Note 2 - Financial Risk Management

2.1 Financial risk factors

The Company is exposed to a variety of financial risks through its ordinary operations and debt financing. Such risks include foreign exchange risk, interest rate risk, credit risk and liquidity risk. To manage these risks, management reviews and assesses its primary financial and market risks. Once risks are identified, appropriate action is taken to mitigate the identified risk. The Company’s risk management is exercised in line with guidelines approved by the Board.

2.2 Foreign exchange risks

USD is the reporting currency for the Company. Functional currency for the parent company is USD, and for the vessel-operating subsidiaries USD, NOK, BRL, AUD and CAD are the functional currency. Remaining subsidiaries use NOK and EUR as functional currency. The Company operates internationally and is exposed to foreign exchange risks arising from various currency exposures primary with respect to NOK, GBP, EUR BRL, CAD and AUD. Foreign exchange risks can be divided into transaction risk from paying and receiving foreign currency and translation risk due to recognizing assets and liabilities in USD. The Company had in 2017 mainly USD, NOK, EUR, GBP, BRL, CAD and AUD revenue and expenses, compared to mainly USD, NOK, EUR, GBP, BRL, CAD and AUD for 2016.

The Company is exposed to foreign exchange risk of its subsidiaries, including the development of the Brazilian Real.

The following sensitivity table demonstrates the impact on the Company’s profit and equity before tax from potential changes to the exchange rates, all other variables held constant.

Consolidated

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

+10% movements

-10% movements

December 31, 2017

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

 

Financial assets

Cash and cash equivalent

63,511

4,073

4,073

-4,073

-4,073

Derivaties

2,938

-3,667

-3,667

4,482

4,482

Accounts receivable

53,830

2,567

2,567

-2,567

-2,567

Impact on financial assets before tax

120,279

2,973

2,973

-2,158

-2,158

Financial liabilities

Accounts payable

21,110

-1,663

-1,663

-1,663

-1,663

Derivatives

9,562

-6,966

-6,966

8,514

8,514

Borrowings

1,302,999

-46,801

-46,801

-46,801

-46,801

Impact on financial liabilities before tax

1,333,671

-55,431

-55,431

56,979

56,979

Income statement

Operating revenue

415,309

25,131

25,131

-25,131

-25,131

Operating expenses

262,412

-20,985

-20,985

-20,985

-20,985

Impact on operating result before tax

152,897

4,146

4,146

-4,146

-4,146

Total increase/decrease before tax

-48,311

-48,311

50,674

50,674

 

Allocation per currency

NOK

-44,333

-44,333

46,696

46,696

EUR

7,502

7,502

-7,502

-7,502

GBP

2,841

2,841

-2,841

-2,841

BRL

-11,693

-11,693

11,693

11,693

CAD

-1,660

-1,660

1,660

1,660

AUD

-968

-968

968

968

Total increase/decrease before tax

-48,311

-48,311

50,674

50,674

Financial assets in 2017 and 2016 include derivatives related to hedging of foreign exchange risks. The derivatives in the sensitivity table include path-dependent options in which the value of the derivatives is influenced when the underlying reaches or fluctuates within, below or above specific barrier levels. The change in value of these derivatives will impact the profit of the Company.

Financial liabilities in 2017 and 2016 consist of interest rate derivatives and are not influenced by movements in foreign exchange rates.

Consolidated

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

+10% movements

-10% movements

December 31, 2016

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

 

Financial assets

Cash and cash equivalent

101,323

6,798

6,798

-6,798

-6,798

Derivaties

-

-

-

-

-

Accounts receivable

48,230

3,519

3,519

-3,519

-3,519

Impact on financial assets before tax

149,553

10,317

10,317

-10,317

-10,317

Financial liabilities

Accounts payable

20,783

-1,646

-1,646

1,646

1,646

Derivatives

8,358

-1,040

-1,040

1,040

1,040

Borrowings

1,470,893

-51,111

-51,111

51,111

51,111

Impact on financial liabilities before tax

1,500,033

-53,797

-53,797

53,797

53,797

Income statement

Operating revenue

469,123

33,889

33,889

-33,889

-33,889

Operating expenses

340,829

-25,938

-25,938

25,938

25,938

Impact on operating result before tax

128,295

7,951

7,951

-7,951

-7,951

Total increase/decrease before tax

-35,528

-35,528

35,528

35,528

 

