ANNU
AL R
EPOR
TSE
VAN
MAR
INE
2010
10 2ANNUAL REPORT
SEVAN MARINE
Contents
Notes to the Consolidated Financial Statement
Note 1 Corporate Information 22Note 2 Summary of Significant Accounting Policies 23
2.1 Basis of Preparation 232.1.1 Changes in Accounting Policy and Disclosures 232.2 Consolidation 242.3 Segment Reporting 252.4 Foreign Currency Translation 252.5 Property, Plant and Equipment 262.6 Construction in Progress 262.7 Construction Contracts 262.8 Intangible Assets 262.9 Impairment of Non-Financial Assets 272.10 Financial Assets 272.11 Inventories 272.12 Trade Receivables 272.13 Cash and Cash Equivalents 272.14 Share Capital 272.15 Interest-Bearing Debt 272.16 Current and Deferred Income Tax 272.17 Employee Benefits 282.18 Provisions 282.19 Revenue Recognition 292.20 Leases 292.21 Dividend Distribution 292.22 Trade payables 29
Note 3 Financial Risk Management 303.1 Financial Risk Factors 303.1.1 Market Risk 303.1.2 Credit Risk 303.1.3 Liquidity Risk 303.1.4 Cash Flow and Fair Value Interest Rate Risk 303.2 Fair Value Estimation 31
Note 4 Accounting Estimates and Judgments 324.1 Critical Accounting Estimates and Assumptions 324.2 Critical Judgments in Applying the Group’s Policies 32
Note 5 Segment Information 33
Board of Directors’ Report 2010 4Statement regarding Establishment of Salary and other Benefits for Senior Management 9The Board of Directors 11Board of Directors’ Statement on Policy for Corporate Governance 12Senior Management 16Auditor’s Report 89Responsibility Statement 91
Note 6 Property, Plant and Equipment 36Note 7 Intangible Assets 37Note 8 Investment in Associates 38Note 9 Derivative Financial Instruments 39
9a Financial Instruments by Category 409b Credit Quality of Financial Assets 41
Note 10 Trade and Other Receivables 42Note 11 Cash and Cash Equivalents 43Note 12 Share Capital 43Note 13 Share-Based Payments 45Note 14 Current Liabilities 46Note 15 Interest-Bearing Debt 46Note 16 Deferred Income Tax 49Note 17 Retirement Benefit Obligations 50Note 18 Provisions 52Note 19 Construction Contracts 52Note 20 Employee Benefit Expense 53Note 21 Financial Income and Financial Expense 56Note 22 Income Tax Expense 57Note 23 Earnings per Share 57Note 24 Dividend per Share 58Note 25 Cash Generated from Operations 58Note 26 Contingencies 59Note 27 Commitments 60Note 28 Related Party Transactions 60Note 29 Operating Leases 60Note 30 Foreign Exchange Gain/(Loss) Related to
Financing 61Note 31 Other Operating Expense 61Note 32 Inventories 62Note 33 Other Non-Current Assets 62Note 34 Events After Balance Sheet Date 62
10 2ANNUAL REPORT
SEVAN MARINE
Sevan Marine GroupConsolidated Balance Sheet 18Consolidated Income Statement 19Consolidated Statement of Comprehensive Income 20Consolidated Statement of Changes in Equity 20Consolidated Cash Flow Statement 21
10 3ANNUAL REPORT
SEVAN MARINE
Notes to the Financial Statements
Accounting Policies 67Note 1 Equity 69Note 2 Taxes 70Note 3 Fixed and Intangible Assets 71Note 4 Investment in Subsidiaries and Receivables
and Liabilities to Companies in the Group 72Note 5 Other Non-Current Assets 74Note 6 Cash and Cash Equivalents 74Note 7 Shares and Share Options Owned or
Controlled by the Board of Directors and 74 Senior Management 74Note 8 Shareholder Information 75Note 9 Employee Benefit Expense 76Note 10 Retirement Benefit Obligations 78
Note 11 Other Operating Expense 79Note 12 Lease Agreements 80Note 13 Earnings per Share 80Note 14 Construction Contracts 80Note 15 Share-Based Payments 81Note 16 Related Party Transactions 82Note 17 Financial Risk Management 82Note 18 Contingencies 83Note 19 Operating Revenue 84Note 20 Interest-Bearing Debt 84Note 21 Provisions 86Note 22 Financial Income and Financial Expense 87Note 23 Events After Balance Sheet Date 88
10 3ANNUAL REPORT
SEVAN MARINE
Sevan Marine ASABalance Sheet 64Income Statement 65Cash Flow Statement 66
10 4ANNUAL REPORT
SEVAN MARINE
Board of direCtors’ report 2010
Sevan Marine ASA (“Sevan Marine” or the “Company”) and its subsidiaries (together with the Company; “Sevan” or the “Group”) is a leading company within floating production of oil and gas and also has activities within deepwater drilling, based on the Company’s proprietary cylindrical hull design. The Company is also developing other applications, including floating LNG production and power plants with CO2 capture.
The business is based on a build-own-operate model. Alternatively, a license model may be applied as in the case of the Sevan 1000 Goliat FPSO.
The Company is a Norwegian public limited liability company. Several of its subsidiaries are Singaporean private companies with registered offices in Singapore. The Group also has operative subsidiaries in Brazil and UK.
Floating ProductionFPSO Sevan Piranema became the world’s first cylindrical FPSO to commence operation in October 2007, and continued to demonstrate high efficiency during 2010. Downtime in May relating to a short circuit problem and in November relating to a periodic maintenance exercise reduced the Technical Uptime for the year to 96.3%. Technical Uptime for the remaining 10 months was as high as 99.5%. However, continuing instabilities in the gas injection process of the processing plant resulted in higher operating expenses and penalties from Petrobras which reduced the Commercial Uptime to 85.1% for the year. Measures to rectify the situation was implemented during the year which gradually improved the level of operating expense. Normalized levels of Commercial Uptime are expected to be achieved during first half of 2011. The FPSO is operating for Petrobras S.A. on the Piranema field offshore Brazil under an 11 year fixed term contract plus extension options.
In August 2008, FPSO Sevan Hummingbird became the first cylindrical FPSO to be installed in the North Sea. A high operating uptime, allowing helicopters to land on the FPSO even during severe winter storms and no processing restrictions experienced in relation to weather conditions, have demonstrated the suitability of the Sevan design for operations in harsh environments. FPSO Sevan Hummingbird continued to deliver stable operation and production throughout 2010, with Technical Uptime of 97.0% for the year and Commercial Uptime of 106.3% including bonus achieved for high production levels. The FPSO is operating for Centrica Energy Upstream (‘Centrica’) on the Chestnut field in the Central UK North Sea under a 2.5 year fixed term contract plus extension options. The first 0.5 year option was exercised in September, thus extending the fixed term of the contract to September 2011. In August 2010, Sevan acquired Centrica’s 20% equity interest in FPSO Sevan Hummingbird for a consideration of USD 39 million and thereby became the 100% owner of the FPSO.
The Group’s third FPSO, the FPSO Sevan Voyageur, commenced operations on the Shelley field in the Central UK North Sea on August 6, 2009. When Oilexco North Sea, the original client for the unit, was put under administration in early 2009, Sevan entered into a contract with Premier Oil and Gas Services Ltd in March 2009. Production at the Shelley decreased faster than originally anticipated and the FPSO departed from the field in August 2010. In November 2010, Sevan and E.ON Ruhrgas UK E&P entered into a contract for the lease of FPSO Sevan Voyageur for the Huntington field in the UK North Sea. The contract is for a fixed term of five years with extension options. The estimated contract value is USD 535 million for the fixed term. Installation of the FPSO on the Huntington field is expected to take place in the fourth quarter of 2011 with first oil targeted for the first quarter of 2012. Prior to installation on the field, the FPSO will be upgraded with two gas compression trains for gas export and gas lift as well as an increase in the water injection system. The cost of the upgrade has been estimated to approximate USD 90 million which will be financed through an increase of the 1st lien financing on the FPSO as described in the ‘Capital and Financing’ section below. The upgrade work commenced at the Nymo yard in Arendal in September 2010.
The Technology License contract with ENI Norge AS relating to the FPSO Sevan 1000 for Goliat was made effective in February 2010 and activities relating to project management and engineering related to the Goliat Project continued during the year.
During 2010, the hulls for FPSO Sevan 300 no. 4 and 5 were relocated to the Cosco Shipyard in China (‘COSCO’). By the end of the year, the Group had invested a total of USD 167 million in the two hulls. At the end of 2010, there was no debt associated with the construction of the hulls. The intention is to complete the construc-tion of the units at COSCO upon securing contracts with clients.
During 2010, Sevan Marine has continued work on a number of feasi-bility studies for various oil companies. The studies have focused on the potential application of the Sevan design for specific field developments. This includes demonstrating the feasibility of using the Sevan cylindrical FPSO bridge-linked to a wellhead platform as well as verifying the feasibility of using steel catenary risers (SCRs) for harsh deepwater applications. Results from the studies have been positive with successful model testing in significant wave heights of up to 22 meters. DrillingIn November 2009, the ultra deepwater drilling unit, Sevan Driller, was delivered from the COSCO 30 months after the start of steel cutting and started its voyage towards Brazil. The rig arrived in Brazil late March 2010, and commenced operation in the Campos basin in June 2010 under a six year fixed term contract for Petrobras S.A. During the initial period of operation, defects on third party equipment caused higher than anticipated downtime on the rig.
10 5ANNUAL REPORT
SEVAN MARINE
The downtime in the third and the fourth quarter was mainly due to defects in the riser tensioning system and the BOP which reduced the Technical Uptime to 49.8% and the Commercial Uptime to 49.1% for 2010. Motions performance on the rig has been good and in accordance with model forecasts. The performance on the rig has rapidly improved following completion of the repair of the defected equipment. Technical Uptime for January and February of 2011 was 78.4% and 96.7% respectively. Commercial Uptime for January and February of 2011 was 77.9% and 102.1% respectively.
The Construction of the Group’s second ultra deepwater drilling unit,the Sevan Brasil (previously referred to as Sevan Driller II), proceedsaccording to plan and budget at the date of this report at the COSCOShipyard. Module fabrication has been completed up to 36.5 metersand the living quarter, derrick and drill floor has been integrated with the main hull. Sevan Brasil is of the same design as Sevan Driller and is scheduled for delivery from the shipyard during the first quarter of 2012.
In June 2008, a third drilling unit was contracted to India’s ONGC with delivery at the end of 2010. During the global financial crisis, it proved difficult to secure the required financing, and construction on the rig subsequently never commenced. Sevan has issued a Notice of Arbitration to ONGC, informing ONGC of its intention to resolve certain disputes regarding the firm order for the deepwater drilling unit by reference to arbitration. ONGC called on a bank guarantee of USD 15.9 million in March 2011. As of the date of this report, the arbitration proceedings to determine whether ONGC is entitled to the funds have not been concluded. The Company is claiming for a refund of the payment made to ONGC under the Bank Guarantee. Potential liabilities relating to the ONGC contract are disclosed in Note 26 in the consolidated financial statements.
Income Statement and Balance SheetConsolidated revenue for the year totaled USD 256 million (2009: USD 195 million). The Group incurred an operating loss in 2010 ofUSD 34 million (2009: USD 83 million). The improvement of USD 49 million relates mostly to the increase in revenues as new units com-menced operations as well as non-recurring expense items in 2009. Net financial loss for the year was USD 135 million (2009: USD 97 million). The increase was mainly due to expensing of non-recurring items including call premiums (USD 25 million) and changes in amortization schedules for financing fees (USD 19 million) following refinancing of debt during the year. In addition, an increase in interest expense relating to Sevan Driller (USD 28 million) was due to interest being expensed through profit and loss rather than capitalized as part of the construction cost following completion of the rig at the inception of 2010. These effects were partly offset by a reduction in unrealized financial currency losses (USD 36 million) from NOK nominated bonds. Net loss came to USD 157 million (2009: USD 143 millioner).
At December 31, 2010, total consolidated assets amounted to USD2,587 million (2009: USD 2,349 million), of which Sevan capital assets amounted to USD 2,146 million (2009: USD 1,904 million) and USD 116 million (2009: USD 163 million) was cash and cash equivalents. At year end, the equity ratio was 31% and the Group had undrawn bank facilities of USD 577 million and an undrawn long term vendor credit facility relating to Sevan Brasil of approximately USD 80 million.
In December, Sevan additionally secured commitments, subject to documentation and conditions precedent, for a USD 480 million senior debt project finance facility for the Sevan Driller. The loan was executed in March 2011 and repaid the existing USD 250 million 1st lien bank facility and NOK 1 billion 2nd lien bond relating to the rig as well as for general corporate purposes.
The Group has prepared the financial statements in accordance with International Financial Reporting Standards (IFRS).
Research and DevelopmentBetween 2001 and 2010, Sevan invested a total of USD 20-25 million in relation to the development of the Sevan designwhich was expensed through the Profit and Loss when incurred. USD 0.1 million was expensed in 2010. In addition, Sevan Marine has capitalized USD 0.1 million in relation to development of the Sevan design for floating LNG during 2010. The Company expects to capitalize on those expenses in the future. In addition, the Company has recovered expenses relating to further development and testing of the Sevan designby compensation from clients relating to feasibility studies and FEED’s. Note 19 in the consolidated financial statements describes further details of such activities.
Capital and Financing Net consolidated cash flow for 2010 was minus USD 47 million. Cash flow from operations amounted to minus USD 26 million. Cash flow to investment activities amounted to minus USD 215 million and cash flow from financing activities amounted to USD 195 million. A detailed cash flow statement is included in the financial statements and a specification of the cash flow from operating activities is included in Note 25 in the consolidated financial statements.
During 2010, the Company continued to work on strengthening its balance sheet with an aim to improve on the alignment of repay-ment of debt to cash flows from operations as well as to achieve a reduction in its cost of capital and to strengthen the general liquidity position of the Group. Reference is made to Note 15 in the consoli-dated financial statements for further details of the credit facilities described below.
In May 2010, Sevan secured commitment for a USD 525 million senior debt project finance facility for Sevan Brasil with ING Bank N.V. (‘ING’) as mandated lead arranger. The facility is structured as a
10 6ANNUAL REPORT
SEVAN MARINE
limited recourse construction financing and is fully underwritten by ING, GIEK/Eksportfinans and Sinosure. The facility completes the construction financing of Sevan Brasil and the first drawdown under the credit facility was made in February 2011.
In July, Sevan Marine carried out a bond issue consisting of two tranches of USD 100 million and NOK 625 million with fixed interest rates of 12.0% and 13.25% respectively. The bond has a term of 5 years with call options. The proceeds were used to refinance the previous USD 135 million 1st lien bond in full, thereby increasing the loan amount on FPSO Sevan Hummingbird and extending the maturity from 2011 to 2015; to acquire the 20% stake in FPSO Sevan Hummingbird from Centrica; and for general corporate purposes.
Sevan secured the required financing to upgrade the FPSO Sevan Voyageur for Huntington operations in parallel to entering into the charter contract with E.ON. The term sheet for a USD 230 million senior secured credit facility was agreed between Sevan and ING in June 2010 and the fully documented loan agreement was completed and signed in November 2010. The net proceeds replaced the exist-ing 1st lien financing of USD 150 million and completed the funding of the upgrade for the unit.
In a bondholders meeting held in June, the bondholders in ISIN NO 001039164.2 (FRN Sevan Marine Senior Secured Callable Notes 2007/2012) consented to certain changes in the loan conditions, including the increase from USD 150 million to USD 230 million of the higher ranking bank facility and an increase in the applicable interest margin. The amendments became effective in November 2010 upon the first drawdown on the senior secured credit facility. NOK 740 million was outstanding on the bond at balance sheet date.
In October, a USD 48 million senior secured callable convertible bond was repaid at 140% of par value and thereby removing a dilution potential of approximately 9.5%. The repurchase was funded by a new USD 83 million bank facility with Investec Bank plc, Standard Bank plc and Macquarie Bank Limited which is secured by an assignment of certain future contracted cash flows.
In December 2010, Sevan secured commitments, subject to documentation and conditions precedent, for a USD 480 million senior debt project finance facility for the Sevan Driller with DVB Group Merchant Bank (Asia) Pte Ltd (‘DVB’), NIBC Bank N.V. (‘NIBC’) and ING as mandated lead arrangers. The facility is structured as a limited recourse financing and is fully underwritten by DVB, NIBC, ING, China Development Bank and GIEK/Eksportfinans. The loan was executed in March 2011 and repaid the existing USD 250 million 1st lien bank facility and NOK 1 billion 2nd lien bond; and for general corporate purposes.
In December, Sevan Marine carried out a bond issue of NOK 700 million with a fixed interest rate of 14.0%. The bond has a term of
four years with call options. Net proceeds were used for general corporate purposes.
During 2011, the Company targets to strengthen its balance sheet with an aim to reduce the cost of capital and to strengthen the general liquidity position of the Group. The Board has prepared a strategy in this respect where different initiatives have been identi-fied. In March 2011, the Board filed a listing application to the Oslo Stock Exchange for an IPO for the Group’s ultra deep water drilling business. The contemplated IPO of Sevan Drilling ASA will involve a combined secondary sale of shares currently owned by Sevan Marine ASA and an equity offering of new shares to be issued by Sevan Drilling ASA. The split between primary and secondary shares offered will be set to achieve satisfactory free float, appropriate capital structure, and required proceeds for both Sevan Drilling ASA and Sevan Marine ASA. The key objective of the listing and equity offering is to allow the drilling business to grow to its full potential, and raise capital to fund the construction of two additional drilling rigs. Furthermore, creating a focused ultra deepwater drilling company will increase the visibility of the value and versatility of the Sevan design as well as strengthen the balance sheet in Sevan Marine ASA and thereby improve its growth potential. Sevan Marine’s ownership interest in Sevan Drilling ASA is expected to be reduced to between 10 and 20 per cent following the transaction (depending on offer price and scope of primary and secondary sale, and effects of over-allotment/stabilization measures). The IPO is subject to bank approval of the change of control.
In connection to the contemplated IPO, subsidiaries of Sevan Drilling ASA entered into LOIs with COSCO for the construction of two UDW drilling rigs based on the same design as Sevan Driller and Sevan Brasil. The rigs are to be delivered in the fourth quarter of 2013 and second quarter of 2014. The LOIs are for turn-key construction contracts with an estimated all-in price of USD 525 million per rig and a payment structure where 20% is payable upon signing of final construction contracts and 80% is payable upon delivery. The LOIs provide for options to build two additional UDW drilling rigs at the same terms with the exception of certain currency and inflation adjustments. Signing of the final construction contracts with COSCO is subject to listing of Sevan Drilling ASA.
However, there is no assurance that the Group will be able to execute the contemplated IPO successfully nor that it will be able to obtain alternative sources of financing in a timely manner on acceptable terms.
Going ConcernIn accordance with the Norwegian Accounting Act’s section 3-3, the Board confirms that the annual accounts have been prepared based on the going concern assumption. The basis for this assumption is the Company’s strategic plan, financial prognoses and successful outcome of the financing measures described above.
10 7ANNUAL REPORT
SEVAN MARINE
RiskThe Company was founded in 2001 and has since its inception focused on the engineering, construction and the subsequent opera-tion of the Sevan units, based on its proprietary design. The Group’s new-building projects require continuous monitoring and ability to control and adapt to inherent risks.
Following more than 3.5 years of operation in Brazil and more than 2.5 years in the North Sea, the Sevan design is proven in these areas and the design risk is therefore reduced. Recorded motions for the FPSOs as well as the Sevan Driller have been in line with model testing and analyses.
The Group’s activities expose it to a variety of financial risks, including market risks, credit risks and liquidity risks. The Companys risk management program includes focusing on the unpredictability of financial markets and seeks to minimize potential adverse effects of such risks on its financial performance. The Company will therefore continue to manage its currency and interest exposures through certain derivative financial instruments in accordance with market practice and to maintain flexibility in the liquidity by keeping committed credit lines available.
Parts of the Group’s loan financing carry floating interest rates which fluctuates with the market. The Group may therefore be exposed to risks due to changes in interest rates for any unhedged portion of such exposure. The value of the Group’s charter contracts may be affected by changes in currency exchange rates or exchange control regulations.
The Group utilizes a combination of equity and bank/bond financing to finance the construction of the Sevan units. Obtaining such financing may be subject to market risks and other risks that may influence the availability, structure and terms of such financing. When the financial markets do not function efficiently, this risk becomes particularly prevalent for a capital intensive company like Sevan which is not yet in a position to support its new building program with cash flow from operations.
In addition to the capital required to fund existing projects and operations, the Group may require additional capital in the future due to unforeseen operational issues, unforeseen liabilities or potential acquisitions, joint ventures or other business opportunities that may be presented to it. There can be no assurance that the Group will be able to obtain necessary financing in a timely manner on acceptable terms.
Historically, demand for offshore exploration, development and production has been volatile and closely linked to the price of hydrocarbons. The demand for the Group’s services in connection with production and exploration in the offshore oil and gas sector is particularly sensitive to price decreases, fluctuations in production
levels and disappointing exploration results. Contracts in the offshore sector require high standards of performance and safety, entailing considerable risks and responsibilities. These include technical, operational, commercial and political risks. There is often consider-able uncertainty as to the duration of offshore charters because most of the agreements give the operator extension options. Changes in the legislative and fiscal framework, including tax rules, governing the activities of the oil companies, could have material impact on exploration, production and development activity or affect the Group’s operations directly.
The clients of the Group are generally oil companies with a strong financial basis, but – as with suppliers and customers in general – there is always a risk that unforeseen financial difficulties on the counterparty’ side may arise which could have material adverse ef-fects on the financial condition, the cash flows and/or the prospects of the Group.
In connection with the construction of the Sevan units, the Group has used its best efforts to prepare proper specifications, including the supply and installation of equipment. Despite these efforts, there can be no assurances that delays and cost overruns will not occur and such events, if occurring, could have an adverse impact on the Company’s financial position. The experience gained to date by Sevan, the shipyards and main suppliers, is expected to benefit the construction of future units. However, the Company cannot guarantee that cost increases and delays in delivery of future units will not occur.
HSE and Corporate GovernanceDeveloping sound health, safety and environment (HSE) principles is a critical success factor for the Company.
The Group has an environmentally friendly profile and continually seeks new ways to reduce the environmental impacts of its opera-tions. Sick leave came to 1.8% for the Company and 2.0% for the Group for the year. No serious work incidents or accidents resulting in personal injuries or damages to materials or equipment occurred in 2010. There has been no Lost Time Incidents (LTI) during 2010, and the FPSO Sevan Piranema has been operating for more than 1,000 days without LTIs at the date of this report. The Company is certified according to several ISO standards with respect to concept develop-ment, design, engineering, procurement, construction, installation and operation of mobile offshore units, including ISO 9001:2008 (quality), ISO 14001:2004 (environment), OHSAS 18001:2007 (health and safety), as well as ISM (international safety code) and ISPS (international ship and port facility security code). The Company is also registered in the FPAL and Achilles supplier management information systems.
The working environment is good. The Board and the management continue to focus on equal positions and opportunities for men and women among its employees and Board members. 38% and 22%
10 8ANNUAL REPORT
SEVAN MARINE
of the employees in the Company and the Group, respectively, are women. Three of ten members of the senior management team are women. Three of seven Board members elected by the shareholders at the Ordinary General Meetings in 2010 were women.
The Company strives to ensure that there is no discrimination due to ethnicity, national origin, descent, race, religion or functional disability. Currently, the Company has not implemented any specific measures in order to meet the objective of the Discrimination Act and of the Anti-discrimination and Accessibility Act. The need for specific measures in this respect is continuously considered by the Board of Directors, the management and the HR function.
The Company aims at maintaining sound corporate governance routines that provide the basis for long-term value creation, to the benefit of shareholders, employees, other interested parties and the society at large.
As a guiding basis for its conduct of corporate governance, the Company uses the national Norwegian Code of Practice for Corporate Governance of 2010. The status of corporate governance is addressed in a separate section of the English language annual financial report.
During 2010, the number of employees increased from 404 to 506.
The Board of DirectorsMay Britt Myhr resigned from the Board of Directors in October 2010. Mai-Lill Ibsen resigned from the Board of Directors in February 2011. Supplementary election will take place at the next Ordinary General Meeting.
ManagementIn connection to the IPO of the Company’s drilling business, Jan Erik Tveteraas, the current CEO Sevan Marine, will assume the position as CEO of Sevan Drilling ASA as from the first day of listing. Jon Wilmann, Vice President Drilling Sevan Marine, will assume the position of CFO. Sevan Marine is in the process of selecting a successor for Mr. Tveteraas.
OutlookThe market outlook for deep water drilling and floating production continues to strengthen. The Company targets to strengthen its balance sheet during 2011. The planned IPO for the ultra deep waterdrilling business will be positive for the Group in such respect. The IPO will strengthen the balance sheet in Sevan Marine ASA and thereby improve its growth potential as well as positioning the drilling business for further growth. Furthermore, creating a focused ultra deepwater drilling company will increase the visibility of the value and versatility of the Sevan design.
The Board would like to thank the employees for the great efforts and achievements during a challenging year.
Annual Results and Year-End AppropriationsThe Board proposes the following appropriation of the annual loss of USD 168,875,000 in the parent company Sevan Marine ASA:
Loss transferred from other equity: USD 168,875,000Total appropriation: USD 168,875,000
The Company had unrestricted equity of USD 121,051,000 as of December 31, 2010.
Arendal, March 30, 2011 The Board of Directors of Sevan Marine ASA
_______________________ _______________________ _______________________ _______________________ Arne Smedal Hilde Drønen Kåre Syvertsen Aasulv Tveitereid Chairman Deputy Chairman Board member Board member
_______________________ _______________________ _______________________ _______________________ Stephan M. Zeppelin Jorunn Haugen Jørgen Skotnes Jan Erik Tveteraas Board member Employee representative Emloyee representative CEO
10 9ANNUAL REPORT
SEVAN MARINE
Pursuant to § 6-16a of the Public Limited Liability Companies Act, the Board of Directors shall prepare a specific statement on the establishment of salary and other benefits to Senior Management. It is further stated in § 5-6 (3) of the Public Limited Liability Companies Act that an advisory voting shall be held at the Annual General Meeting regarding the Board of Directors’ guidelines for determining remuneration of Senior Management for the next accounting year (ref. (ii) below). To the extent the guidelines are linked to share-based incentive schemes, they will also be subject to approval by the General Meeting (ref. (iii) below).
(i) Remuneration and other Benefits to Senior Management for the Previous Accounting Year
The Board of Directors adopts the terms and conditions for the CEO, as well as the principal resolutions regarding the Group’s remunera-tion policy and benefit schemes for all employees.
Information Regarding Senior ManagementSenior Management includes the following employees:
Jan Erik Tveteraas, CEOOskar Mykland, CFOBirte Norheim, Vice President FinanceErling Andreas Ronglan, Vice President Floating ProductionFredrik Major, Vice President Business Development/R&DHelle Hundseid, Vice President ProjectsHanna Moland, Vice President HR & AdministrationMorten Martens Breivik, Vice President QHSEJon Helge Wilmann, Vice President DrillingAlf-Roger Skikstein, Vice President Engineering
Remuneration of Senior Management for the accounting year 2010 is disclosed in Note 20 of the consolidated financial statements.
The CEO will receive 6-24 months’ salary upon termination of employment, dependant on fulfillment of certain conditions.
The guidelines for determination of remuneration of Senior Manage-ment and the allotment of options were discussed at the Annual General Meeting in May 2010. The Board of Directors has not deviated from these guidelines for the accounting year 2010.
(ii) Remuneration and other Benefits to Senior Management for the Next Accounting Year
For advisory voting at the Annual General Meeting in 2011, the Board of Directors will present the following guidelines for determination of remuneration and other compensation to Senior Management for the next accounting year:
Salary and Payment-in-KindThe main objective of the Company’s remuneration policy for Senior Management is to provide a framework for remuneration, contribute to the recruitment of senior personnel with the required skills and secure relevant development of expertise. In addition to the base sal-ary, Senior Management participates in the Group’s bonus and stock option schemes along with other key employees. The compensation package for the CEO and Senior Management may also include a company car arrangement, newspapers, mobile phone and refund of expenses for internet subscription, all in accordance with common market practice. Senior Management further participates in the Group’s collective pension and insurance schemes along with all employees in the Group.
The Board of Directors may grant loans from the Company to key employees. Satisfactory security arrangements shall be provided and the interest rate shall correspond to the current standard interest rate for loans granted to employees.
The Company’s remuneration policy is based on defined roles and re-sponsibilities, clear goals and key performance indicators, combined with evaluation of results and achievements. The total compensation package shall as a guideline be at a level that corresponds to the market median in the different markets and industries in which the Group operates.
The annual wage and base salary adjustment takes place on July 1, and shall be based on the general development of wages in the market and relevant industries, combined with an evaluation of the previous year’s achievements and results. Any individual salary adjustment shall be based on the annual performance appraisal.
Bonus Scheme and Performance IncentivesThe Group’s and the business areas’ financial and non-financial results, shall form the basis for the collective bonus scheme. A bonus scheme tied to individual performance and results is also established for key employees. The collective and individual bonus schemes may in total constitute up to 20-50% of the base salary. Bonus may be paid annually, based on a performance appraisal of results and achievement and subject to approval by the Board of Directors
The Board of Directors’ intention with the bonus scheme is to align objectives of the Company and the employees through increasing motivation, enthusiasm and team spirit in the organization, as well as rewarding strong leadership and cooperation across departments and disciplines.
The Board of Directors may grant key employees a stay-on bonus measured over a three year period with a maximum payment of up to 20% of the base salary per year in the bonus period.
statement regarding estaBlishment of salary and other Benefits for senior management
10 10ANNUAL REPORT
SEVAN MARINE
Consequences for the Company and the ShareholdersThe Board of Directors has confidence in the employees and their motivation and capacity to contribute to the Company’s results. The Board of Directors is of the opinion that the Company’s future success to a high degree depends on highly motivated, qualified and competent staff. A well defined compensation program enables the Company to remain competitive. Remuneration of employees is considered an essential contributor to the strategy of creating shareholder value.
