 2008 and July 2007 respectively. Finally the Company has issued options for 2,454,167 shares to management with strike NOK 30 per share, and 1,500,000 shares to the Board of Directors with strike NOK 53.41 per share and for a further 1,715,000 shares to management with strike NOK 54.25 per share. Mr Blystad, in his capacity of Chairman holds options to subscribe 500,000 shares. Assuming all warrants and options mentioned above are converted, the Company would on a fully diluted basis have 96,732,567 shares. Of this Arne Blystad controls 22.73%, or an estimated 21,938,180 shares, warrants, options and BOP options to be converted into shares. The estimated 4,182,983 shares covered by Spencer's warrants and BOP options constitutes 5.11% of the existing 81,910,336 shares issued by the Company. Songa Management AS, a wholly owned subsidiary in the Group, has in 2006 entered into a management agreement providing management services to KCA Abbot, a company in which Arne Blystad, Chairman of the Group at year end had 12.25% ownership. Revenue for 2006 was USD 0.6 million. Office space in Oslo is rented from Arne Blystad AS, a company controlled by Arne Blystad, Chairman of the Group. The rent for 2006 was USD 0.2 million (2005: less than USD 0.1 million). The Company has been charged with costs relating to work performed by Board Member Jon C. Syvertsen, he is an employee in Arne Blystad AS. The charge for 2006 was USD 0.3 millon (2005: USD 0.3 million). The Company has acquired services from the law firm Wikborg Rein were the Board memeber Einar J. Greve is partner. The amount for 2006 was USD 50,000 (2005: USD 39,000) The Company has acquired services from the law firm Nordia were Marianne H. Blystad is employed, spouse of the Chairman Arne Blystad. The amount for 2006 was USD 2,000 (2005: no amount) All related party transactions were made on terms equivalent to those that prevail in arm's length transactions. Note 27 Events after the balance sheet date In December 2006 the Group entered into an agreement with the Odfjell Group under which the Group was to acquire the rig Deepsea Trym for USD 238.5 million. This acquisition was carried through in January 2007. In order to finance the acquisition, Songa Offshore ASA in December carried through a private placement of NOK 218.75 million and also issued a commercial paper in the amount of USD 40 million. The Company has entered into a USD 210 million bridge acquisition facility. The loan was established in connection with the acquisition of Deepsea Trym in January 2007. USD 165 million was drawn upon on 18 January, while the remaining part of the facility is available for working capital purposes. Main terms of the agreement: The loan is secured with first priority mortgage in the rig Deepsea Trym. Final maturity date 15 June 2007. Minimum value of the rig at any time at least 105% of the loan. Cash to be minimum USD 5 million per rig or vessel. Not to make any distribution or to pay any dividends to or make any loan to or issue any guarantee on behalf of any of its shareholders without the prior written consent of the Banks. Standard cross default clause. Deepsea Trym is of enhanced Aker H-3 design built in 1976 and has during the recent years been continuously upgraded to meet the latest operator and regulatory requirements for operations on the Norwegian Continental Shelf. The rig is currently working for Norsk Hydro on the Troll field on a firm contract until February 2008 with 2 ea 6 month options outstanding. The rig is equipped and maintained for operating in harsh environments for water depth up to 1200 ft and it holds an SUT / AoC diploma. The rig is classified by Det norske Veritas (DnV). Odfjell Drilling AS will continue to operate the rig for Norsk Hydro under a bareboat agreement for the remainder of the Norsk Hydro contract, which runs to March 2009 if all options are declared. For the period up until the end of the Norsk Hydro contract, Odfjell Drilling AS will bareboat charter the rig from the Group at a daily rate of USD 50,000. The rig is scheduled for a renewal classification survey in July 2007. Odfjell Drilling AS will carry all costs related to the survey, but the Group will receive no charter hire during this period. The Company entered into a Total Return Swap (TRS) agreement with Carnegie Investment Bank AB Norway on 4 January 2007. The agreement provided for cash settlement and with 2,129,165 shares in Songa Offshore ASA as underlying security. The initial reference price under the swap is NOK 59.50 per share and the swap39 agreement expires on 29 June 2007. Songa Offshore ASA will pay Carnegie Investment Bank AB Norway a sum equal to the latter's
the rig from the Group at a daily rate of USD 50,000. The rig is scheduled for a renewal classification survey in July 2007. Odfjell Drilling AS will carry all costs related to the survey, but the Group will receive no charter hire during this period. The Company entered into a Total Return Swap (TRS) agreement with Carnegie Investment Bank AB Norway on 4 January 2007. The agreement provided for cash settlement and with 2,129,165 shares in Songa Offshore ASA as underlying security. The initial reference price under the swap is NOK 59.50 per share and the swap agreement expires on 29 June 2007. Songa Offshore ASA will pay Carnegie Investment Bank AB Norway a sum equal to the latter's funding cost plus a margin. Songa Offshore ASA secures all the upside and downside on the price development of the underlying securities. Employees in the Group have in January 2007 exercised options to buy shares in Songa Offshore ASA. In total, options in the form of warrants for 2,454,167 shares have been exercised. See note 24. In January Songa Offshore ASA has acquired 0.5% in BOP 15 Invest AS for NOK 568,222. BOP 15 Invest AS has a right to convert its investment in a blow out preventer, which is leased to Songa Offshore ASA, into shares in Songa Offshore ASA. See note 6. The Board has issued options to Mr Robert J. Scott to acquire 500,000 shares in Songa Offshore ASA. Mr. Scott was elected as board member of Songa Offshore at the Company's EGM in December 2006, and until end of 2006 he was the Company's CEO. The options have a strike price of NOK 53.41. The options are immediately vested, but have to be declared before end January 2008. Mr. Scott's ownership interests after this is the mentioned 500,000 options.