Allocation per currency

NOK

-37,620

-37,620

37,620

37,620

EUR

8,974

8,974

-8,974

-8,974

GBP

4,378

4,378

-4,378

-4,378

BRL

-13,663

-13,663

13,663

13,663

CAD

1,979

1,979

-1,979

-1,979

AUD

423

423

-423

-423

Total increase/decrease before tax

-35,528

-35,528

35,528

35,528

Parent company

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

+10% movements

-10% movements

December 31, 2017

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

 

 

 

 

 

 

Financial assets

Cash and cash equivalent

203,832

13,376

13,376

-13,376

-13,376

Impact on financial assets before tax

203,832

13,376

13,376

-13,376

-13,376

Financial liabilities

Accounts payable

16

-2

-2

2

2

Borrowings

171,095

-16,875

-16,875

16,875

16,875

Impact on financial liabilities before tax

171,111

-16,877

-16,877

16,877

16,877

Income statement

Operating revenue

4,566

262

262

-262

-262

Operating expenses

6,762

-613

-613

613

613

Impact on operating result before tax

-2,196

-351

-351

351

351

Total increase/decrease before tax

-3,851

-3,851

3,851

3,851

 

 

 

Allocation per currency

NOK

-11,431

-11,431

11,431

11,431

EUR

7,684

7,684

-7,684

-7,684

GBP

-103

-103

103

103

Total increase/ decrease before tax

-3,851

-3,851

3,851

3,851

Parent company

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

+10% movements

-10% movements

December 31, 2016

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

 

 

 

Financial assets

Cash and cash equivalent

195,433

9,006

9,006

-9,006

-9,006

Impact on financial assets before tax

195,433

9,006

9,006

-9,006

-9,006

Financial liabilities

Accounts payable

56

-4

-4

4

4

Borrowings

210,807

-16,553

-16,553

16,553

16,553

Impact on financial liabilities before tax

210,863

-16,558

-16,558

16,558

16,558

Income statement

Operating revenue

865

22

22

-22

-22

Operating expenses

13,187

-1,298

-1,298

1,298

1,298

Impact on operating result before tax

-12,321

-1,275

-1,275

1,275

1,275

Total increase/decrease before tax

-8,827

-8,827

8,827

8,827

 

 

 

Allocation per currency

NOK

-12,105

-12,105

12,105

12,105

EUR

2,611

2,611

-2,611

-2,611

GBP

667

667

-667

-667

Total increase/ decrease before tax

-8,827

-8,827

8,827

8,827

2.3 Credit risks, Concentration risks

The Company’s credit risk is primarily attributable to its trade and other short-term receivables and asset derivative positions. The derivative counterparties are large established financial institutions, and the counterparty risk for the asset derivative positions are regarded as limited.

The exposure to credit risk for trade and other short-term receivables is measured on an ongoing basis and credit evaluations are performed for customers identified to be risky. The Company’s debtors are mainly major oil companies and offshore service companies, which are considered to be creditworthy third parties. Historically, the loss percentage has been low but due to the market development caused by the low oil price, the counterparty risk has increased significantly during the year. Ongoing provisions are made and, on December 31, 2016, the provision for certain accounts receivables which may not be paid in full was USD 23.9 million for the Company (2016: USD 23.9 million) and USD 0 for the Parent (2016: USD 0K).

The table below presents the concentration risks for 2017 and 2016.

Parent company

Consolidated

(Amounts in USD 1,000)

USD

% of total

USD

% of total

Receivables on December 31, 2017

1 to 5 largest

-

0.0 %

28,770

41.5 %

6 to 10 largest

-

0.0 %

12,343

17.8 %

Others

-

0.0 %

28,263

40.7 %

Provision for bad debt

-

0.0 %

-15,546

0.0 %

Total accounts receivable

-

0.0 %

53,830

100%

 

(Amounts in USD 1,000)

USD

% of total

USD

% of total

Receivables on December 31, 2016

1 to 5 largest

-

0.0 %

38,008

52.7 %

6 to 10 largest

-

0.0 %

16,692

23.1 %

Others

-

0.0 %

17,403

24.1 %

Provision for bad debt

-

0.0 %

-23,872

0.0 %

Total accounts receivables

-

0,0 %

48,230

100%

Parent company

Consolidated

(Amounts in USD 1,000)

2017

2016

2017

2016

Provision bad debt

Opening balance January 1

-

261

23,872

13,369

Realized loss

-

-261

-

-261

Reversal provision previous year

-

-

-9,125

-2,487

Provision current year

-

-

798

13,252

Closing balance December 31

-

-

15,546

23,872

Trade and receivables

The table below presents an aging analysis of the outstanding receivables at year end 2017 and 2016. Overdue receivables are followed up continually by Management. The Management considers the outstanding amounts to be recoverable.

