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 2016 mainly USD, NOK, EUR, GBP, BRL, CAD and AUD revenue and expenses, compared to mainly USD, NOK, EUR, GBP and BRL for 2015.

At year-end, the Company had a shipbuilding contract with Polish yard for the construction of one PSV. The contract with the Polish yard is in EUR. After year-end the contract was cancelled due to delayed delivery from yard. The Company has been repaid all pre-delivery instalments related to the cancelled contract. Further information regarding the contract is set out in Note 2.5 and Note 17.

The Company is exposed to foreign exchange risk of its subsidiaries, in particular 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, 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

Financial assets in 2016 and 2015 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 2016 and 2015 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, 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

Derivaties

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

-29,617

-29,617

29,617

29,617

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

Accounts receivable

-

-

-

-

-

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

Derivatives

-

-

-

-

-

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

GBP

2,611

2,611

-2,611

-2,611

BRL

667

667

-667

-667

Total increase/ decrease before tax

-8,827

-8,827

8,827

8,827

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

207,582

-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

GBP

3,719

3,719

-3,719

-3,719

BRL

-42

-42

42

42

Total increase/ decrease before tax

-2,503

-2,503

2,503

2,503

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 (2015: USD 13.4 million) and USD 0 for the Parent (2015: USD 261K).

The table below presents the concentration risks for 2016 and 2015.

Parent company

Consolidated

(Amounts in USD 1,000)

USD

% of total

USD

% of total

Receivables on December 31, 2016

1 to 5 largest

-

0.0 %

38,008

78.8 %

6 to 10 largest

-

0.0 %

16,692

34.6 %

Others

-

0.0 %

17,403

36.1 %

Provision for bad debt

-

-23,872

Total accounts receivable

-

0%

48,230

100%

(Amounts in USD 1,000)

% of total

USD

% of total

Receivables on December 31, 2015

1 to 5 largest

261

100.0 %

38,217

82.8 %

6 to 10 largest

-

0.0 %

10,869

23.6 %

Others

-

0.0 %

10,433

-6.4 %

Provision for bad debt

-261

-13,372

Total accounts receivables

-

100%

46,147

100%

Trade and receivables

The table below presents an aging analysis of the outstanding receivables at year end 2016 and 2015. 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)

% of total

% of total

Aging on December 31, 2016

Not due

-

0.0 %

26,744

37.1 %

Due up to 1 month

-

0.0 %

13,815

19.2 %

Due 1-4 months

-

0.0 %

4,207

5.8 %

Due more than 4 months

-

0.0 %

27,336

4.8 %

Total accounts receivable

-

0%

72,102

100%

(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%

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)

2016

2015

2016

2015

Currency

USD

-

-

13,041

24,529

NOK

-

-

3,579

2,351

EUR

-

-

20,216

14,233

GBP

-

-

2,339

3,252

CAD

-

-

2,534

-

AUD

-

-

3,801

-

BRL

-

-

2,721

1,783

Total accounts receivable

-

-

48,230

46,147

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. 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.Borrowings in the tables above (both for 2016 and 2015) 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.

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.

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

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

657,317

5,782

5,782

-5,770

-5,770

Impact on financial liabilities before tax

657,317

5,782

5,782

-5,770

-5,770

Total increase/decrease before tax

4,294

4,294

-4,282

-4,282

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

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

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 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 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

76,215

79,511

88,002

92,159

Long-term receivables

31,168

31,168

51,598

51,598

Accounts receivables

48,230

48,230

46,147

46,147

Other short-term receivables

120,977

120,977

60,657

60,657

Financial assets held for sale

1,099

1,099

3,459

3,459

Derivative financial instruments

-

-

1,451

1,451

Cash and cash equivalents

101,323

101,323

148,753

148,753

Total

379,012

382,307

400,066

404,224

Financial liabilities

Borrowings

1,470,893

1,483,834

1,122,585

1,162,291

CIRR loan

76,215

92,580

88,002

92,159

Other non-current liabilities

47,382

47,382

34,142

34,142

Accounts payable

20,783

20,783

8,395

8,395

Derivative financial instruments

8,358

8,358

12,896

12,896

Other current liabilities

134,868

134,868

91,001

91,001

Total

1,758,498

1,774,734

1,357,022

1,400,884

PARENT COMPANY

(Amounts in USD 1,000)

12/31/2016

12/31/2015

Financial assets

Book value

Fair value

Book value

Fair value

CIRR loan deposit

14,300

15,343

19,208

20,215

Long-term loan

59,868

59,868

25,867

25,867

Accounts receivable

-

-

-

-

Other short-term receivables

6,298

6,298

4,169

4,169

Cash and cash equivalents

195,433

195,433

269,293

269,293

Total

275,900

276,943

318,538

319,544

Financial liabilities

CIRR loan

14,300

20,636

19,208

20,215

Accounts payable

56

56

144

144

Other current liabilities

7,401

7,401

1,347

1,347

Total

21,757

22,800

20,698

21,706

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, yard instalments, 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.

The Company will from time to time require additional capital to take advantage of business opportunities.

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

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, 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

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

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, 2016

Yard instalments falling due

-

-

-

-

-

-

December 31, 2015

Yard instalments falling due

3,650

392,250

-

-

-

395,900

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

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

No yard instalments falling due for the parent company as there were no vessels under construction year-end 2016 and 2015.

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 wholly-owned Norwegian company, Siem Offshore Rederi AS, had 1 PSV under construction in Poland at year end. The construction contract was cancelled after year-end due to delayed delivery from the yard. The pre-delivery instalments paid to the yard have been repaid to the Company.

The Company cancelled one PSV prior to year-end due to delayed delivery from the yard, and took delivery of 6 vessels during the year. All vessels have commenced on long term contracts.

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 10 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.

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

Consolidated

Interest rate risk (IR)

(Amounts in USD 1,000)

-1% movements

+1% movements

December 31, 2015

Estimated total revenue

Profit/(loss)

Equity

Profit/(loss)

Equity

Total value of contracts

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

Board Of Directors

Financial Statements

Notes