Note 28 Remuneration to the Board of Directors and senior management USD '000
Director's fee
Salary
Pension
Fair value of options at grant date Other
Total
Senior management: Robert J. Scott - CEO Tom E. Jebsen - CFO Asbjorn Vavik - COO
-
450 127 444
15 -
-
2 258 589 2 802
2 708 732 3 246
1
Board of Directors:
Arne Blystad - Chairman Jon C. Syvertsen - board member Gunnar Hvammen board member Einar J. Greve - board member Øystein S. Spetalen board member (resigned) Total
32
-
-
-
779
811
24
-
-
-
779
803
24
-
-
-
779
803
24
-
-
-
-
15
-
24 128
1 021
1
7 986
24
24 9 151
Senior Management consists of Group management being: Chief Financial Officer - CFO, Chief Operating Officer - COO and Chief Executive Officer - CEO, who is disclosed separately above. The Group has two share option schemes implemented: 1. At the Company’s extraordinary general meeting held on 30 September 2005, the Board of Directors was authorised to issue up to 2,500,000 subscription rights (warrants) in connection with the introduction of a share based incentive program for key individuals of the Songa Offshore Group. Said subscription rights give the holders a right to subscribe for up to 2,500,000 new Shares in the Company for a period up to 1 January 2007 at a subscription price of NOK 30 per Share. 2. At the annual general meeting on June 7, 2006, the Board of Directors was authorised to issue options to subscribe shares in the Company to employees and members of the Board. Of the options to subscribe for 4,500,000 shares, a total of 2,000,000 were reserved for the exclusive allocation to employees. The strike price for the options to the employees has, in accordance with the authorisation given by the AGM, been set at the closing price for the Company's shares on the Oslo Stock Exchange on October 18. This price is determined to be NOK 54.25 per share. Employees that leave before the options are fully vested loose their options.
40
Shares to the Board of Directors vest immediately and can be exercised any time until they
NOK 54.25 per share. Employees that leave before the options are fully vested loose their options. Shares to the Board of Directors vest immediately and can be exercised any time until they expire 31 January 2008. Options to management vest with 1/12 per month and can not be exercised until they are fully vested 31 December 2006/31 December 2007. The options can only be exercised in January the year after they are fully vested. Options to Board of Directors and senior management is as follows: Number of share in thousands, exercise price in USD Outstanding at the beginning of period
Granted
Outstandi ng at the end of period
Weighted average exercise price
Senior management: Robert J. Scott - CEO Tom E. Jebsen - CFO Asbjørn Vavik - COO
-
500 300 800
500 300 800
4,82 8,71 6,28
-
500 500 500 3 100
500 500 500 3 100
8,58 8,58 8,58
Board of Directors: Arne Blystad - Chairman Jon C. Syvertsen - board member Gunnar Hvammen - board member Total
The remuneration of the members of the Board is determined on an annual basis. The directors will be reimbursed for, inter alia, travelling and other expenses incurred by them in attending meetings of the Board. A director who has been given a special assignment beside the normal duties of a member of the Board, may be paid such extra remuneration as the Board may determine. The total remuneration to the Board is, at present, not expected to exceed NOK 1.2 million per annum, excluding reimbursement for expenses. No loans or guarantees are granted to the Chairman, member of the Board, CEO, employees, management, shareholders or other related parties to any of these groups. There is no agreement on payment of salary in arrears, bonuses and profit sharing to neither senior management nor members of the Board. The senior management has not received any other remuneration from any Group companies other that what is disclosed above. There has been no additional remuneration for any special services exceeding the normal work scope of senior management. Information on the guidelines regarding remuneration to the members of the senior managementis is included in accordance with the Norwegian Accounting Act: Songa Offshore ASA's remuneration policy states that senior management shall be offered a competitive remuneration package when all apects such as salary, benefits in kind, bonus and pension plans are seen as a whole. The Company shall offer a level of remuneration that reflects the level of comparable companies listed on Oslo Stock Exchange and the industry in general. Senior management shall be able to obtain a bonus in addition to base salary, but only limited to a percentage of base salary and linked to specific goals. The guidelines for such bonus schemes shall be determined by the Board of Directors. Bonus to the CEO is determined by the Board of Directors. Senior management in Songa Offshore ASA and it's subsidiaries, shall be able to receive options to by shares in the Company. Such options shall be based on the share price at grant date and have an expected life of one year. The total number of options in the share option progams shall not exceed 5% of the share capital. Senior management will normally receive pension benefits that are proportionate with the salary they have obtained during their active years. Members of the senior management may have car and phone costs covered by the Company but no other benefits in kind. Remuneration to senior management for the year ended 31 December 2007 will be done in accordance with the above mentioned principles.