Parent company

Consolidated

(Amounts in USD 1,000)

USD

% of total

USD

% of total

Aging on December 31, 2017

Not due

-

0.0 %

25,404

47.2 %

Due up to 1 month

-

0.0 %

17,474

32.5 %

Due 1-4 months

-

0.0 %

8,231

15.3 %

Due more than 4 months

-

0.0 %

2,721

5.1 %

Total accounts receivable

-

0.0 %

53,830

100%

 

(Amounts in USD 1,000)

USD

% of total

USD

% of total

Aging on December 31, 2016

Not due

-

0.0 %

26,744

55.5 %

Due up to 1 month

-

0.0 %

13,815

28.6 %

Due 1-4 months

-

0.0 %

4,207

8.7 %

Due more than 4 months

-

0.0 %

3,464

7.2 %

Total accounts receivable

-

0.0 %

48,230

100%

The carrying amounts of the Company’s and Parent’s accounts receivables are denominated in the following currencies:

Parent company

Consolidated

(Amounts in USD 1,000)

2017

2016

2017

2016

Currency

USD

-

-

28,162

13,041

NOK

-

-

5,674

3,579

EUR

-

-

6,924

20,216

GBP

-

-

5,533

2,339

CAD

-

-

2,690

2,534

AUD

-

-

3,452

3,801

BRL

-

-

1,395

2,721

Total accounts receivable

-

-

53,830

48,230

The maximum exposure to credit risk at the reporting date is the carrying value of each class of accounts receivables mentioned above.

2.4 Cash flow, interest risk and fair value

The Company is financed by debt and equity. If the Company fails to repay or refinance its loan facilities, additional equity financing may be required. There can be no assurance that the Company will be able to repay its debts or extend re-payment schedules through re-financing of its loan agreements or avoid net cash flow shortfalls exceeding the Company’s available funding sources or comply with minimum cash requirements. Further, there can be no assurance that the Company will be able to raise new equity, or arrange new borrowing facilities, on favourable terms and in amounts necessary to conduct its ongoing and future operations, should this be required.

In the event of insolvency, liquidation or similar event relating to a subsidiary of the Company, all creditors of such subsidiary would be entitled to payment in full out of the assets of such subsidiary before the Company, as a shareholder, would be entitled to any payments. Defaults by, or the insolvency of, a subsidiary of the Company could result in the obligation of the Company to make payments under parent company guarantees issued in favour of such subsidiary.

The Company is moreover exposed to changes in interest rates, which may affect the Company’s financial results. These risks are mainly related to the Company’s long term borrowings with floating interest rates. Further details of the Company’s borrowings are set out in Note 12.

The Company has no significant interest-bearing assets other than cash and cash equivalents and therefore the Company’s income and operating cash flows are substantially independent of changes in market interest rates. Cash and cash equivalents are invested for short maturity periods, generally from 1 day to 3 months, which mitigates some of the potential interest rate risk.

The following sensitivity tables demonstrate the impact on the Company’s profit before tax and equity from a potential shift in interest rates, all other variables held constant.

Consolidated

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

 

December 31, 2017

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

Financial assets

Cash and cash equivalent

63,511

-635

-635

635

635

Impact on financial assets before tax

63,511

-635

-635

635

635

Financial liabilities

Borrowings

919,001

10,161

10,161

-9,915

-9,915

Impact on financial liabilities before tax

919,001

10,161

10,161

-9,915

-9,915

Total increase/decrease before tax

9,526

9,526

-9,280

-9,280

 

Consolidated

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

 

December 31, 2016

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

Financial assets

Cash and cash equivalent

101,323

-1,013

-1,013

1,013

1,013

Impact on financial assets before tax

101,323

-1,013

-1,013

1,013

1,013

Financial liabilities

Borrowings

1,023,997

12,687

12,687

-19,507

-19,507

Impact on financial liabilities before tax

1,023,997

12,687

12,687

-19,507

-19,507

Total increase/decrease before tax

11,674

11,674

-18,494

-18,494

Borrowings in the tables above (both for 2017 and 2016) include only borrowings with floating interest.

Above movements also include the effect of interest rate swaps entered into in order to hedge the floating interest risk. Market-to-market effects in relation to the interest rate swaps impacts the profit and loss following a change of +/- 1% in the interest rate.

