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 and vessel-operating subsidiaries is USD, except for one of the Norwegian subsidiary where NOK is the functional currency, and the Brazilian subsidiary where BRL is 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 and BRL.

CONSOLIDATED

 

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

 

+10% movements

-10% movements

December 31, 2015

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

148,753

7,839

7,839

-7,839

-7,839

Derivatives

1,451

-

-

-

-

Accounts receivable

46,147

2,162

2,162

-2,162

-2,162

Impact on financial assets before tax

196,351

10,000

10,000

-10,000

-10,000

           

Financial liabilities

         

Accounts payable

8,395

-823

-823

823

823

Derivatives

12,896

14,093

14,093

-14,093

-14,093

Borrowings

1,122,585

-51,906

-51,906

51,906

51,906

Impact on financial liabilities before tax

1,143,877

-38,635

-38,635

38,635

38,635

           

Income statement

         

Operating revenue

422,449

23,242

23,242

-23,242

-23,242

Operating expenses

303,901

-24,224

-24,224

24,224

24,224

Impact on operating result before tax

118,548

-982

-982

982

982

Total increase/decrease before tax

 

-29,617

-29,617

29,617

29,617

     

Allocation per currency

         

NOK

-33,637

-33,637

33,637

33,637

EUR

17,459

17,459

-17,459

-17,459

GBP

 

1,496

1,496

-1,496

-1,496

BRL

 

-14,935

-14,935

14,935

14,935

Total increase/ decrease before tax

 

-29,917

-29,917

29,617

29,617

Financial assets in 2015 and 2014 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 2015 and 2014 consist of interest rate derivatives and are not influenced by movements in foreign exchange rates.

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 2015 and 2014 mainly USD, NOK, EUR, GBP and BRL revenue and expenses. At year end, the Company had one ship- building contract with a Brazilian yard for the construction of one OSRV, shipbuilding contracts with a Polish yard for the construction of three PSVs and one CLV and shipbuilding contracts with a German yard for construction of two WIVs. The contract with the Brazilian yard is in USD, BRL and NOK, the contracts with the Polish- and German yards are in EUR. Further information regarding these contracts is set out in Note 2.5 and Note 17. 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, 2014

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

117,623

3,614

3,614

-3,614

-3,614

Derivatives

1,041

-

-

-

-

Accounts receivable

74,753

1,292

1,292

-1,292

-1,292

Impact on financial assets before tax

193,417

4,907

4,907

-4,907

-4,907

           

Financial liabilities

         

Accounts payable

10,781

-1,583

-1,583

1,583

1,583

Derivatives

16,732

18,402

18,402

-21,016

-21,016

Borrowings

1,214,360

-51,399

-51,399

51,399

51,399

Impact on financial liabilities before tax

1,241,873

-34,580

-34,580

31,966

31,966

           

Income statement

         

Operating revenue

491,312

20,149

20,149

-20,149

-20,149

Operating expenses

297,187

-18,284

-18,284

18,284

18,284

Impact on operating result before tax

194,125

1,866

1,866

-1,866

-1,866

Total increase/decrease before tax

 

-27,807

-27,807

25,193

25,193

           

Allocation per currency

         

NOK

-21,985

-21,985

19,371

19,371

EUR

10,274

10,274

-10,274

-10,274

GBP

 

440

440

-440

-440

BRL

 

-16,537

-16,537

16,537

16,537

Total increase/ decrease before tax

 

-27,807

-27,807

25,193

25,193

PARENT COMPANY

 

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

 

+10% movements

-10% movements

December 31, 2015

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

269,293

15,060

15,060

-15,060

-15,060

Accounts receivable

-

-

-

-

-

Impact on financial assets before tax

269,293

15,060

15,060

-15,060

-15,060

           

Financial liabilities

         

Accounts payable

144

-14

-14

14

14

Derivatives

-

-

-

-

-

Borrowings

207,852

-16,678

-16,678

16,678

16,678

Impact on financial liabilities before tax

207,996

-16,693

-16,693

16,693

16,693

           

Income statement

         

Operating revenue

145

15

15

-15

-15

Operating expenses

9,240

-885

-885

885

885

Impact on operating result before tax

-9,095

-871

-871

871

871

Total increase/decrease before tax

 