(iii) Particulars on Share-Related Incentive Schemes
Stock Option Scheme The Board of Directors proposes to continue the stock option scheme. The Company uses stock options as part of its compensa-tion package for key employees. The general framework for the
option scheme, including the number of options that may be awarded, is presented to the Annual General Meeting for approval every year. The number of stock options awarded shall not exceed 3-5% of the outstanding shares. The exercise price for stock options shall minimum correspond to the market price at the date of award. Within this framework, the Board of Directors is authorized to award options to key employees.
Bonus Linked to the Development in the Share PriceThe Board of Directors may grant key employees a bonus linked to the development of the price of the Company’s shares during a period of at least three years. The bonus amount shall not exceed 50% of the annual base salary. Within this framework, the Board of Directors is authorized to grant a bonus linked to the development of the Company’s share price to key employees.
Arendal, March 30, 2011 The Board of Directors of Sevan Marine ASA
_______________________ _______________________ _______________________ _______________________ Arne Smedal Hilde Drønen Kåre Syvertsen Aasulv Tveitereid Chairman Deputy Chairman Board member Board member
_______________________ _______________________ _______________________ _______________________ Stephan M. Zeppelin Jorunn Haugen Jørgen Skotnes Jan Erik Tveteraas Board member Employee representative Emloyee representative CEO
10 11ANNUAL REPORT
SEVAN MARINE
the Board of direCtorsArne Smedal (1947)Chairman Mr. Smedal has served as a member of the Board of Directors since the Company’s inception in 2001. Mr. Smedal holds an MSc in hydrodynam-ics from the Norwegian Institute of Technology (NTNU) in Trondheim. Mr. Smedal has previous experience as President and CEO of Navis ASA from 1997 to 2001; Executive Vice President
of Hitec ASA from 1996 to 1997; founder and President of Marine Consulting Group and Advanced Production and Loading (APL) from 1989 to 1996; as well as various positions, incl. Project Manager, VP marketing and President, at Pusnes from 1979 to 1988; and Det Norske Veritas (DNV) from 1974 to 1979. Mr. Smedal has served as Board member of various companies within the shipping and electronics industries and is a Norwegian citizen with residence in Arendal, Norway.
Hilde Drønen (1961)Deputy ChairmanMrs. Drønen has served as a member of the Board of Directors since 2006 and as Chairman of the Audit Committee since 2008. Mrs. Drønen holds a Business Administration degree from the Norwe-gian School of Management (BI) and is currently CFO of DOF ASA and has extensive experience from the offshore sector. Mrs. Drønen is represented in
several other Boards of Directors; including the Board of Directors of DOF Subsea AS. Mrs. Drønen is a Norwegian citizen with residence in Bekkjarvik, Norway.
Jørgen Skotnes (1971)Employee representative of the Board and Senior Structural EngineerMr. Skotnes has served as a member of the Board of Directors since 2009. Mr. Skotnes holds a B.eng (Hons) in Naval Architecture and Offshore Engineering from University of Strathclyde, Glasgow from 1999. Mr. Skotnes has previous ex-perience from working with oil, chemical and gas carriers with Det Norske Veritas
AS from 2002-2007; Hitec Framnæs from 2001-2002; Cammell Laird from 1999-2001. Mr. Skotnes is a Norwegian citizen with residence in Revetal, Norway.
Jorunn Haugen (1966)Employee representative of the Board and HR CoordinatorMrs. Haugen has served as a member of the Board of Directors since 2009. Mrs. Haugen holds a degree in Administra-tion and Management from Høgskolen i Nord-Trøndelag. Mrs. Haugen has previous experience within the offshore industry from The Ugland Group from 1987 to 1995; Det Søndenfjeldsnorske
Dampskibsselskap (DSND) from 1995 to 2002; Subsea 7 from 2002 to 2004; Atlantis Deepwater Technology AS from 2004 to 2005; and Aker Pusnes from 2006 to 2007. Mrs. Haugen has also worked as Lecturer at Folkeuniversitetet in Arendal from 2005 to 2006. Mrs. Haugen is a Norwegian citizen with residence in Arendal, Norway.
Kåre Syvertsen (1950)Board member and Group Manager TechnologyMr. Syvertsen has served as a member of the Board of Directors since the Com-pany’s inception in 2001. Mr. Syvertsen holds an MSc in naval architecture from the Norwegian Institute of Technology (NTNU) in Trondheim. Mr. Syvertsen has previous experience as Vice President Technology of Navis from 1997 to 2001;
Vice President Technology of Advanced Production and Loading (APL) from 1994 to 1997; Project Manager of Marine Consulting Group from 1990 to 1994; and Ass. Professor in Marine Technology at the Norwegian Institute of Technology (NTNU), Trondheim, from 1976 to 1990. Mr. Syvertsen is a Norwegian citizen with residence in Kristiansand, Norway.
Stephan M. Zeppelin (1974)Board memberMr. Zeppelin has served as a member of the Board of Directors since 2007. Mr. Zeppelin holds a Bachelor of Science degree in Business Administration with emphasis on finance from the University of Colorado, Leeds School of Business (1997). Mr. Zeppelin joined International Value Advisers in 2010 and has previous experience as Vice President of Wexford
Capital LLC focusing on oil services, shipping and shipbuilding from 2004 to 2009; as Analyst/Associate at Bear Stearns & Co., New York, from 2000 to 2004; as Associate at Globecon Group Ltd, New York, from 1999 to 2000; and as Associate at Bankers Trust, New York, from 1998 to 1999. Mr. Zeppelin is a U.S. citizen with residence in CT, USA.
Aasulv Tveitereid (1973)Board memberMr. Tveitereid has served as a member of the Board of Directors since 2010 and as a member of the Audit Committee since 2010. Mr. Tveitereid holds a degree from the Norwegian school of Econom-ics and Business Administration (NHH) in Bergen. Mr. Tveitereid has 10 years experience as Oil & Oil Service Research Analyst in SEB Enskilda. Since 2008 he
has been managing his own investment company; AAT Invest. Tveit-ereid is also a member of the Board of Noreco ASA. Mr. Tveitereid is a Norwegian citizen with residence in Oslo, Norway.
10 12ANNUAL REPORT
SEVAN MARINE
Board of direCtors’ statement on poliCy for Corporate governanCeCorporate Governance in Sevan MarineSevan Marine shall be managed based on principles that seek to ensure openness, integrity and equal treatment of shareholders. The Company follows the Norwegian Code of Practice for Corporate Governance (as amended on October 21, 2010). The management and Board of Directors annually review the principles for corporate governance and how they are implemented in the Group.
The description below accounts for the Company’s compliance with the Norwegian Code of Practice.
BusinessSevan Marine’s vision is to be a world-class company in the technologically challenging segments of the offshore market. The Company shall utilize its competitive advantages within design, engineering, project execution and operations to offer cost-efficient and innovative products and solutions to its clients, based on the proprietary Sevan design.
The Company shall aim at maintaining a local presence in interna-tional markets. Growth is to be achieved mainly through organic development and partnership arrangements.
The Board of Directors is of the opinion that the business objectives laid down in the Company’s Articles of Association provide predict-ability and direction for the Company’s business strategy and the activities that it may acquire or initiate. The Company’s Articles of Association is posted at the corporate website.
Ethics and Social Responsibility PolicySevan Marine is committed to high ethical standards in its business dealings to ensure that the integrity of employees and the organiza-tion is maintained. Corporate social responsibility for Sevan Marine is an extension of the way the Company conducts its business. The Company’s ethics policy and social responsibility policy is posted at the corporate website.
Equity and DividendThe Company shall aim at establishing a sound financial structure, reflecting the capital intensive nature of its business, the offshore market fluctuations and the duration of the contract portfolio for the fleet. In this respect, the Company shall ensure that its equity basis is sufficient. At December 31, 2010, the Group had total equity of 809 million. The Board of Directors continually reviews the capital situation in light of the Company’s targets, strategies and risk profile.
The Company shall provide its shareholders with a competitive return on investment over time. The Company’s target is that the underlying values shall be reflected in the share price. Long-term, the Company shall aim at paying a dividend to its shareholders on a regular basis. Near-term, the Company’s focus will be on expanding the fleet of units based on the proprietary Sevan design and on growth in the
Company’s share price based on the market’s valuation of existing and future earnings.
At the Ordinary General Meeting on May 31, 2010, the sharehold-ers, as proposed by the Board of Directors, granted the Board of Directors the authorizations described below. The authorizations are valid for a period ending at the next Ordinary General Meeting (in 2011), with exception of the authorization to issue share options and new shares to employees. The deviation from the Norwegian Code of Practice for Corporate Governance in respect of the authorization to issue new shares to employees for a period beyond the next Ordinary General Meeting is explained below. The authorizations granted to the Board of Directors during 2010 were restricted to defined purposes. The full details of the authorizations are set out in the minutes from the meeting which are available at the corporate website.
- New shares, financingThe Board of Directors was authorized to issue up to 52,606,998 new shares to part finance capital requirements of the Company, including capital requirements relating to engineering, construction, equipment and/or operations of Sevan units and acquisition of enterprises.
- Share options and new shares to employeesThe Board of Directors was authorized to award up to 6,325,000 share options until the next Ordinary General Meeting and to issue up to 26,185,487 new shares in connection with exercise of awarded stock options and bonus programme. The authorization to issue the new shares is effective for the maximum statutory period of two years and is not limited to the time of the next Ordinary General Meeting. This is because the rights granted under the employee stock option programme are effective also for the period following the next Ordinary General Meeting.
- Treasury sharesThe Board of Directors was authorized to acquire up to 52,606,998 treasury shares.
- Convertible loansThe Board of Directors was authorized to obtain convertible loans in the aggregate amount of up to USD 200,000,000 which can be converted into up to 52,606,998 shares.
Equal Treatment of Shareholders and Transactions with Close AssociatesThe Company has only one class of shares and each share entitles the holder to one vote at General Meetings. Transactions with close associates shall be on arm’s-length basis and always in compliance with the Norwegian Public Limited Companies Act.
The Company did not issue any new shares during the year ended December 31, 2010. No derogations from the pre-emptive rights of
10 13ANNUAL REPORT
SEVAN MARINE
the existing shareholders of the Company were made during the year.
Freely Negotiable SharesThe Company’s shares are listed on Oslo Børs and are freely negotiable.
General MeetingsThe General Meeting is the Company’s supreme corporate body. It elects the Board of Directors and the auditor and is the forum for presentation and discussion of other issues of general interest to shareholders. Every shareholder of the Company has the right to attend the General Meetings.
The date of the Ordinary General Meeting is published as a part of the Financial Calendar for the year, which is posted at the corporate website. Notice of the General Meetings shall be sent to shareholders no later than 21 days before the meeting is to be held; however at the Ordinary General Meeting held on May 31, 2010, a resolution was passed pursuant to which the Board of Directors could – until the next Ordinary General Meeting (in 2011) – resolve to send notice for Extraordinary General Meetings at the latest two weeks in advance of the meeting. This resolution was passed in order to give the Board of Directors the flexibility to – on a case-by-case basis – call for Extraordinary General Meetings at shorter notice than what would otherwise be required under the Norwegian Public Limited Liability Companies Act, should it be in the best interest of the Company.
The Articles of Association stipulate that documents that are to be considered at a General Meeting may be published on the corporate website instead of being enclosed to the notice of the meeting. This also applies to documents which by law must be attached to the notice of the General Meeting. Individual shareholders are nonethe-less entitled to have the documents sent to them free of charge, upon request to the Company. General Meetings of the Company may be held in Arendal or Oslo.
Attendance forms may be sent to the Company until the day before the General Meeting in order to enable as many shareholders as possible to attend. If any shareholder is unable to attend, he or she may attend by proxy. The minutes from the General Meeting are published as soon as possible at the corporate website.
Nomination CommitteeA Nomination Committee, which works under the mandate and au-thority of the General Meeting, makes preparations and recommends candidates for the General Meeting’s election of the Board members, as well as proposes the remuneration of the Board of Directors.
Pursuant to the Articles of Association, the Nomination Commit-tee consists of the Chairman of the Board of Directors and two
members elected by the General Meeting. The members elected by the General Meeting are appointed for two years. Currently, the Nomination Committee consists of Arne Smedal (in capacity of being the Chairman of the Board of Directors), Mimi Kristine Berdal, and Christel Borge.
The Board of Directors has considered the current arrangement whereby the Chairman of the Board shall be one of the three members of the Nomination Committee. The Board of Directors was of the view that this alternative is in the best interest of the Company and the shareholders in general. The Board of Directors will address this issue in its annual evaluation of performance and expertise and continue to obtain and consider the views of the Nomination Committee. The report of the Board of Directors’ evaluation of performance and expertise is made available to the Nomination Committee. The Chairman of the Board, Arne Smedal, has desisted from participating in the process of nominating the Chairman of the Board of Directors for the recommendation published by the Nomina-tion Committee for the Ordinary General Meeting in 2011.
Mimi Kristine Berdal works as a lawyer in private practice. Christel Borge is a business and management graduate and works with strategic development at the Telenor group. Prior to the General Meeting, the Nomination Committee provides contact information for its members and any deadlines for submitting proposals to the committee at the corporate website.
Corporate Assembly and Board of DirectorsAs of today, the Company is not required to have a Corporate Assembly.
The Company’s Board of Directors shall, pursuant to the Articles of Association, consist of five to nine members. Two members shall be elected by and amongst the employees in the Group and the remaining members shall be elected by the General Meeting. The Chairman of the Board is appointed by the General Meeting. During 2010, the Board of Directors has consisted of up to nine members (seven elected by the General Meeting and two by and amongst the employees). One of the Directors – May Britt Myhr – withdrew from her position during the year (in October) and – Mai-Lill Ibsen - withdrew from her position in February 2011. The Board of Directors decided to postpone the supplementary elections until the next Ordinary General Meeting (in 2011), as it still constituted a quorum, cf. § 6-8 of the Public Limited Liability Companies Act. No further changes to the composition of the Board of Directors have taken place since the Ordinary General Meeting in 2010.
Biographical information on each Director is outlined on page “The Board of Directors” on page 11 of the 2010 Annual Report and at the corporate website.
10 14ANNUAL REPORT
SEVAN MARINE
The Composition of the Board of Directors Since the Ordinary General Meeting in 2010 and Until December 31, 2010:
Arne Smedal Chairman (15 meetings)Hilde Drønen Deputy Chairman (12 meetings)Stephan M. Zeppelin Board member (14 meetings)Kåre Syvertsen Board member (15 meetings)Mai-Lill Ibsen Board member (15 meetings) May Britt Myhr Board member (until Oct. 21, 2010) (2 meetings)Aasulv Tveitereid Board member (15 meetings)Jørgen Skotnes Employee representative (15 meetings)Jorunn Haugen Employee representative (15 meetings) All Directors elected by the shareholders are deemed to be inde-pendent of the Company’s main shareholders and material business contacts. Five out of seven Directors elected by the shareholders are deemed independent of the Company’s Senior Management. Smedal and Syvertsen are not deemed independent due their employment with and engagements for the Company.
The Work of the Board of DirectorsThe Board of Directors is ultimately responsible for administering the Company’s affairs and for ensuring that the Company’s operations are organized in a satisfactory manner. Moreover, the Board is responsible for establishing supervisory systems and for overseeing that the business is run in accordance with the Company’s core values and ethical guidelines.
The Board of Directors meets minimum six times a year and more frequently if required. A total of 24 Board meetings (including those by means telephone conferences) have been held in the course of the year ended December 31, 2010. The overview above shows the composition of the Board of Directors since the Ordinary General Meeting in 2010 and additionally includes information on the number of meetings for which each Director has participated.
Audit Committee The Board of Directors has established an Audit Committee. Since the Ordinary General Meeting in 2010, the Audit Committee has con-sisted of Board member, Aasulv Tveitereid, and Deputy Chairman, Hilde Drønen. The Audit Committee assists the Board of Directors in matters relating to the integrity of the Company’s financial statements, financial reporting processes and internal controls, and the qualifications, independence and performance of the external auditor. The members of the Audit Committee receive additional remuneration for duties relating to the committee responsibilities. Such remuneration is approved by the Ordinary General Meeting.
Risk Management and Internal ControlThe Board of Directors shall ensure that the Company has good internal control functions and appropriate systems for risk manage-ment tailored to its operations and in accordance with the Company’s
core values, ethical guidelines and social responsibility policy. A review of the Company’s most important risk areas and its internal control functions is conducted by the Board on an annual basis.
The Group’s activities expose it to a variety of risks; including market risks, financial risks and operational risks. The Group’s overall risk management programme seeks to minimize the potential adverse effects on the Group’s financial performance likely to be caused by its exposure to such risk factors, including but not limited to the use of derivative financial instruments and development of sound health, safety and environment (HSE) principles as well as prudent monitor-ing of constructional and operational activities.
Remuneration of the Board of DirectorsThe remuneration of the Board of Directors is determined on a yearly basis by the Ordinary General Meeting. The Directors may also be reimbursed for travelling, hotel and other expenses incurred by them in attending Board meetings or in connection with the business of the Company.
Remuneration of the Board of Directors, as proposed by the Nomination Committee and approved by the Ordinary General Meeting, is not linked to the Company’s performance nor based on stock options.
At the Company’s Ordinary General Meeting in May 2010, the remuneration of the Board of Directors for the financial year 2009 was set to NOK 400,000 for the Chairman, NOK 265,000 for the Deputy Chairman and NOK 250,000 for each of the Board members. Remuneration of each of the Employee representatives was set to NOK 125,000 with equivalent amounts reserved in an ‘Employee Benefit Fund’ to benefit employees in the Group. The members of the Audit Committee received additional remuneration (NOK 60,000 to Hilde Drønen and NOK 30,000 to each of Stephan Zeppelin and Vibeke Strømme). The Board of Directors has authorized that, in principal, stock options may be awarded to the Directors Arne Smedal and Kåre Syvertsen due to their other engagements for the Company. On May 5, 2010, Arne Smedal was granted 2,000,000 stock options, and Kåre Syvertsen 1,000,000 stock options, pursuant to, and in accordance with, an authorization granted to the Board of Directors at the Ordinary General Meeting in 2009. The options have an exercise price of NOK 8.81; equal to the closing price for the share at the date of the award. The share options may be exercised with one third after one, two and three years respectively, and expire after five years.
A Director who has been given a special assignment, besides his or her normal duties as a Director, in relation to the business of the Company, may be paid such additional remuneration as the Board of Directors may determine.
10 15ANNUAL REPORT
SEVAN MARINE
Remuneration of the Senior ManagementThe Board of Directors has established guidelines for the remunera-tion of Senior Management. These guidelines are presented to and approved by the Ordinary General Meeting and are described in the ‘Statement Regarding Establishment of Salary and Other Benefits for Senior Management’ which is included on page “Board of Directors’ Statement on Policy for Corporate Governance” on page 12 of the 2010 Annual Report.
Information and CommunicationThe Board of Directors has established guidelines for the Company’s reporting of financial and other information based on openness and taking into account the requirements for equal treatment of all participants in the securities market.
In order to ensure equal treatment of its shareholders, an important aim is to make sure that the securities market is in possession of correct, clear and timely information about the Company’s operations and condition at all times. This is essential for an efficient pricing of the shares and bonds and for the market’s confidence in the Company.
Approaches taken to meet this aim include timely and comprehen-sive reporting of the Company’s interim results and publication of the annual and quarterly financial reports. In addition, information of significance for assessing the Company’s underlying value and prospects is reported through Oslo Børs and are made available at the corporate website as well as distributed to email-subscribers. Further details, such as contact details and general updates and news about the Company, are available at the corporate website.
The Company will also strive to ensure that its progress is monitored by securities analysts. The Company has established a designated Investor Relations position for relations with shareholders, bondhold-ers, Oslo Børs, analysts and investors in general. The Company shall seek to clearly communicate its long-term potential, including its strategy, value drivers and risk factors.
The Company shall maintain an open and proactive investor relations policy, a best practice website and shall give presentations regularly in connection with interim financial reports. Sevan Marine has been awarded the Oslo Børs’ Information and English symbols. These
symbols have been established to identify issuers working profes-sionally and systematically to make financial information readily available to investors and other market players, both nationally and internationally.
The Company’s Financial Calendar is available at the corporate website. Shareholder information is published at the website as well as sent directly to email-subscribers.
TakeoversThe Board of Directors will handle any possible takeover in ac-cordance with Norwegian corporate law. There are no mechanisms against takeover bids in the Articles of Association or in any underlying steering document, nor are any measures to limit the opportunity to acquire shares in the Company implemented. The Board of Directors will not seek to hinder or obstruct an offer for the Company’s activities or shares unless there are particular reasons for this. The Board of Directors has otherwise so far chosen not to publish any explicit guiding principles for how it will act in the event of a takeover bid.
AuditorThe Board of Directors has established an Audit Committee. The auditor participates in relevant agenda items at meetings with the Audit Committee and meets with the committee at least once each year. In addition, and at least once a year, the Audit Committee meets with the auditor without any member of the Company being present. The auditor annually reports the main features of the plan for the audit to the Audit Committee.
Once a year, the auditor presents a review of the Company’s internal control procedures, including identifying weaknesses and proposals for improvement. The auditor presents the view on internal control procedures through the annual management letter.
In connection with the issue of the auditor’s report, the auditor provides the Board of Directors with a declaration of independence and objectivity, and the auditor participates in the Board meeting at which the annual accounts are approved. The proposal for approval of the remuneration of the auditor provides a breakdown of remuneration relating to statutory audit tasks and other assignments and is reported to the Ordinary General Meeting.
10 16ANNUAL REPORT
SEVAN MARINE
senior management
Jan Erik Tveteraas (1960)CEO Mr. Tveteraas holds an MBA from Norwegian School of Economics and Administration (NHH) in Bergen. Mr. Tveteraas has been the Company’s CEO since its inception in 2001 and has previous experience as Chief Financial Officer of Navis from 1998 to 2001; Vice President Corporate Planning of Sonat Offshore (Transocean
Offshore), Houston, from 1996 to 1998; and Chief Financial Officer in Transocean AS from 1991 to 1996. From 1985 to 1991, Mr. Tveteraas held various management positions within the offshore industry. Mr. Tveteraas is a Board member of INTSOK and a Norwegian citizen with residence in Tananger, Norway.
Fredrik Major (1950)Vice President Business Development/R&DMr. Major holds a BSc in Naval Architecture and an MSc in Computer Science from NTNU in Trondheim 1976. Mr. Major has previous experience as Vice President Business Development in Advanced Production and Loading from 1995 to 2005; Technical Director in Ericsson AS from 1994 to 1995; Founder
and Managing Director of Semafor Data, later Semafor AS from 1983 to 1994 (acquired by Ericsson AS in 1994); Independent Consultant from 1979 to 1983; and Research Engineer at NSFI, The Ship Research Institute of Norway (now Marintek), from 1976 to 1979. Mr. Major is a Norwegian citizen with residence in Arendal, Norway.
Helle Hundseid (1965)Vice President ProjectsMrs. Hundseid holds a Master of Sci-ence degree in Mechanical Engineering from NTNU from 1988. Mrs. Hundseid has 17 years experience from DNV within the onshore/offshore industry both nationally and internationally; including positions as Project Manager from 1990 to 2006; Section Leader for Safety from 1998 to 2002; Service Area Leader -
Norway from 2002 to 2004; Market Sector Leader - Upstream from 2004 to 2006; and Customer Service Manager from 2002 to 2006. Mrs. Hundseid has experience from several Boards of Directors and is a Norwegian citizen with residence in Asker, Norway.
Erling Andreas Ronglan (1969)Vice President Floating ProductionMr. Ronglan holds an MSc from the Nor-wegian Institute of Technology, Faculty of Marine Technology. Mr. Ronglan has previous experience as Operations Man-ager for FPSO “Petrojarl I”, PGS Produc-tion AS since 2001; Operations Engineer for PGS Production AS from 1999 to 2001, Customer Service Manager for DNV Oslo from 1997 to 1999. Mr Rong-
lan is a Norwegian citizen with residence in Trondheim, Norway.
Oskar Mykland (1966)CFOMr. Mykland holds a Bachelor degree in Business and Administration from BI Norwegian School of Management (BI) in Skien from 1992. Mr. Mykland has previ-ous experience as Chief Financial Officer of Siem Offshore from 2006 to 2009 and Finance Director of Viking Supply Ships AS from 1998 to 2006. From 1994 to 1998, Mr. Mykland held various
management positions within the offshore industry. Mr. Mykland is a Norwegian citizen with residence in Kristiansand, Norway.
Birte Norheim (1973)Vice President Finance Mrs. Norheim holds a Master of Applied Finance from Queensland University of Technology, Australia, from 2002. From 2005 to 2008, Mrs. Norheim was Group Controller for Sevan Marine ASA, and she has previous experience as Finance Analyst for MI-SWACO, Houston, from 2004 to 2005; Chief Accountant for MI-SWACO, Norway, from 2003 to 2004;
and Accountant for Laerdal Medical AS from 1993 to 1999. Mrs. Norheim is a Norwegian citizen with residence in Sola, Norway.
10 17ANNUAL REPORT
SEVAN MARINE
senior management - suBsidiaries
Hanna Moland (1955)Vice President HR & Administration Mrs. Moland has previous experience as Administrative Services Manager, Advanced Production and Loading AS from 2003 to 2005; Human Resource Manager, Advanced Production and Loading AS from 2002 to 2003; and various positions within Hitec Marine AS from 1993 to 2002. Mrs. Moland is a Norwegian citizen with residence in Vegardshei, Norway.
Morten Martens Breivik (1969)Vice President QHSEMr. Breivik holds a degree in Master Mariner and a Bachelor BA from Stord/Haugesund University College and a Bachelor degree in Asset Management from Sør-Trøndelag University College. Mr. Breivik joined Sevan in 2007 and has previous experience as QHSE Manager in APL ASA from 2005 to 2007; and as Marine Superintendant in Hydro O&G
from 2002 to 2005. From 1996 to 2002, Mr. Breivik held various management positions in operations in Smedvig Offshore. Mr. Breivik is a Norwegian citizen with residence in Arendal, Norway.
Heitor Gioppo (1959)President Sevan Brasil Mr. Gioppo holds a B.Sc. in Mechanical Engineering from Paraná Federal University in Brazil from 1981 and an MBA from Fundação Getulio Vargas FGV from 2001. From 2006 to 2008, Mr. Gioppo was General Manager for Sevan Piranema and from 2008 to 2010 he was Operations Director for Sevan Marine’s operations in Brazil. Mr. Gioppo also
has previous experience as Project Manager for Schlumberger, from 1998 to 2005; and from various roles at Odebrecht, including Rig Superintendent, from 1982 to 1998. Mr. Gioppo is a Brazilian citizen with residence in Rio de Janeiro, Brazil.
Aslak Hjelde (1953)Managing Director KANFA ASMr Hjelde holds a degree in Mechanical engineering from 1979 and a degree in Economics from 1984. Mr. Hjelde has previous experience from Kongsberg Våpenfabrikk, Consultas Engineering, SB Verksted and Kvaerner Process Systems as designer, technical director, QA responsible, project manager and sales director. Mr. Hjelde is a Norwegian
citizen with residence in Hokksund, Norway.
Jon Helge Wilmann (1961)Vice President DrillingMr. Wilmann holds an MBA from Mr. Wilmann holds an MBA from Norwegian school of Economics and Administration (NHH) in Bergen from 1985. Mr. Wilmann has previous experience as Managing Director and Head of Offshore Oil & Gas Financing in GE Transportation Finance (GE Capital) from 2002 to 2009; Senior Vice President Offshore Oil &
Gas Financing in ABB Financial Services from 1998 to 2002; and Deputy General Manager Corporate Division in DnB NOR in Oslo and Luxembourg from 1985 to 1998. Mr. Wilmann is a Norwegian citizen with residence in Oslo, Norway.
Alf-Roger Skikstein (1963)Vice President EngineeringMr. Skikstein holds a degree in Subsea Systems from Kongsberg College of Engineering from 1987 and in Mechani-cal Engineering from Trondheim College of Engineering from 1986. From 2007 to 2010 Mr. Skikstein was Process Depart-ment Manager for Sevan Marine ASA. Mr. Skikstein has previous experience as Project Manager for KANFA AS, from
2000 to 2007; Manager - Oil and Gas Department for Kværner Pro-cess Systems a.s., from 1999 to 2000; Manager - Project Department for Kværner Process Systems a. s., from 1997 to 1999; Mechanical Engineer and Project Manager for Kværner Process Systems a.s., from 1990 to 1996; Mechanical Engineer for Read Process Engineer-ing A/S, from 1987 to 1990. Mr. Skikstein is a Norwegian citizen with residence in Asker, Norway.