41
Songa Offshore ASA Income Statement For the year ended 31 December 2006 (USD '000) Note
2006
2005
39 39
-
(2 443) (4 132) (6 575)
(465) (1 079) (1 544)
(6 536)
(1 544)
59 647 (45 651) 13 996
4 148 (25 119) (20 971)
7 460
(22 515)
(3 521)
2 475
Profit (loss) for the year
3 939
(20 040)
Attributable to: Other equity
3 939
(20 040)
Revenue Other income Total operating income Operating expenses Employee benefits expense Other operating expenses Depreciation Total operating expenses
5
Operating loss Financial income and costs Finance income Finance costs Net financial items
6 6
Profit (loss) before tax Income tax (expense)
7
42
Songa Offshore ASA Balance Sheet at 31 December 2006 (USD '000) Note ASSETS Non-current assets Intangible assets Deferred tax assets
7
Tangible assets Rigs, machinery and equipment
10
Financial assets Investment in subsidiaries Investment in joint ventures Intercompany loans Total financial assets
3 19
Total non-current assets Current assets Receivables Accounts receivable Intercompany receivables Total receivables
19
31/12/06
31/12/05
-
2 475
15 025
15 025
88 107 502 450 590 557
75 541 11 120 843 196 395
605 582
213 895
179 656 179 656
9 34 760 34 769
Other assets
9
24 793
919
Cash and cash equivalents
8
81 051
1 493
Total current assets
285 500
37 181
TOTAL ASSETS
891 082
251 076
43
Songa Offshore ASA Balance Sheet at 31 December 2006 (USD '000) Note
31/12/06
31/12/05
12 791 27 469 14 838 55 098
9 254 75 984 276
Other equity Other equity Total other equity
137 011 137 011
(20 040) (20 040)
Total equity
192 109
65 474
1 046
-
EQUITY Share capital and reserves Share capital Additional paid in capital Paid in not registered share capital Reserves Total share capital and reserves
13 13 13
LIABILITIES Non-current liabilities Provisions Deferred tax
7
85 514
Other non current liabilities Bank loan 12 204 682 51 244 Bond loans 12 167 889 108 142 Obligation under finance lease 11 10 658 11 106 ncern Going concern Going concern19 Intercompany liabilities 35 983 with the Accounting Act § 3-3a we confirm that the Financial Statements have been Total other non current liabilities 419 212 we 170 492 In accordance with the Accounting Act § 3-3a we confirm that the Financial Statements have been In accordance with the Accounting Act § 3-3a confirm that the Financial Statements er the assumption of going concern. This assumption is based on income forecasts prepared under thelong-term assumption of going concern. This Group assumption is based on This income forecastsis based on income fo prepared under the assumption of going concern. assumption 007 and the Group and the Company’s strategic forecasts. The and fornon the year 2007 and the and the2007 Company’s long-term strategic forecasts. The Group and for the year Group and the long-term forecasts. The G Total current liabilities 420 Company’s 258 170 strategic 492 s economic and financial position is sound. TheGroup Board believes thatand thethe annual report the Company’s economic and financial position is sound. Boardposition believesisthat the annual report the Company’s economic andThe financial sound. The Board believes that the ann rect outline of the Group and the Company’s assets and debt, financial position and provides a correct outline of provides the Group the outline Company’s assets financial position a and correct of the Groupand anddebt, the Company’s assetsand and debt, financial pos Current liabilities result. result. Bank loan 12 246 142 456 29 March 2007 Trade and Oslo, other payables 104 29 March 2007 965 Oslo, 29 March 2007 Oslo, Obligation under finance lease 11 2 555 2 555 Derivative instruments 14 13 919 7 248 Goingfinancial concern Interest payable 15 282 3 265 In accordance with the Accounting Act § 3-3a we confirm that the Financial Statements have been Other liabilities 713 on income forecasts 621 prepared under the assumption of going concern. This assumption is based Total liabilities 278 715 15 110 forcurrent the year 2007 and the Group and the Company’s long-term strategic forecasts. The Group and the Company’s economic and financial position is sound. The Board believes that the annual report provides a correct outline of the Group and the Company’s assets and and Total liabilities 698 debt, 973 financial position 185 602 result.
Blystad
Chairman)
ar J. G
ard member)
ar Hvammen
ard member)
TOTAL EQUITY LIABILITIES ArneAND Blystad
(Chairman)
_____________________ Arne Blystad Chairman of the Board
Einar J. G Arne Blystad (Board member) (Chairman) _____________________ Gunnar Hvammen
Gunnar Einar J.Hvammen G
Jon Chr. Syvertsen 891 082 ArneOslo, Blystad 29 March 2007 Jon Chr. Syvertsen (Board (Chairman) member) (Board member) Oslo , 29 March 2007
_____________________ Robert J. Scott
Einar J. G
(Board member) (Board member) _____________________ Einar J. Greve
Asbjørn Vavik Gunnar Hvammen
Officer) (Boardmember) member) (Chief Executive (Board member) (Board
44
251 076 Jon Chr. Syvertsen
(Board member)
_____________________ Jon C. Syvertsen
Jon Chr. Syvertsen (Boardmember) member) (Board
(Board member)
_____________________ Asbjørn Vavik Chief Executive Officer
Asbjørn Vavik
Asbjørn Vavik
(Chief Executive Officer) (Chief Executive Officer (Board member)
Songa Offshore ASA Statement of changes in equity for the year ended 31 December 2006 (USD '000)
Note
Share capital
Balance as at 18 April 2005 (inception) Issue of share capital
Additional Paid in not paid in registered capital share capital
Equitysettled employee benefits reserve
Other equity
Total equity
158
842
-
-
-
1 000
9 096
65 514
276