For more details, see Note 12.

PARENT company

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

 

December 31, 2017

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

Financial assets

Cash and cash equivalent

203,832

-2,038

-2,038

2,038

2,038

Impact on financial assets before tax

203,832

-2,038

-2,038

2,038

2,038

Financial liabilities

Borrowings

171,095

1,711

1,711

-1,711

-1,711

Impact on financial liabilities before tax

171,095

1,711

1,711

-1,711

-1,711

Total increase/decrease before tax

-327

-327

327

327

 

PARENT company

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

December 31, 2016

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

Financial assets

Cash and cash equivalent

195,433

-1,954

-1,954

1,954

1,954

Impact on financial assets before tax

195,433

-1,954

-1,954

1,954

1,954

Financial liabilities

Borrowings

210,807

2,108

2,108

-2,108

-2,108

Impact on financial liabilities before tax

210,807

2,108

2,108

-2,108

-2,108

Total increase/decrease before tax

154

154

-154

-154

The Company’s financial assets are classified into the categories: assets at fair value through the profit and loss, loans and receivables, and available for sale. Financial liabilities are classified as liabilities at fair value through the profit and loss, and other financial liabilities. For further information about comparison by category, see Note 29.

The value of forward exchange contracts is set by comparing forward exchange rate and the rate on the reporting date. The Company’s following financial instruments are not evaluated at fair value: accounts receivable, cash and cash equivalents, other short-term receivables, accounts payable and long-term liabilities with floating interest.

Because of the short term to maturity, the value of cash and cash equivalents entered into the Statements of Financial Position is almost the same as the fair value of these. Accordingly, the values of accounts receivables and accounts payables are almost the same as their fair values since they are entered on “normal” conditions.

The fair value of the Company’s non-current liabilities subjected to fixed interest rates is calculated by comparing the Company’s terms and market terms for liabilities with the same terms to maturity and credit risk.

The following tables display the booked value and the fair value of financial assets and obligations.

Consolidated

(Amounts in USD 1,000)

12/31/2016

12/31/2015

 

Financial assets

Book value

Fair value

Book value

Fair value

CIRR loan deposit

65,346

63,961

76,215

79,511

Long-term receivables

13,927

13,927

31,168

31,168

Accounts receivables

53,830

53,830

48,230

48,230

Other short-term receivables

60,510

60,510

120,977

120,977

Financial assets held for sale

-

-

1,099

1,099

Derivative financial instruments

2,938

2,938

-

-

Cash and cash equivalents

63,511

63,511

101,323

101,323

Total

260,062

258,677

379,012

382,307

 

Financial liabilities

Borrowings

1,302,999

1,324,295

1,470,893

1,483,834

CIRR loan

65,346

63,961

76,215

92,580

Other non-current liabilities

66,926

66,926

47,382

47,382

Accounts payable

21,110

21,110

20,783

20,783

Derivative financial instruments

9,562

9,562

8,358

8,358

Other current liabilities

91,110

91,110

134,868

134,868

Total

1,557,052

1,576,963

1,758,498

1,787,804

PARENT COMPANY

(Amounts in USD 1,000)

12/31/2017

12/31/2016

 

Financial assets

Book value

Fair value

Book value

Fair value

CIRR loan deposit

10,311

10,658

14,300

15,343

Long-term loan

73,987

73,987

59,868

59,868

Accounts receivable

-

-

-

-

Other short-term receivables

-

-

5,697

6,298

Cash and cash equivalents

203,832

203,832

195,433

195,433

Total

288,130

288,478

275,299

276,943

 

Financial liabilities

CIRR loan

10,311

10,658

14,300

20,636

Accounts payable

16

16

56

56

Other current liabilities

57,491

57,491

7,401

7,401

Total

67,818

68,165

21,757

28,093

2.5 Liquidity risk

The Company monitors its cash flow from operations closely and optimizes the working capital level of the individual companies and the Company as a whole. The Company funds are used for investment opportunities in the business, scheduled repayments and repayments of debt and to general working capital purposes.

The Company seeks to fix the majority of its fleet on long-term contracts. Vessels not fixed on long-term contracts are typically exposed to the volatility in the in the short to medium term market.

TThe Company will from time to time require additional capital to take advantage of business opportunities. Historically the Company has managed to obtain necessary financing in a timely manner on acceptable terms when needed.