10 18ANNUAL REPORT
SEVAN MARINE
Consolidated BalanCe sheet
Figures in USD 1,000 Note 2010 2009
ASSETS
Non-current assets
Sevan capital assets 6 2,145,614 1,904,282
Other fixed assets 6 38,691 48,918
Intangible assets 7 13,641 14,691
Investments in associates 8 1,148 1,406
Deferred income tax assets 16 124,062 109,087
Other non-current assets 33 76,101 31,801
Total non-current assets 2,399,257 2,110,184
Current assets
Inventories 32 14,507 21,306
Trade and other receivables 10,19 57,203 54,228
Derivative financial instruments 9 287 56
Cash and cash equivalents 11 116,140 163,019
Total current assets 188,136 238,609
Total assets 2,587,393 2,348,792
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital 12 16,633 16,633
Other equity 791,457 957,913
Total shareholders’ equity 808,091 974,546
Non-controlling interest 729 37,969
Total equity 808,819 1,012,515
LIABILITIES
Non-current liabilities
Interest-bearing debt 15 1,245,604 85,868
Retirement benefit obligations 17 1,938 1,708
Deferred income tax liabilities 16 1,829 2,565
Total non-current liabilities 1,249,371 90,141
Current liabilities
Interest-bearing debt 15 188,000 1,103,005
Derivative financial instruments 9 28 0
Trade payables 14 248,985 100,345
Provisions 18 8,083 11,818
Other current liabilities 14,19 84,107 30,968
Total current liabilities 529,204 1,246,136
Total liabilities 1,778,574 1,336,277
Total equity and liabilities 2,587,393 2,348,792
10 19ANNUAL REPORT
SEVAN MARINE
Consolidated inCome statement
Figures in USD 1,000 Note 2010 2009
Operating revenue 5,19 255,907 194,824
Operating expense -85,067 -117,014
Depreciation, amortization and impairment 5,6,7 -105,119 -64,697
Employee benefit expense 20 -69,908 -56,004
Other operating expense 31 -28,008 -33,520
Foreign exchange gain/(loss) related to operation -1,528 -6,654
Total operating expense -289,630 -277,889
Operating profit/(loss) -33,724 -83,065
Income from associated companies 8 13 389
Financial income 21 10,415 9,038
Financial expense 21 -145,167 -70,661
Foreign exchange gain/(loss) related to financing 30 -95 -36,045
Net financial items -134,833 -97,279
Profit/(loss) before tax -168,557 -180,344
Tax income/(expense) 22 11,709 36,931
Net profit/(loss) -156,848 -143,414
Attributable to:
Equity holders of the Company -157,213 -142,793
Non-controlling interest 365 -621
Earnings per share for profit/(loss) attributable to the equity holders of the Company during the year (USD per share):
- Basic 23 -0.30 -0.31
- Diluted 23 -0.30 -0.31
Arendal, March 30, 2011 The Board of Directors of Sevan Marine ASA
_______________________ _______________________ _______________________ _______________________ Arne Smedal Hilde Drønen Kåre Syvertsen Aasulv Tveitereid Chairman Deputy Chairman Board member Board member
_______________________ _______________________ _______________________ _______________________ Stephan M. Zeppelin Jorunn Haugen Jørgen Skotnes Jan Erik Tveteraas Board member Employee representative Emloyee representative CEO
10 20ANNUAL REPORT
SEVAN MARINE
Figures in USD 1,000 Attributable to equity holders of the Company
Other equity
Note
Share
capital
Share
premium
Retained
earnings
Non-
controlling
interest
Total
equity
January 1, 2009 12 6,187 562,401 131,906 38,590 739,084
Total proceeds from share issues 10,446 407,414 417,859
Share issue costs -21,781 -21,781
Tax effect of share issue costs 6,099 6,099
Expensed portion of value of share options 1,170 1,170
Convertible bond, equity portion 14,058 14,058
Tax effect of convertible bond, equity portion -3,936 -3,936
Comprehensive income for the year -139,416 -621 -140,037
December 31, 2009 12 16,633 954,132 3,782 37,969 1,012,515
Figures in USD 1,000 Attributable to equity holders of the Company
Other equity
Note
Share
capital
Share
premium
Retained
earnings
Non-
controlling
interest
Total
equity
January 1, 2010 12 16,633 954,132 3,782 37,969 1,012,515
Value of share options 2,149 2,149
Purchase of non-controlling interest * -1,395 -37,605 -39,000
Repayment of convertible bond -10,916 -10,916
Comprehensive income for the year -156,295 365 -155,930
December 31, 2010 12 16,633 954,132 -162,675 729 808,819
* During 2010, a Group subsidiary acquired the 20% equity interest in FPSO Sevan Hummingbird, previously owned by Centrica Energy Upstream, for a
consideration of USD 39 million. Following the transaction, the Sevan Group became the 100% owner of the FPSO and the carrying value of the related
non-controlling interest was derecognized.
Consolidated statement of Changes in equity
Consolidated statement of Comprehensive inCome
Figures in USD 1,000 2010 2009
Net profit/(loss) -156,848 -143,414
Foreign currency translation 918 3,377
Comprehensive income -155,930 -140,037
10 21ANNUAL REPORT
SEVAN MARINE
Consolidated Cash flow statement
Figures in USD 1,000 Note 2010 2009
Cash flows from operating activities
Cash from operations 25 49,916 -29,155
Interest paid 21 -72,057 -74,118
Taxes paid 22 -4,264 -3,077
Net cash generated from operating activities -26,405 -106,350
Cash flows from investment activities
Purchase of property, plant and equipment (PPE) 6 -175,634 -344,080
Acquisition of non-controlling interest -39,000 0
Purchases of intangible assets 7 -711 -555
Net cash flow from investment activities -215,345 -344,635
Cash flows from financing activities
Net proceeds from issuance of ordinary shares 0 396,079
Net proceeds from interest-bearing debt 15 606,579 175,557
Repayments of interest-bearing debt 15 -414,608 -5,000
Purchase/sale of own bond loan 15 2,900 -2,900
Net cash flow from financing activities 194,871 563,736
Net cash flow for the period -46,879 112,751
Cash balance at the beginning of the year 11 163,019 50,268
Cash balance at the end of the year 11 116,140 163,019
10 22ANNUAL REPORT
SEVAN MARINE
Sevan Marine ASA (the “Company”) and its subsidiaries (together with the Company the “Group”) are engaged in development, construction, ownership, and operation of floating production units and drilling units, which are based on the proprietary design of the Company. The Group is also developing other application types for its cylindrical Sevan hull, including floating LNG production and power plants with CO2 capture.
The Company is a public limited liability company incorporated and domiciled in Norway. The address of its registered office is Kittelsbuktveien 5, 4836 Arendal.
The Company’s shares are listed on the Oslo Stock Exchange.
These consolidated financial statements were approved by the Board of Directors on March 30, 2011.
Overview of Group structure as of December 31, 2010:
sevan marine groupnotes to the Consolidated finanCial statement
Subsidiaries Registered office Interest held Equity Profit/(loss) 2010KANFA AS Norway 100% 22,420 -273KANFA Mator AS Norway 100% -516 -42KANFA Aragon AS Norway 50% 1,163 -8Sevan Production Pte Ltd Singapore 100% 186,910 -7,682Sevan Marine do Brasil Ltda Brazil 100% 1,758 -5,726Sevan Piranema Servicios De Petroleo Ltda Brazil 100% -2,670 -4,197Sevan Production AS Norway 100% 41,143 -10,392Sevan Invest AS Norway 100% 261,918 -761Sevan Production General Partnership Singapore 100% 226,034 2,587Sevan Production Services Ltd UK 100% -35,960 1,420Sevan Production UK Ltd UK 100% -7,151 -674Sevan Pte Ltd Singapore 100% -3,525 -1,248Sevan Drilling AS * Norway 100% 198,129 -8,368Sevan Drilling Rig Pte Ltd Singapore 100% -13,780 -10,831Sevan Drilling Pte Ltd Singapore 100% 303,574 -54,144Sevan 300 Pte Ltd Singapore 100% 249,251 -18,032Sevan Drilling ASA ** Norway 100% 3,557 -800Sevan Holding I AS Norway 100% 47,983 -239Sevan Holding II AS Norway 100% 8,097 -4Sevan Holding III AS Norway 100% 555 -3Sevan Holding IV AS Norway 100% 551 -3Sevan Holding I Pte Ltd Singapore 100% -3,291 -3,160Sevan Holding II Pte Ltd Singapore 100% -631 -631Sevan Holding III Pte Ltd Singapore 100% -65 -2Sevan Holding IV Pte Ltd Singapore 100% -66 -3Sevan Drilling Limited UK 100% -3,992 -3,344Sevan Marine Servicos de Perfuracao Ltda Brazil 100% -330 -4,129Sevan Services AS Norway 100% 12 -2Sevan Drilling Rig AS Norway 100% 6 -3Sevan Drilling Rig II AS Norway 100% -3,974 -3,718Sevan Drilling Rig IV AS Norway 100% 14 -2Sevan Drilling Rig V AS Norway 100% 13 -2Sevan Drilling Rig VI AS Norway 100% 14 -2Sevan Drilling Rig VII AS Norway 100% 14 -2Sevan Drilling Rig VIII AS Norway 100% 14 -2Sevan Drilling Rig IX AS Norway 100% 10 -5Sevan Drilling Rig II Pte Ltd Singapore 100% 122,935 -2,569Sevan Drilling Rig IV Pte Ltd Singapore 100% -31 -9Sevan Drilling Rig V Pte Ltd Singapore 100% -22 -9Sevan Drilling Rig VI Pte Ltd Singapore 100% -23 -10
NOTE 1 CORPORATE INFORMATION
10 23ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Sevan Drilling Rig VII Pte Ltd Singapore 100% -23 -9Sevan Drilling Rig VIII Pte Ltd Singapore 100% -22 -9Sevan Drilling Rig IX Pte Ltd Singapore 100% -209 -195Sevan Drilling Holding Pte Ltd Singapore 100% 0 0Hummingbird Oil Pte Ltd Singapore 100% -747 -774
* During March 2011, equity in Sevan Drilling AS was increased by conversion of debt by the Company of USD 75 million. Equity following the conversion
amounted to USD 273 million.
** During March 2011, equity in Sevan Drilling ASA was increased by conversion of debt by the Company of USD 189 million. Equity following the conversion
amounted to USD 193 million.
Associated Companies Registered office Interest held Equity Profit/(loss) 2010KANFA-TEC AS Norway 49.995% 2,110 26
(Amounts in the tables above are prepared in local GAAP and presented in USD 1,000)
`Interests in joint ventures’, are effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 July 2009. The revised standard continues to apply the acquisi-tion method to business combinations but with some significant changes compared with IFRS 3. For example, all payments to purchase a business are recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re- measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs are expensed. IFRS 3 (revised) has had no impact on the current period.
• IAS 27 (revised) requires the effect of all transaction with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognized in profit or loss. IAS 27 (revised) has had no impact on the current period, as none of the non-controlling interests have a deficit balance; there have been no transaction whereby an interest in an entity is retained after the loss of control of that entity, and there have been no transactions with non-controlling interests.
b) New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January 2010 but not currently relevant to the group (although they may affect the accounting for future transactions and events)
• IFRIC 9, `Reassessment of embedded derivatives and IAS 39, Financial instruments: Recognition and measurement’, effective 1 July 2009. This amendment to IFRIC 9 requires an entity to assess
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 financial years presented. The presentation currency of the Group is USD which corresponds to the functional currency of the majority of the entities in the Group. All numbers are in USD 1,000 unless otherwise stated.
2.1 Basis of PreparationThe consolidated financial statements of the Group have been pre-pared in accordance with International Financial Reporting Standards (IFRS) and IFRIC interpretations as adopted by the European Union (EU) and valid as of December 31, 2010. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise judgment in the process of applying the Group’s accounting policies. Areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 4.
2.1.1 Changes in Accounting Policy and Disclosures
a) New and amended standards adopted by the Group The Group has adopted the following new and amended IFRS as of January 1, 2010:
• IFRS 3 (revised), `Business combinations’, and consequential amendments to IAS 27, `Consolidated and separate financial statements’, IAS 28, `Investments in associates’, and IAS 31,
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
10 24ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
whether an embedded derivative should be separated from a host contract when the entity reclassifies a hybrid financial asset out of the `fair value through profit or loss’ category. This assessment is to be made based on circumstances that existed on the later of the date the entity first became a party to the contract and the date of any contract amendments that significantly change the cash flows of the contract. If the entity is unable to make this assessment, the hybrid instrument must remains classified as at fair value through profit or loss in its entirety.
• IAS 1 ‘Presentation of Financial Statements’ (amendment)The amendment provides clarification that the potential settlement of a liability by the issue of equity is not relevant to its classification as current or non-current. By amending the definition of current liability, the amendment permits a liability to be classified as non-current (provided that the entity has an unconditional right to defer settlement by transfer of cash or other assets for at least 12 months after the accounting period) notwithstanding the fact that the entity could be required by the counterparty to settle in shares at any time.
• IAS 36 (amendment) Impairment of assets, effective 1 January 2010. The amendment clarifies that the largest cash-generating unit (or group of units) to which goodwill should be allocated for the purpose of impairment testing is an operating segment, as defined by paragraph 5 of IFRS 8. Operating segments (that is, before the aggregation of segments with similar economic characteristics).
• IFRS 2 (amendments) Group cash-settled share-based payments transactions, effective from 1 January 2010. In addition to incorporating IFRIC 8, Scope of IFRS 2, and IFRIC 11, IFRS 2 Group treasury share transactions, the amendments expand on the guidance in IFRC 11 to address the classification of group arrange-ments that were not covered by that interpretation.
• IFRS 5 (amendment) Noncurrent assets held for sale and discon-tinued operation. The amendment provides clarification that IFRS 5 specifies the disclosures required in respect of non-current assets (or disposal groups) classified as held for sale or discontinued operations. It also clarifies that the general requirements of IAS 1 still apply, particularly paragraph 15 (to achieve a fair presentation) and paragraph 125 (sources of estimation uncertainty) of IAS 1.
c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Group
• IFRS 9, `Financial instruments’, issued in November 2009. This standard is the first step in the process to replace IAS 39, `Financial instruments: recognition and measurement’. IFRS 9 introduces new requirements for classifying and measuring financial assets and is likely to affect the group’s accounting for its financial assets. The standard is not applicable until 1 January 2013 but is available for early adoption. However, the standard has not yet been endorsed by the EU. The adoption is not expected to have any material impact on the Group`s financial statements.
• Classification of rights issues’ (amendment to IAS 32), issued in October 2009. The amendment applies to annual periods begin-ning on or after 1 February 2010. Earlier application is permitted. The amendment addresses the accounting for rights issues that are denominated in a currency other than the functional currency of the issuer. Provided certain conditions are met, such rights
issues are now classified as equity regardless of the currency in which the exercise price is denominated. Previously, these issues had to be accounted for as derivative liabilities. The amendment applies retrospectively in accordance with IAS 8 `Accounting poli-cies, changes in accounting estimates and errors’. The adoption is not expected to have any material impact on the Group`s financial statements.
• IFRIC 19, `Extinguishing financial liabilities with equity instruments’, effective 1 July 2010. The interpretation clarifies the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability (debt for equity swap). It requires a gain or loss to be recognized in profit or loss, which is measured as the difference between the carrying amount of the financial liability and the fair value of the equity instruments issued. If the fair value of the equity instruments issued cannot be reliably measured, the equity instruments should be measured to reflect the fair value of the financial liability extin-guished. The group will apply the interpretation from 1 January 2011, subject to endorsement by the EU. It is not expected to have any impact on the group or the parent entity’s financial statements.
• Prepayments of a minimum funding requirement’ (amendments to IFRIC 14). The amendments correct an unintended consequence of IFRIC 14, `IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction’. Without the amendments, entities are not permitted to recognize as an asset some voluntary prepayments for minimum funding contributions. This was not intended when IFRIC 14 was issued, and the amendments correct this. The amendments are effective for annual periods beginning 1 January 2011. Earlier application is permitted. The amendments should be applied retrospectively to the earliest comparative period presented. The group will apply these amendments for the financial reporting period commencing on 1 January 2011.
2.2 ConsolidationSubsidiariesSubsidiaries comprise all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than 50% of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group, and are de-consolidated from the date that control ceases.
The Group uses the acquisition method to account for the acquisition of subsidiaries. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred assumed at the date of exchange. Acquisition-related costs are expenses as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespec-tive of the extent of any non-controlling interest. The excess of the cost of the acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of the acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the income statement immediately.
10 25ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated but considered an impairment indicator of the asset transferred. Accounting policies of subsidiaries are changed where necessary to ensure consistency with the policies adopted by the Group.
Transactions and non-controlling interests The group treats transactions with non-controlling interests as transactions with equity owners of the group. For purchases from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.
When the group ceases to have control or significant influence, any retained interest in the entity is remeasured to its fair value, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss.
If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate.
AssociatesAssociates comprise all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associ-ates are accounted for using the equity method of accounting and are initially recognized at cost. The Group’s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The Group’s share of associates’ post-acquisition profits or losses is recognized in the income statement, and its share of post-acquisition movements in other comprehensive income is recognized in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealized gains on transactions between the Group and associates are eliminated to the extent of the Group’s ownership share in the associate. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates are changed where necessary to ensure consistency with the policies adopted by the Group.
2.3 Segment ReportingOperating segments are reported in a manner consistent with the internal reporting provided to Senior Management and Board of Directors, responsible for making strategic decisions. Senior Management is responsible for allocating resources and assessing performance of the operating segments.
Operating segmentsThe Group is organized in four business areas, “Floating Production”, “Drilling”, “Topside and Process Technology”, and “Corporate”.
The activities within the Floating Production segment relate to the de-sign, engineering, construction, and operation of the Sevan platforms (FPSOs). This includes licensing of the Sevan proprietary design for floating production units.
The activities within the Drilling segment relate to the design, engineering, construction and operation of the Sevan drilling units. The segment Topside and Process Technology consists of the activities of KANFA AS and subsidiaries which mainly relate to the provision of services and equipment to the processing plants of the Sevan FPSOs and external clients.
The activities within Corporate relate to general administration and marketing activities including studies made for clients.
Geographic perspectiveThe Group’s operating segments operate in the global offshore market and have common marketing and Senior Management functions. Currently, the Group does not consider the business from a geographic perspective. As further units are completed and start operations, dividing business into main geographical areas will be assessed.
2.4 Foreign Currency TranslationFunctional and presentation currencyItems included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which each entity operates (‘the functional currency’). The consolidated financial statements are presented in USD, which is the Group’s presentation currency.
Transactions and balancesForeign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transac-tions. Foreign exchange gains and losses resulting from settlement of such transactions (realized items) and from translation at exchange rates prevailing at balance sheet date of monetary assets and liabilities denominated in foreign currencies (unrealized items) are recognized in the income statement, except when deferred in equity as qualifying cash flow hedges.
Foreign exchange gains and losses relating to interest-bearing debt and cash and cash equivalents are presented (net) as a separate line item in the income statement within financial items. Foreign exchange gains and losses relating to operation are presented (net) as a separate line item in the income statement within operating expenses.
Group companiesThe results and financial position of all Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency, are translated into the presentation currency as follows:
• Assets and liabilities are translated at exchange rates prevailing at balance sheet date.
10 26ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
• Income and expenses are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at exchange rates prevailing at the dates of the transactions).
• All resulting exchange differences are recognized as a separate component of equity.
Upon consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such invest-ments, are taken to other comprehensive income. When a foreign operation is sold, exchange differences that were recorded in equity are recognized in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
2.5 Property, Plant and EquipmentFixed assets are stated at historic cost less accumulated deprecia-tion. The Group has not used, and has no plans of utilizing the revaluation option in IAS 16. Depreciation is calculated using the straight-line method. Fixed assets are reviewed for impairment when-ever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying value of an asset to estimated discounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated discounted future cash flows, an impairment charge is recognized.
Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. Subsequent cost are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement as incurred.
Borrowing cost is capitalized when the cost is directly attributable to the construction of a qualifying asset.
Each major component of the Sevan Capital Assets is depreciated separately when the units are available for intended use. A major component is defined as a part with a cost that is significant in relation to the total cost of the asset. An estimation of useful lives indicates an average depreciation period of 20-30 years.
Other fixed assets consist of furniture, fixtures and equipment that are depreciated using the straight-line method over their estimated useful lives ranging from three to ten years.
Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement.
2.6 Construction in ProgressConstruction contracts are capitalized as construction in progress based on installments payable to the yard and other suppliers.
Insurance and net financial expense during the construction period are capitalized as construction in progress. Cost of labor directly attributable to the construction of the Sevan units is also capitalized.
Cost of training, manning and other pre-operational activities are expensed as incurred.
2.7 Construction Contracts Contract cost is recognized when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent that contract cost incurred is likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract. When it is probable that total contract cost will exceed total contract revenue, the expected total loss is recognized as an expense immediately.
The Group uses the ‘percentage of completion method’ (POC) to determine the appropriate amount to recognize in a given period. The stage of completion is estimated, using judgmental assessment, of the progress of completion of subcomponents of identified milestone deliverables in each contract up to the balance sheet date as a percentage of total identified contract milestone deliverables. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which cost incurred plus recognized profits (less recognized losses) exceed progress billings. Progress billings not yet paid by customers and retention are included as ‘trade and other receivables’. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed cost incurred plus recognized profits (less recognized losses).
2.8 Intangible AssetsGoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisition of subsidiaries is included in ‘intangible assets’. Goodwill on acquisitions of associates is included in ‘investments in associates’. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.
Computer softwareAcquired computer software is capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives, ranging from three to five years. Cost associated with developing or maintaining computer software programs are recognized in the income statement as incurred.
Research and DevelopmentCost associated with research is expensed as incurred. Qualifying cost associated with development activities are capitalized and depreciated over expected useful life.
10 27ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
2.9 Impairment of Non-Financial AssetsAssets that have an indefinite useful life are not subject to amortiza-tion but are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less cost to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels at which separate cash flows are identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that has suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
2.10 Financial AssetsThe Group classifies its financial assets as fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired: Management determines the classification of its financial assets at initial recognition.
Loans and receivables are measured at fair value at transaction date, subsequently remeasured at amortized cost. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Financial assets are included in current assets, except for those with maturities greater than 12 months after balance sheet date, in which case they are classified as non-current assets.
Derivative financial instruments are initially recognized at fair value at the date a derivative contract is entered into and are subsequently remeasured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates derivatives as hedges of a particular risk associated with a recognized asset or liability or a highly probable forecast transaction (cash flow hedge).
Hedge accounting has not been applied in 2010 or 2009.
2.11 InventoriesInventories are stated at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Cost is determined using the average cost method.
2.12 Trade ReceivablesTrade receivables are amounts due from customers for services per-formed in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as noncurrent assets. Trade receivables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future
cash flows, discounted at the effective interest rate. The provision is recognized in the income statement as ‘other operating expense’.
2.13 Cash and Cash EquivalentsIn the consolidated statement of cash flow, cash and cash equivalents includes cash in hand, bank deposits, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. In the consolidated balance sheet, bank overdrafts are shown within interest-bearing debt in the current liabilities section in the balance sheet.
2.14 Share CapitalOrdinary shares are classified as equity. Incremental cost directly attributable to the issue of new shares is shown in equity as a deduction, net of tax, from the proceeds. Where any Group company acquires the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable cost (net of income taxes) is deducted from equity attributable to the Company’s equity holders until the shares are cancelled, reissued or disposed of. Where such shares are subsequently sold or reissued, any considera-tion received, net of any directly attributable transaction cost and income tax, is included in equity attributable to the Company’s equity holders.
2.15 Interest-Bearing Debt Interest-bearing debt is initially recognized at fair value, net of trans-action cost incurred and including the value of any embedded call options. Interest-bearing debt is subsequently stated at amortized cost; any difference between the proceeds (net of transaction cost and embedded value of call options) and the redemption value is recognized in the income statement over the period of the interest-bearing debt using the effective interest method. The value of call options embedded in bond loans are treated as separate financial assets and are initially recognized at fair value and subsequently remeasured at fair value each balance sheet date. Gains and losses are recognized in the income statement immediately. Interest-bearing debt is presented net of the separated financial asset and is classified as current liabilities unless the Group has an unconditional right to defer settlement for more than 12 months after the balance sheet date.
Compound financial instruments issued by the Group comprise convertible bonds that can be converted to share capital at the option of the holder, where the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have en equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction cost is allocated to the liability and equity components in proportion to their initial carrying amounts. Subse-quent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition except on conversion or expiry. 2.16 Current and Deferred Income TaxThe tax expense for the period comprises current and deferred tax. Tax is recognized in the income statement, except to the extent
10 28ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit and loss. Deferred income tax is determined using tax rates (and legislation) that have been enacted or substantially enacted by balance sheet date and are expected to apply when the deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differ-ences can be utilized. Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. The tax base included in the calculation of deferred income tax is calculated in local currency and translated into USD at foreign exchange rates prevailing at balance sheet date. Deferred income tax asset and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities related to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
The Group has been granted Approved International Shipping Enterprise (AIS) status under Singapore tax law for qualifying entities and Approved Network Company (ANC) status for qualifying related entities. Under the AIS and ANC regime, income from shipping activ-ity under the Singapore Income Tax Act Section 13 F is exempt from corporate taxation. Also, payment of charter hire to registered related entities is exempt from Singapore withholding tax and dividends from the ANC entities is tax exempt in Singapore. The AIS and ANC status is pegged to the status of the Singapore management and administration entity Sevan Production Pte Ltd. The status is granted on the basis of existing and planned activity in Singapore, including rig management, administrative activity and spending on Singapore trade infrastructure. There is regular reporting and status updates with grantor, the Maritime and Port Authority of Singapore. The AIS status applies for 10 years from 2008. Extensions may be granted.
2.17 Employee BenefitsPension obligationsGroup companies operate both defined benefit and defined contribution plans. The schemes are funded through payments to
insurance companies. For defined contribution plans, the group pays contribution to privately administrated pension insurance plans. The group has no further payment obligation once the contribution has been paid. The contribution are recognized as employee benefit expense when they are due. Prepaid contributions are recognized as an asset in the extent that a cash refund or a reduction in the future payments is available.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefits plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the balance sheet in respect of defined benefit pension plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past-service costs. The defined benefit obligation is calculated annu-ally by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates on government bonds in the currency which the benefit will be paid, and that have terms to maturity approximating to the terms of the related obligation.
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% of the defined benefit obligation are charged or credited to income over the employees’ expected average remaining working lives. Past-service cost is expensed immediately.
Share-based compensationThe Group operates a share-based compensation plan. In line with IFRS 2, the cost represented by the fair value at award date is expensed over the vesting period. The fair value at the date of the award is supported by a third party calculation using the Black & Scholes’ option-pricing model.
Cost represented by employer’s contribution tax of the excess of fair value of the share relative to the strike prices (intrinsic value) is expensed over the vesting period in line with the changing market price of the Company’s shares. When the options are exercised, the Company issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the options are exercised.
Profit-sharing and bonus plansThe Group recognizes a provision where contractually obliged or where there is a constructive obligation. The provision takes into account the incurred portion of the measurement period and shall be based on a ‘best estimate’ of the expected achievements of the key performance indicators as set out in the actual bonus program.
2.18 ProvisionsA provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation and the amount has been reliably estimated.
10 29ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured as the present value of the expected ex-penditures required to settle the obligation using a pre-tax discount rate that accounts for time value of money and risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
2.19 Revenue RecognitionRevenue comprises the fair value of the consideration 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, estimated returns, rebates and discounts and after eliminated sales within the Group.
The group recognizes revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the group’s activities as described below. The group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrange-ment.
Revenue is recognized as follows:
• Other operating revenues are recognized in line with the develop-ment of the underlying projects.
• Sale of services: The group sells design and engineering services to other oil service companies and oil companies. These services are provided on a time basis or as a fixed-price-contract, with contract terms generally ranging from less than one year to three years. Revenue from services that according to the underlying contract is a fixed-price-contract is recognized under the percent-age of completion (POC) method. Under the POC method, revenue is generally recognized based on the services performed to date as percentage of the total services to be performed. Reference is made to Note 2.7 for further details of accounting treatment of construction contracts. If circumstances arise that may change the original estimates of revenues, costs or extent of progress toward completion, estimates are revised. These revisions may result in increases or decreases in estimated revenue or costs and are reflected in income in the period in which the circumstances that give rise to the revision become known by management.
• Interest income is recognized on a time-proportion basis using the effective interest method.
• Design fee/license revenue is recognized in accordance with the substance of the relevant agreements.
• Dividend income is recognized when the right to receive payment is established.
• Mobilization expenses are offset by mobilization revenues and recognized using the straight line method over the full fixed term of the underlying charter contract.
• Charter revenues are recognized on a straight-line basis over the contract period during which the services are rendered, and at the rates established in the underlying contracts.
• Penalties imposed as compensation to client for delivery of a unit later than contractually agreed shall be accrued for on a separate account in the balance sheet at the date the charter contract com-mences. If any part of the penalties is recoverable from vendors due to directly correlated delays caused by them, the penalty recoverable from the vendor shall offset the accrual of penalties payable to the client. Net accrued amount shall subsequently be amortized as a reduction of income over the fixed term of the charter contract.
2.20 LeasesLeases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.
When assets owned by the Group are leased to clients under an operating lease, the asset is included in the balance sheet based on the nature of the asset. Lease income is recognized in accordance with the underlying contract.
2.21 Dividend DistributionDividend distribution to the Company’s shareholders is recognized as a liability in the Group’s financial statements in the period in which the dividend is approved by the Company’s shareholders.
2.22 Trade payablesTrade Payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.
10 30ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
3.1 Financial Risk FactorsThe Group’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredict-ability of financial markets and seeks to minimize potential adverse effects on the Group’s financial performance.
Risk management for the Group is carried out by Treasury under policies approved by the Board of Directors. Treasury identifies, evaluates and hedges financial risks in close co-operation with the operating units within the Group. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity.
3.1.1 Market RiskForeign exchange riskThe Group operates internationally and is exposed to foreignexchange risk arising from various currency exposures, primarilywith respect to the NOK, USD, EURO, Reais and GBP. Foreign exchangerisk arises from future commercial transactions, recognized assets or liabilities, and net investments in foreign operations.
Foreign exchange risk arises when future commercial transactions orrecognized assets or liabilities are denominated in a currency that isnot an entity’s functional currency. The Group aims at achieving a natural hedge between cash inflows and cash outflows and manages remaining foreign exchange risk arising from future commercial transactions and recognized assets and liabilities, by forward contracts and similar instruments as appropriate.
Hedging of foreign exchange exposures are executed on a grossbasis and foreign exchange contracts with third parties generallydesignated at Group level. The Group’s risk management policy is tohedge anticipated transactions in each major currency.
The Group has certain investments in foreign operations, whose netassets are exposed to foreign currency translation risk.
If the NOK exchange rate was 10% stronger/weaker against the USD at balance sheet date than actual exchange rate (all other variables held constant), before-tax profit for the year would have been 42,353 (2009: 27,879) higher/lower than actual profit/(loss) before tax mainly as a result of foreign exchange gains/losses on translation of trade receivables, cash and cash equivalents and interest-bearing debt nominated in NOK. Profit/(loss) before tax was more sensitive to movements in exchange rates in 2010 than 2009 due to an increase in interest-bearing debt nominated in NOK during the year.