-
-
74 886
9 628
-
-
-
9 628
-
(20 040)
(20 040)
(20 040)
65 474
65 474
Issue of warrants Loss for the period
-
-
-
Balance as at 31 December 2005
9 254
75 984
276
Balance as at 1 January 2006
9 254
75 984
276
-
(20 040)
-
-
3 939
3 939
13
Profit for the year Issue of share capital
1 546
87 315
(276)
-
-
88 585
13
Conversion of warrants Jan Dec Recognition of share-based payment
1 991
17 281
-
-
-
19 272
-
14 838
-
14 838
(153 111)
-
-
153 111
0
27 469
-
14 838
137 011
192 109
15 13
Transfer of funds from Share premium to other equity Balance as at 31 December 2006
-
-
-
12 791
-
45
Songa Offshore ASA Statement of cash flows for the year ended 31 December 2006 (USD '000) Note Cash flow from operating activities: Profit (loss) before tax
2006
7 460
2005
(22 515)
Adjustments for: Finance cost
6
31 690
9 900
Share based payment expense
15
1 878
-
Fair value gain/(loss) on BOP option
14
6 671
5 609
(167 223)
Change in receivables
(861)
Change in payables
812
Change in other liabilities
(20 605)
Interest paid
(140 178)
Net cash flow from operating activities Cash flows from investing activities: Proceeds from sale of rig, machinery and equipment
-
Proceeds from sale of financial investment Purchase of rig, machinery and equipment
10
(9) 965 3 422 (2 628)
15 300
53 500
-
-
(15 025) (75 552)
Investment in subsidiaries and joint ventures
3
-
Interest received from group companies
6
(54 912)
-
(1 412)
(75 277)
Net cash flow used in investing activities Cash flows from financing activities: Proceeds from issue of share capital
13
107 857
74 614
Proceeds from borrowings
12
458 871
159 386
Disbursements of loans to group companies
19
(345 624)
(155 603)
221 104
Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period
8
Effects of exchange rate changes on the balance of cash held in foreign currencies Cash and cash equivalents at end of period
46
79 514
492
1 492
1 000
45 8
78 397
81 051
1 492
Notes to the financial statements for the year ended 31 December 2006 Note 1 General information For general information about the Company please see note 1 in Songa Offshore Group consolidated financial statements.
Note 2 Significant accounting policies Basis of preparation The principal accounting policies applied in the preparation of these financial statements are set out in note 3 to the Songa Offshore Group consolidated financial statements. These policies have been consistently applied to all the years presented, unless otherwise stated. Financial risk management of the Company is included in note 5 of the Songa Offshore Group consolidated financial statement. When preparing the accounts for Songa Offshore ASA, the Company has applied simplified application in accordance with the Norwegian Accounting Act § 3-9 of International Financial Reporting Standards (IFRS) as adopted by EU. This means that the IFRS valuation rules are applied, while keeping to the Norwegian Accounting Act and Norwegian generally accepted accounting principles for presentation of the notes. Songa Offshore ASA was established 18 April 2005. All financial information presented in “2005” columns represents the period from inception to year end unless otherwise stated. The Company as a lessee, finance leases The Company presents finance leases in the financial statements as assets and liabilities, equal to the cost price of the asset or, if lower, the present value of the cash flow to the lease. When calculating the present value of the lease the implicit interest rate in the lease is used when it can be determined. Direct costs relating to the lease are included in the asset’s cost price. Monthly rent is separated into an interest element and a repayment element. Interest costs are allocated to different periods, so that the interest cost for the remaining debt is the same in different periods. Assets that form part of a finance lease are depreciated. The depreciation period is consistent for equivalent assets that are owned by the Group. Investment in subsidiaries Shares in subsidiaries are recorded in accordance with the cost method in the parent company accounts. The investments are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Dividends and contributions from subsidiaries are recognised as finance income.
47
Note 3 List of subsidiaries The following subsidiaries are recognised in the financial statements using the cost method: Company
Registered office
Acquired
Ownership share
Voting Equity as of 31 Profit/(loss) share December for 2006 2006
Songa Management AS !
Oslo, Norway
June 2006
100 %
100 %
Songa Offshore AS
Oslo, Norway
April 2005
100 %
100 %
Songa Saturn AS
Oslo, Norway
November 2005
100 %
100 %
KS Bjørgvin Offshore "
Oslo, Norway
October 2005
90 %
90 %
Bjørgvin Offshore AS
Oslo, Norway
October 2005
100 %
100 %
Songa Dee AS
Oslo, Norway
May 2006
100 %
100 %
Songa Offshore Pte Ltd
Singapore
August 2006
100 %
100 %
Songa Saturn Chartering Pte Ltd
Singapore
August 2006
100 %
100 %
Songa Management Inc
Houston, USA
November 2005
100 %
100 %
674
(3 590)
(1 080)
(462)
(3 098)
(2 632)
36 006
32 056
(119)
(135)
(33 886)
(33 903)
(67)
(1 993)
(36)
(36)
(4 451)
(10 823)
!50% Joint Venture up to 8 June 2006 (refer to Note 6 in the group consolidated accounts) " The remaining 10% is owned through Bjørvin Offshore AS.
Note 4 Segment information Songa Offshore ASA has no operations as such. The purpose of the company is to be the holding company in the Group and obtain external funding. No segment information is available. For further discussion on segment reporting plase refer to note 7 in the Group financial statements.
