Annual Report 2010 - SBM Offshore

Funding risk
Success in obtaining new lease and operate contracts
requires significant amounts of debt to be arranged.
This places pressure on the balance sheet but also
provides an excellent opportunity to leverage higher
returns on equity. The Company continues to be well
supported by its banks due to a good performance
record and high quality contracts. The funding risks on
projects are monitored from project inception and no
new lease project requiring finance is bid or accepted
without first having received positive indications of
financial support. A five-year financial model is maintained
to anticipate longer term financing requirements,
thus driving decisions on corporate and project finance.
The project finance market continued to recover
throughout 2010 and the refinancing and expansion of
the revolving credit facility in June 2010 and the project
debt financing for the Aseng project showed increased
liquidity at attractive terms.
The issue of credit availability is also being addressed
by studying alternative sources of finance, including
export credit agencies, capital markets and partners.
Litigation
From time to time, the Company has disputes with
counterparties concerning contractual requirements
and product performance. These are generally resolved
amicably but litigation and arbitration may arise causing
additional costs. Financial provisions are taken for
any expected negative outcome, and recoveries are
accrued when a positive result can be reliably projected
and estimated.
Treasury and liquidity risk
The Company is exposed to financial market risks;
mainly relating to currency and interest rates. The
functional and reporting currency is US Dollars and
almost all offshore revenues are effectively earned in
US Dollars. There are however significant costs and
some investments denominated in Euros and other
non-Dollar currencies leading to potential exposures
on profit and equity. The lease business is particularly
capital intensive and substantially financed with floating
rate debt giving rise to interest rate exposures.
Report of the Board of Management
The policy is to minimise profit volatility and hedge
all significant currency and interest rate exposures
as soon as they arise, using mainly fixed-rate instruments.
No speculative activities are engaged in using
financial instruments. The market value risk on financial
instruments (in particular interest rate swaps) can be
significant and, under International Financial Reporting
Standards (IFRS) rules, market value variations impact
reported equity values or in some cases profitability
where the hedge does not accurately match the underlying
exposure. This was the case in 2010 when interest
rate swaps for the Deep Panuke platform were confirmed
to exceed the actual interest rate exposure for
that project. The notes to the Financial Statements provide
details of financial instrument policies, sensitivities
to exchange rate or interest rate movements, accounting
treatments and market values.
As a departure from the policy of full hedging, the
equity and profit from activities of non-US Dollar
denominated subsidiaries are not fully hedged. The
resultant volatility is not considered material in the overall
financial context.
The Company does not use financial instruments to
hedge during the bid phase for prospective projects but
instead seeks to mitigate significant foreign exchange
exposures through currency adjustment mechanisms
in its tender prices. Where this is not possible, the
Company is exposed to the currency and always to
interest rate risk.
Treasury prepares a twelve-month detailed cash plan
on a quarterly basis to monitor liquidity and borrowing
requirements with a high level two-year cash plan for a
longer term view. The business unit cash plans are built
up from the detail of each project to accurately forecast
liquidity. Treasury reports cash and debt balances on
a weekly basis, identifies and explains material divergences
from the plan and takes corrective actions.
Treasury reports every month to the Board of
Management and quarterly to the Audit Committee of
the Supervisory Board.
SBM Offshore – Annual Report 2010 93