Price riskThe Group is exposed to commodity price risk at two main levels;
• The demand for Sevan units is sensitive to oil price developments, fluctuations in production levels, exploration results and general activity within the oil industry.
• The cost of construction of future units is sensitive to changes in market prices of the input factors.
3.1.2 Credit RiskCredit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Group has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution. Credit exposures to customers are mainly concentrated around the charter contracts.
3.1.3 Liquidity RiskPrudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. The Group aims to maintain flexibility in its liquidity by keeping committed credit lines available.
The Group has implemented routines to continuously update its cash flow forecast when changes to main assumptions relating to repay-ment schedules, interest rates changes etc to be able to foresee the necessary actions to taken to rectify any potential adverse effects on its future liquidity position. Reference is made to Note 15 for a maturity analysis of the Group’s financial liabilities.
During 2011, the Company targets to strengthen its balance sheetwith an aim to reduce the cost of capital and to strengthen thegeneral liquidity position of the Group. The Board has prepared astrategy in this respect where different initiatives have been identified.In March 2011, the Board filed a listing application to the OsloStock Exchange for an IPO for the Group’s ultra deep water drillingbusiness. The contemplated IPO of Sevan Drilling ASA will involvea combined secondary sale of shares currently owned by SevanMarine ASA and an equity offering of new shares to be issued bySevan Drilling ASA. The split between primary and secondary sharesoffered will be set to achieve satisfactory free float, appropriatecapital structure, and required proceeds for both Sevan DrillingASA and Sevan Marine ASA.
3.1.4 Cash Flow and Fair Value Interest Rate RiskThe Group’s interest rate risk arises from non-current debt. Debt subject to floating interest rates exposes the Group to cash flow interest rate risk. Debt subject to fixed interest rates exposes the Group to fair value interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk. The Group’s policy is to maintain part of its debt at fixed rates.
The Group simulates various scenarios taking into consideration refinancing and renewal of current positions, alternative financing and hedging. Based on the different scenarios, the Group manages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of conversion from floating interest rates to fixed interest rates. Under the interest rate swaps, the Group agrees with other parties to exchange, at specified intervals the difference between fixed interest rates and floating interest rates calculated by reference to the agreed notional amounts.
The Group’s policy is to maintain liquidity through placement of excess cash at bank-deposits and/or short-term, marketable investments at limited risk.
If interest rates during the year had been 0.1 percentage point higher/lower than actual interest rates, the impact on profit/(loss) before tax would have been a reduction/increase of 792 (2009: 951).
NOTE 3 FINANCIAL RISK MANAGEMENT
10 31ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
The Group’s assets and liabilities which are measured at fair value:
December 31, 2010 Level 1 Level 2 Level 3 Total
Assets
Financial assets at fair value through profit or loss
- Floating-to-fixed interest rate swaps 0 287 0 287
- Forward foreign exchange contracts 0 0 0 0
- Call options bond loans 0 6,103 0 6,103
Total assets 0 6,390 0 6,390
December 31, 2010 Level 1 Level 2 Level 3 Total
Liabilities
Financial liabilities at fair value through profit or loss
- Floating-to-fixed interest rate swaps 0 0 0 0
- Forward foreign exchange contracts 0 28 0 28
- Call options bond loans 0 0 0 0
Total liabilities 0 28 0 28
December 31, 2009 Level 1 Level 2 Level 3 Total
Assets
Financial assets at fair value through profit or loss
- Floating-to-fixed interest rate swaps 0 0 0 0
- Forward foreign exchange contracts 0 56 0 56
- Call options bond loans 0 4,214 0 4,214
Total assets 0 4,270 0 4,270
At December 31, 2009, the Group does not have any financial liabilities at fair value through profit or loss.
The fair value of financial instruments traded in active markets is based on quoted market prices at each balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on arm’s-length basis. Such instruments are classified as level 1. At balance sheet date, the Group does not have any level 1 financial instruments.
The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data where it is available and rely as little as possible on estimates specific to the Group. If all significant inputs required to estimate the fair value of an instrument are observable, the instrument is classified as level 2. The Group uses valuation techniques in determining the fair value of forward foreign exchange contracts and call options embedded in bond loans. Assump-tions in the calculations are based on market conditions prevailing at each balance sheet date.
If one or more of the significant inputs is not based on observable market data, the instrument is classified as level 3. At balance sheet date, the Group does not have any level 3 financial instruments. Reference is made to Note 9 and 15 for further details of financial instruments.
Fair value of bond loans is based on the market price of the bonds at balance sheet date. Reference is made to Note 15 for further details of fair value of bonds.
Fair value of financial liabilities is estimated by discounting the future contractual cash flows at the current market interest rate for similar financial instruments.
3.2 Fair Value EstimationFinancial instruments measured in the balance sheet at fair value are disclosed by level of the following measurement hierarchy:
• Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities
• Level 2 - Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices)
• Level 3 - Inputs that are not based on observable market data (that is, unobservable inputs)
10 32ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are assumed to be reasonable under current circumstances.
4.1 Critical Accounting Estimates and AssumptionsThe Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are disclosed below.
Estimated impairment of Sevan Capital AssetsThe Group has tested whether the Sevan Capital Assets have suffered any impairment, in accordance with the accounting policy stated in Note 2.5. The recoverable amounts of the assets have been determined based on value-in-use calculations. These calculations require the use of estimates.
Estimated impairment of goodwillThe Group annually tests whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 2.8. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates.
Income taxes The Group is subject to income taxes in various jurisdictions. Judgment is required in determining the provision for income taxes. During the ordinary course of business, transactions and calculations occur for which the ultimate tax effect is uncertain. The Group recognizes liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final outcome of these matters is different from the amounts that were initially recognized, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
The accounting for deferred income tax asset relies upon manage-ment’s judgment of the Group’s ability to generate future positive taxable income in each respective jurisdiction.
Revenue recognitionThe Group uses the percentage-of-completion method in accounting for its sales of construction contracts. Use of the percentage-of-completion method requires the Group to estimate the services performed to date as a proportion of the total services to be performed. This accounting methodology relies on estimates of progress, total cost, and final revenues from each contract.
Share-based paymentThe Group uses estimates when calculating the cost of share-based payment through options. The main assumptions subject to esti-mates include the duration of the option and the volatility of the share price. The estimated market values are an imputed cost without any cash effect, and the offsetting entry being an increase in equity.
CommitmentsThe Group uses estimates regarding assessment of remaining commitments.
WarrantiesThe Group uses estimates in calculating the provision for warranties to customers.
Option periods for charter contractsSome charter contracts include options for the client to extend the contractual period at predefined terms. Option periods are taken into consideration when assessing value-in-use for each asset. Option periods are not included in the order back-log in Note 29.
Depreciation of units in operationThe Group uses estimates when assessing a Sevan capital asset’s useful life and residual value to determine the depreciation plan for each unit in operation.
Approved International Shipping Enterprise (AIS) Should one or more Sevan entities leave the AIS regime by choice or because it no longer qualifies, the tax exemption will cease to apply going forward. The current tax implications of this would depend on the taxable status of each individual company. There are currently no indications of an imminent exit from the AIS regime.
4.2 Critical Judgments in Applying the Group’s Policies Assumptions applied for the purpose of impairment testing of Sevan Capital Assets include estimated WACC and expected future cash flows. Due to the inverse relationship between discount rate and net present value, a decrease in WACC will increase the net present value and an increase in WACC will decrease the net present value. An increase in estimated future cash flows will increase the net present value and a decrease in estimate expected future cash flows will decrease the net present value. Estimation of WACC is based on determination of an average WACC for the Group of 10.2% which is differentiated for specific assets if the underlying asset risk is viewed as being different to that of an average Sevan Capital Asset. Estimated WACC applied in the FPSO segment ranges between 8.5% - 10.5% for the different FPSOs. Estimated WACC applied in the Drilling segment is 10.5% for both rigs. Estimation of future cash flows is based on several assump-tions, including forecasted operational expense, utilization and day rates which are based on actual contracts as well as forecasts beyond the contracted periods.
NOTE 4 ACCOUNTING ESTIMATES AND JUDGMENTS
10 33ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Operating segments considered from a business perspectiveThe Group is organized in four business areas, “Floating Production”, “Drilling”, “Topside and Process Technology”, and “Corporate”. Determination of the operating segments based on the same grouping of activities as applied in the financial reports to Senior Management and Board of Directors, who are responsible for making the strategic decisions in the Group.
Revenue in the Floating Production segment consists of the activities relating to the operation of FPSO Sevan Piranema, FPSO Sevan Hummingbird, FPSO Sevan Voyageur, hulls Sevan 300 no. 4 and 5 as well as the Goliat license contract and related services.
FPSO Sevan Piranema has been operating at the Piranema field offshore Brazil under an 11 year fixed contract plus extension options for Petrobras S.A. since October 2007. FPSO Sevan Hummingbird has been operating at the Chestnut field in the UK North Sea under a 2.5 year fixed contract plus extension options for Centrica Energy Upstream (‘Centrica’) since September 2008. In September 2010, Centrica exercised a 0.5 year option, thus extending the fixed contract period until September 2011.
FPSO Sevan Voyageur operated under a ‘life of field’ contract with Premier Oil and Gas Services Ltd oil at the Shelley field in the UK North Sea from August 2009 until July 2010. In November 2010, Sevan and E.ON Ruhrgas UK E&P (‘E.ON’) signed a contract for the FPSO Sevan Voyageur to operate on the Huntington field in the
NOTE 5 SEGMENT INFORMATION
UK North Sea. The contract is for a fixed term of five years plus extension options. Installation of the FPSO on the Huntington field is expected to take place in the fourth quarter of 2011 with first oil targeted for the first quarter of 2012. Prior to installation on the field, the FPSO will be upgraded with two gas compression trains for gas export and gas lift as well as an increase in the water injection system. The upgrade work commenced at the Nymo yard in Arendal in September 2010.
The hulls for FPSO Sevan 300 no. 4 and 5 are currently available for potential clients.
The Topside and Process Technology segment consists of the activities of KANFA AS, KANFA Aragon AS, KANFA Mator AS and KANFA-TEC AS whose primary business activities relate to the provision of services and equipment to processing plants for FPSOs.
The main activities in the Drilling segment relate to the preparation for and operations of the Sevan Driller as well as to the construction of Sevan Brasil (Sevan Driller II) which commenced at the COSCO Shipyard in July 2009. Sevan Driller commenced operation offshore Brazil in June 2010 under a fixed six year contract for Petrobras S.A. Sevan Brasil is also contracted to Petrobras S.A. for a six year fixed term and is scheduled for delivery by mid-2012.
The activities within Corporate segment relate to general administra-tion and marketing activities, including studies made for clients.
10 34ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Segment results:
Topside
Floating and Process
Year ended December 31, 2010 Production Technology Corporate Drilling Eliminations Group
Revenue 202,248 5,864 7,156 40,639 0 255,907
Intragroup revenue 0 1,795 24,289 0 -26,084 0
Total operating revenue 202,248 7,659 31,445 40,639 -26,084 255,907
EBITDA 102,592 -820 -24,253 -4,288 -1,835 71,395
Operating profit/(loss) 44,907 -1,000 -26,863 -44,296 -6,472 -33,724
Net financial profit/(loss) -134,846
Share of profit/(loss) from associates 13
Profit/(loss) before tax -168,558
Tax income/(expense) 11,709
Net profit/(loss) -156,848
Topside
Floating and Process
Year ended December 31, 2009 Production Technology Corporate Drilling Eliminations Group
Revenue 177,829 14,272 2,084 638 0 194,824
Intragroup revenue 1,343 1,431 23,957 10 -26,741 0
Total operating revenue 179,172 15,703 26,042 648 -26,741 194,824
EBITDA 28,804 -513 -13,958 -30,447 -2,253 -18,368
Operating profit/(loss) -28,456 -738 -17,045 -32,545 -4,281 -83,065
Net financial profit/(loss) -97,668
Share of profit/(loss) from associates 389
Profit/(loss) before tax -180,345
Tax income/(expense) 36,931
Net profit/(loss) -143,414
Specification of certain segment items included in the income statement:
Topside
Floating and Process
Year ended December 31, 2010 Production Technology Corporate Drilling Eliminations Group
Depreciation 53,385 180 900 32,223 4,636 91,324
Amortization 0 0 1,710 0 0 1,710
Impairment charge 4,300 0 0 7,785 0 12,085
Total 57,685 180 2,610 40,008 4,636 105,119
Topside
Floating and Process
Year ended December 31, 2009 Production Technology Corporate Drilling Eliminations Group
Depreciation 52,636 225 157 541 2,028 55,588
Amortization 0 0 2,461 0 0 2,461
Impairment charge 4,624 0 468 1,557 0 6,649
Total 57,260 225 3,086 2,098 2,028 64,697
10 35ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Segment assets and liabilities, and yearly capital expenditure were as follows:
Topside
Floating and Process
December 31, 2010 Production Technology Corporate Drilling Eliminations Group
Assets 1,638,396 27,953 2,281,493 1,112,154 -2,473,751 2,586,245
Investment in associates 0 1,148 0 0 0 1,148
Total assets 1,638,396 29,101 2,281,493 1,112,154 -2,473,751 2,587,393
Liabilities 865,497 5,713 869,186 1,049,869 -1,011,691 1,778,574
Capital expenditures 57,116 0 1,360 278,280 -1,578 335,178
Topside
Floating and Process
December 31, 2009 Production Technology Corporate Drilling Eliminations Group
Assets 1,333,457 28,108 1,936,670 912,838 -1,863,687 2,347,386
Investment in associates 0 1,406 0 0 0 1,406
Total assets 1,333,457 29,513 1,936,670 912,838 -1,863,687 2,348,792
Liabilities 808,957 5,246 640,121 762,452 -880,499 1,336,277
Capital expenditures 39,217 0 1,394 228,597 15,162 284,370
Segment assets consist primarily of property, plant and equipment, intangible assets (including goodwill and software) and cash and cash equivalents. Intercompany balances were not included.
Segment liabilities comprise operating liabilities and non-current liabilities and exclude intercompany balances.
Capital expenditures comprise additions to property, plant and equipment and intangible assets.
Operating segments considered form a geographic perspectiveThe Group’s business segments operate in the global offshore market and have common marketing and Senior Management functions. Currently, the Group does not divide its operations into geographical segments. Accounting principles applied for segmentation are outlined in Note 2.
10 36ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Sevan Other Total
Construction in Unit in Operation Capital Fixed Fixed
Progress (CIP) (UIO) Assets Assets Assets
Year ended December 31, 2010
Book value January 1 894,073 1,010,209 1,904,282 48,918 1,953,200
Asset reclassified from ‘CIP’ to ‘UIO’ -646,175 646,175 0 0 0
Asset reclassified from ‘Other Fixed Assets’ to ‘UIO’ 0 7,537 7,537 -7,537 0
Additions 244,450 82,485 326,935 7,529 334,464
Disposals 0 0 0 0 0
Impairment -6,875 -910 -7,785 -4,300 -12,085
Depreciation 0 -85,355 -85,355 -5,919 -91,274
Book value December 31 485,474 1,660,141 2,145,614 38,691 2,184,305
At December 31, 2010
Cost 498,529 1,830,654 2,329,183 62,702 2,391,885
Accumulated impairment -13,056 -910 -13,966 -4,300 -18,266
Accumulated depreciation 0 -169,603 -169,603 -19,712 -189,314
Book value December 31 485,474 1,660,141 2,145,614 38,691 2,184,305
Sevan Other Total
Construction in Unit in Operation Capital Fixed Fixed
Progress (CIP) (UIO) Assets Assets Assets
Year ended December 31, 2009
Book value January 1 658,290 1,034,668 1,692,958 38,686 1,731,644
Asset reclassified from ‘CIP’ to ‘UIO’ 0 0 0 0 0
Asset reclassified from ‘Other Fixed Assets’ to ‘UIO’ 0 0 0 0 0
Additions 241,964 26,711 268,675 15,115 283,791
Disposals 0 0 0 0 0
Impairment -6,181 0 -6,181 -468 -6,649
Depreciation 0 -51,171 -51,171 -4,416 -55,587
Book value December 31 894,073 1,010,209 1,904,282 48,918 1,953,200
At December 31, 2009
Cost 900,253 1,094,456 1,994,710 62,710 2,057,421
Accumulated impairment -6,181 0 -6,181 0 -6,181
Accumulated depreciation 0 -84,248 -84,248 -13,793 -98,040
Book value December 31 894,073 1,010,209 1,904,282 48,918 1,953,200
The impairment charge for Construction in Progress (CIP) of 6,875 in 2010 relates to a discontinued project as described in Note 26. Following the write-down, the capitalized value of the discontinued project was zero. The impairment charge for Unit in Operation (UIO) of 910 in 2010 relates to defect equipment which has been replaced. A warranty settlement for repair of the thrusters system on Sevan Driller was received from a third party and recognized as operating revenue in 2010. Warranty claims relating to repair of the DAT cylinders and the BOP on Sevan Driller were still ongoing at balance sheet date and therefore not recog-nized in the financial statements.
The impairment charge for Construction in Progress (CIP) of 6,181 in 2009 relates to the decision not to build the Sevan FPSO 650 (4,624) aswell as the cancellation of a vendor contract (1,557). The impairment charge for Other Fixed Assets of 468 in 2009 relates to an asset whichsubsequently was scrapped.
Security arrangements relating to construction in progress assets are described in Note 26. Capitalized interest is described in Note 21, and commitments relating to capital expenditure are described in Note 27.
NOTE 6 PROPERTY, PLANT AND EQUIPMENT
10 37ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 7 INTANGIBLE ASSETS
Goodwill Software Development Total
Year ended December 31, 2010
Book value January 1 11,119 1,657 1,915 14,691
Additions 0 651 60 711
Impairment charge 0 0 0 0
Amortization 0 -1,148 -612 -1,760
Book value December 31 11,119 1,160 1,363 13,641
At December 31, 2010
Cost 11,119 7,555 2,921 21,595
Accumulated amortization and impairment 0 -6,395 -1,558 -7,953
Book value December 31 11,119 1,160 1,363 13,641
Goodwill Software Development Total
Year ended December 31, 2009
Book value January 1 11,119 3,212 2,245 16,576
Additions 0 321 255 576
Impairment charge 0 0 0 0
Amortization 0 -1,876 -585 -2,461
Book value December 31 11,119 1,657 1,915 14,691
At December 31, 2009
Cost 11,119 6,904 2,861 20,884
Accumulated amortization and impairment 0 -5,247 -946 -6,193
Book value December 31 11,119 1,657 1,915 14,691
Expensed research and development (R&D)Between 2001 and 2010, the Group invested a total of 20-25 million in relation to the development of the Sevan design which was expensed through the Income Statement when incurred. 68 was expensed in 2010 (2009: 302). Accounting principles regarding treatment of R&D are described in Note 2.8.
In addition, Sevan Marine has recovered expenses relating to further development and testing of the Sevan design by compensation from clients relating to feasibility studies and FEED’s. Note 19 describes further details of such activities.
Impairment tests for goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identified according to geographical region of operation and business segment.
10 38ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Segment-level summary of goodwill allocations:
Topside &
Floating Process
Year ended December 31, 2010 Production Drilling Technology Corporate Group
Europe 0 0 11,119 0 11,119
South America 0 0 0 0 0
Asia 0 0 0 0 0
Total goodwill 0 0 11,119 0 11,119
Topside &
Floating Process
Year ended December 31, 2009 Production Drilling Technology Corporate Group
Europe 0 0 11,119 0 11,119
South America 0 0 0 0 0
Asia 0 0 0 0 0
Total goodwill 0 0 11,119 0 11,119
The recoverable amount of a Cash Generating Unit (CGU) was determined based on value-in-use calculations. These calculations use cash flow projections based on financial budgets.
Key assumptions for value-in-use calculations:
Europe
Profit before tax* 4,973
Growth rate ** 5%
Discount rate *** 10%
* Budgeted result before tax year 1 (2011)
** Weighted average growth rate used for extrapolating cash flows in the five-year budget period. For the purpose of impairment testing, zero growth was assumed
beyond the budget period
*** Pre-tax discount rate applied to the cash flow projections
Budgeted results were based on past performance and expectations for future developments. The discount rate applied was pre-tax and reflects the specific risks of the operating segment.
2010 2009
Book value January 1, 1,406 1,290
Income from associated companies 13 389
Currency translation adjustments 57 246
Dividend paid -328 -519
Book value December 31, 1,148 1,406
KANFA-TEC AS was the Group’s only associate company during 2009 and 2010.
Gross balance sheet, gross income statement and the Group’s share of ownership in associates:
Country of Assets Liabilities Revenue Profit/(loss) % interest
Name Year incorporation 100% 100% 100% 100% held
KANFA-TEC AS 2010 Norway 3,873 1,763 5,265 26 49.995%
KANFA-TEC AS 2009 Norway 6,900 4,791 8,448 887 49.995%
NOTE 8 INVESTMENT IN ASSOCIATES
10 39ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 9 DERIVATIVE FINANCIAL INSTRUMENTS
2010 2009
Current portion Assets Liabilities Assets Liabilities
Forward foreign exchange contracts 0 28 56 0
Floating-to-fixed interest rate swaps 287 0 0 0
Total current portion 287 28 56 0
Forward foreign exchange contractsThe notional principal amount of outstanding forward foreign exchange contracts at balance sheet date was GBP 0.8 million (2009: GBP 1.3 million).
Floating-to-fixed interest rate swapsThe notional principal amount of interest rate swap positions at balance sheet date was USD 177.9 million. The interest rate swap expires in November 2016. There were no outstanding interest rate swaps at balance sheet date in 2009.
Embedded call optionsIn December 2010, the Company carried out an unsecured bond issue of NOK 700 million, at a fixed interest rate of 14.0%. The bond has a term of 4 years, with European call options at 107.0%, 106.0%, 105.0% and 104.0% after 24, 30, 36 and 42 months respectively. Fair value of the options at balance sheet date was estimated to 0.5 million.
In August 2010, the Company carried out a bond issue consisting of two tranches of 100 million and NOK 625 million, at fixed interest rates of 12.0% and 13.25% respectively. The bond has a term of 5 years and American call options at 108.0%, 106.5% and 105.0% during year 3, 4 and 5 respectively. Fair value of the call options at balance sheet date was estimated to 0.6 million and 1.1 million respectively.
In October 2007, the Company carried out a bond issue of NOK 870 million, at an interest rate of Nibor+5.5%. The bond has a term of 5 years, and an American call option at 105%. NOK 740 million remained outstanding on the loan at balance sheet date. Fair value of the option at balance sheet date was estimated to 3.8 million (2009: 2.1 million).
In May 2007, the Company carried out a bond issue of 270 million, at an interest rate of Libor+3.0%. The bond has a term of 6 years, with one remaining European call option at 102.5% which can be exercised in May 2011. 250 million remained outstanding on the loan at balance sheet date. Fair value of the option at balance sheet date was estimated to be nil (2009: 1.3 million).
In December 2006, Sevan Drilling AS, a wholly-owned subsidiary of the Company, carried out a bond issue of NOK 1 billion, at an interest rate of Nibor+5.0%. The bond has a term of 6 years with a call option window of 6-12 months following acceptance of Sevan Driller at 104%. The fair value of the option was estimated to be nil at balance sheet date (2009: nil).
In August 2010, the Company prepaid an outstanding bond of 135 million at a call price of 102.5%. In November 2010, the Company prepaid an outstanding 48 million convertible bond at a call price of 140%.
The impact on the income statement for changes in the estimated fair value of embedded call options are described in Note 21.
10 40ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Assets at fair Derivatives
Loans and value through used for Available
December 31, 2010 receivables profit and loss hedging for sale Total
Financial assets
Derivative financial instruments 287 0 0 0 287
Trade and other receivables 57,203 0 0 0 57,203
Cash and cash equivalents 116,140 0 0 0 116,140
Total financial assets 173,630 0 0 0 173,630
Assets at fair Derivatives
Loans and value through used for Availeble
December 31, 2009 receivables profit and loss hedging for sale Total
Financial assets
Derivative financial instruments 56 0 0 0 56
Trade and other receivables 54,228 0 0 0 54,228
Cash and cash equivalents 163,019 0 0 0 163,019
Total financial assets 217,303 0 0 0 217,303
Liabilities at fair Derivatives
Other financial value through the used for Availeble
December 31, 2010 liabilities profit and loss hedging for sale Total
Financial liabilities
Interest-bearing debt 1,433,604 0 0 0 1,433,604
Trade payables 248,985 0 0 0 248,985
Derivative financial instruments 28 0 0 0 28
Total financial liabilities 1,682,616 0 0 0 1,682,616
Liabilities at fair Derivatives
Other financial value through the used for Availeble
December 31, 2009 liabilities profit and loss hedging for sale Total
Financial liabilities
Interest-bearing debt 1,188,873 0 0 0 1,188,873
Trade payables 100,345 0 0 0 100,345
Derivative financial instruments 0 0 0 0 0
Total financial liabilities 1,289,218 0 0 0 1,289,218
9A FINANCIAL INSTRUMENTS BY CATEGORY
Accounting principles for financial instruments were applied to the line items below as indicated:
10 41ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
9B CREDIT QUALITY OF FINANCIAL ASSETS
The credit quality of financial assets that were neither past due nor impaired was assessed by reference to external credit ratings (where available) and by analysis of historical information about counterparty default rates:
Trade receivables - Counterparty with external credit rating 2010 2009
AA 0 3,843
AA- 2,214 0
A+ 7,134 0
A 1,667 0
A- 5,352 0
BBB 0 2,726
BBB- 5,068 0
Total 21,434 6,569
Trade receivables - Counterparty without external credit rating 2010 2009
Group 1 378 1,280
Group 2 7,305 12,467
Group 3 0 0
Total 7,683 13,747
Total trade receivables 29,117 20,316
Group 1 - New customers (less than 6 months) Group 2 - Existing customers (more than 6 months) with no defaults in the past Group 3 - Existing customers (more than 6 months) with some defaults in the past
Cash at bank and short-term bank deposits 2010 2009
AA 36,899 77,567
AA- 1,904 7,020
A+ 1,316 580
A 14,238 3,161
A- 61,652 0
BBB 0 335
No rating available 131 74,356
Total cash and cash equivalents 116,140 163,019
Derivative financial assets 2010 2009
AA- 287 56
Total derivative financial assets 287 56
10 42ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 10 TRADE AND OTHER RECEIVABLES
2010 2009
Trade receivables* 29,117 28,996
Provision for impairment of receivables 0 -8,680
Trade receivables – net 29,117 20,316
Prepayments 4,950 7,623
Other receivables 9,036 2,177
Accrued income 14,100 24,112
Trade and other receivables 57,203 54,228
* Trade receivables includes receivables from related parties (KANFA-TEC AS) amounting to 56 (2009: 493)
At balance sheet date in 2009, total provisions relating to receivables from Oilexco North Sea Ltd. (Oilexco) amounted to 8,680. During 2010, the Group received a final settlement for claims towards Oilexco of 9,841. The settlement included 496 relating to the outstanding receivables and the provision was reversed accordingly. 9,345 related to compensation for loss of future revenues under the charter contract and which was recognized as operating revenues in the Income Statement. The Group has not made any other actual losses on receivables during 2010 or 2009. The Group did not make any new provisions relating to receivables during 2010.
Fair value of trade and other receivables were as follows: 2010 2009
Trade receivables 29,117 20,316
Prepayments 4,950 7,623
Other receivables 9,036 2,177
Accrued income 14,100 24,112
Total trade and other receivables 57,203 54,228
Trade receivables that are less than three months past due are generally not considered for impairment. At balance sheet date, trade receiva-bles of 8,864 (2009: 4,765) were past due but not impaired. These overdue receivables relate to several independent customers with whom the Group has no history of default.
Ageing of trade receivables was as follows: 2010 2009
Before due date 20,253 15,551
Up to 3 months after due date 3,068 4,581
Between 3 and 6 months after due date 252 184
More than 6 months after due date 5,544 0
Total trade receivables - net 29,117 20,316
Carrying amounts of trade receivables were denominated in the following currencies: 2010 2009
USD 16,414 8,792
GBP 4,308 5,369
NOK 6,935 5,632
BRL 981 521
Other currencies 479 3
Total trade receivables - net 29,117 20,316
10 43ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 11 CASH AND CASH EQUIVALENTS
Cash and cash equivalents include the following: 2010 2009
Cash at bank and in hand 88,351 144,156
Restricted employees’ tax deduction fund 2,524 1,737
Restricted short-term bank deposits 25,265 17,126
Total cash and cash equivalents 116,140 163,019
15,904 (2009: 15,904) of restricted cash was collateralized in relation to a guarantee made on behalf of Sevan Drilling Rig Pte Ltd. 9,241 (2009: 0) was reserved as ‘Debt Service’ in relation to a bank facility for Sevan Drilling Pte Ltd. 2,524 (2009: 1,737) relates to customary income taxes withheld from employees, and 102 (2009: 97) relates to deposit for rental of offices.
1,000 of the restricted cash at balance sheet date in 2009 was collateralized in relation to a guarantee made on behalf of Sevan Drilling Pte Ltd. The amount was no longer collateralized at balance sheet date in 2010.
At balance sheet date, the Group has an unused bank overdraft facility of 3.4 million (2009: 3.5 million).
NOTE 12 SHARE CAPITAL
The total authorized number of ordinary shares was 526.1 million (2009: 526.1 million) with a par value of NOK 0.20 per share. All issued shares were fully paid at balance sheet date.
Number of shares Share capital Share premium Total
January 1,2010 526,069,982 16,633 954,132 970,765
Proceeds from shares issued 0 0 0 0
Cost of share issues, net of tax 0 0 0 0
December 31, 2010 526,069,982 16,633 954,132 970,765
Number of shares Share capital Share premium Total
January 1,2009 196,128,448 6,187 562,400 568,588
Proceeds from shares issued 329,941,534 10,446 407,414 417,859
Cost of share issues, net of tax 0 0 -15,682 -15,682
December 31, 2009 526,069,982 16,633 954,132 970,765
At December 31, 2010, the Company had 10,288 shareholders (2009: 10,941 shareholders). 52% of the share capital was owned by share-holders residing outside of Norway (2009: 57%).