Note 5 Employee benefit expense USD '000
2006
2005
1 878 436 128 1 2 443
465 465
USD '000
2006
2005
Statutory audit Other assurance services Other non-assurance services Tax consultant services Total
59 36 63 48 206
30 27 45 102
Salary Share options (Note 15) Social security Director's fee Other social costs Total employee benefit expense
Fees paid to the auditors Deloitte AS (Norway) and cooperating companies are split as follows (VAT is not included in the auditor's fee):
48
Note 6 Finance income and finance costs USD '000 Interest income Foreign exchange gains Group contribution Interest income group company Total finance income
Interest expense Other financial expenses Foreign exchange loss Interest expense group company Total finance costs
2006
2005
1 030 3 1 538 57 076 59 647
397 3 3 748 4 148
2006
2005
34 336 9 010 141 2 164 45 651
6 833 18 286 25 119
Note 7 Income tax and deferred taxes USD '000 Tax payable Changes in deferred tax Tax income
A reconciliation of the effective rate of tax and the nominal tax rate in Songa Offshore ASA’s country of registration, Norway:
Pre-tax profit
2006
2005
(3 521) (3 521)
2 475 2 475
28 %
28 %
2006
2005
7 460
(22 515)
Tax assessed at the nominal tax rate in Songa Offshore ASA’s country of registration, Norway: 28%
(2 089)
6 304
Non-taxable income Non-deductible expenses Issue expenses recorded to equity Tax (cost) income recognised in the income statement
(1 990) 558 (3 521)
(4 343) 514 2 475
Effective tax rate
47,2 %
11,0 %
2006
2005
1 564 1 564
3 265 3 265
Property, plant and equipment Other Deferred tax liabilities - gross
(1 096) (1 514) (2 610)
790 790
Net recognised (deferred tax) / tax assets
(1 046)
2 475
2006
2005
6 671 (1 906) 2 343 (1 995) 5 113
5 608 (1 834) 9 900 13 674
Deferred tax assets and deferred tax liabilities: Loss carried forward Deferred tax assets - gross
Deferred tax and deferred tax assets are explained as follows:
Permanent differences: Change in fair value of BOP option Gain on limited partnership Employee options Issue expenses Valuation of warrants regarding refinance of bond loan Total 49
Net recognised (deferred tax) / tax assets
(1 046)
2 475
2006
2005
6 671 (1 906) 2 343 (1 995) 5 113
5 608 (1 834) 9 900 13 674
3 913 5 409 9 322
2 820 2 820
(5 588) (5 588)
(11 661) (11 661)
9 322 (5 588) 3 734
2 820 (11 661) (8 841)
1 046
(2 475)
Deferred tax and deferred tax assets are explained as follows:
Permanent differences: Change in fair value of BOP option Gain on limited partnership Employee options Issue expenses Valuation of warrants regarding refinance of bond loan Total
Temporary differences: Property plant and equipment Interest bearing debt Total
Losses carried forward: Loss carried forward Total
Net temporary differences: Positive differences Negative differences Net temporary differences 28% Tax on net temporary differences Tax losses carried forward have no expiry date.
Note 8 Cash and cash equivalents USD '000
2006
Cash at the bank and in hand Time deposit Cash collateral on Total Return Swap Total cash and cash equivalents
3 75 2 81
600 000 451 051
2005 2 220 2 220
Note 9 Other assets Other receivables include an amount of USD 23.9 million that has been prepaid to an escrow / joint account with Odfjell Drilling AS, the seller of the rig Deepsea Trym. The sale was carried through in January 2007. See note 27 in the group financial statements for more information. Note 10 Rigs, machinery and equipment USD '000
Year ended 31 December 2005 Opening net book amount Purchase Additions Depreciation charge Closing net book amount At 31 December 2005 Cost Accumulated depreciation Net book amount Year ended 31 December 2006 Opening net book amount
Rigs, machinery and equipment 15 025 15 025
15 025 15 025
50 15 025
Cost Accumulated depreciation Net book amount
15 025 15 025
Year ended 31 December 2006 Opening net book amount Additions Book value before depreciations Depreciation charge Closing net book amount
15 025 15 025 15 025
At 31 December 2006 Cost Accumulated depreciation Net book amount
15 025 15 025
The asset of USD 15,025,000 recognised in the balance sheet relates to an agreement for the sale and leaseback of a BOP (Blowout Preventer). The lease agreement is recognized as a finance lease (note 11). The asset will be depreciated at the same rate as the rig on which it is placed once the rig is brought in to operation. In addition to the lease payments, Songa Offshore ASA is responsible for the maintenance and insurance of the asset. The owners of the asset have the option to sell the asset to Songa Offshore ASA for USD 12 million at the end of the leasing period. The leasing period runs for a maximum of 3 years. The owners of the asset also have an option to sell their shares in BOP 15 settled in shares in Songa Offshore ASA at a price of NOK 35 per share. See Note 6 in the group financial statements for more information about this transaction. There are no indications of possible impairment. Note 11 Obligation under finance leases Overview of future minimum lease payments including put option: USD '000 Next 1 year Next 2 year Next 3 year Future minimum lease payments Put option at end of period Future minimum payments including option
2006
2005
2 555 2 345 4 900 12 000 16 900
2 2 2 7 12 19
555 555 345 455 000 455
Present value of future minimum lease payments including put option: USD '000 Next 1 year Next 2 year Next 3 year Future minimum lease payments Put option at end of period Future minimum payments including option
2006 2 376 1 871 4 247 8 966 13 213
2005 2 2 1 6 7 13
351 025 860 236 425 661
The lease agreement does not contain any restrictions on the company's dividend policy or financing opportunities. USD '000 Nominal value of lease obligation Value of call option at recognition Installments paid since recognition Recognised value of lease obligation USD '000 Finance cost Installment Lease payments expensed
2006
2005
15 300 (1 639) (448) 13 213
15 300 (1 639) 13 661
2006
2005
2 164 391 2 555
345 57 402
The Group’s assets under finance leases relates to a blowout preventer (BOP). Lease payments are fixed at USD 7,000 per51 day. In addition to the rental payments, the Group has obligations relating to the maintenance of
Finance cost Installment Lease payments expensed
2 164 391 2 555
345 57 402
The Group’s assets under finance leases relates to a blowout preventer (BOP). Lease payments are fixed at USD 7,000 per day. In addition to the rental payments, the Group has obligations relating to the maintenance of the assets and insurance. The owners of the BOP have the option to sell the BOP to Songa Offshore ASA at a price of USD 12 million at the end of the rental period. If the option is not used by the owners of the BOP, Songa Offshore has the right to purchase the BOP at the end of the lease term at the price of USD 15.3 million. The lease period is for a maximum of 3 years. The BOP 15 Invest AS shareholders also have an option to sell their owner shares in BOP 15 Invest AS and “call” Songa Offshore ASA shares at NOK 35 as settlement.