-2,503

-2,503

2,503

2,503

           

Allocation per currency

         

NOK

-6,181

-6,181

6,181

6,181

EUR

3,719

3,719

-3,719

-3,719

GBP

 

-42

-42

42

42

Total increase/ decrease before tax

 

-2,503

-2,503

2,503

2,503

PARENT COMPANY

 

Foreign exchange risk rate 10%

(Amounts in USD 1,000)

 

+10% movements

-10% movements

December 31, 2014

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

222,579

15,217

15,217

-15,217

-15,217

Accounts receivable

-

-

-

-

-

Impact on financial assets before tax

222,579

15,217

15,217

-15,217

-15,217

           

Financial liabilities

         

Accounts payable

53

-1

-1

1

1

Derivatives

-

-

-

-

-

Borrowings

174,881

-20,334

-20,334

20,334

20,334

Impact on financial liabilities before tax

174,934

-20,334

-20,334

20,334

20,334

           

Income statement

         

Operating revenue

405

-

-

-

-

Operating expenses

12,521

-1,156

-1,156

1,156

1,156

Impact on operating result before tax

-12,116

-1,156

-1,156

1,156

1,156

Total increase/decrease before tax

 

-6,273

-6,273

6,273

6,273

           

Allocation per currency

         

NOK

-8,212

-8,212

8,212

8,212

EUR

1,916

1,916

-1,916

-1,916

GBP

 

23

23

-23

-23

Total increase/ decrease before tax

 

-6,273

-6,273

6,273

6,273

2.3 Credit risks, Concentration risks

The Company’s credit risk is primarily attributable to its trade and other shortterm 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. Ongoing provisions are made and, on 31 December 2015, the provision for certain accounts receivable which may not be paid in full was USD 13.4 million for the Company (2014: USD 9.5 million) and USD 0.3 million for the Parent (2014: USD 0.7 million).

The table below presents the concentration risks for 2015 and 2014

PARENT COMPANY

 

CONSOLIDATED

(Amounts in USD 1,000)

 

% of total

 

 

% of total

           

Receivables on December 31, 2015

         

1 to 5 largest

-

0.0 %

 

38,217

82.8 %

6 to 10 largest

-

0.0 %

 

10,869

23.6 %

Others

-

0.0 %

 

-2,939

-6.4 %

Total accounts receivable

-

0%

 

46,147

100%

           

(Amounts in USD 1,000)

 

% of total

 

 

% of total

           

Receivables on December 31, 2014

         

1 to 5 largest

-

0.0 %

 

50,454

67.5 %

6 to 10 largest

-

0.0 %

 

16,279

21.8 %

Others

-

0.0 %

 

8,020

10.7 %

Total accounts receivable

-

0%

 

74,753

100%

Trade and receivables

The table below presents an aging analysis of the outstanding receivables at year end 2015 and 2014. Overdue receivables are fol- lowed up continually by Management. The Management considers the outstanding amounts to be recoverable.

 

PARENT COMPANY

 

CONSOLIDATED

(Amounts in USD 1,000)

 

% of total

 

 

% of total

           

Aging on December 31, 2015

         

Not due

-

0.0 %

 

31,007

67.2 %

Due up to 1 month

-

0.0 %

 

3,947

8.6 %

Due 1-4 months

-

0.0 %

 

5,450

11.8 %

Due more than 4 months

-

0.0 %

 

5,742

12.4 %

Total accounts receivable

-

0%

 

46,147

100%

           

Aging on December 31, 2014

         

Not due

-

0.0 %

 

28,392

38.0 %

Due up to 1 month

-

0.0 %

 

14,823

19.8 %

Due 1-4 months

-

0.0 %

 

12,409

16.6 %

Due more than 4 months

-

0.0 %

 

19,128

25.6 %

Total accounts receivable

-

0%

 

74,753

100%

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

 

PARENT COMPANY

 

CONSOLIDATED

(Amounts in USD 1,000)

2015

2014

 

2015

2014

Currency

         

USD

-

-

 

24,529

61,830

NOK

-

-

 

2,351

1,947

EUR

-

-

 

14,233

5,606

GBP

-

-

 

3,252

2,386

BRL

-

-

 

1,783

2,984

Total accounts receivable

-

-

 

46,157

74,753

The maximum exposure to credit risk at the reporting date is the carrying value of each class of accounts receivable 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 eq- uity 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 eq- uity, or arrange new borrowing facilities, on favourable terms and in amounts nec- essary 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 sub- sidiary of the Company could result in the obligation of the Company to make pay- ments under parent company guarantees issued in favour of such subsidiary.