10 44ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
20 largest shareholder accounts at December 31, 2010: Number of Ownership-
Name shares share (%)
BANK OF NEW YORK MELLON S/A 27,565,034 5.24
STATE STREET BANK AND TRUST CO 20,173,142 3.83
JPMORGAN CHASE BANK NA A/C FIDELITY 20,003,805 3.80
SEB ENSKILDA ASA 12,350,000 2.35
CITIBANK N.A. NEW YORK BRANCH 11,021,226 2.10
FIDELITY FUNDS-EUROPEAN 10,159,579 1.93
SKAGEN VEKST 9,675,000 1.84
JPMORGAN CHASE BANK NORDEA 8,310,034 1.58
STATE STREET BANK & TRUST CO. A/C 7,582,816 1.44
STATE STREET BANK AND TRUST CO. A/C 6,546,278 1.24
BANK OF NEW YORK MELLON S/A 6,503,428 1.24
BANK OF NEW YORK MELLON SA/NV 6,384,500 1.21
EUROCLEAR BANK S.A./N.V. 5,642,089 1.07
BNP PARIBAS SECS SERVICES PARIS 5,599,897 1.06
FID. FUNDS-EU. BLUE 5,075,300 0.96
FIRST SECURITIES AS 5,000,000 0.95
VARMA MUTUAL PENSION 4,720,000 0.90
BANK OF NEW YORK MELLON SA/NV 4,675,417 0.89
BANK OF NEW YORK MELLON SA/NV 4,596,000 0.87
CLEARSTREAM BANKING 4,434,022 0.84
20 largest shareholder accounts 186,017,567 35.36
Remaining shareholders 340,052,415 64.64
Total shareholders 526,069,982 100.00
20 largest shareholder accounts at December 31, 2009: Number of Ownership-
Name shares share (%)
BANK OF NEW YORK MELLON S/A 21,281,549 4.05
JPMORGAN CHASE BANK 16,812,066 3.20
STATE STREET BANK AND TRUST CO 15,021,863 2.86
JPMORGAN CHASE BANK 13,828,690 2.63
FIDELITY FUNDS-EUROPEAN AGGRESSIVE FUND 9,989,287 1.90
SKAGEN VEKST 8,900,000 1.69
JPMORGAN CHASE BANK 8,828,963 1.68
STATE STREET BANK AND TRUST CO. A/C 8,416,122 1.60
DNB NOR BANK ASA EGENHANDELSKONTO 8,209,078 1.56
MORGAN STANLEY & CO 8,052,428 1.53
FIDELITY FUNDS 7,462,472 1.42
HOLBERG NORGE 7,258,000 1.38
BANK OF NEW YORK MELLON SA/NV 6,384,500 1.21
BANK OF NEW YORK MELLON S/A 6,333,616 1.20
GOLDMAN SACHS & CO 5,925,752 1.13
BNP PARIBAS SECS SERVICES PARIS 5,599,897 1.06
FID. FUNDS-EU. BLUE 5,588,300 1.06
STATE STREET BANK & TRUST CO. A/C 5,537,000 1.05
CITIBANK N.A. (LONDON) 5,450,000 1.04
BANK OF NEW YORK MELLON SA/NV 5,205,875 0.99
20 largest shareholder accounts 180,085,458 34.23
Remaining shareholders 345,984,524 65.77
Total shareholders 526,069,982 100.00
10 45ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 13 SHARE-BASED PAYMENTS
The exercise prices of share options awarded to employees was at minimum equal to the market price of the share at the time of the award.16.3 million of the remaining options may be exercised with 1/3 each year, first time one year following the award and expire five years following the award. 2.1 million of the remaining options may be exercised provided fulfillment of certain criteria and expire five years following the award. The Group has no legal or constructive obligation to repurchase or settle the options in cash.
Remaining share options and weighted average exercise prices were as follows: 2010 2009
Average Average
exercise price No. of exercise price No. of
(NOK per share) options (NOK per share) options
January 1 47.71 6,239,156 47.70 6,654,277
Granted 8.81 14,125,000 0 0
Exercised 0 0 0 0
Lapsed/forfeited 25.18 -2,013,515 47.45 -415,121
December 31 25.77 18,350,641 47.71 6,239,156
Of the 18.4 million remaining options (2009: 6.2 million), 2.5 million options were exercisable (2009: 3.2 million). No options were exercised during 2009 and 2010.
Expiration dates and average exercise prices for the remaining share options: Share options
Exercise price remaining at the end of year
Year of expiration (NOK per share) 2010 2009
2010 16.60 0 16,667
2010 15.00 0 20,335
2010 15.50 0 16,667
2010 19.30 0 192,126
2010 24.00 0 640,902
2010 30.90 0 270,318
2011 38.40 303,601 303,601
2011 38.80 366,670 366,670
2011 37.90 258,734 258,734
2011 35.20 125,001 125,001
2011 33.50 33,334 33,334
2012 37.60 128,834 128,834
2012 53.00 53,667 53,667
2012 58.25 52,000 53,500
2012 57.25 3,050,000 3,350,000
2012 58.75 58,800 58,800
2012 37.90 8,000 8,000
2013 62.75 312,000 317,000
2013 78.00 25,000 25,000
2015 8.81 13,575,000 0
Total 18,350,641 6,239,156
The average fair value of options awarded during 2010, determined using the Black-Scholes’ option-pricing model, was NOK 2.09. The significant inputs into the model were share price at the award dates, exercise prices as shown above, standard deviation of expected share price returns of 30%, dividend yield of 0%, estimated option life, and annual risk-free interest rate of 3.0%. No options were awarded during 2009.
As of December 31, 2010, none of the remaining share options were ‘in-the-money’.
10 46ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 14 CURRENT LIABILITIES
2010 2009
Trade payables * 206,528 89,432
Accrued expenses relating to trade payables 42,457 10,913
Total trade payables 248,985 100,345
Interest-bearing debt, current portion 188,000 1,103,005
Derivative Financial Instruments 28 0
Income tax payable 5,534 2,339
Employer’s contribution tax and other taxes 5,825 3,620
Other payables 72,748 25,009
Provisions 8,083 11,818
Total current liabilities 529,204 1,246,136
* At balance sheet date in 2009,16 was payable to related parties (KANFA-TEC AS) (2010: nil)
NOTE 15 INTEREST-BEARING DEBT
2010 2009 *
Nominal Amortized Fair Nominal Amortized Fair
value value value value value value
Bank debt 428,871 422,378 428,871 0 0 0
Vendor credit 0 0 0 51,890 51,890 51,890
Convertible bond 0 0 0 48,000 33,978 52,263
Bond 847,024 829,314 818,792 0 0 0
Value of embedded call options -18,362 -6,088 -6,088 0 0 0
Interest-bearing debt, non current 1,257,533 1,245,604 1,241,576 99,890 85,868 104,153
Bank debt 66,331 65,687 66,331 357,375 344,493 357,375
Vendor credit 77,835 77,835 77,835 25,945 25,945 25,945
Bond 58,605 44,493 42,603 761,705 736,781 627,844
Value of embedded call options -13,907 -14 -14 -35,891 -4,214 -4,214
Interest-bearing debt, current 188,864 188,000 186,754 1,109,134 1,103,005 1,006,950
Total interest-bearing debt 1,446,396 1,433,604 1,428,330 1,209,024 1,188,873 1,111,103
* As described in the Board of Director’s Report in the Financial Statements of 2009, while the Board of Directors was of the firm opinion that the outstanding
debt at balance sheet date in 2009 in reality was non-current in nature, the accounting regulations require that amounts which formally could be held to be
mandatorily repayable as at the balance sheet date be classified as current irrespective of whether such repayment was required by the lenders or the basis
therefore has subsequently been eliminated. Accordingly, relevant liabilities were classified as current in the 2009 financial statements. All necessary actions
were resolved during 2010 and the debt was classified back to non-current by balance sheet date in 2010.
10 47ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Repayment schedule as per December 31, 2010: Nominal 2016 and
value 2011 2012 2013 2014 2015 onwards
Bond loan (USD 100 million) 100,000 0 0 7,500 7,500 85,000 0
Bond loan (NOK 625 million) 106,721 0 0 8,004 8,004 90,713 0
Bond loan (USD 270 million) 250,000 22,500 25,000 202,500 0 0 0
Bond loan (NOK 870 million) * 126,357 22,198 108,813 0 0 0 0
Bond loan (NOK 1 000 million) ** 170,753 0 170,753 0 0 0 0
Bond loan (NOK 700 million) 119,527 0 0 0 119,527 0 0
Bank debt (USD 82.3 million) 72,072 41,493 30,579 0 0 0 0
Bank debt (USD 230 million) 177,900 0 35,580 35,580 35,580 35,580 35,580
Bank debt (USD 250 million) ** 245,230 33,323 35,822 38,509 41,397 44,502 51,679
Vendor credit (USD 77.8 million) *** 77,835 77,835 0 0 0 0 0
Total nominal value 1,446,396 197,349 406,547 292,093 212,008 255,794 87,259
Estimated interest payments **** 107,586 92,189 58,177 49,819 27,926 2,162
* Matures in 2012 at 105% of the remaining value
** The loan was repaid in March 2011 (ref. Note 34)
*** The repayment schedule was changed after balance sheet date. The new repayment schedule is USD 25.9 million in 2011 and USD 51.9 in 2012.
****Estimates based on LIBOR and NIBOR spot rates at December 31, 2010
Interest-bearing debt was nominated in the following currencies (nominal values):
2010 2009
Bank debt, USD nominated 495,202 357,375
Vendor credit, USD nominated 77,835 77,835
Convertible bond, USD nominated 0 48,000
Bond, USD nominated 350,000 402,100
Bond, NOK nominated 523,359 323,714
Total interest-bearing debt 1,446,396 1,209,024
Fair value of bank loans was estimated by discounting the contractual cash flows at a rate reflecting the underlying risk. Fair value of bond loans was based on market rates of the bonds at balance sheet date.
The Group was exposed to changes in interest rates for a NOK 740 million bond loan (3-month Nibor + margin), a NOK 1,000 million bond loan (6-month Nibor + margin), a USD 250 million bond loan (6-month Libor + margin) and bank debt for a total nominal amount of USD 245.2 million (3-month Libor + margin).
Effective interest rates at balance sheet date *: 2010 2009
NOK USD NOK USD
Bank debt (USD 150 million) NA 8.1%
Bank debt (USD 230 million) 6.4% NA
Bank debt (USD 250 million) 6.5% 9.1%
Bank debt (USD 82.3 million) 12.6% NA
Vendor credit (USD 77.8 million) 4.5% 4.5%
Convertible bond (USD 48 million) NA 25.6%
Bond (NOK 1,000 million) 9.7% 9.8%
Bond (USD 140 million) NA 9.7%
Bond (NOK 870 million) ** 11.8% 11.0%
Bond (USD 270 million) 5.4% 6.9%
Bond (NOK 700 million) 15.3% NA
Bond (NOK 625 million) 14.4% NA
Bond (USD 100 million) 12.9% NA
* Estimates based on LIBOR and NIBOR spot rates at December 31, 2010
** In a bondholders meeting held in June, the bondholders consented to certain changes in the loan conditions, including the increase from USD 150 million to
USD 230 million of a higher ranking bank facility and an increase in the applicable interest margin from Nibor+5.50% to Nibor+10.0% which became effective in
November 2010 upon the first drawdown on the senior secured credit facility.
10 48ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
The Group has the following undrawn debt facilities: 2010 2009
Floating rate
– Expiring within one year 0 46,087
– Expiring beyond one year 577,100 0
Fixed rate
– Expiring within one year 0 0
– Expiring beyond one year 80,000 80,000
Total undrawn debt facilities 657,100 126,087
* Undrawn borrowing facilities were converted into USD using prevailing exchange rates at balance sheet date
Convertible bondIn April, May and June 2009 the Company issued senior secured callable convertible bonds in aggregate nominal value of USD 48 million. The term of the convertible bonds was four years and coupon was fixed at 15% p.a. of parity value to conversion price.
The values of the liability component and the equity conversion component were determined at the time of the issuance of the bond. Fair value of the liability component at issue date, classified as interest-bearing debt, was calculated using a market interest rate for an equivalent non-convertible bond. The market interest rate applied was based on third party valuations. The residual amount, representing the value of the equity conversion option, was classified as shareholders’ equity in “other equity” net of income taxes.
The USD 48 million convertible bond was repaid at 140% of par value in November 2010.
Convertible bond recognized in the balance sheet was calculated as follows: 2010 2009
Face value of convertible bond 0 48,000
Issue cost 0 -1,476
Equity component 0 -14,058
Liability component on initial recognition 0 32,466
Financial expense 0 6,312
Coupon interest incurred 0 -4,800
Liability component at December 31 0 33,978
Fair value of the liability component of the convertible bond amounted to USD 52.3 million at December 31, 2009. Fair value was calculated using cash flows discounted at an assumed marked interest rate for an equivalent non-convertible bond. The assumed market interest rate was based on third party valuations.
CovenantsSecurity arrangements related to financing are described in Note 26.
The bank loans have conceptually been structured on a project finance basis, however, guaranteed by the Company in whole or in part. The agreements reflect that the respective borrowers are single purpose companies, with extensive security arrangements and customary limitations, restrictions and obligations as regards actions and operations. Accordingly, no borrower may cease to carry on its business, make disposals or restructurings or otherwise enter into arrangements which may adversely affect its ability to fulfil its obligations towards the lenders or the security granted in their favour. Certain of the finance documents include financial covenants at borrower or group level (as the case may be), such as a minimum debt service coverage ratio of no less than 1.1, an equity ratio of minimum 25%, minimum liquidity of USD 50 million and a leverage ratio from 6 to 4 (stepwise reduced over the term of the facilities). The finance documents include restrictions on ownership changes and dividend distributions, affecting the ability of subsidiary borrowers to upstream funds to the Company, as well as cross default and material adverse change provisions.
The bond loan agreements contain customary covenants and conditions, including cross default, material adverse effect and other restrictive provisions. Certain agreements also provide for mandatory prepayment in case of a “change of control” event and require that the Company must have an equity ratio of 30% on a consolidated basis.
10 49ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 16 DEFERRED INCOME TAx
Deferred income tax assets and liabilities are offset when a legally enforceable right to offset current tax assets against current tax liabilities exists.
Offsetting amounts were as follows:Deferred tax assets 2010 2009
– Deferred tax asset to be recovered after more than 12 months 168,862 141,327
– Deferred tax asset to be recovered within 12 months 0 411
Total deferred tax assets 168,862 141,738
Deferred tax liabilities 2010 2009
– Deferred tax liability to be settled after more than 12 months -41,963 -35,216
– Deferred tax liability to be settled within 12 months -4,666 0
Total deferred tax liabilities -46,629 -35,216
Net deferred tax assets/(liabilities) 2010 2009
– Deferred tax asset to be recovered after more than 12 months 126,899 106,111
– Deferred tax asset/(liability) to be recovered/(settled) within 12 months -4,666 411
Net deferred tax assets/(liabilities) 122,233 106,522
Gross movement on the deferred income tax account was as follows: 2010 2009
Book value January 1 106,535 64,581
Exchange differences -574 874
Income statement charge relating to deferred tax assets 16,272 38,904
Tax charged to equity 0 2,163
Book value December 31 122,233 106,522
Specification of deferred tax assets/deferred tax liabilities: 2010 2009
Deferred tax asset 124,062 109,087
Deferred tax liability -1,829 -2,565
Net deferred tax assets/(liabilities) 122,233 106,522
2010 2009
Unrealized currency gain/(loss) -11,484 -12,315
Convertible bond -792 -3,958
Fixed assets -26,119 -18,401
Accounting provisions -4,666 0
Establishment fee bond loans -3,568 -542
Total deferred tax liabilities -46,629 -35,216
Pension liabilities 545 264
Accounting provisions 2,495 411
Losses carry forward 165,822 141,063
Losses carry forward related to Sevan Marine do Brasil Ltda 20,344 7,426
Valuation allowance -20,344 -7,426
Total deferred tax assets 168,862 141,738
The Group did not recognize deferred income tax assets of 20,344 (2009: 7,426) in respect of losses in Sevan Marine do Brasil Ltda.
Group entities incorporated in Singapore have been accepted under the local tax exemption regime. As a consequence, no deferred tax asset resulting from losses carried forward from entities incorporated in Singapore were recognized in the financial statements.
Deferred income tax assets are recognized for tax loss carry-forwards to the extent that the realization of the tax benefit through the future taxable profits is probable. At balance sheet date, expected future taxable profits from existing contracts in the Norwegian tax jurisdiction were insufficient to utilize the tax advantage in Norway in full. If taxable profits from anticipated and/or potential activities in Norway should not materialize, the Board will carry out necessary reorganization of the existing fleet to enable Sevan to take advantage of the tax position in Norway.
10 50ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 17 RETIREMENT BENEFIT OBLIGATIONS
Companies in the Group operate both defined benefit and defined contribution plans.
Defined benefit plan:
Amounts recognized in the balance sheet were determined as follows:
2010 2009
Present value of funded obligations 6,942 5,559
Fair value of plan assets -4,797 -3,542
Present value of unfunded obligations 2,145 2,017
Unrecognized actuarial losses -528 -593
Employer’s contribution tax relating to pension liabilities 321 284
Liability in the balance sheet 1,938 1,708
Movements in the liability recognized in the balance sheet:
2010 2009
January 1 1,708 628
Exchange differences -15 210
Implementation actuarial calculation group company 0 255
Expense charged to the income statement 1,324 1,391
Contributions paid, including employer’s contribution tax -1,079 -776
December 31 1,938 1,708
Principal actuarial assumptions:
2010 2009
Discount rate 3.20% 4.40%
Expected return on plan assets 4.60% 5.60%
Future salary increase 4.00% 4.25%
Expected G-regulation 3.75% 4.00%
Future pension increases 1.10% 2.10%
Future turnover 10.00% 10.00%
Employer’s contribution tax 14.10% 14.10%
At the date of this report, actual return on pension assets for 2010 was not yet known. Actual return on pension assets for 2009 was 5.26%.
The actuarial calculations for the Group’s defined benefit plans were carried out by an independent actuary. Calculated pension obligation was based on mortality table K2005 and disability table K1963 adjusted for observed developments.
Average life expectancy for a person retiring at 67 years of age:
2010 2009
Male 17.7 17.7
Female 20.1 20.1
10 51ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Amounts recognized in the income statement were as follows:
2010 2009
Net present value of current year’s pension earned 1,060 1,113
Interest cost on pension liabilities 234 191
Expected return on pension assets -213 -193
Estimate changes 30 67
Implementation actuarial calculation group company 0 224
Administration cost 53 48
Pension cost, defined benefit plan 1,164 1,450
Employer’s contribution tax relating to implementation 0 31
Employer’s contribution tax relating to pension liabilities 160 164
Pension cost, including employer’s contribution tax 1,324 1,645
No. of employees included 43 45
Expected pension cost for 2011 for the defined benefit plan was estimated to 1,129.
Major categories of plan assets as a percentage of fair value of total plan assets:
2010 2009
Equities 14% 7%
Property 20% 21%
Fixed bonds 45% 45%
Liquid bonds 19% 26%
Other 2% 1%
Total plan assets 100% 100%
Defined contribution plan: 2010 2009
Pension costs, defined contribution plan 1,595 1,255
Employer’s contribution tax relating to contributions paid 225 168
Pension cost, including social security 1,820 1,423
No. of employees included 163 162
Total pension cost: 2010 2009
Pension cost, defined benefit plan 1,164 1,450
Pension cost, defined contribution plan 1,595 1,255
Total pension cost 2,759 2,705
The Group’s pension schemes satisfy the requirements in the Norwegian legislation regarding mandatory occupational pension.
10 52ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 18 PROVISIONS
Decommissioning
Warranties Bonus cost Total
January 1, 2010 558 0 11,260 11,818
Currency translation adjustments 26 0 0 26
Arising during the year 0 2,351 0 2,351
Reversed during the year 0 0 -5,760 -5,760
Used during year -352 0 0 -352
December 31, 2010 232 2,351 5,500 8,083
Decommissioning
Warranties Bonus cost Total
January 1, 2009 599 0 0 599
Currency translation adjustments 128 0 0 128
Arising during the year 0 0 11,260 11,260
Reversed during the year 0 0 0 0
Used during year -169 0 0 -169
December 31, 2009 558 0 11,260 11,818
WarrantiesProvision for warranties was based on historical experience.
BonusProvision for bonus was based on a defined bonus program for employees in the Sevan Group for the measurement period July 1, 2010, to June 30, 2011. The provision was based on a ‘best estimate’ of the expected achievements of the key performance indicators as set out in the bonus program and takes into account the incurred portion of the measurement period at balance sheet date.
Decommissioning costThe provision for decommissioning cost relates to the estimated cost of removing the suction anchors and mooring system for FPSO SevanVoyageur from the Shelley field.
All provisions in 2010 and 2009 were current.
NOTE 19 CONSTRUCTION CONTRACTS
2010 2009
Contract revenues 1,956 27,725
Contract cost -1,783 -20,811
Net profit on construction contracts 173 6,914
2010 2009
Recognized, not yet invoiced for ongoing projects 143 57
Incurred cost on ongoing projects included in current liabilities 161 1,025
Activities defined as construction contracts mainly relate to Joint Industry Projects, feasibility studies and Front End Engineering and Design activities (FEED’s). Under the activities defined as construction contracts, the Group was able to recover certain expenses relating to further development and testing of the Sevan design.
Construction activities in 2009 include to FEED’s relating to the Goliat project.
10 53ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 20 EMPLOYEE BENEFIT ExPENSE
2010 2009
Wages and salaries 59,650 52,518
Employer’s contribution tax 9,715 7,554
Expensed portion of value of share options 2,182 1,170
Pension cost 2,759 2,705
Other employee benefit expense 5,466 3,896
Total employee benefit expense 79,772 67,842
Allocated to construction in progress -9,864 -11,838
Net employee benefit expense 69,908 56,004
No. of man-years 506 404
Remuneration of Senior Management, as paid: 2010
Retirement Other
Salaries benefits benefits
Jan Erik Tveteraas CEO 977 28 33
Oskar Mykland CFO 313 13 1
Birte Norheim Vice President Finance 301 13 1
Fredrik Major Vice President Business Development / R&D 344 30 23
Helle Hundseid Vice President Projects 290 15 1
Alf Roger Skikstein Vice President Engineering 264 26 1
Erling Andreas Ronglan Vice President Floating Production 419 13 33
Hanna Moland Vice President HR & Administration 202 32 1
Morten Martens Breivik Vice President QHSE 197 13 1
Jon Helge Wilmann * Vice President Drilling 313 14 35
Total remuneration paid 3,620 197 130
Remuneration of Senior Management, as paid: 2009
Retirement Other
Salaries benefits benefits
Jan Erik Tveteraas CEO 882 24 1
Oskar Mykland CFO 245 8 2
Birte Norheim Vice President Finance 248 8 1
Fredrik Major Vice President Business Development / R&D 277 25 24
Helle Hundseid Vice President Projects 233 8 4
Alf Roger Skikstein Vice President Engineering 108 26 1
Erling Andreas Ronglan Vice President Floating Production 373 8 4
Hanna Moland Vice President HR & Administration 160 27 1
Morten Martens Breivik Vice President QHSE 154 8 2
Jon Helge Wilmann * Vice President Drilling 103 8 9
Total remuneration paid 2,783 150 49
* First day of employment was August 1, 2009
Salaries and other benefits included above were based on actual period of employment and translated at average exchange rates for each year.
10 54ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Senior Management is included in the Group’s collective retirement benefit plans. During 2010, the Chairman of the Board of Directors received bonus of 124 (2009: 173) and the CEO received bonus of 134 (2009: 173). At balance sheet date, the Group has an outstanding loan of 173 to the CEO (2009: 173). Acceptable security has been provided. No other loans were granted to Senior Management or any member of the Board of Directors in 2010 or 2009. The CEO will receive 6-24 months’ salary upon termination of employment, dependant on fulfilment of certain conditions.
In addition, Senior Management was awarded the following stock options: Remaining
no. of options
at balance
No. of options Year of award Strike/NOK sheet date
Jan Erik Tveteraas 2,000,000 2010 8.81 2,000,000
Oskar Mykland 400,000 2010 8.81 400,000
Birte Norheim 50,000 2007 57.25 50,000
Birte Norheim 400,000 2010 8.81 400,000
Fredrik Major 300,000 2007* 57.25 300,000
Fredrik Major 500,000 2010 8.81 500,000
Helle Hundseid 25,000 2006 35.20 16,668
Helle Hundseid 300,000 2007* 57.25 300,000
Helle Hundseid 450,000 2010 8.81 450,000
Alf Roger Skikstein 150,000 2010 8.81 150,000
Erling Andreas Ronglan 300,000 2007* 57.25 300,000
Erling Andreas Ronglan 500,000 2010 8.81 500,000
Hanna Moland 50,000 2007 57.25 50,000
Hanna Moland 300,000 2010 8.81 300,000
Morten Martens Breivik 10,000 2008 62.75 10,000
Morten Martens Breivik 300,000 2010 8.81 300,000
Jon Helge Wilmann 400,000 2010 8.81 400,000
Total options/average exercise price 6,435,000 16.50 6,426,668* May be exercised provided the fulfillment of certain criteria
Remuneration of the Board of Directors, as paid: 2010 2009
Arne Smedal, Chairman 66 64
Hilde Drønen, Deputy Chairman 51 36
Kåre Syvertsen 41 36
Stephan M. Zeppelin 49 36
Aasulv Tveitereid 0 0
Jorunn Haugen, Employee Representative * 21 0
Jørgen Skotnes, Employee Representative * 21 0
Total 249 172
* Jorunn Haugen and Jørgen Skotnes entered the Board of Directors as Employee Representatives on May 25, 2009
Remuneration of the Board of Directors was paid in the year following duties rendered.
Salaries and other benefits paid to Directors as employees: 2010 2009
Retirement Other Retirement Other
Salaries benefits benefits Salaries benefits benefits
Arne Smedal, Chairman 949 43 40 791 28 36
Kåre Syvertsen 812 38 23 577 24 23
Jorunn Haugen 90 6 1 80 3 0
Jørgen Skotnes 157 10 3 126 7 4
10 55ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Shares and options owned or controlled by the Board of Directors and Senior Management As of December 31, 2009, the following Board members and Senior Management owned or controlled shares in the Company:
Board of DirectorsArne Smedal, Chairman of the Board, owns 3,698,703 shares directly, 3,263,297 shares through Elvheim AS, where he holds a controlling ownership interest. Mr. Smedal also holds 2,000,000 share options with a strike price of NOK 8.81.
Kåre Syvertsen, Board member and Group Manager Technology, owns 428,704 shares directly, and 2,877,296 shares through his wholly owned company Hallingen AS. Mr. Syvertsen also holds 1,000,000 share options with a strike price of NOK 8.81.
Hilde Drønen, Deputy Chairman, owns 2,800 shares directly and 44,200 shares through her wholly owned company Djupedalen AS.
Stephan M. Zeppelin, Board member, owns 55,000 shares.
Aasulv Tveitereid, Board member, owns 150,000 shares through his wholly owned company AAT Invest.
Jørgen Skotnes, Employee representative of the Board and Senior Structural Engineer, owns 5,100 shares and holds 10,000 share options with a strike price of NOK 58.75 and 75,000 share options with a strike price of NOK 8.81.
Jorunn Haugen, Employee representative of the Board and HR Coordinator, holds 25,000 share options with a strike price of NOK 8.81.
Senior ManagementJan Erik Tveteraas, CEO, owns 57,556 shares directly and 2,993,444 shares through his wholly owned company Supernova AS. Mr. Tveteraas also holds 2,000,000 share options with a strike price of NOK 8.81.
Oskar Mykland, CFO, owns 100,000 shares and holds 400,000 share options with a strike price of NOK 8.81.
Birte Norheim, Vice President Finance, owns 35,000 shares and holds 50,000 share options with a strike price of NOK 57.25 and 400,000 share options with a strike price of NOK 8.81.
Fredrik Major, Vice President Business Development/R&D, owns 47,332 shares and holds 300,000 share options with a strike price of NOK 57.25 and 500,000 share options with a strike price of NOK 8.81.
Helle Hundseid, Vice President Projects, holds 30,000 shares and holds 16,668 share options with a strike price of NOK 35.20, 300,000 share options with a strike price of NOK 57.25 and 450,000 share options with a strike price of NOK 8.81.
Erling Andreas Ronglan, Vice President Floating Production, owns 30,000 shares and holds 300,000 share options with a strike price of NOK 57.25 and 500,000 share options with a strike price of NOK 8.81. Hanna Moland, Vice President HR & Administration, owns 13,667 shares and holds 50,000 share options with a strike price of NOK 57.25 and 300,000 share options with a strike price of NOK 8.81.
Morten Martens Breivik, Vice President QHSE, owns 2,000 shares and holds 10,000 share options with a strike price of NOK 62.75 and 300,000 share options with a strike price of NOK 8.81.
John Helge Wilmann, Vice President Drilling, owns 165,000 shares and holds 400,000 share options with a strike price of NOK 8.81.
Alf-Roger Skikstein, Vice President Engineering, owns 240,523 shares through his wholly owned company Knuten AS and holds 150,000 share options with a strike price of NOK 8.81.
Reference is made to the ’Statement regarding establishment of salary and other benefits for Senior Management’ for further details of remuneration of Senior Management.
10 56ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 21 FINANCIAL INCOME AND FINANCIAL ExPENSE
Currency gains and losses relating to operational activities were classified as a separate line item as an operational expense in the Income Statement and are not included in the tables below. Currency gains and losses relating to financing activities were presented as separate line item as a financial income/(expense) in the Income Statement and are specified in Note 30.