Note 12 Borrowings Information related to short term and long term borrowings are provided in note 21 of the Group financial statements. Assets pledged as security are provided in note 20 of the Group financial statements. Mortgage with the rigs as security: USD '000 Songa Venus Songa Mercur Songa Saturn Songa Dee Rigs and drill ship
2006 84 126 220 225 655
2005 000 000 000 000 000
84 000 126 000 15 000 225 000
Note 13 Share capital
USD '000
Number of shares
Share capital
As at 18/04/2005 (inception) Issue of share capital Q2 Issue of share capital Q3 Issue of share capital Q4 Issue of warrants Q2 Conversion of warrants Q3 Conversion of warrants Q4 Paid in not registered at year end Issue expense As at 31/12/2005
1 49 2 2
000 000 000 087 2 996 1 995 -
158 7 683 310 332 467 304 -
59 078
As at 01/01/2006 Conversion of warrants not registered at 12/31 2005 Issue of share capital Q1 Issue of share capital Q4 Conversion of warrants Q1 Conversion of warrants Q2 Conversion of warrants Q3 Conversion of warrants Q4 Issue expense Transfer of funds from share premium to other equity As at 31/12/2006
Additional paid in capital
Paid in not registered
Total
9 254
842 41 317 10 099 8 973 9 900 4 028 2 689 (1 864) 75 984
276 276
1 000 49 000 10 409 9 305 9 900 4 495 2 993 276 (1 864) 85 514
59 078
9 254
75 984
276
85 514
184 300 500 431 860 375 182 -
28 956 562 816 1 087 60 28 -
248 54 489 34 572 7 331 9 203 502 245 (1 994)
(276)
55 445 35 134 8 147 10 290 562 273 (1 994)
6 3 5 6
81 910
12 791
(153 111) 27 469
-
(153 111) 40 260
At an extraordinary general meeting 29 December 2006 the Shareholders decided to reduce the share capital premium fund in order to obtain a more flexible capital structure. The share capital premium fund was reduced with NOK 957,725,032 (USD 153,111,066) and the amount transferred to “other equity”.
52 (2005: 104,031,653) including warrants and Total authorised number of shares is 124,119,469 employee options, with a par value of NOK 1 per share (2005: NOK 1 per share). All issued shares
premium fund was reduced with NOK 957,725,032 (USD 153,111,066) and the amount transferred to “other equity”.
Total authorised number of shares is 124,119,469 (2005: 104,031,653) including warrants and employee options, with a par value of NOK 1 per share (2005: NOK 1 per share). All issued shares are fully paid. All issued shares in the Company are vested with equal shareholder rights in all respects. There is only one class of shares and all shares are freely transferable. At the General Meeting 7 June 2006 the General Assembly granted the Board of Directors authorisation to buy back own shares up to 10% of the share capital. At year end 2006 no shares had been bought back.
Please see Note 22 in the Group financial statements for information about the 20 largest shareholders as well as shares owned by the Company’s board members and senior management.
Note 14 Financial instruments Information regarding financial instruments is provided in note 23 of the Group financial statements.
Note 15 Share based payments Fair value at grant date of options issued to members of the Board have been recognised in profit and loss of Songa Offshore ASA. Fair value at grant date of options issued to employees in subsidiaries are recognised as an increase in investment in subsidaries. Further information regarding share based payments is provided in note 24 of the Group financial statements.
Note 16 Transactions with related parties Information regarding transactions with related parties is provided in note 26 of the Group financial statements. See also note 19 of these financial statements regarding intercompany transactions which mainly relates to the funding of subsidiaries. Songa Offshore ASA has a management agreement with Songa Management AS. The main areas the agreement covers are archive and documentation, bookkeeping and accounting, budget and reports, cash managment and controlling, investor relations and disclosure requirements.
Note 17 Events after the balance sheet date Information related to events ocurring after the balance sheet date is provided in note 27 of the Group financial statements.
Note 18 Remuneration to the Board of Directors and senior management Information about salary, pension and other benefits to the Board of Directors, CEO and senior management has been provided in note 28 of the Group financial statements.
Note 19 Intercompany USD '000
2006
2005
Receivables falling due later than one year: Long term receivables group companies
502 450
120 843
Debts in Songa Offshore ASA, are secured through mortgages in the rigs, insurance policies and receivables. These assets are spread across several units in the Group. See Note 20 in the Group financial statements.