The Company is moreover exposed to changes in interest rates, which may af- fect 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 borrow- ings 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 the potential interest rate risk.

The following sensitivity tables demon- strate 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, 2015

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

148,753

-1,488

-1,488

1,488

1,488

Impact on financial assets before tax

148,753

-1,488

-1,488

1,488

1,488

           

Financial liabilities

         

Borrowings

657,617

5,782

5,782

-5,770

-5,770

Impact on financial liabilities before tax

657,617

5,782

5,782

-5,770

-5,770

Total increase/decrease before tax

 

4,294

4,294

-4,282

-4,282

           
   

CONSOLIDATED

 

Interest rate risk (IR)

(Amounts in USD 1,000)

 

-1% movements

+1% movements

December 31, 2014

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

117,623

-1,176

-1,176

1,176

1,176

Impact on financial assets before tax

117,623

-1,176

-1,176

1,176

1,176

           

Financial liabilities

         

Borrowings

668,772

2,689

2,689

-2,320

-2,320

Impact on financial liabilities before tax

668,772

2,689

2,689

-2,320

-2,320

Total increase/decrease before tax

 

1,513

1,513

-1,144

-1,144

Borrowings in the tables above (both for 2015 and 2014) 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, 2015

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

269,293

-2,693

-2,693

2,693

2,693

Impact on financial assets before tax

269,293

-2,693

-2,693

2,693

2,693

           

Financial liabilities

         

Borrowings

207,852

2,079

2,079

-2,079

-2,079

Impact on financial liabilities before tax

207,852

2,079

2,079

-2,079

-2,079

Total increase/decrease before tax

 

-614

-614

614

614

           
           

PARENT COMPANY

 

Interest rate risk (IR)

(Amounts in USD 1,000)

 

-1% movements

+1% movements

December 31, 2014

Carrying amount

Profit/(loss)

Equity

Profit/(loss)

Equity

           

Financial assets

         

Cash and cash equivalent

222,579

-2,226

-2,226

2,226

2,226

Impact on financial assets before tax

222,579

-2,226

-2,226

2,226

2,226

           

Financial liabilities

         

Borrowings

174,881

1,749

1,749

-1,749

-1,749

Impact on financial liabilities before tax

174,881

1,749

1,749

-1,749

-1,749

Total increase/decrease before tax

 

-477

-477

477

477

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 compari- son 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 finan- cial 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 receivable and accounts payable 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 as- sets and liabilities.

CONSOLIDATED

       

(Amounts in USD 1,000)

 

12/31/2015

 

12/31/2014

 

Book value

Fair value

Book value

Fair value

         

Financial assets

       

CIRR loan deposit

88,002

92,159

28,453

30,114

Long-term receivables

51,598

51,598

23,432

23,432

Accounts receivable

46,147

46,147

74,753

74,753

Other short-term receivables

60,657

60,657

63,877

63,877

Financial assets held for sale

3,459

3,459

-

-

Derivative financial instruments

1,451

1,041

1,041

1,041

Cash and cash equivalents

148,753

148,753

117,623

117,623

Total

400,066

403,814

309,179

310,840

         

Financial liabilities

       

Borrowings

1,122,585

1,162,291

1,214,360

1,250,847

CIRR loan

88,002

92,159

28,453

30,114

Other non-current liabilities

34,142

34,142

26,565

26,565

Accounts payable

8,395

8,395

10,781

10,781

Derivative financial instruments

12,896

12,896

16,732

16,732

Other current liabilities

91,001

91,001

123,072

123,072

Total

1,357,022

1,400,884

1,419,963

1,458,111

PARENT COMPANY

 

 

(Amounts in USD 1,000)

 

12/31/2015

 

12/31/2014

 

Book value

Fair value

Book value

Fair value

         