On April 10, 2018 the sale of Siem Offshore Contractors (SOC) and the sale of the cable lay vessel Siem Aimery and the walk to work vessel Siem Moxie to a company in the Subsea group was completed for an initial consideration of EUR 140 million subject to usual adjustment for net cash and working capital. In addition, the Company estimates that the additional contingent consideration for future periods (2019-2024) will amount to between EUR 25-40 million. The initial proceeds from the sale will be used to pay down the bank loan on Siem Aimery and Siem Moxie which amounts to around EUR 60 million. The excess cash generated by the transaction will be applied to among other increase amortization and pre-pay debt. The transactions secures that the Company has the required liquidity to fund future obligations for at least a 12 months future period. We refer to the subsequent event Note 26 to the consolidated financial statements for further information

The tables below summarize the maturity profile of the Company’s financial liabilities including interest.

CONSOLIDATED

(Amounts in USD 1,000)

Less than 3 months

3 to 12 months

1 to 2

years

2 to 5

years

Thereafter

Total

 

December 31, 2017

Interest-bearing loans and borrowings

29,872

140,305

220,401

903,575

349,140

1,643,293

Trade and other payables

21,110

-

-

-

-

21,110

Total

50,982

140,305

220,401

903,575

349,140

1,664,403

 

December 31, 2016

Interest-bearing loans and borrowings

26,649

232,026

234,836

873,923

463,874

1,831,308

Trade and other payables

20,783

-

-

-

-

20,783

Total

47,432

232,026

234,836

873,923

463,874

1,852,091

 

PARENT COMPANY

(Amounts in USD 1,000)

Less than 3 months

3 to 12 months

1 to 2

years

2 to 5

years

Thereafter

Total

 

December 31, 2017

Interest-bearing loans and borrowings

2,311

12,650

91,073

112,533

-

218,567

Trade and other payables

16

-

-

-

-

16

Total

2,327

12,650

91,073

112,533

-

218,583

 

PARENT COMAPNY

(Amounts in USD 1,000)

Less than 3 months

3 to 12 months

1 to 2

years

2 to 5

years

Thereafter

Total

 

December 31, 2016

Interest-bearing loans and borrowings

62,724

11,402

161,134

5,441

-

240,701

Trade and other payables

56

-

-

-

-

56

Total

62,780

11,402

161,134

5,441

-

240,757

2.6 Capital risk management

The Company seeks to obtain long-term financing supported by long-term contracts, in order to reduce the frequency and risk associated with the refinancing of loans. Long-term charter parties at acceptable charter rates will also enable a higher degree of debt-financing.

The low oil price and the excess capacity of offshore service vessels have increased the competition amongst owners which further put pressure on fixture rates. As a consequence owners have placed more vessels into lay-up. End of year the Company had 5 vessels in lay-up.

2.7 Risks related to loan agreements, restrictions on dividends and distribution

The Company’s loan agreements include terms, conditions and covenants which impose restrictions on the operations of the Company. These restrictions may negatively affect the Company’s operations including, but not limited to, the Company’s ability to meet the fierce competition in the market in which it operates.

2.8 Risks related to possible tax liabilities

The Company seeks to optimize its tax structure to minimize withholding taxes when operating vessels abroad, avoiding double taxation, and minimizing corporate tax paid by making optimal use of the shipping taxation rules that apply. It is, however, a challenging task to optimize taxation, and there is always a risk that the Company may end up paying more taxes than the theoretical minimum, which may in turn affect the financial results negatively.

2.9 Long term contracts

The Company uses the percentage-of-completion method in accounting for its fixed price construction contracts related to the segment Submarine Power Cable Installation. Significant estimates are the percentage of complete and the overall margin. The following sensitivity table demonstrates the impact on the Company’s profit and equity before tax from potential changes to the percentage of completion and margin, all other variables held constant.

Consolidated

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

 

December 31, 2017

Estimated total revenue

Profit/(loss)

Equity

Profit/(loss)

Equity

Total value of contracts

584,013

Progress reporting, effect from movement

5,840

5,840

-5,840

-5,840

Margin estimate, effect from movement

-

5,840

5,840

-5,840

-5,840

 

Consolidated

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

 

December 31, 2016

Estimated total revenue

Profit/(loss)

Equity

Profit/(loss)

Equity

Total value of contracts

512,811

Progress reporting, effect from movement

5,128

5,128

-5,128

-5,128

Margin estimate, effect from movement

-

5,128

5,128

-5,128

-5,128