Net project specific borrowing cost incurred for construction of any qualifying asset was capitalized during the period of time that is required to complete and prepare the asset for its intended use. Other borrowing cost was expensed as incurred. Borrowing cost of 428 (2009: 34,366) arising from financing specifically for the construction of the Sevan Capital Assets was capitalized during the year and was included in ‘Additions’ in property plant and equipment. The capitalization represents the net borrowing cost for financing of each project during the construction period. Reference is made to Note 6 for further details on construction in progress.
Financial income 2010 2009
Interest income 373 1,633
Amortization of embedded call options 9,923 4,499
Interest swap 112 2,660
Other financial income 7 246
Total financial income 10,415 9,038
Financial expense 2010 2009
Interest expense 85,632 57,072
Value of call options embedded in bonds 1,459 7,311
Amortization of fee related to interest-bearing debt 31,425 5,605
Call premium 24,778 0
Other financial expenses 1,873 674
Total financial expense 145,167 70,661
19.2 million of the expensed call premium in 2010 relates to the early repayment of a USD 48 million senior secured callable convertible bond at 140% of par value, 2.2 million relates to the early repayment of a USD 45 million 1st lien bond at 105% of par value and 3.4 million relates to the early repayment of a USD 135 million 1st lien bond at 102.5% of par value. Approximately USD 13.5 million of the amortization of fees related to interest-bearing debt in 2010 relates to an acceleration in amortization schedules for financing fees following early repayment of the credit facilities relating to FPSO Sevan Voyageur and to the convertible bond. In addition, and following a refinancing facility of USD 480 million being fully underwritten in December 2010, the carrying value of fees on existing financing on Sevan Driller of USD 5.5 million was expensed in full as the refinancing is expected to be executed during the first quarter of 2011.
10 57ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 22 INCOME TAx ExPENSE
2010 2009
Current tax -4,450 -1,973
Deferred tax 16,159 38,904
Net tax income/(expense) 11,709 36,931
Reconciliation between tax charge based on the nominal Norwegian statutory tax rate of 28% and actual tax charge: 2010 2009
Profit/(loss) before tax -168,557 -180,345
Tax calculated at domestic tax rates applicable to profits in each respective countries 2,422 38,033
Income not subject to tax 23,776 153
Currency translation adjustment -1,224 15,637
Expenses not deductible -9,099 -9,171
Tax losses for which no deferred income tax asset was recognized 19 -3,623
Tax income/(expense) 15,893 41,029
Gross revenue tax -2,478 -1,027
Tax charge relating to previous years 80 -1,021
Tax permanent establishment -301 -100
Withholding tax -1,485 -1,950
Net tax income/(expense) 11,709 36,931
The weighted average applicable tax rate for the consolidated Group was 7.0% (2009: 21.1%).
NOTE 23 EARNINGS PER SHARE
2010 2009
Profit/(loss) attributable to equity holders of the Company (1,000 USD) -157,213 -142,793
Weighted average number of ordinary shares on issue (thousands) 526,070 455,868
Basic earnings per share (USD per share) -0.30 -0.31
Basic earnings per shareBasic earnings per share were calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year.
Diluted earnings per shareDue to net losses for the periods reported, and according to the principle of no negative dilution (positive effects on earnings per share resulting from an increase in number of shares issued, are not to be included), diluted earnings per share was calculated as earnings per share.
2010 2009
Profit/(loss) attributable to equity holders of the Company (1,000 USD) -157,213 -142,793
Profit/(loss) used to determine diluted earnings per share (1,000 USD) -157,213 -142,793
Weighted average number of ordinary shares on issue (thousands) 526,070 455,868
Total remaining share options at balance date (thousands) 18,351 6,239
Weighted average number of shares for diluted earnings per share (thousands) 526,070 455,868
Diluted earnings per share (USD per share) -0.30 -0.31
10 58ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 24 DIVIDEND PER SHARE
No dividend was paid in 2010 or 2009. No dividend is to be proposed at the Annual General Meeting on April 15, 2011.
NOTE 25 CASH GENERATED FROM OPERATIONS
2010 2009
Profit/(loss) before tax -168,557 -180,344
Adjustments for:
– Depreciation and impairment 103,359 62,236
– Amortization of intangible assets 1,760 2,461
– Interest expense 85,632 57,072
– Unrealized forex loss/(gain) relating to NOK nominated bonds 956 56,991
– Other financial assets at fair value through profit and loss -203 -14,937
– Expensed portion of value of options at the time of the award 2,149 1,170
Changes in working capital:
– Inventories 6,799 -9,219
– Trade and other receivables -2,975 -18,072
– Trade and other payables -10,190 -16,510
– Other current liabilities, provisions and charges 31,186 29,997
Cash generated from operations 49,916 -29,155
10 59ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 26 CONTINGENCIES
The Group has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business. The Group has made a provision for guarantees amount-ing to 232 at balance sheet date (2009: 558) relating to external deliveries from KANFA AS.
At balance sheet date, the Group is party to the following security arrangements:
Security arrangements relating to financing:FPSO Sevan Piranema: The Company has issued a bond loan, secured by 1st priority securi-ties pursuant to the terms of the USD 270 million (USD 250 million outstanding at balance sheet date) bond loan agreement described in Note 15.
FPSO Sevan Hummingbird: The Company has issued two tranches of a bond loan, secured by 1st priority securities pursuant to the terms of the USD 100 million and NOK 625 million bond loan agreement described in Note 15.
FPSO Sevan Voyageur: The Company has issued a bond loan, secured by 2nd prioritysecurities pursuant to the terms of the NOK 870 million (NOK 740million outstanding at balance sheet date) bond loan agreement.Sevan 300 Pte Ltd has entered into a bank financing facility secured by 1st priority securities pursuant to the terms of the USD 230 million (USD 177.9 million drawn at balance sheet date) term loan agree-ment. Both credit facilities are further described in Note 15.
Sevan Driller: The Company has provided securities on 1st priority in accordancewith the terms of the USD 250 million (USD 245.2 million outstandingat balance sheet date) bank financing facility to Sevan Drilling Pte Ltdand provided a guarantee on 2nd priority in accordance with termsof the NOK 1,000 million bond loan agreement to Sevan Drilling AS. Both credit facilities are further described in Note 15. In addition, the Company has provided a guarantee in accordance with terms of a vendor credit facility of USD 78 million as described in Note 15.
Sevan Brasil (Sevan Driller II): The Company has provided securities on 1st priority in accordancewith the terms of the USD 525 million bank financing facility (undrawn at balance sheet date) to Sevan Drilling Rig II Pte Ltd as described in Note 15.
Future contracted cash flowsThe Company has entered into a credit facility, secured by 1st priority securities pursuant to the terms of the USD 83 million (USD 72 million outstanding at balance sheet date) bank loan agreement describedin Note 15.
Security arrangements relating to equipment supplies and services:Sevan Driller: The Company has issued guarantees for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors.
Sevan Brasil: The Company has issued guarantees for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors.
Discontinued project (Sevan Driller III):The Company has issued guarantees for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors. Maximum exposure for the Group for cancellation fees to vendors was estimated to USD 3.8 million. Should a third drilling rig be ordered, no cancellation fee is expected to incur in relation to the discontinued project.
KANFA AS:The Company has issued a performance guarantee for KANFA AS’ delivery of a process plant and compression packages to a client.
KANFA Aragon AS:The Company has issued a performance guarantee for KANFA Aragon AS’ delivery of a processing facility for LNG to a client.
Security arrangements relating to operations:FPSO Sevan Piranema:The Company has granted a performance guarantee to the technical manager. FPSO Sevan Hummingbird:The Company has guaranteed for correct fulfillment of the contract with the end-charterer and granted a performance guarantee to the technical manager.
FPSO Sevan Voyageur:The Company has guaranteed for correct fulfillment of the contract with the end-charterer and granted a performance guarantee to the technical manager.
Sevan Brasil:The Company has guaranteed for correct fulfillment of the contract with the end-charterer.
Discontinued project:The Company has guaranteed for correct fulfillment of the contract with the end-charterer. During the global financial crisis, it proved difficult to secure the required financing for the newbuild project, and construction on the rig subsequently never commenced. Sevan has issued a Notice of Arbitration to the end-charter (ONGC), informing ONGC of its intention to resolve certain disputes regarding the firm order for the deepwater drilling unit by reference to arbitration. In the arbitration, Sevan is disputing ONGC’s right to call on a bank guarantee for the sum of USD 15.9 million. At balance sheet date, the arbitration proceedings were not yet concluded. Estimation with sufficient probability (higher than 50% likelihood) of the possible outcome of these proceedings was not achievable. No liability was therefore recognized in the balance sheet as of December 31, 2010.
Reference is made to Note 34 for events after balance sheet date regarding the discontinued project.
10 60ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 29 OPERATING LEASES
Operating leases: Group company as lesseeThe Group has entered into several lease- and rental-agreements for rental of offices, software, ASP solutions, and cars. The agreements were entered into on ordinary operational terms. The Group’s lease expense for rental of offices, software, ASP solutions and cars amounted to 2,928 for the year (2009: 2,658).
At balance sheet date, the Group has entered into lease- and rental-obligations as follows:
Lease- and rental obligations 2010 2009
No later than 1 year 2,928 2,154
Between 1-5 years 10,083 8,518
Later than 5 years 23,018 25,057
Total lease and rental-obligations 36,029 35,729
Operating leases-Group company is lessorThe Group charters out units under various agreements with fixed terms that end at different times during 2011-2018. None of the arrange-ments include any form of option to buy the units following end of contractual period.
NOTE 27 COMMITMENTS
Capital expenditure contracted for at balance sheet date, but not yet incurred, were as follows: 2010 2009
Property, plant and equipment 281,435 218,258
Total capital commitments 281,435 218,258
Capital commitments include unconditional commitments that the Group has entered into by balance sheet date which were not reflected in the financial statements. Of the total capital commitments of 281 million, 172 million falls due in 2011. The remaining capital commitments fall due in 2012 or later.
NOTE 28 RELATED PARTY TRANSACTIONS
The Group is widely held (reference is made to Note 12).
Related-party transactions were made on an arm’s-length basis, and include the following:
Sales of goods and services to associates 2010 2009
KANFA-TEC AS 82 63
Purchases from associates 2010 2009
KANFA-TEC AS 0 95
Year-end balances arising from sales/purchases of goods/services:
Receivable from associate parties 2010 2009
KANFA-TEC AS 56 3
Payable to associate parties 2010 2009
KANFA-TEC AS 0 16
10 61ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
Future lease payments receivable under charter contracts:
2010 2009
No later than 1 year 266,171 249,253
Between 1-5 years 2,257,992 2,217,854
Later than 5 years 301,821 555,413
Total future charter revenues * 2,825,984 3,022,520
* The third drilling charter was included in the 2009, but not in the 2010 estimate of future lease payments receivable under charter contracts as the project has
been discontinued. Reference is made to Note 26 for further information of the discontinued project.
The overview includes charter revenue for the fixed lease periods for the five units on charter-hire. License revenue and potential charter revenue for option periods not yet exercised was not included. At balance sheet date, book value of assets generating charter revenue was 1,660 million (2009: 1,010 million).
Order back-log for charter revenue: Fixed term Option periods
Unit Client (years) (years) Commencement
FPSO Sevan Piranema Petrobras S.A. 11 6 x 1 Q1-2007
FPSO Sevan Hummingbird * Centrica Energy Upstream 2.5 4 x 0.5 + 1 x 3 + 2 x 1 Q3-2008
FPSO Sevan Voyageur ** E. ON Ruhrgas UK E&P LTD 5 Evergreen EQ4-2011
Sevan Driller Petrobras S.A. 6 NA Q2-2010
Sevan Driller II (‘Sevan Brasil’) Petrobras S.A. 6 NA EQ2-2012
* The first option period of 0.5 years was exercised in 2010, thus extending the fixed term untill Q3-2011
** Option periods are automatically renewed until termination at 12 months’ notice (‘Evergreen’)
NOTE 30 FOREIGN ExCHANGE GAIN/(LOSS) RELATED TO FINANCING
Foreign exchange gain/(loss) related to financing is mainly due to the impact of changes in the relationship between NOK and US dollars on the NOK nominated bonds, as well as to cash and cash equivalents nominated in foreign currency. Reference is made to Note 15 for further details regarding the NOK nominated bonds.
Foreign exchange gain/(loss) related to financing: 2010 2009
Realized gain/(loss) 480 -409
Unrealized gain/(loss) -575 -35,636
Total foreign exchange gain/(loss) related to financing -95 -36,045
NOTE 31 OTHER OPERATING ExPENSE
Other operating expense 2010 2009
Pre-operational expense 0 12,701
Cost of hired personnel 3,175 962
Office cost (IT, rental etc) 8,194 6,348
Consultancy (audit, tax and legal)* 5,939 4,221
Marketing 737 991
Other 9,963 8,297
Total other operating expense 28,008 33,520
*Specification of auditor’s fee (excl. VAT): 2010 2009
Statutory audit 973 573
Audit related services 3 24
Tax related service 130 37
Other services 0 128
Total auditor’s fee 1,106 761
10 62ANNUAL REPORT
SEVAN MARINESevan Marine GroupNotes to the Consolidated Financial Statements
NOTE 32 INVENTORIES
Inventories consist of spare parts for FPSO Sevan Piranema and Sevan Driller. Inventory for FPSO Sevan Hummingbird and FPSO Sevan Voyageur is owned and maintained by the technical manager. The cost of usage of inventory was classified as “operating expense” in the income statement.
Write-down of inventories during the year resulted in an increase in operating expense of 176 (2009: 1,103).
Inventories 2010 2009
Materials and spare parts for use during operations 14,807 21,430
Provision for stock obsoleteness -300 -124
Inventories - net 14,507 21,306
NOTE 33 OTHER NON-CURRENT ASSETS
2010 2009
Net mobilization expense 23,824 26,832
Net late delivery penalties 13,249 0
Prepaid financing fees 30,921 0
Prepaid agency fees 7,491 4,950
Other 616 19
Total other non-current assets 76,101 31,801
Net mobilization expense includes mobilization expense for FPSO Sevan Piranema and Sevan Driller, offset by mobilization fee received from the client. Net capitalized mobilization expense will amortize over the fixed contract period as an increase in operating expense.
Net late delivery penalties include penalties incurred for FPSO Sevan Piranema and Sevan Driller, offset by directly correlated penalties recoverable from vendors. Net late delivery penalties will amortize over the fixed contract period as a reduction in operating revenue.
Prepaid financing fees include prepaid fees on undrawn credit facilities. Such fees will be reclassified to interest-bearing debt upon first drawdown and will subsequently amortize as a financial expense over the term of the loan.
Prepaid agency fees relate to the Group’s drilling activities. Agency fees will amortize over the fixed contract periods as a reduction in operat-ing revenue.
NOTE 34 EVENTS AFTER BALANCE SHEET DATE
In December 2010, Sevan additionally secured commitments, subject to documentation and conditions precedent, for a USD 480 million senior debt project finance facility for the Sevan Driller. The loan was executed in March 2011 and repaid the existing USD 250 million 1st lien bank facility and NOK 1 billion 2nd lien bond relating to the rig as well as for general corporate purposes.
On March 17, 2011, the Indian Supreme Court resolved to not grant the Company’s application for an order preventing ONGC from calling on the Bank Guarantee for the sum of USD 15.9 million until after the disputes between the Company and ONGC relating to a firm order of a deepwater drilling unit was been resolved by way of arbitration. ONGC has subsequently called on the bank guarantee. As of the date of this report, the arbitration proceedings to determine whether ONGC is entitled to the funds were not yet concluded. The Company is claiming for a refund of the payment made to ONGC under the bank guarantee. Potential liabilities relating to the ONGC contract are disclosed in Note 26 in the consolidated financial statements.
In March 2011, the Board filed a listing application to the Oslo Stock Exchange for an IPO for its ultra deep water drilling business. The contemplated IPO of Sevan Drilling ASA will involve a combined secondary sale of shares currently owned by Sevan Marine ASA and an equity offering of new shares to be issued by Sevan Drilling ASA. The IPO is subject to bank approval of the change of control.
In connection to the IPO of the Company’s drilling business, Jan Erik Tveteraas, the current CEO Sevan Marine, will assume the position as CEO of Sevan Drilling ASA as from the first day of listing and Jon Wilmann, Vice President Drilling Sevan Marine, will assume the position of CFO. Sevan Marine is in the process of selecting a successor for Mr. Tveteraas.
10 63ANNUAL REPORT
SEVAN MARINE10 63ANNUAL REPORT
SEVAN MARINE10 63ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
10 64ANNUAL REPORT
SEVAN MARINE
sevan marine asaBalanCe sheet
Figures in USD 1,000 Note 2010 2009
ASSETS
Non-current assets
Fixed assets 3 873 1,288
Intangible assets 3 4,676 6,859
Investment in subsidiaries 4 951,220 1,054,432
Deferred income tax assets 2 37,373 30,457
Receivable from companies in the Group 4 552,877 440,291
Other non-current assets 5 349 338
Total non-current assets 1,547,367 1,533,664
Current assets
Trade and other receivables 10,379 6,788
Receivables from companies in the Group 4 356,261 381,585
Cash and cash equivalents 6 75,791 55,401
Total current assets 442,431 443,774
Total assets 1,989,798 1,977,438
EQUITY
Capital and reserves attributable to equity holders of the Company
Share capital 1,8 16,633 16,633
Share premium reserve 1 954,132 954,132
Other equity 1 162,467 340,178
Total equity 1,133,230 1,310,943
LIABILITIES
Non-current liabilities
Interest-bearing debt 20 680,368 33,978
Retirement benefit obligations 10 1,018 931
Total non-current liabilities 681,386 34,909
Current liabilities
Interest-bearing debt 20 85,279 556,102
Trade payables 3,263 1,936
Payables to companies within the Group 4 59,872 56,843
Provisions 23 2,001 0
Other current liabilities 24,768 16,704
Total current liabilities 175,182 631,585
Total liabilities 856,568 666,495
Total equity and liabilities 1,989,798 1,977,438
10 65ANNUAL REPORT
SEVAN MARINE
sevan marine asainCome statement
Figures in USD 1,000 Note 2010 2009
Operating revenue 16,14,19 85,770 53,811
Operating expense 2,708 12,218
Depreciation, amortization and impairment 3 3,218 3,944
Employee benefit expense 9 42,266 31,398
Other operating expense 11 10,510 9,838
Foreign exchange gain (loss) related to operation 365 4,077
Total operating expense 59,067 61,475
Operating profit/(loss) 26,703 -7,664
Financial income 22 53,152 48,011
Financial expense 22 -252,971 -70,944
Foreign exchange gain (loss) related to financing -1,561 -13,102
Net financial profit/(loss) -201,381 -36,033
Profit/(loss) before tax -174,678 -43,697
Tax income/(expense) 2 5,802 23,611
Net profit/(loss) -168,875 -20,085
Attributable to:
Equity holders of the Company -168,875 -20,085
Earnings per share for profit/(loss) attributable to the equity holders of the Company during the year (USD per share):
- Basic 13 -0.03 -0.04
- Diluted 13 -0.03 -0.04
Arendal, March 30, 2011 The Board of Directors of Sevan Marine ASA
_______________________ _______________________ _______________________ _______________________ Arne Smedal Hilde Drønen Kåre Syvertsen Aasulv Tveitereid Chairman Deputy Chairman Board member Board member
_______________________ _______________________ _______________________ _______________________ Stephan M. Zeppelin Jorunn Haugen Jørgen Skotnes Jan Erik Tveteraas Board member Employee representative Emloyee representative CEO
10 66ANNUAL REPORT
SEVAN MARINE
sevan marine asaCash flow statement
Figures in USD 1,000 Note 2010 2009
Cash flows from operating activities
Profit/(loss) before tax -174,678 -43,697
Adjustment for:
Depreciation/amortization 3 3,218 3,944
Write-down of investment in subsidiaries 4 156,430 4,089
Interest expense 22 53,296 48,624
Unrealized forex loss/(gain) relating to NOK nominated bonds -3,394 26,158
Expensed portion of value of share options at the time of award 9 2,081 956
Change in working capital:
Inventory 0 103
Receivable and payables relating to companies in the Group 4 -84,233 -201,672
Trade and other receivables -3,591 -275
Trade payables 1,327 -3,008
Other liabilities, provisions and charges 30,411 -6,167
Cash generated from operations -19,133 -170,945
Cash flows from operating activities
Cash from operations -19,133 -170,945
Tax paid during the period 2 -1,112 -714
Interest paid -44,537 -48,798
Net cash flow from operating activities -64,782 -220,458
Cash flows from investment activities
Investment in subsidiaries 4 -53,218 -192,803
Purchase of intangible assets 3 -254 -396
Purchase of tangible assets 3 -365 -334
Net cash flow from investment activities -53,837 -193,532
Cash flows from financing activities
Net proceeds from issuance of ordinary shares 1 0 396,079
Net proceeds from interest-bearing debt 20 438,808 46,970
Repayment of interest-bearing debt 20 -299,799 -5,000
Purchase/sale of own bond loan 20 0 -2,900
Net cash flow from financing activities 139,009 435,149
Net cash flows for the period 20,390 21,160
Cash balance at the beginning of the year 6 55,401 34,242
Cash balance at the end of the year 75,791 55,401
10 67ANNUAL REPORT
SEVAN MARINE
sevan marine asanotes to the finanCial statements
ACCOUNTING POLICIESSevan Marine ASA’s (‘the Company’) financial statements have been prepared in accordance with the Accounting Act and generally accepted accounting principles in Norway.
Sevan Marine ASA is the parent company of the Sevan Marine Group (‘the Group’).
The Company`s functional currency is US dollar (USD). All numbers in the financial statements are in USD 1,000 unless otherwise stated.
Use of EstimatesThe preparation of financial statements in accordance with gener-ally accepted accounting principles requires management to use estimates and assumptions that impact the value of assets and liabilities as well as disclosure notes. Such estimates and assump-tions may have significant impact on reported revenue and cost for a specific reporting period. Actual amounts may therefore deviate from the estimates.
Contingent losses, which are likely to occur as well as quantifiable, are expensed when incurred.
Principal Rule for Evaluation and Classification of Assets and LiabilitiesAssets intended for long term ownership or use, are classified as fixed assets. Assets relating to the operating cycle are classified as current assets. Receivables are classified as current assets if they are to be repaid within one year after balance sheet date. Equivalent criteria apply to liabilities.
Current assets are valued at the lower of purchase cost and net realizable value. Current liabilities are reflected in the balance sheet at nominal value at establishment date.
Fixed assets are valued at purchase cost. Fixed assets whose value will decline are depreciated on a straight-line basis over the asset’s estimated useful life. Fixed assets are written down to net realizable value if a value reduction occurs that is expected to be permanent. Long-term liabilities are reflected in the balance sheet at nominal value on establishment date.
Trade Receivables and Other ReceivablesTrade receivables and other receivables are reflected in the balance sheet at nominal value less provision for estimated losses. Estimated losses are provided for on the basis of an individual assessment of each debtor.
Trade payablesTrade Payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities. Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.
ProvisionsA provision is recognized in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to
settle the obligation and the amount has been reliably estimated.
Provisions are not recognized for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured as the present value of the expected ex-penditures required to settle the obligation using a pre-tax discount rate that accounts for time value of money and risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense.
Tangible Fixed AssetsFixed assets are reflected in the balance sheet and depreciated over the asset’s expected useful life on a straight-line basis. Maintenance cost is expensed as incurred. Additions or improvements are added to the asset’s cost price and depreciated with the asset. When changes in circumstances indicate that the carrying value of an asset may not be recoverable, an impairment charge is recognized and the asset is written down to recoverable amount (being the highest of net sales value and value in use). Value in use is the net present value of the expected future cash flows generated from the asset.
Intangible AssetsGoodwillGoodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identifiable assets of the acquired subsidiary/associate at the date of acquisition. Goodwill on acquisition of subsidiaries is included in ‘intangible assets’. Goodwill on acquisitions of associates is included in ‘investment in associates’. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. Separately recognized goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Computer softwareAcquired computer software is capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over their estimated useful lives, ranging from three to five years. Cost associated with developing or maintaining computer software programs are recognized in the income statement as incurred.
Research and Development Cost associated with research activities are expensed as incurred. Qualifying expense associated with development activities are capitalized and depreciated over expected useful life.
Shares in Subsidiaries and Associated Companies In the parent company’s accounts, investments in subsidiaries and associated companies are recorded under the cost method. Investments are written down to fair value when a reduction in value is expected to be permanent.
10 68ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Dividend is recognized as income in the year the provision is made in the subsidiary. If the dividend exceeds retained earnings, the excess represents repayment of invested capital, and dividend is deducted from the book value of the investment in the balance sheet.
Cash and Bank DepositsCash and bank deposits include cash in hand, bank deposits and other short-term highly liquid investments with original maturities of three months or less.
CurrencyCash and bank deposits, current assets, and current liabilities nominated in foreign currencies are converted to exchange rates prevailing at balance sheet date. Realized and unrealized exchange gains and losses on assets and liabilities in foreign currencies are included as financial or operational items in the income statement depending on the characteristics of the underlying asset or liability.
Pension PlansThe Company operates both defined benefit and defined contribution plans. A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company 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. Cost associated with the defined contribution plans are expensed as incurred.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefits plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The pension expense and pension commitments are calculated on a straight-line earning profile basis, based on as-sumptions relating to discount rates, projected salaries, the amount of benefits from the National Insurance Scheme, future return on pension assets, and actuarial calculations relating to mortality rate, voluntary retirement, etc. Pension funds are valued at net realizable value and deducted from the net pension obligation in the balance sheet.
TaxesDeferred income taxes is provided using the liability method on temporary difference at balance sheet date between the tax basis of assets and liabilities and their carrying amounts for financial reporting purpose. Tax-reducing temporary differences and losses carry forward are offset against tax-increasing temporary differences that are reversed in the same time intervals. Taxes consist of taxes payable (taxes on current year taxable income) and change in net deferred taxes. Tax base included in the calculation of deferredincome tax is calculated in local currency and translated to USD atcurrency rates prevailing at balance sheet date.
Earnings per ShareEarnings per share are calculated by dividing net profit/loss by the weighted average of number of outstanding shares. Shares issued during the year are weighted in relation to the period they have been outstanding.
Share Based Incentive PlansThe Company operates a share-based compensation plan. In line
with generally accepted accounting principles in Norway, the cost represented by the fair value at the date of the award is expensed over the vesting period. The fair value at the date of the award is confirmed by a third party calculation using the Black & Scholes’ option-pricing model.
Cost represented by employer’s contribution tax of the excess of fair value of the share relative to the strike prices (intrinsic value) is expensed over the vesting period in line with the changing market price of the stock.
Cash Flow StatementThe cash flow statement is prepared in accordance with the indirect method.
Interest-Bearing DebtInterest-bearing debt is initially recognized at fair value, net of transaction cost incurred and including the value of any embedded call options inherent in bonds. Interest-bearing debt is subsequently stated at amortized cost; any difference between the proceeds (net of transaction cost and embedded value of call options) and the nominal value is recognized in the income statement over the period of the interest-bearing debt using the effective interest method.
The value of call options embedded in bond loans are treated as separate financial assets and are initially recognized at fair value and subsequently remeasured at fair value each balance sheet date. Gains and losses on fair value of call options are recognized in the income statement immediately. Interest-bearing debt is presented net of the separated financial asset and is classified as current liabilities unless the Company has an unconditional right to defer settlement for more than 12 months after the balance sheet date.
Compound financial instruments issued by the Company comprise convertible bonds that can be converted to share capital at the option of the holder, where the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognized initially at the fair value of a similar liability that does not have en equity conversion option. The equity component is recognized initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction cost is allocated to the liability and equity components in proportion to their initial carrying amounts. Subse-quent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not remeasured subsequent to initial recognition except on conversion or expiry. Segment ReportingA business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. The accounting figures of the Company are consolidated as part of the ‘Corporate’ segment with exception of revenue and expense relating to the Goliat project which are consolidated as part of the ‘Floating Production’ segment.
Revenue RecognitionRevenue comprises the fair value of the consideration receivable for
10 69ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
the sale of goods and services in the ordinary course of business. Revenue is shown net of value-added tax and discounts.
The Company recognizes revenue when the amount of revenue can be reliably measured and in accordance with the underlying contracts.
a) Design fee/license revenue Design fee/license revenue is recognized on in accordance with the underlying contracts.
b) Interest income Interest income is recognized on a time-proportion basis using the effective interest method.
c) Sales of fixed price contracts Sale of fixed price contracts is recognized in accordance with the underlying contracts under the percentage of completion (POC) method. Under the POC method, revenue is generally recognized based on the services performed to date as percentage of the total services to be performed.
d) Sales of services Service income is recognized in line with the underlying contracts and the amount of work executed.
LeasesLeases in which a significant portion of the risk and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the
lease. All lease agreements entered into by the Company at balance sheet date are considered to be operational leases.
Construction ContractsContract cost is recognized when incurred. When the outcome of a construction contract cannot be estimated reliably, contract revenue is recognized only to the extent that contract cost incurred is likely to be recoverable. When the outcome of a construction contract can be estimated reliably and it is probable that the contract will be profitable, contract revenue is recognized over the period of the contract. When it is probable that total contract cost will exceed total contract revenue, the expected total loss is recognized as an expense immediately.
The Group uses the ‘percentage of completion method’ (POC) to determine the appropriate amount to recognize in a given period. The stage of completion is estimated, using judgmental assessment, of the progress of completion of subcomponents of identified milestone deliverables in each contract up to the balance sheet date as a percentage of total identified contract milestone deliverables. The Group presents as an asset the gross amount due from customers for contract work for all contracts in progress for which cost incurred plus recognized profits (less recognized losses) exceed progress billings. Progress billings not yet paid by customers and retention are included as ‘trade and other receivables’. The Group presents as a liability the gross amount due to customers for contract work for all contracts in progress for which progress billings exceed cost incurred plus recognized profits (less recognized losses).