Financial assets

       

CIRR loan deposit

19,208

20,215

28,453

30,114

Long-term loan

25,867

25,867

30,053

30,053

Accounts receivable

-

-

-

-

Other short-term receivables

4,169

4,169

17,343

17,343

Cash and cash equivalents

269,293

269,293

222,579

222,579

Total

318,538

319,544

298,429

300,089

         

Financial liabilities

       

CIRR loan

19,208

20,215

28,453

30,114

Accounts payable

144

144

53

53

Other current liabilities

1,347

1,347

67,255

67,255

Total

20,698

21,706

95,761

97,422

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 aims to fix the majority of its fleet on long-term contracts. Vessels not fixed on long-term contracts are exposed to the volatility in the North Sea spot market.

The Company funds are used for investment opportunities in the business, yard instalments, scheduled repayments and repayments of debt and for general working capital purposes. The Company will from time to time re- quire 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.

The tables below summarize the maturity profile of the Company’s financial liabilities, including interests and future commitments to the newbuilding program.

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, 2015

           

Interest-bearing loans and borrowings

32,670

187,734

256,406

722,220

209,856

1,408,886

Trade and other payables

8,395

-

-

-

-

8,395

Total

41,065

187,734

256,406

722,220

209,856

1,417,281

             

December 31, 2014

           

Interest-bearing loans and borrowings

23,085

291,508

99,623

675,463

166,379

1,256,058

Trade and other payables

10,781

-

-

-

-

10,781

Total

33,866

291,508

99,623

675,463

166,379

1,266,839

             
             

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, 2015

           

Yard instalments falling due

3,650

392,250

-

-

-

395,900

             

December 31, 2014

           

Yard instalments falling due

39,262

202,800

308,408

-

-

550,470

             
             

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, 2015

           

Interest-bearing loans and borrowings

2,776

12,956

141,472

95,182

-

252,386

Trade and other payables

144

-

-

-

-

144

Total

2,920

12,956

141,472

95,182

-

252,530

             

December 31, 2014

           

Interest-bearing loans and borrowings

-

5,691

5,691

191,952

-

203,334

Trade and other payables

53

-

-

-

-

53

Total

53

5,691

5,691

191,952

-

203,387

No yard instalments falling due for the parent company as there were no vessels under construction at year-end 2015 and 2014.

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 will also enable a higher degree of debt-financing.

The wholly-owned Norwegian company, Siem Offshore Rederi AS, has 6 vessels under construction in Poland and Germany at year end, which includes three dual-fuel PSVs, one CLV and two WIVs. First 10% to 20% of contract price is or will be paid in accordance with agreed payment schedules and the remaining 80% to 90% will be paid at delivery. The Company has secured long-term employment for the two WIVs under construction. The CLV will be utilised by the Company’s wholly-owned subsidiary, Siem Offshore Contractors, for project work within the submarine power cable installation, repair and maintenance segment. The Company is in discussions for vessels-under-constructions contracts for the the three dual fuelled PSVs. The wholly-owned Brazilian subsidiary, Siem Offshore do Brasil SA, has one OSRV under construction in Brazil at yearend. The OSRV is scheduled for delivery in first quarter 2016. The vessel shall commence an eight-year firm contract for Petrobras with options for additional eight-year periods. The company has secured debt-financing for all of the seven vessels under construction at year-end.

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. See note 12.

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

         

(Amounts in USD 1,000)

 

Long-term contracts

   

+1% movements

-1% movements

December 31, 2015

Estimated total revenue

Profit/(loss)

Equity

Profit/(loss)

Equity

           
 

334,093

       

Progress reporting, effect from movement

 

3,341

3,341

-3,341

-3,341

Margin estimate, effect from movement

-

3,341

3,341

-3,341

-3,341

           
           

CONSOLIDATED

         

(Amounts in USD 1,000)

 

Long-term contracts

   

+1% movements

-1% movements

December 31, 2014

Estimated total revenue

Profit/(loss)

Equity

Profit/(loss)

Equity

           
 

150,166

       

Progress reporting, effect from movement

 

1,502

1,502

-1,502

-1,502

Margin estimate, effect from movement

-

1,502

1,502

-1,502

-1,502