Intercompany balances 2006: Long term receivables Songa Offshore ASA
502 450
Short term receivables
Long term liability
179 656
(35 983)
53
the Group financial statements.
Intercompany balances 2006: Long term receivables Songa Offshore ASA Songa Offshore AS Songa Mercur AS Songa Venus AS Sogna Saturn AS KS Bjørgvin Offshore Bjørgvin Offshore AS Songa Management AS Songa Management Inc Songa Dee AS Songa Pty Ltd Songa Offshore Pte Ltd Total
Short term receivables
502 450 (75 000) (70 600) (95 000) (443) (261 407) -
179 (1 (40 (45 (55
Long term liability
656 348) 869) 660) 851) (58) (1 956) (2 035) (23 102) (8 508) (269) -
(35 983) 35 983 -
Short term receivables
Long term liability
Intercompany balances 2005: Long term receivables Songa Offshore ASA Songa Offshore AS Songa Mercur AS Songa Venus AS Sogna Saturn AS Bjørgvin Offshore AS Total
120 843 (45 000) (50 400) (25 000) (443) -
34 (11 (9 (11 (1
760 845) 229) 864) 801) (21) -
(456) 266 95 95 -
Note 20 Transition to IFRS From 1 January 2006, Songa Offshore ASA has applied simplified application in accordance with the Norwegian Accounting Act § 3-9 of International Financial Reporting Standards (IFRS) as adopted by the EU to prepare the Company's financial statements as described in note 2. The Company’s financial statements for 2005 have been prepared in accordance with the Norwegian Accounting Act and generally accepted accounting principles in Norway (NGAAP). Songa Offshore ASA has analysed the differences between NGAAP and IFRS for those areas that affect the financial statements. The identified differences are calculated and presented in the tables below. The reconciliation gives comparable information of the financial statements as of 31 December 2005. The standard giving rise to the only change in the financial statements of the Company on transition from NGAAP to IFRS is IFRS 3 Business combinations, regarding timing when measuring compensation and excess values of transactions. Companies listed on Oslo Stock Exchange are required to present income statements for three years. For a first time adopter of IFRS, there is an exemption for restating comparative figures to IFRS for more than one year. However, income statements for the two previous years prepared in accordance with NGAAP should be disclosed in the same annual report. The history of Songa Offshore ASA only goes one year back, from inception 18 April 2005 to 31 December 2005. The Company has applied IFRS 1 in preparing these financial statements. The reporting date of these financial statements is 31 December 2006. The company’s IFRS adoption date is 1 January 2006. The principal difference between NGAAP and IFRS as applicable to Songa Offshore ASA are as follows: Business combinations The Company has reviewed the requirements under IFRS 3. Based on this, timing for when compensation and excess values in a transactions shall be measured is changed from contract formation to date of exchange. Impact on income statement: None. Impact on balance sheet: Investment in subsidaries is reduced with USD 1.8 million and share premium is reduced with USD 1.8 million.
54
Impact on income statement: None. Impact on balance sheet: Investment in subsidaries is reduced with USD 1.8 million and share premium is reduced with USD 1.8 million.
Songa Offshore ASA Income Statement For the year ended 31 December 2005 (USD '000) NGAAP Operating expenses Employee benefits expense Other operating expenses Depreciation Total operating expenses
(465) (1 079) (1 544)
Operating loss
(1 544)
Financial income and costs Finance income Finance costs Net financial items
4 148 (25 119) (20 971)
Loss before tax
(22 515)
Income tax expense
Adjustment
-
(465) (1 079) (1 544)
-
(1 544)
-
4 148 (25 119) (20 971)
-
(22 515)
-
2 475
IFRS
-
2 475
Loss for the year
(20 040)
-
(20 040)
Attributable to: Other equity
(20 040)
-
(20 040)
Songa Offshore ASA Balance Sheet at 31 December 2005 (USD '000) NGAAP ASSETS Non-current assets Intangible assets Deferred tax assets
Adjustment
IFRS
2 475
-
2 475
15 025
-
15 025
Financial assets Investment in subsidiaries Investment in joint ventures Intercompany loans Total financial assets
77 369 11 120 843 198 223
(1 828) (1 828)
75 541 11 120 843 196 395
Total non-current assets
215 723
(1 828)
213 895
9 34 760 34 769
-
9 34 760 34 769
919
-
919
1 493
-
1 493
37 181
-
37 181
252 904
(1 828)
251 076
Tangible assets Rigs, machinery and equipment
Current assets Receivables Accounts receivable Intercompany receivables Total receivables Other assets Cash and cash equivalents Total current assets TOTAL ASSETS
55
Songa Offshore ASA Balance Sheet at 31 December 2005 (USD '000) 31/12/05
31/12/05
31/12/05
EQUITY Share capital and reserves Share capital Additional paid in capital Paid in not registered share capital
9 254 77 812 276
(1 828) -
9 254 75 984 276
Reserves Total owners equity
87 342
(1 828)
85 514
Other equity Other equity Total accumulated profits
(20 040) (20 040)
-
(20 040) (20 040)
67 302
(1 828)
65 474
-
-
-
Other non current liabilities Bank loan Bond loans Obligation under finance lease Intercompany liabilities Total other non current liabilities
51 244 108 142 11 106 170 492
-
51 244 108 142 11 106 170 492
Total non current liabilities
170 492
-
170 492
456 965 555 248 265 621 110
-
456 965 555 248 265 621 110
Total liabilities
185 602
-
185 602
TOTAL EQUITY AND LIABILITIES
252 904
(1 828)
251 076
Total equity LIABILITIES Non current liabilities Provisions Deferred tax
Current liabilities Bank loan Trade and other payables Obligation under finance lease Derivative financial instruments Interest payable Other liabilities Total current liabilities
2 7 3 15
2 7 3 15
Songa Offshore ASA Reconciliation of equity (USD '000)
Share capital
Additional Paid in not Other equity paid in registered capital share capital
Total equity
NGAAP 18 April 2005
158
842
-
-
1 000
Adjustment IFRS 18 April 2005
158
842
-
-
1 000
NGAAP 31 December 2005
9 254
77 812
