2002 Annual Report - SBM Offshore

The Board of Management is nonetheless highly aware of
the need to maintain appropriate balance sheet ratios,
and has a clear focus on this issue. It is the Group’s
intention to continue financing new lease FPSO’s with
long-term debt, as the charter revenues are more than
adequate to service such debt.
Some specific remarks relating to the balance sheet at
year-end 2002 are as follows:
x Capital Employed has increased substantially, mainly
due to the addition of new long-term debt, as was
expected. Shareholders’ equity on balance increased
only slightly;
x the solvency ratio (shareholders’ equity : total assets)
at slightly below 30% is acceptable, and does not pose
any problems with banking covenants. The terms and
conditions of the new revolving credit facility focus on
other ratios as financial covenants. (Net debt :
EBITDA, EBITDA interest cover, etc.);
x Debt : equity – the present level of debt reflects the
growth in the lease fleet. Neither the Company nor its
banks are concerned with the present debt level.
Furthermore, a large part of the present debt is with
limited recourse to the Group, thus reducing the risk
profile. Net gearing, taking into account available
liquidities, increased in line with the borrowing, to
reach a level of 124%;
x all important liabilities are clearly identified and
consolidated in the Group balance sheet, and there is
no ‘off-balance’ financing;
x investment in tangible fixed assets (consisting of
completing two large FPSO’s under construction at the
beginning of the year, and investments in three further
FPSO’s as well as the Sanha LPG FPSO) was much
higher than in 2001, reflecting the current high level of
activity;
x the interest cover ratios are lower, partly due to the
reduced EBIT(DA), and partly due to the large
increase in long-term debt. These ratios do not include
interest capitalised during construction of FPSO’s for
lease, but it is nonetheless expected that the ratios will
improve in years to come, in spite of the increasing
interest burden, due to the projected increase
especially in profits and depreciation.
TREASURY MANAGEMENT AND REPORTING
General
The fundamental objectives of Treasury are to minimise
volatility in Group equity and profits. Exposures are
reviewed and hedged on an ongoing basis. Treasury
reports monthly to the Board of Management of IHC
Caland and quarterly to the Supervisory Board. The
Group does not engage in any speculative activities and
only undertakes hedging in respect of confirmed
exposures using mostly fixed rate instruments.
Derivatives are used infrequently and are never sold.
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Change in reporting currency from Euro to
US dollar
With effect from 1 January 2003, in view of the everincreasing
importance of the US dollar – denominated
offshore division, the Group decided to change its
reporting currency from the Euro to the US dollar.
This change will have the benefits of reduced pressure on
the Group’s credit lines, a simplified and more
transparent financial structure, reduced financial risk
and reduced currency-driven volatility in the Group’s
financial ratios.
The change in reporting currency was decided in August
2002 and the equity and profit hedges in place on that
date were either reversed or relabelled as hedges in
respect of a significant part of the offshore division’s
Euro costs up to the year 2008. The net effect of all the
related transactions is slightly above break-even.
The theoretical cost of closing out all remaining future
foreign exchange contracts, where US dollars have been
sold to purchase Euros, is around € 31 million.
Currency exposure management – Offshore
The business and functional currency of the offshore
activities of the Group is the US dollar. Currency
exposures relating to contracts in hand including the
Euro denominated manpower requirements are hedged
to US dollars.
Currency exposure management – Shipbuilding
and other Netherlands based activities
Despite the change in reporting currency of IHC Caland
from the Euro to the US dollar, the activities in the
Netherlands continue to report in Euros. Due to their
limited contribution to profits and the illiquid
characteristic of equity, no hedging of these items will be
undertaken. This is an exception to the otherwise full
hedging policy, but considering the low values involved,
the effect on Group profits and equity resulting from
foreign exchange rate movements will be limited.
Interest rate management
The Group finances most FPSO/FSO long-term lease
projects with debt. Forward rate agreements are used
during construction to minimise variations in the total
investment cost. Long-term lease projects have fixed
revenue streams while the interest costs related to
financing these projects are usually based on floating
interest rates. Profit volatility is reduced by swapping
floating interest costs for fixed interest rates. All interest
costs are US dollar denominated.
Liquidity
Group Treasury prepares a twelve month cash plan on a
quarterly basis. The offshore business also prepares a
two year cash plan. The business unit cash plans are built