NOTE 1 EQUITY
Share Share Other Total
capital premium equity equity
January 1, 2010 16,633 954,132 340,178 1,310,943
Value of share options 0 0 2,081 2,081
Repayment of convertible bond 0 0 -10,916 -10,916
Net profit/(loss) 0 0 -168,875 -168,875
December 31, 2010 16,633 954,132 162,467 1,133,230
Share Share Other Total
capital premium equity equity
January 1, 2009 6,187 562,401 349,186 917,774
Total proceeds from share issues - June 4,284 167,064 0 171,348
Total proceeds from share issues - July 5,169 201,576 0 206,744
Total proceeds from share issues - August 994 38,774 0 39,769
Share issue cost 0 -21,781 0 -21,781
Tax effect of share issue cost 0 6,099 0 6,099
Value of share options 0 0 956 956
Convertible bond 0 0 14,058 14,058
Tax effect of convertible bond, equity portion 0 0 -3,936 -3,936
Net profit/(loss) 0 0 -20,085 -20,085
December 31, 2009 16,633 954,132 340,178 1,310,943
10 70ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 2 TAxES
2010 2009
Profit/(loss) before tax -174,678 -43,697
Permanent differences 145,488 -18,414
Currency translation adjustment 5,876 -36,972
Changes in temporary differences 3,014 9,220
Tax basis -20,300 -89,862
Loss to be brought forward 20,300 89,862
Basis for taxes payable 0 0
Taxes payable (PE tax) -108 -100
Withholding tax payable -1,004 -1,615
Change in deferred tax assets from income statement 6,914 25,327
Tax income/(expense) 5,802 23,611
Temporary differences: 2010 2009
Fixed assets -392 510
Goodwill 92 623
Inventory -239 -234
Pension liabilities -1,018 -901
Amortization bond 25,101 14,136
Call options embedded in bond -22,272 -21,547
Fair value options embedded in bond and convertible bond 6,104 17,803
Net temporary differences 7,376 10,390
Losses carry forward relating to income statement -77,324 -56,857
Basis for deferred tax assets from the income statement -69,948 -46,467
Losses carried forward relating to items posted directly in the balance sheet -63,523 -62,308
Basis for deferred tax assets -133,471 -108,775
Deferred tax assets 37,373 30,457
At balance sheet date, expected future taxable profits from existing contracts in the Norwegian tax jurisdiction were insufficient to utilize the tax advantage in Norway in full. If taxable profits from anticipated and/or potential activities in Norway should not materialize, the Board will carry out necessary reorganization of the existing fleet to enable Sevan to take advantage of the tax position in Norway.
Reconciliation between tax charge based on the nominal Norwegian statutory tax rate of 28% and actual tax charge: 2010 2009
Profit before tax -174,678 -43,697
Expected tax charge -48,910 -12,235
Tax charge in the income statement - 5,802 - 23,611
Difference - 43,108 11,376
Tax effect of expensed portion of value of share options -608 -296
Other permanent differences 40,737 -1,157
Permanent currency difference 4,091 -8,208
Withholding tax -1,112 -1,715
Explained difference 43,108 -11,376
10 71ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 3 FIxED AND INTANGIBLE ASSETS
Machinery, fixtures
Year ended December 31, 2010
Book value January 1 1,288
Additions 365
Disposals 0
Depreciation -781
Book value December 31 873
At December 31, 2010
Cost or valuation 3,974
Accumulated depreciation and impairment -3,101
Book value December 31 873
Machinery, fixtures
Year ended December 31, 2009
Book value January 1 1,629
Additions 334
Depreciation -675
Book value December 31 1,288
At December 31, 2009
Cost or valuation 3,694
Accumulated depreciation and impairment -2,406
Book value December 31 1,288
Economic life 3-5 years
Goodwill Software Development Total
Year ended December 31, 2010
Book value January 1 3,568 1,417 1,874 6,859
Additions 0 217 37 254
Amortization charge -1,008 -828 -601 -2,437
Book value December 31 2,561 806 1,309 4,676
At December 31, 2010
Cost 5,635 6,488 2,851 14,973
Accumulated amortization and impairment -3,075 -5,682 -1,542 -10,298
Book value December 31 2,561 806 1,309 4,676
Goodwill Software Development Total
Year ended December 31, 2009
Book value January 1 4,541 2,947 2,245 9,733
Additions 0 187 208 396
Amortization charge -973 -1,717 -580 -3,269
Book value December 31 3,568 1,417 1,874 6,859
At December 31, 2009
Cost 5,635 6,271 2,814 14,720
Accumulated amortization and impairment -2,067 -4,853 -940 -7,861
Book value December 31 3,568 1,417 1,874 6,859
Economic life 5 years 3 years 5 years
Capitalization of development expense mainly relates to cost of developing the Sevan design for production, storage and offloading of LNG. Expensed research and development cost of purchases from third parties amounted to 68 for the year (2009: 132). Goodwill relates to the acquisition of KANFA AS.
10 72ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 4 INVESTMENT IN SUBSIDIARIES AND RECEIVABLES AND LIABILITIES TO COMPANIES IN THE GROUP
Figures in the tables below were prepared in local GAAP and presented in USD 1,000 with exception of number of shares.
2010
Office Cost No of Book Profit/ Ownership-
Company name location price shares Equity value (loss) share
KANFA AS Norway 14,287 2,500 22,420 14,287 273 100%
Sevan Production AS * Norway 178,007 100,000 41,143 41,143 -10,392 100%
Sevan Marine do Brasil Ltda ** Brazil 21,324 42,614,614 1,758 1,758 -5,726 100%
Sevan 300 Pte Ltd Singapore 313,556 313,556,070 249,251 313,556 -18,032 100%
Sevan Invest AS Norway 262,840 100 261,918 262,840 -761 100%
Sevan Drilling AS *** Norway 259,620 100 198,129 259,620 -8,368 100%
Sevan Drilling ASA *** Norway 494 3,000,000 3,557 494 -800 100%
Sevan Drilling Holding Pte Ltd Singapore 0 1 0 0 0 100%
Sevan Holding I AS Norway 48,259 100 47,983 48,259 -239 100%
Sevan Holding II AS Norway 12,202 100 8,097 8,113 -4 100%
Sevan Holding III AS Norway 565 100 555 565 -3 100%
Sevan Holding IV AS Norway 561 100 551 561 -3 100%
Sevan Services AS Norway 26 100 12 26 -2 100%
Total 1,111,740 951,220
* The Company recognized a write-down of 136,864 regarding its investments in Sevan Production AS during 2010
** The Company recognized a write-down of 19,566 regarding its investments in Sevan Marine do Brasil Ltda during 2010
*** Reference is made to Note 23 for disclosure on conversion of debt to equity executed after balance sheet date. By the conversion, the equity in Sevan Drilling
AS was increased by USD 75 million to USD 273 million, and equity in Sevan Drilling ASA was increased by USD 189 million to USD 193 million.
2009
Office Cost No of Book Profit/ Ownership-
Company name location price shares Equity value (loss) share
KANFA AS Norway 14,287 2,500 23,087 14,287 229 100%
Sevan Production AS Norway 178,007 100,000 51,535 178,007 -3,529 100%
Sevan Marine do Brasil Ltda Brazil 14,336 32,199,800 520 14,336 -4,221 100%
Sevan 300 Pte Ltd Singapore 267,325 267,325,131 221,037 267,325 -43,732 100%
Sevan Invest AS Norway 262,840 100 262,680 262,840 -19 100%
Sevan Drilling AS Norway 259,620 100 206,358 259,620 -43,547 100%
Sevan Drilling ASA Norway 494 3,000,000 4,496 494 4,618 100%
Sevan Holding I AS Norway 48,259 100 48,222 48,259 -19 100%
Sevan Holding II AS * Norway 12,202 100 8,100 8,113 -4,092 100%
Sevan Holding III AS Norway 565 100 558 565 -1 100%
Sevan Holding IV AS Norway 561 100 554 561 -1 100%
Sevan Services AS Norway 26 100 14 26 1 100%
Total 1,058,521 1,054,432
* The Company recognized a write-down of 4,089 regarding its investments in Sevan Holding II AS during 2009
10 73ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Non-current receivables from companies in the Group: 2010 2009
Sevan Production AS 337,219 337,219
Sevan Drilling ASA 105,358 103,072
Sevan Drilling Rig II AS 61,232 0
Sevan Invest AS 49,068 0
Total non current receivables from companies in the Group 552,877 440,291
Current receivables from companies in the Group: 2010 2009
Sevan Production AS 3,984 1,694
Sevan Production General Partnership 12,621 12,506
KANFA AS 532 622
Sevan Production Services Limited 58,418 78,502
Sevan Drilling AS 92,235 60,085
Sevan Drilling Pte Ltd 13,093 6,571
Sevan Drilling Rig II Pte Ltd 6,848 64,893
Sevan Drilling Rig Pte Ltd 9,149 9,197
Sevan Drilling ASA 308 0
Sevan Holding I Pte Ltd 1,383 55
Sevan Holding I AS 9,854 48
Sevan 300 Pte Ltd 2,548 440
KANFA Mator AS 31 358
Sevan Production UK Limited 1,966 2,563
Piranema Servicios De Petroleo Ltd 172 113
Sevan Marine do Brasil Ltda 182 128
Sevan Production Pte Ltd 142,009 143,504
Sevan Drilling Limited 686 0
Other companies within the Group 245 305
Total current receivables from companies in the Group 356,261 381,585
Current payables to companies in the Group: 2010 2009
Sevan 300 Pte Ltd 39,111 286
Sevan Pte Ltd 202 251
Sevan Holding II AS 196 0
Sevan Holding III AS 500 0
Sevan Holding IV AS 501 0
Sevan Invest AS 189 0
Sevan Drilling AS 0 15,423
Sevan Drilling ASA 0 26,083
KANFA AS 16,960 13,981
Sevan Production AS 1,925 510
Sevan Holding I Pte Ltd 202 251
Other companies within the Group 86 59
Total current payables from companies in the Group 59,872 56,843
10 74ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 5 OTHER NON-CURRENT ASSETS
NOTE 6 CASH AND CASH EQUIVALENTS
NOTE 7 SHARES AND SHARE OPTIONS OWNED OR CONTROLLED BY THE BOARD OF DIRECTORS AND SENIOR MANAGEMENT
2010 2009
Deposit 151 150
Loan to employees 183 173
Other prepaid 15 15
Total other non-current assets 349 338
2010 2009
Cash at bank and in hand 57,496 36,907
Restricted employees’ tax deduction fund 2,289 1,493
Restricted bank deposits 16,006 17,001
Total cash and cash equivalents 75,791 55,401
15,904 (2009: 15,904) of the restricted cash was collateralized in relation to a guarantee made on behalf of Sevan Drilling Rig Pte Ltd. 1,000 of restricted cash in 2009 was collateralized in relation to a guarantee made on behalf of Sevan Drilling Pte Ltd. The amount was no longer collateralized at balance sheet date in 2010. 102 (2009: 97) of the restricted cash relates to deposit for rental of offices.
As of December 31, 2010, the following Directors and Senior Management owned or controlled shares in the Company:
Board of DirectorsArne Smedal, Chairman of the Board, owns 3,698,703 shares directly, 3,263,297 shares through Elvheim AS, where he holds a controlling ownership interest. Mr. Smedal also holds 2,000,000 share options with a strike price of NOK 8.81.
Kåre Syvertsen, Board member and Group Manager Technology owns 428,704 shares directly, and 2,877,296 shares through his wholly owned company Hallingen AS. Mr. Syvertsen also holds 1,000,000 share options with a strike price of NOK 8.81.
Hilde Drønen, Deputy Chairman, owns 2,800 shares directly and 44,200 shares through her wholly owned company Djupedalen AS.
Stephan M. Zeppelin, Board member, owns 55,000 shares.
Aasulv Tveitereid, Board member, owns 150,000 shares through his wholly owned company AAT Invest.
Jørgen Skotnes, Employee representative of the Board and Senior Structural Engineer, owns 5,100 shares and holds 10,000 share options with a strike price of NOK 58.75 and 75,000 share options with a strike price of NOK 8.81.
Jorunn Haugen, Employee representative of the Board and HR Coordinator, holds 25,000 share options with a strike price of NOK 8.81.
Senior ManagementJan Erik Tveteraas, CEO, owns 57,556 shares directly and 2,993,444 shares through his wholly owned company Supernova AS. Mr. Tveteraas also holds 2,000,000 share options with a strike price of NOK 8.81.
Oskar Mykland, CFO, owns 100,000 shares and holds 400,000 share options with a strike price of NOK 8.81.
Birte Norheim, Vice President Finance, owns 35,000 shares and holds 50,000 share options with a strike price of NOK 57.25 and 400,000 share options with a strike price of NOK 8.81.
Fredrik Major, Vice President Business Development/R&D, owns 47,332 shares and holds 300,000 share options with a strike price of NOK 57.25 and 500,000 share options with a strike price of NOK 8.81.
Helle Hundseid, Vice President Projects, holds 30,000 shares and holds 16,668 share options with a strike price of NOK 35.20 and 300,000 share options with a strike price of NOK 57.25 and 450,000 share options with a strike price of NOK 8.81.
Erling Andreas Ronglan, Vice President Floating Production, owns 30,000 shares and holds 300,000 share options with a strike price of NOK 57.25 and 500,000 share options with a strike price of NOK 8.81. Hanna Moland, Vice President HR & Administration, owns 13,667 shares and holds 50,000 share options with a strike price of NOK 57.25 and 300,000 share options with a strike price of NOK 8.81.
Morten Martens Breivik, Vice President QHSE, owns 2,000 shares and holds 10,000 share options with a strike price of NOK 62.75 and 300,000 share options with a strike price of NOK 8.81.
Jon Helge Wilmann, Vice President Drilling, owns 165,000 shares and holds 400,000 share options with a strike price of NOK 8.81.
Alf-Roger Skikstein, Vice President Engineering, owns 240,523 shares through his wholly owned company Knuten AS, and holds 150,000 share options with a strike price of NOK 8.81.
10 75ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 8 SHAREHOLDER INFORMATION
At December 31, 2010, the Company had 10,288 shareholders (2009: 10,941 shareholders). 52% of the share capital was owned by share-holders residing outside of Norway (2009: 57%).
20 largest shareholder accounts at December 31, 2010: Number of Ownership-
Name shares share (%)
BANK OF NEW YORK MELLON S/A 27,565,034 5.24
STATE STREET BANK AND TRUST CO 20,173,142 3.83
JPMORGAN CHASE BANK NA A/C FIDELITY 20,003,805 3.80
SEB ENSKILDA ASA 12,350,000 2.35
CITIBANK N.A. NEW YORK BRANCH 11,021,226 2.10
FIDELITY FUNDS-EUROPEAN 10,159,579 1.93
SKAGEN VEKST 9,675,000 1.84
JPMORGAN CHASE BANK NORDEA 8,310,034 1.58
STATE STREET BANK & TRUST CO. A/C 7,582,816 1.44
STATE STREET BANK AND TRUST CO. A/C 6,546,278 1.24
BANK OF NEW YORK MELLON S/A 6,503,428 1.24
BANK OF NEW YORK MELLON SA/NV 6,384,500 1.21
EUROCLEAR BANK S.A./N.V. 5,642,089 1.07
BNP PARIBAS SECS SERVICES PARIS 5,599,897 1.06
FID. FUNDS-EU. BLUE 5,075,300 0.96
FIRST SECURITIES AS 5,000,000 0.95
VARMA MUTUAL PENSION 4,720,000 0.90
BANK OF NEW YORK MELLON SA/NV 4,675,417 0.89
BANK OF NEW YORK MELLON SA/NV 4,596,000 0.87
CLEARSTREAM BANKING 4,434,022 0.84
20 largest shareholder accounts 186,017,567 35.36
Remaining shareholders 340,052,415 64.64
Total shareholders 526,069,982 100.00
20 largest shareholder accounts at December 31, 2009: Number of Ownership-
Name shares share (%)
BANK OF NEW YORK MELLON S/A 21,281,549 4.05
JPMORGAN CHASE BANK 16,812,066 3.20
STATE STREET BANK AND TRUST CO 15,021,863 2.86
JPMORGAN CHASE BANK 13,828,690 2.63
FIDELITY FUNDS-EUROPEAN AGGRESSIVE FUND 9,989,287 1.90
SKAGEN VEKST 8,900,000 1.69
JPMORGAN CHASE BANK 8,828,963 1.68
STATE STREET BANK AND TRUST CO. A/C 8,416,122 1.60
DNB NOR BANK ASA EGENHANDELSKONTO 8,209,078 1.56
MORGAN STANLEY & CO 8,052,428 1.53
FIDELITY FUNDS 7,462,472 1.42
HOLBERG NORGE 7,258,000 1.38
BANK OF NEW YORK MELLON SA/NV 6,384,500 1.21
BANK OF NEW YORK MELLON S/A 6,333,616 1.20
GOLDMAN SACHS & CO 5,925,752 1.13
BNP PARIBAS SECS SERVICES PARIS 5,599,897 1.06
FID. FUNDS-EU. BLUE 5,588,300 1.06
STATE STREET BANK & TRUST CO. A/C 5,537,000 1.05
CITIBANK N.A. (LONDON) 5,450,000 1.04
BANK OF NEW YORK MELLON SA/NV 5,205,875 0.99
20 largest shareholders accounts 180,085,458 34.23
Remaining shareholders 345,984,524 65.77
Total shareholders 526,069,982 100.00
:3D illustration of Sevan the FLNG concept
10 76ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 9 EMPLOYEE BENEFIT ExPENSE
2010 2009
Wages and salaries 32,286 24,185
Employer`s contribution tax 4,894 3,762
Pension costs 2,017 1,762
Expensed portion of value of share options 2,081 956
Other employee benefit expense 988 733
Total employee benefit expense 42,266 31,398
Number of man-years 170 167
Remuneration of Senior Management, as paid: 2010 2009
Retirement Other Retirement Other
Salaries benefits benefits Salaries benefits benefits
Jan Erik Tveteraas, CEO 977 28 33 882 24 1
Oskar Mykland, CFO 313 13 1 245 8 2
Birte Norheim, Vice President Finance 301 13 1 248 8 1
Erling Andreas Ronglan, Vice President Floating Production 419 13 33 373 8 4
Fredrik Major, Vice President Business Development/ R&D 344 30 23 277 25 24
Helle Hundseid, Vice President Projects 290 15 1 233 8 4
Alf Roger Skikstein, Vice President Engineering 264 26 1 108 26 1
Hanna Moland, Vice President HR & Administration 202 32 1 160 27 1
Morten Martens Breivik, Vice President QHSE 197 13 1 155 8 1
Jon Wilmann, Vice President Drilling* 313 14 35 103 8 9
Total remuneration paid 3,620 197 130 2,784 150 48
* First day of employment was August 1, 2009
Salaries and other benefits included above were based on actual period of employment and translated at average exchange rates for each year.
Senior Management is included in the Group’s collective retirement benefit plans. During 2010, the Chairman of the Board of Directors received bonus of 124 (2009: 173) and the CEO received bonus of 134 (2009: 173). At balance sheet date, the Group has an outstanding loan of 173 to the CEO (2009: 173). Acceptable security has been provided. No other loans were granted to Senior Management or any member of the Board of Directors in 2010 or 2009. The CEO will receive 6-24 months’ salary upon termination of employment, dependant on fulfilment of certain conditions.
Reference is made to the ‘Statement regarding establishment of salary and other benefits for Senior Management’ for further details of remuneration of Senior Management.
10 77ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Remuneration of the Board of Directors, as paid: 2010 2009
Arne Smedal, Chairman 66 64
Hilde Drønen, Deputy Chairman 51 36
Kåre Syvertsen 41 36
Stephan M. Zeppelin 49 36
Aasulv Tveitereid 0 0
Jorunn Haugen, Employee representative * 21 0
Jørgen Skotnes, Employee representative * 21 0
Total remuneration paid 249 172
* Jorunn Haugen and Jørgen Skotnes entered the Board of Directors as Employee Representatives on May 25, 2009
Remuneration of the Board of Directors was paid in the year following duties rendered.
Salaries and other benefits paid to Directors as employees:
2010 2009
Retirement Other Retirement Other
Salaries benefits benefits Salaries benefits benefits
Arne Smedal, Chairman 949 43 40 791 28 36
Kåre Syvertsen 812 38 23 577 24 23
Jorunn Haugen 90 6 1 80 3 0
Jørgen Skotnes 157 10 3 126 7 4 Reference is made to Note 7 for further information about options and shares owned or controlled by the Board of Directors and Senior Management.
10 78ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 10 RETIREMENT BENEFIT OBLIGATIONS
The Company operates both defined benefit and defined contribution plans that together include all employees.
Defined benefit plan:
Amounts recognized in the balance sheet were determined as follows:
2010 2009
Present value of funded obligations 4,547 3,806
Fair value of plan assets -3,432 -2,487
Present value of unfunded obligations 1,115 1,319
Unrecognized actuarial losses -270 -574
Employer`s contribution tax relating to pension liabilities 173 186
Liability in the balance sheet 1,018 931
Movements in the liability recognized in the balance sheet were as follows:
2010 2009
January 1 931 398
Exchange differences -100 121
Expense charged to the income statement 889 887
Contributions paid, including employer`s contribution tax -702 -475
December 31 1,018 931
Principal actuarial assumptions were as follows:
2010 2009
Discount rate 3.20% 4.40%
Expected return on plan assets 4.60% 5.60%
Future salary increase 4.00% 4.25%
Expected G-regulation 3.75% 4.00%
Future pension increases 1.10% 2.10%
Future turnover 10.00% 10.00%
Employer`s contribution tax 14.10% 14.10%
At the date of this report actual return on pension assets for 2010 was not yet known. Actual return on pension assets for 2009 was 5.26%.
The actuarial calculations for the Company’s defined benefit plans were carried out by an independent actuary. Calculated pension obligation was based on mortality table K2005 and disability table K1963 adjusted for observed developments.
Average life expectancy for a person retiring at 67 years of age:
2010 2009
Male 17.7 17.7
Female 20.1 20.1
Amounts recognized in the income statement were as follows:
2010 2009
Net present value of current year’s pension earned 705 714
Interest cost on pension liabilities 160 128
Expected return on pension assets -143 -141
Estimate changes 31 58
Administration cost 30 26
Pension cost, defined benefit plan 783 785
Employer`s contribution tax relating to pension liabilities 106 103
Pension cost, including employer`s contribution tax 889 888
No. of employees included 28 30
Expected pension cost for 2011 for the defined benefit plan was estimated to 710.
10 79ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Major categories of plan assets as a percentage of the fair value of total plan assets were as follows:
2010 2009
Equities 14% 7%
Property 20% 21%
Fixed bonds 45% 45%
Liquid bonds 19% 26%
Other 2% 1%
Total plan assets 100% 100%
Defined contribution plan: 2010 2009
Pension costs, defined contribution plan 1,235 977
Employer`s contribution relating to contributions paid 174 129
Pension cost, including employer`s contribution 1,409 1,106
No. of employees included 143 137
Total pension cost: 2010 2009
Pension cost, defined benefit plan 782 785
Pension cost, defined contribution plan 1,235 977
Total pension cost 2,017 1,762
The Company’s pension schemes satisfy the requirements in the Norwegian legislation regarding mandatory occupational pension.
NOTE 11 OTHER OPERATING ExPENSE
2010 2009
Cost of hired personnel 165 801
Office cost (IT, rental etc) 4,250 4,363
Consultancy (audit, tax and legal)* 1,708 1,816
Marketing 287 177
Other 4,100 2,682
Total other operating expense 10,510 9,838
* Specification of auditor’s fee (excl. VAT): 2010 2009
Statutory audit 363 151
Tax related service 38 6
Other services 0 116
Fees charged directly to equity 0 12
Total auditor’s fees 401 286
10 80ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 12 LEASE AGREEMENTS
The Company has entered into several agreements for rent of offices. Lease expense for offices amounted to 1,118 for the year (2009: 1,038). The Company has entered into a lease agreement for rent of offices in Arendal of 10 years duration and commencement in 2014, with an annual lease expense of 2,877.
The Company has entered into lease agreements for various software, ASP solutions and cars for which the expense for the year amounted to 319 (2009: 358). All lease agreements entered into by balance sheet date were based on ordinary operational terms.
At balance sheet date the Company has entered into the following lease obligations: 2010 2009
No later than 1 year 1,456 1,354
Between 1 and 5 years 7,984 7,239
Later than 5 years 23,018 25,037
Total lease obligations 32,458 33,630
NOTE 13 EARNINGS PER SHARE
2010 2009
Net profit/(loss) (USD 1,000) -168,875 -20,085
Earnings per share (USD) -0.03 -0.04
Earnings per share diluted (USD) -0.03 -0.04
Average no. of outstanding shares (thousands) 526,070 455,868
Weighted avg. no. of ordinary shares for diluted earnings per share (thousands) 526,070 455,868
Basic earnings per shareBasic earnings per share were calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares on issue during the year.
Diluted earnings per shareDue to net losses for the periods reported, and according to the principle of no negative dilution (positive effects on earnings per share resulting from an increase in number of shares issued, are not to be included), diluted earnings per share was calculated as earnings per share.
NOTE 14 CONSTRUCTION CONTRACTS
2010 2009
Contract revenue 1,956 27,725
Contract cost -1,783 -21,517
Net profit/(loss) 173 6,208
2010 2009
Recognized, not yet invoiced 143 57
Incurred cost on ongoing projects, included in current liabilities 161 1,025
Activities defined as construction contracts mainly relate to Joint Industry Projects, feasibility studies and Front End Engineering and Design activities (FEEDs). Under the activities defined as construction contracts, the Company was able to recover certain expenses relating to further development and testing of the Sevan design.
Construction activities in 2009 include FEEDs relating to the Goliat project.
10 81ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 15 SHARE-BASED PAYMENTS
The exercise prices of share options awarded to employees was at minimum equal to the market price of the share at the time of the award. 14.7 million of the remaining options may be exercised with 1/3 each year, first time one year following the award and expire five years following the award. 2.1 million of the remaining options may be exercised provided fulfillment of certain criteria and expire five years following the award. The Company has no legal or constructive obligation to repurchase or settle the options in cash.
Remaining share options and weighted average exercise prices were as follows:
2010 2009
Average Average
exercise price No. of exercise price No. of
(NOK per share) options (NOK per share) options
January 1 47.57 5,384,521 47.44 5,679,691
Granted 8.81 12,500,000 0 0
Exercised 0 0 0 0
Lapsed/forfeited 24.24 -1,054,848 45.07 -295,170
December 31 20.24 16,829,673 47.57 5,384,521
Of the 16.8 million remaining options (2009: 5.4 million), 2.1 million options were exercisable (2009: 1.9 million). No options were exercised during 2010 and 2009.
Expirations dates and average exercise prices for the remaining share options:
Year of Exercise price Share options remaining
expiration in NOK per share at end of year
2010 2009
2010 16.60 0 16,667
2010 15.00 0 16,668
2010 15.50 0 16,667
2010 19.30 0 192,126
2010 24.00 0 590,902
2010 30.90 0 220,318
2011 38.40 246,768 246,768
2011 38.80 316,670 316,670
2011 37.90 225,400 225,400
2011 35.20 58,334 58,334
2011 33.50 16,667 16,667
2012 37.60 116,667 116,667
2012 53.00 53,667 53,667
2012 58.25 47,000 48,500
2012 57.25 3,000,000 3,000,000
2012 58.75 10,000 10,000
2013 62.75 213,500 213,500
2013 78.00 25,000 25,000
2015 8.81 12,500,000 0
Total 16,829,673 5,384,521
The average fair value of options awarded during 2010, determined using the Black-Scholes’ option-pricing model, was NOK 2.12. The significant inputs into the model were share price at the award dates, exercise prices as shown above, standard deviation of expected share price returns of 30%, dividend yield of 0%, estimated option life, and annual risk-free interest rate of 3.0%. No options were awarded during 2009.
As of December 31, 2010, none of the outstanding share options were in-the-money.
10 82ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 16 RELATED PARTY TRANSACTIONS
2010Total operating revenue of 85,770 includes revenue from Group companies amounting to 19,842.
The Company charged companies within the Group 1,000 for design fee/license revenue during 2010. The Company charged companies within the Group 16,163 for services relating to management, engineering and site supervision, and 2,679 for management fees.
The Company charged companies within the Group 37,475 for interest relating to loans during 2010, and was charged 860 for interest relating to borrowings from companies within the Group during the year.
The Company charged companies within the Group 4,709 relating to guarantees during the year, and was charged 3,892 relating to guarantees from companies within the Group.
The Company received Group contribution of 212 during 2010.
2009Total operating revenue of 53,811 includes revenue from Group companies amounting to 24,003.
The Company charged companies within the Group 1,500 for design fee/license revenue during 2009. The Company charged companies within the Group 20,433 for services relating to management, engineering and site supervision, and 2,070 for management fees.
The Company charged companies within the Group 32,622 for interest relating to loans during 2009, and was charged 1,139 for interest relating to borrowings from companies within the Group during the year.
The Company charged companies within the Group 4,181 relating to guarantees during the year, and was charged 3,527 relating to guarantees from companies within the Group.
The Company received Group contribution of 510 during 2009.
NOTE 17 FINANCIAL RISK MANAGEMENT
Financial risk factorsThe Company’s activities expose it to a variety of financial risks; market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance.
Risk management is carried out by Treasury under policies approved by the Board of Directors. Treasury identifies, evaluates and hedges financial risks in close co-operation with its operating units. The Board approves the principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and investment of excess liquidity.
Market riskForeign exchange riskThe Company operates internationally and is exposed to foreignexchange risk arising from various currency exposures, primarily withrespect to NOK, EURO and GBP. Foreign exchange risk arises fromfuture commercial transactions, recognized assets or liabilities, andnet investments in foreign operations.
Foreign exchange risk arises when future commercial transactions orrecognized assets or liabilities are denominated in a currency that isnot the entity’s functional currency. The Company aims at achieving a natural hedge between cash inflows and cash outflows and manages remaining foreign exchange risk arising from future commercial transactions and recognized assets and liabilities, by forward contracts and similar instruments as appropriate.
Hedging of foreign exchange exposures are executed on a grossbasis and foreign exchange contracts with third parties generallydesignated at Group level. The Group’s risk management policy is tohedge anticipated transactions in each major currency.