276
(20 040)
67 302
Adjustment (see above) IFRS 31 December 2005
9 254
(1 828) 75 984
276
(20 040)
(1 828) 65 474
Songa Offshore ASA
56
Adjustment (see above) IFRS 31 December 2005
9 254
(1 828) 75 984
276
(20 040)
(1 828) 65 474
Songa Offshore ASA Statement of cash flows for the year ended 31 December 2005 (USD '000) NGAAP Cash flow from operating activities: Profit before income tax Adjustments for: Finance cost Fair value gain/(loss) on BOP option Change in receivables Change in payables Change in other liabilities Net cash flow from operating activities Cash flows from investing activities: Proceeds from sale of rig, machinery and equipment Purchase of rig, machinery and equipment Investment in subsidiaries and joint ventures Net cash flow used in investing activities Cash flows from financing activities: Proceeds from issue of share capital Proceeds from borrowings Disbursements for loans to group companies Net cash flow from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period
57
Adjustment
IFRS
(22 515)
-
(22 515)
9 900 5 609 (9) 965 3 422 (2 628)
-
9 900 5 609 (9) 965 3 422 (2 628)
15 (15 (77 (77
300 025) 380) 105)
1 828 1 828
76 159 (155 80
442 386 603) 225
(1 828) (1 828)
492 1 000 1 492
-
15 (15 (75 (75
300 025) 552) 277)
74 159 (155 78
614 386 603) 397
492 1 000 1 492
58
APPENDIX
CORPORATE GOVERNANCE It is Songa Offshore ASA’s objective to comply with all relevant laws and regulations, as well as the Norwegian Code of Practice for Corporate Governance. The Company’s directors have adopted a Corporate Governance Policy 18 July 2006 to reflect Songa Offshore’s desire to comply with good corporate governance. The Company has also established a Corporate Code of Business Ethics and Conduct. Corporate Governance is in focus at all levels of the organisation, which is reflected in various corporate documents, like articles of incorporation, strategy and mission statement. These documents are posted on the Company’s web site. The key goal is to have systems for communication, monitoring, responsibility and incentives in place that create the greatest value over time, long-term health and success for the Company, as well as the shareholders’ return of their investments. Songa Offshore has implemented the Norwegian Code of Practice for Corporate Governance Deviations from this code of practice will be explained in line with the code’s principle of “comply or explain.” Songa has the following deviations from the code with explanations: 8.3 The composition of the board of directors should ensure that it can operate independently of any special interests. At least half of the shareholder-elected members of the board should be independent of the company’s executive management and material business contacts. At least two of the members of the board elected by the shareholders should be independent of the company’s main shareholder(s). Two of the five members are independent within the definition of the Code. We believe it is in the Company’s and shareholders’ interest to have a board where the majority of the members have industry expertise including founding members of the Company, and that this should be given priority before the Code’s recommendation of a majority to be independent. The Company is a young Company in a start-up phase, and at this stage the Company finds it more important to have a board composed to secure expertise rather than to comply with the Code. 9.4 The board of directors should consider appointing board committees in order to help ensure thorough and independent preparation of matters relating to financial reporting and compensation paid to the members of the executive management. Membership of such committees should be restricted to members of the board who are independent of the compan’s executive management.
The board does not consider it appropriate to establish sub-committees. These would undermine the board’s work and authority. Nor does the size of the board and the frequency of its meetings indicate that such committees are required. 11.2 The remuneration of the board of directors should not be linked to the company’s performance. The company should not grant share options to members of its board. With reference to § 3.1 of the Company’s Corporate Governance Policy the remuneration of the board of directors should not be subject to the company’s result. However, directors may receive options as part of their remuneration. The Company believes that shareholders’ return are more likely to be maximized when members of the board are given incentives linked to the Company’s share price performance. The Company believes that the shareholders, many of which are foreign institutional investors, agree to this. Finally, the Company believes that the Code’s recommendation misses the point when it comes to young start-up companies: in such companies the directors are typically also the founders of the company, and therefore share options function as compensation in the case the company is a success. 15.1 The auditor should submit the main features of the plan for the audit of the company to the board of directors annually. For the financial year 2006 this has not been complied with. For the financial year 2007 and onwards auditors will present the audit plan for the forthcoming year to the board. 15.3 The auditor should at least once a year present to the board of directors a review of the company’s internal control procedures, including identified weaknesses and proposals for improvement. This is handled in the auditor’s letter(s) to the Company. This will be expanded in 2007/2008 in connection with the Company’s efforts to comply with the latest version of the code of practice. Except for the deviations of the Code discussed above the Company has done the utmost to comply with the Norwegian Code of Practice for Corporate Governance. The Company is also implementing the new section on risk management and internal control.
59