The Company has certain investments in foreign operations, whosenet assets are exposed to foreign currency translation risk.
Price riskThe Company is exposed to commodity price risk at two main levels:
• The demand for Sevan units is sensitive to oil price developments, fluctuations in production levels, exploration results and general activity within the oil industry.
• The cost of construction price of future units is sensitive to changes in market price of the input factors.
Cash flow and fair value interest rate riskThe Company’s interest rate risk arises from non-current debt. Debt subject to floating interest rates exposes the Company to cash flow interest rate risk. Debt subject to fixed interest rates exposes the Company to fair value interest rate risk. The Company’s policy is to maintain part of its debt at fixed rate.
The Company simulates various scenarios taking into consideration, refinancing, and renewal of current positions, alternative financing and hedging. Based on the different scenarios, the Company man-ages its cash flow interest rate risk by using floating-to-fixed interest rate swaps. Such interest rate swaps have the economic effect of conversion from floating interest rates to fixed interest rates. Under the interest rate swaps, the Company agrees with other parties to exchange, at specified intervals the difference between fixed contract interest rates and floating-rate interest amounts calculated by reference to the agreed notional amounts.
The Company’s policy is to maintain liquidity through placement of excess cash as bank-deposits and/or short-term, marketable investments at limited risk.
Credit riskCredit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers. The Company has no significant concentration of credit risk towards single financial institutions and has policies that limit the amount of credit exposure to any single financial institution.
10 83ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Liquidity riskPrudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities, and the ability to close out market positions. The Company aims to maintain flexibility in its liquidity by keeping committed credit lines available.
The Company has implemented routines to continuously update its cash flow forecast when changes to main assumptions relating to repayment schedules, interest rates changes etc to be able to foresee the necessary actions to taken to rectify any potential adverse effects on its future liquidity position. Reference is made to Note 20 for a maturity analysis of the Company’s financial liabilities.
NOTE 18 CONTINGENCIES
The Company has contingent liabilities in respect of bank and other guarantees as well as other matters arisen in the ordinary course of business.
At balance sheet date the Company is part to the following security arrangements:
Security arrangements relating to financing:FPSO Sevan Piranema: The Company has issued a bond loan, secured by own and related entity 1st priority securities pursuant to the terms of the USD 270 million (USD 250 million outstanding at balance sheet date) bond loan agreement descripted i Note 20.
FPSO Sevan Hummingbird: The Company has issued two tranches in a bond loan, secured by own and subsidiary’s 1st priority securities pursuant to the terms of the USD 100 million plus NOK 625 million bond loan agreement descripted i Note 20.
FPSO Sevan Voyageur: The Company has issued a bond loan, secured by own and subsidiary’s 2nd priority securities pursuant to the terms of the NOK 870 million (USD 740 million outstanding at balance sheet date) bond loan agreement descripted i Note 20. The Company has provided certain securities on 1st priority in accordance with the terms of a USD 230 million (USD 177.9 million drawn at balance sheet date) term loan agreement to Sevan 300 Pte Ltd.
Sevan Driller: The Company has provided certain securities on 1st priority in accordance with terms of the USD 250 million (USD 244 million outstanding at balance sheet date) bank financing facility to Sevan Drilling Pte Ltd and provided a guarantee on 2nd priority in accord-ance with terms of the NOK 1,000 million bond loan agreement to Sevan Drilling AS. In addition, the Company has provided a guarantee in accordance with terms of a vendor credit facility of USD 78 million.
Sevan Brasil (Sevan Driller II): The Company has provided certain securities on 1st priority in
accordance with the terms of the USD 525 million bank financing facility (undrawn at balance sheet date) to Sevan Drilling Rig II Pte Ltd.
Future contracted cash flowsThe Company has entered into a credit facility, secured by 1st priority securities pursuant to the terms of the USD 83 million (USD 72 million outstanding at balance sheet date) bank loan agreement describedin Note 20.
Security arrangements relating to equipment supplies and services:KANFA AS:The Company has issued a performance guarantee for KANFA AS’ delivery of a process plant and compression packages to a client.
KANFA Aragon AS:The Company has issued a performance guarantee for KANFA Aragon AS’ delivery of a process facility for LNG to a client.
Sevan Driller: The Company has issued guarantees for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors.
Sevan Brasil: The Company has issued a guarantee for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors.
Discontinued project (Sevan Driller III):The Company has issued guarantees for the subsidiary’s correct fulfillment of its contractual commitments as purchaser towards vendors. Maximum exposure for the Group for cancellation fees to vendors was estimated to USD 3.8 million. Should a third drilling rig be ordered, no cancellation fee is expected to incur in relation to the discontinued project.
Security arrangements relating to operations:FPSO Sevan Piranema:The Company has granted a performance guarantee to the technical manager. FPSO Sevan Hummingbird:The Company has guaranteed for correct fulfillment of the contract with the end-charterer and granted a performance guarantee to the technical manager.
FPSO Sevan Voyageur:The Company has guaranteed for correct fulfillment of the contract with the end-charterer and granted a performance guarantee to the technical manager.
Sevan Brasil:The Company has guaranteed for correct fulfillment of the contract with the end-charterer.
Discontinued project:The Company has guaranteed for correct fulfillment of the contract
10 84ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
with the end-charterer. During the global financial crisis, it proved difficult to secure the required financing for the newbuild project, and construction on the rig subsequently never commenced. Sevan has issued a Notice of Arbitration to the end-charter (ONGC), informing ONGC of its intention to resolve certain disputes regarding the firm order for the deepwater drilling unit by reference to arbitration. In the arbitration, Sevan is disputing ONGC’s right to call on a bank guarantee for the sum of USD 15.9 million. At balance sheet date,
NOTE 19 OPERATING REVENUE
2010 2009
Revenue from companies in the Group 19,842 24,003
License fee 44,000 0
Other revenue 21,928 29,808
Total operating revenue 85,770 53,811
NOTE 20 INTEREST-BEARING DEBT
2010 2009 *
Nominal Amortized Fair Nominal Amortized Fair
value value value value value value
Bond loan 665,789 656,347 642,917 0 0 0
Bank debt 30,579 30,110 30,579 0 0 0
Convertible bond 0 0 0 48,000 33,978 52,263
Value of embedded call options -7,881 -6,089 -6,089 0 0 0
Interest-bearing debt, non current 688,487 680,368 667,408 48,000 33,978 52,263
Bond loan* 58,604 44,435 42,603 603,524 560,316 475,507
Bank loan 41,493 40,858 41,493
Value of embedded call options -13,907 -14 -14 -25,410 -4,214 -4,214
Interest-bearing debt, current 86,190 85,279 84,082 578,114 556,102 471,293
Total interest-bearing debt 774,677 765,647 751,489 626,114 590,080 523,556
* As described in the Board of Director’s Report in the Financial Statements of 2009, while the Board of Directors was of the firm opinion that the outstanding
debt at balance sheet date in 2009 in reality was non-current in nature, the accounting regulations require that amounts which formally could be held to be
mandatorily repayable as at the balance sheet date be classified as current irrespective of whether such repayment was required by the lenders or the basis
therefore has subsequently been eliminated. Accordingly, relevant liabilities were classified as current in the 2009 financial statements. All necessary actions
were resolved during 2010 and the debt was classified back to non-current by balance sheet date in 2010.
Repayment schedule as per December 31, 2010: Nominal
value 2011 2012 2013 2014 2015
Bond loan (USD 100 million) 100,000 0 0 7,500 7,500 85,000
Bond loan (NOK 625 million) 106,721 0 0 8,004 8,004 90,713
Bond loan (USD 270 million) 250,000 22,500 25,000 202,500 0 0
Bond loan (NOK 870 million)* 126,357 22,198 108,813 0 0 0
Bond loan (NOK 700 million) 119,527 0 0 0 119,527 0
Bank debt (USD 82,3 million) 72,072 41,493 30,579 0 0
Total nominal value 774,677 86,190 164,392 218,004 135,031 175,713
Estimated interest payments ** 73,169 63,805 46,216 40,914 22,219
* Matures in 2012 at 105% of the remaining value
** Estimated interest payments are based on prevalling LIBOR and NIBOR spot rates at December 31, 2010
the arbitration proceedings were not yet concluded. Estimation with sufficient probability (higher than 50% likelihood) of the possible outcome of these proceedings was not achievable. No liability was therefore recognized in the balance sheet as of December 31, 2010.
Reference is made to Note 23 for events after balance sheet date regarding the discontinued project.
10 85ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Interest-bearing debt are nominated in the following currencies (nominal values):
2010 2009
NOK 226,248 455,701
USD 548,429 170,413
Total interest-bearing debt 774,677 626,114
Fair value of bank loans was estimated by discounting the contractual cash flows at a rate reflecting the underlying risk. Fair value of bond loans was based on market rates of the bonds at balance sheet date.
At balance sheet date, the Company was exposed to changes in interest rates for an outstanding bond loan balance of NOK 740 million (3-month Nibor + margin) and a outstanding bond loan balance of USD 250 million (6-month Libor + margin).
Effective interest rates at balance sheet date *: 2010 2009
NOK USD NOK USD
Bank debt (USD 82.3 million) 12.6% NA
Convertible bond (USD 48 million) NA 25.6%
Bond (USD 140 million) NA 9.7%
Bond (NOK 870 million) ** 11.7% 11.0%
Bond (USD 270 million) 5.4% 6.9%
Bond (NOK 700 million) 15.3% NA
Bond (NOK 625 million) 14.4% NA
Bond (USD 100 million) 12.9% NA
* Estimated interest payments are based on prevalling LIBOR and NIBOR spot rates at December 31, 2010
** In a bondholders meeting held in June, the bondholders consented to certain changes in the loan conditions, including the increase from USD 150 million to
USD 230 million of a higher ranking bank facility and an increase in the applicable interest margin from Nibor+5.50% to Nibor+10.0% which became effective in
November 2010 upon the first drawdown on the senior secured credit facility.
Embedded call optionsIn December 2010, the Company carried out an unsecured bond issue of NOK 700 million, at a fixed interest rate of 14.0%. The bond has a term of 4 years, with European call options at 107.0%, 106.0%, 105.0% and 104.0% after 24, 30, 36 and 42 months respectively. Fair value of the options at balance sheet date was estimated to 0.5 million.
In August 2010, the Company carried out a bond issue consisting of two tranches of USD 100 million and NOK 625 million, at fixed interest rates of 12.0% and 13.25% respectively. The bonds have a term of 5 years and American call options at 108.0%, 106.5% and 105.0% during year 3, 4 and 5 respectively. Fair value of the call options at balance sheet date was estimated to 0.5 million and 1.1 million respectively.
In October 2007, the Company carried out a bond issue of NOK 870 million, at an interest rate of Nibor+5.5%. The bond has a term of 5 years, and an American call option at 105%. NOK 740 million remained outstanding on the loan at balance sheet date. Fair value of the option at balance sheet date was estimated at 3.8 million (2009: 2.1 million).
In May 2007, the Company carried out a bond issue of USD 270 million, at an interest rate of Libor+3.0%. The bond has a term of 6 years, with one remaining European call options at 102.5% which can be exercised in May 2011. USD 250 million remained outstanding on the loan at balance sheet date. Fair value of the option at balance sheet date was estimated at nil (2009: 1.3 million).
In August 2010, the Company prepaid an outstanding bond of 135 million at a call price of 102.5%. In November 2010, the Company prepaid an outstanding 48 million convertible bond at a call price of 140%.
Convertible bondIn April, May and June 2009 the Company issued senior secured callable convertible bonds in aggregate nominal value of USD 48 million. The term of the convertible bonds was four years and coupon was fixed at 15% p.a. of parity value to conversion price.
The values of the liability component and the equity conversion component were determined at the time of the issuance of the bond. Fair value of the liability component at issue date, classified as interest-bearing debt, was calculated using a market interest rate for an equivalent non-convertible bond. The market interest rate applied was based on third party valuations. The residual amount, representing the value of the equity conversion option, was classified as “other equity” net of income taxes.
The USD 48 million convertible bond was repaid at 140% of par value in November 2010.
10 86ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
Convertible bond recognized in the balance sheet was calculated as follows: 2010 2009
Face value of convertible bond 0 48,000
Issue cost 0 -1,476
Equity component 0 -14,058
Liability component on initial recognition 0 32,466
Financial expense 0 6,312
Coupon interest incurred 0 -4,800
Liability component at December 31 0 33,978
Fair value of the liability component of the convertible bond amounted to USD 52.3 million on December 31, 2009. Fair value was calculated using cash flows discounted at an assumed marked interest rate for an equivalent non-convertible bond. The assumed market interest rate was based on third party valuations.
CovenantsIn addition to the loans taken up by the Company as described earlier in this note, reference is made to Note 15 in the Consolidated Financial Statements for an overview of the Group’s interest-bearing debt facilities. Security arrangements related to financing are described in Note 18.
The Company’s loan agreements contain customary covenants and conditions, including cross default, material adverse effect and other restrictive provisions, including limitations on dividend distributions to shareholders. Certain agreements also provide for mandatory prepay-ment in case of a “change of control” event and require that the Company must have an equity ratio of 30% on a consolidated basis.
NOTE 21 PROVISIONS
Bonus Total
January 1, 2010 0 0
Currency translation adjustments 0 0
Arising during the year 2,001 2,001
Reversed during the year 0 0
Used during year 0 0
December 31, 2010 2,001 2,001
BonusProvision for bonus was based on a defined bonus program for employees in the Company for the measurement period July 1, 2010, to June 30, 2011. The provision was based on a ‘best estimate’ of the expected achievements of the key performance indicators as set out in the bonus program and takes into account the incurred portion of the measurement period at balance sheet date. The bonus provision was classified as a current liability.
There was no provisions at balance sheet date in 2009.
10 87ANNUAL REPORT
SEVAN MARINE
NOTE 22 FINANCIAL INCOME AND FINANCIAL ExPENSE
Currency gains and losses relating to operational activities were classified as a separate line item as an operational expense in the Income Statement and are not included in the tables below. Currency gains and losses relating to financing activities were presented as separate line item as a financial income/(expense) in the Income Statement.
Financial income 2010 2009
Interest income 211 743
Amortization of embedded call options 8,174 4,499
Value of call options embedded in bonds 2,371 2,556
Interest swap 0 2,660
Other financial income 0 240
Received group contribution 212 510
Financial income from companies within the Group 42,184 36,803
Total financial income 53,152 48,011
Financial expense 2010 2009
Interest expense 52,435 48,624
Loss on value of call options 3,830 9,867
Financial investments 65 0
Amortization of fee related to interest-bearing debt 9,469 3,603
Write-down investment in subsidiary 156,430 4,089
Call premium 24,778 0
Other financial expense 1,211 96
Financial expense from companies within the Group 4,753 4,666
Total financial expense 252,971 70,944
USD 19.2 million of the expensed call premium in 2010 relates to the early repayment of a USD 48 million senior secured callable convertiblebond at 140% of par value, USD 2.2 million relates to the early repayment of a USD 45 million 1st lien bond at 105% of par value and USD 3.4million relates to the early repayment of a USD 135 million 1st lien bond at 102.5% of par value.
Amortization of interest-bearing debt and embedded call options in 2010 includes amortization of all remaining fees and embedded call options related to refinanced debt.
10 88ANNUAL REPORT
SEVAN MARINESevan Marine ASANotes to the Financial Statements
NOTE 23 EVENTS AFTER BALANCE SHEET DATE
During March 2011, equity in Sevan Drilling AS was increased by conversion of debt by the Company of USD 75 million. Equity in Sevan Drilling AS following the conversion amounted to USD 273 million.
During March 2011, equity in Sevan Drilling ASA was increased by conversion of debt by the Company of USD 189 million. Equity in Sevan Drilling ASA following the conversion amounted to USD 193 million.
On March 17, 2011, the Indian Supreme Court resolved to not grant the Company’s application for an order preventing ONGC from calling on the Bank Guarantee for the sum of USD 15.9 million until after the disputes between the Company and ONGC relating to a firm order of a deepwater drilling unit was been resolved by way of arbitration. ONGC has subsequently called on the bank guarantee. As of the date of this report, the arbitration proceedings to determine whether ONGC is entitled to the funds were not yet concluded. The Company is claiming for a refund of the payment made to ONGC under the bank guarantee. Potential liabilities relating to the ONGC contract are disclosed in Note 26 in the consolidated financial statements.
In March 2011, the Board filed a listing application to the Oslo Stock Exchange for an IPO for its ultra deep water drilling business. The contemplated IPO of Sevan Drilling ASA will involve a combined secondary sale of shares currently owned by Sevan Marine ASA and an equity offering of new shares to be issued by Sevan Drilling ASA. The IPO is subject to bank approval of the change of control.
In connection to the IPO of the Company’s drilling business, Jan Erik Tveteraas, the current CEO Sevan Marine, will assume the position as CEO of Sevan Drilling ASA as from the first day of listing and Jon Wilmann, Vice President Drilling Sevan Marine, will assume the position of CFO. Sevan Marine is in the process of selecting a successor for Mr. Tveteraas.
10 89ANNUAL REPORT
SEVAN MARINE
auditor’s report
Alta Arendal Bergen Bodø Drammen Egersund Florø Fredrikstad Førde Gardermoen Gol Hamar Hardanger Harstad Haugesund KongsbergKristiansund Larvik Lyngseidet Mandal Mo i Rana Molde Mosjøen Måløy Namsos OsloPricewaterhouseCoopers navnet refererer til individuelle medlemsfirmaer tilknyttet den verdensomspennende PricewaterhouseCoopMedlemmer av Den norske Revisorforening • Foretaksregisteret: NO 987 009 713 • www.pwc.no
To the Annual Shareholders' Meeting
Independent auditor’s report
Report on the Financial Statements
We have audited the accompanying financial statements of Sevanfinancial statements of the parent company and the financial statements of the group. The financialstatements of the parent company comprise the balance sheet as at 31 December 2010, and theincome statement for the year theexplanatory information. The financial statements of the group comprise the balance sheet at 31December 2010, income statement, statement of comprehensive income, changes in equity, cashfor the year then ended, and a summary of significant accounting policies and other explanatoryinformation.
The Board of Directors and the Managing Director’s Responsibility for the Financial Statements
The Board of Directors and the Managing Directopresentation of the financial statements of the parent company in accordance with NorwegianAccounting Act and accounting standards and practices generally accepted in Norway, and for thepreparation and fair presentation of the financial statements of the group in accordance withInternational Financial Reporting Standards as adopted by EU and for such internal control as theBoard of Directors and the Managing Director determine is necessary to enable the prefinancial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based on our audit.conducted our audit in accordance with laws, regulations, and auditing standards andgenerally accepted in Norway, including International Standards on Auditing. Those standards requirethat we comply with ethical requirements and plan and perform the audit to obtain reasonassurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts andin the financial statements. The procedures selected depend on theassessment of the risks of material misstatement of the financialerror. In making those risk assessments, the auditorpreparation and fair presentation of the financial statements in order to design audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing an opinion on theeffectiveness of the entity’s internal control. An audit also includes evaccounting policies used and the reasonableness of accounting estimates made by management, aswell as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sfor our audit opinion.
Alta Arendal Bergen Bodø Drammen Egersund Florø Fredrikstad Førde Gardermoen Gol Hamar Hardanger Harstad Haugesund Kongsberg Kongsvinger KristiansandKristiansund Larvik Lyngseidet Mandal Mo i Rana Molde Mosjøen Måløy Namsos Oslo Sandefjord Sogndal Stavanger Stryn Tromsø Trondheim Tønsberg Ulsteinvik ÅlesundPricewaterhouseCoopers navnet refererer til individuelle medlemsfirmaer tilknyttet den verdensomspennende PricewaterhouseCoopers organisasjonen
orening • Foretaksregisteret: NO 987 009 713 • www.pwc.no
Annual Shareholders' Meeting of Sevan Marine ASA
’s report
Report on the Financial Statements
We have audited the accompanying financial statements of Sevan Marine ASA, which comprise thefinancial statements of the parent company and the financial statements of the group. The financialstatements of the parent company comprise the balance sheet as at 31 December 2010, and theincome statement for the year then ended, and a summary of significant accounting policies and otherexplanatory information. The financial statements of the group comprise the balance sheet at 31December 2010, income statement, statement of comprehensive income, changes in equity, cashfor the year then ended, and a summary of significant accounting policies and other explanatory
The Board of Directors and the Managing Director’s Responsibility for the Financial Statements
The Board of Directors and the Managing Director are responsible for the preparation and fairpresentation of the financial statements of the parent company in accordance with NorwegianAccounting Act and accounting standards and practices generally accepted in Norway, and for the
presentation of the financial statements of the group in accordance withInternational Financial Reporting Standards as adopted by EU and for such internal control as theBoard of Directors and the Managing Director determine is necessary to enable the prefinancial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit.dance with laws, regulations, and auditing standards and
generally accepted in Norway, including International Standards on Auditing. Those standards requirecomply with ethical requirements and plan and perform the audit to obtain reason
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts andin the financial statements. The procedures selected depend on the auditor’s judgment, including theassessment of the risks of material misstatement of the financial statements, whether due to fraud orerror. In making those risk assessments, the auditor considers internal control relevant to the entity’s
d fair presentation of the financial statements in order to design audit procedures thatcircumstances, but not for the purpose of expressing an opinion on the
entity’s internal control. An audit also includes evaluating the appropriateness ofpolicies used and the reasonableness of accounting estimates made by management, as
evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a
PricewaterhouseCoopers AS
Forus AtriumPostboks 8017NO-4068 Stavanger
Telefon 02316
Kongsvinger KristiansandSandefjord Sogndal Stavanger Stryn Tromsø Trondheim Tønsberg Ulsteinvik Ålesund
ers organisasjonen
Marine ASA, which comprise thefinancial statements of the parent company and the financial statements of the group. The financialstatements of the parent company comprise the balance sheet as at 31 December 2010, and the
n ended, and a summary of significant accounting policies and otherexplanatory information. The financial statements of the group comprise the balance sheet at 31December 2010, income statement, statement of comprehensive income, changes in equity, cash flowfor the year then ended, and a summary of significant accounting policies and other explanatory
The Board of Directors and the Managing Director’s Responsibility for the Financial Statements
r are responsible for the preparation and fairpresentation of the financial statements of the parent company in accordance with NorwegianAccounting Act and accounting standards and practices generally accepted in Norway, and for the
presentation of the financial statements of the group in accordance withInternational Financial Reporting Standards as adopted by EU and for such internal control as theBoard of Directors and the Managing Director determine is necessary to enable the preparation offinancial statements that are free from material misstatement, whether due to fraud or error.
Our responsibility is to express an opinion on these financial statements based on our audit. Wedance with laws, regulations, and auditing standards and practices
generally accepted in Norway, including International Standards on Auditing. Those standards requirecomply with ethical requirements and plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosuresjudgment, including the
statements, whether due to fraud orconsiders internal control relevant to the entity’s
d fair presentation of the financial statements in order to design audit procedures thatcircumstances, but not for the purpose of expressing an opinion on the
aluating the appropriateness ofpolicies used and the reasonableness of accounting estimates made by management, as
nt and appropriate to provide a basis
10 90ANNUAL REPORT
SEVAN MARINE
Opinion on the financial statements of the parent company
In our opinion, the financial statements of the parent company give a true and fair view of the financialposition for Sevan Marine ASAthen ended in accordance with the Norwegian Accounting Act and accounting standards and practicesgenerally accepted in Norway.
Opinion on the financial statements of the group
In our opinion, the financial statements of the group give a true and fair view of the financial position ofthe group Sevan Marine ASAflows for the year then ended in accordance with In
Report on Other Legal and Regulatory Requirements
Opinion on the Board of Directors’ report and account of corporate governance principles andpractices
Based on our audit of the financial statements as describedinformation presented in the Board of Directors report and account of corporate governance principlesand practices concerning the financial statements and the going concern assumption, and theproposal for coverage of the loss is consistent with the financial statements and complies with the lawand regulations.
Opinion on Registration and documentation
Based on our audit of the financial statements as described above, and control procedures weconsidered necessary in accordance with the International Standard on Assurance EngagementsISAE 3000 “Assurance Engagements Other than Audits or Reviews of Historical FinancialInformation”, it is our opinion that the company’s management has fulfilled its duty to produce a proand clearly set out registration and documentation of the company’s accounting information inaccordance with the law and bookkeeping standards and practices generally accepted in
Stavanger, 30 March 2011PricewaterhouseCoopers AS
Torbjørn LarsenState Authorised Public Accountant (Norway)
Note: This translation from Norwegian has been prepared for information purposes only.
Opinion on the financial statements of the parent company
In our opinion, the financial statements of the parent company give a true and fair view of the financialne ASA as at 31 December 2010, and of its financial performance for the year
then ended in accordance with the Norwegian Accounting Act and accounting standards and practicesgenerally accepted in Norway.
Opinion on the financial statements of the group
n our opinion, the financial statements of the group give a true and fair view of the financial position ofas at 31 December 2010, and of its financial performance and its cash
flows for the year then ended in accordance with International Financial Reporting Standards.
Report on Other Legal and Regulatory Requirements
Opinion on the Board of Directors’ report and account of corporate governance principles and
Based on our audit of the financial statements as described above, it is our opinion that theinformation presented in the Board of Directors report and account of corporate governance principles
concerning the financial statements and the going concern assumption, and theloss is consistent with the financial statements and complies with the law
Opinion on Registration and documentation
Based on our audit of the financial statements as described above, and control procedures weaccordance with the International Standard on Assurance Engagements
Engagements Other than Audits or Reviews of Historical FinancialInformation”, it is our opinion that the company’s management has fulfilled its duty to produce a proand clearly set out registration and documentation of the company’s accounting information in
with the law and bookkeeping standards and practices generally accepted in
PricewaterhouseCoopers AS
State Authorised Public Accountant (Norway)
Note: This translation from Norwegian has been prepared for information purposes only.
(2)
In our opinion, the financial statements of the parent company give a true and fair view of the financialas at 31 December 2010, and of its financial performance for the year
then ended in accordance with the Norwegian Accounting Act and accounting standards and practices
n our opinion, the financial statements of the group give a true and fair view of the financial position ofas at 31 December 2010, and of its financial performance and its cash
ternational Financial Reporting Standards.
Opinion on the Board of Directors’ report and account of corporate governance principles and
above, it is our opinion that theinformation presented in the Board of Directors report and account of corporate governance principles
concerning the financial statements and the going concern assumption, and theloss is consistent with the financial statements and complies with the law
Based on our audit of the financial statements as described above, and control procedures we haveaccordance with the International Standard on Assurance Engagements
Engagements Other than Audits or Reviews of Historical FinancialInformation”, it is our opinion that the company’s management has fulfilled its duty to produce a properand clearly set out registration and documentation of the company’s accounting information in
with the law and bookkeeping standards and practices generally accepted in Norway.
Note: This translation from Norwegian has been prepared for information purposes only.
10 91ANNUAL REPORT
SEVAN MARINE
responsiBility statementWe confirm, to the best of our knowledge, that the financial statements for the period January 1 to December 31, 2010, have been prepared in accordance with current applicable accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit and loss of Sevan Marine ASA as well as the consolidated group.
We also confirm that the Board of Directors’ Report includes a true and fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncer¬tainties facing the Company and the Group.
Arendal, March 30, 2011 The Board of Directors of Sevan Marine ASA
_______________________ _______________________ _______________________ _______________________ Arne Smedal Hilde Drønen Kåre Syvertsen Aasulv Tveitereid Chairman Deputy Chairman Board member Board member
_______________________ _______________________ _______________________ _______________________ Stephan M. Zeppelin Jorunn Haugen Jørgen Skotnes Jan Erik Tveteraas Board member Employee representative Emloyee representative CEO
10 92ANNUAL REPORT
SEVAN MARINE
SITE OFFICE CHINASevan Marine at Cosco QidongCosco (Qidong) Offshore Shipyard
Yinyang Town
Qidong 22 62 00
REPUBLIC OF CHINA
BRAZILSevan Marine – Rio de Janeiro Palácio Austregésilo de Athayde
Avenida Presidente Wilson No 231 suite 1003
20030-905 Rio de Janeiro - RJ
BRASIL
Phone: (+55) 21 38 61 79 79
Fax: (+55) 21 38 61 79 99
Sevan Marine – Piranema operations, AracajuAv. Pedro Paes de Azevedo 34,
Salgado Filho-Aracaju-Sergpipe (SE)
49020-450
BRASIL
Phone: (+55) 79 32 26 61 50
Fax: (+55) 79 32 26 61 70
SINGAPORESevan Marine - Singapore 350 Orchard Road
Shaw House # 15-18
SINGAPORE 238868
Phone: (+65) 62 20 13 14
Fax: (+65) 62 20 13 15
UNITED KINGDOMSevan Marine – UKC/O Wood Group Engineering
(North Sea) Ltd
Trafalgar House, Altens
Aberdeen AB12 3LE
SCOTLAND, UK
Phone: (+47) 37 40 40 00
Fax: (+47) 37 40 40 99
NORWAYSevan Marine - Arendal Kittelsbuktveien 5
4836 Arendal
NORWAY
Phone: (+47) 37 40 40 00
Fax: (+47) 37 40 40 99
Sevan Marine - Trondheim Business address:
Havnegata 9, Brattøra (Pir 1, C4)
7011 Trondheim
NORWAY
Postal address:
Postboks 1282, Sluppen
7462 Trondheim
NORWAY
Phone: (+47) 73 10 84 00
Fax: (+47) 73 10 84 99
KANFA AS / KANFA-TEC AS/ Sevan Marine ASA - OsloNye Vakås vei 80
1395 Hvalstad
NORWAY
Phone: (+47) 64 00 18 00
Fax: (+47) 64 00 18 01
KANFA Mator ASTormod Gjestlandsvei 16
3936 Porsgrunn
NORWAY
Phone: (+47) 35 57 49 00
KANFA Aragon AS/Sevan Marine - BergenFantoftveien 42
5072 Bergen
NORWAY
Phone: (+47) 37 40 40 00
Fax: (+47) 37 40 40 99