Final Results - Part Two

Petrofac Limited 05 March 2007 PART 2 CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2006 2006 2005 Notes US$'000 US$'000 Continuing operations Revenue 4a 1,863,873 1,485,472 Cost of sales 4b (1,593,462) (1,324,673) ----------------------------- Gross profit 270,411 160,799 Selling, general and administration 4e (103,029) (74,928) expenses Other income 4c 4,870 5,223 Other expenses 4d (1,133) (2,491) ------------------------------ Profit from continuing operations before tax and finance costs 171,119 88,603 Finance costs 5 (7,168) (8,448) Finance income 5 9,296 3,193 ------------------------------ Profit before tax 173,247 83,348 Income tax expense - UK (13,886) (7,106) - Overseas (37,454) (845) ------------------------------ 6 (51,340) (7,951) Profit for the year from continuing 121,907 75,397 operations Discontinued operations Loss for the year from discontinued operations 7 (1,575) (815) ------------------------------ Profit for the year 120,332 74,582 ============================== Attributable to: Petrofac Limited shareholders 120,332 74,582 Minority interests - - ------------------------------ 120,332 74,582 ============================== Earnings per share (US cents) 8 From continuing and discontinued operations: - Basic 34.98 24.52 - Diluted 34.87 22.17 From continuing operations: - Basic 35.44 24.79 - Diluted 35.32 22.41 The attached notes 1 to 34 form part of these consolidated financial statements. CONSOLIDATED BALANCE SHEET At 31 December 2006 2006 2005 Notes US$'000 US$'000 ASSETS Non-current assets Property, plant and equipment 10 143,176 120,431 Goodwill 12 56,732 49,183 Intangible assets 13 17,959 2,982 Available-for-sale financial assets 15 1,726 2,413 Other financial assets 16 1,947 680 Deferred income tax assets 6c 2,902 5,576 ------------------------- 224,442 181,265 ------------------------- Current assets Inventories 17 1,943 1,156 Work in progress 18 367,869 235,047 Trade and other receivables 19 330,515 325,716 Due from related parties 31 7,725 28,402 Other financial assets 16 10,133 4,501 Cash and short-term deposits 20 457,848 208,896 ------------------------ 1,176,033 803,718 ------------------------ Assets of discontinued operations classified as held for sale 7 1,372 1,667 ------------------------ TOTAL ASSETS 1,401,847 986,650 ======================== EQUITY AND LIABILITIES Equity attributable to Petrofac Limited shareholders Share capital 21 8,629 8,629 Share premium 66,210 66,210 Capital redemption reserve 10,881 10,881 Treasury shares 22 (8,144) (17) Other reserves 24 19,611 (12,426) Retained earnings 227,508 121,850 ----------------------- 324,695 195,127 Minority interests 209 - ------------------------ TOTAL EQUITY 324,904 195,127 ------------------------ Non-current liabilities Interest-bearing loans and borrowings 25 90,705 76,187 Provisions 26 12,498 8,284 Other financial liabilities 27 7,373 1,222 Deferred income tax liabilities 6c 2,794 3,121 ----------------------- 113,370 88,814 ----------------------- Current liabilities Trade and other payables 28 346,706 219,425 Due to related parties 31 182 1,335 Interest-bearing loans and borrowings 25 26,475 30,683 Other financial liabilities 27 172 15,810 Income tax payable 33,045 2,210 Billings in excess of cost and 18 124,990 69,776 estimated earnings Accrued contract expenses 29 432,003 363,470 ----------------------- 963,573 702,709 ----------------------- TOTAL LIABILITIES 1,076,943 791,523 ------------------------ TOTAL EQUITY AND LIABILITIES 1,401,847 986,650 ======================== The attached notes 1 to 34 form part of these consolidated financial statements. CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2006 2006 2005 Notes US$'000 US$'000 OPERATING ACTIVITIES Profit / (loss) before income taxes and minority interest: Continuing operations 173,247 83,348 Discontinued operations 7 (1,575) (815) ------------------------ 171,672 82,533 Adjustments for: Depreciation, amortisation and impairment 28,807 27,281 Share-based payments 4f 1,281 897 Difference between other long term employment benefits paid and amounts recognised in the income statement 3,082 2,372 Finance (income) costs, net (2,128) 5,255 Gain on disposal of investments 4c (1,671) (2,390) Gain on disposal of property, plant and equipment 4b,4c (11,681) (271) Other non-cash items, net 1,203 (1,815) ------------------------- Operating profit before working capital 190,565 113,862 changes Trade and other receivables (2,355) (106,794) Work in progress (132,822) (126,010) Due from related parties 20,677 (7,513) Inventories (787) 546 Current financial assets 983 15,121 Trade and other payables 129,896 61,010 Billings in excess of cost and estimated earnings 55,214 (2,379) Accrued contract expenses 68,533 184,462 Due to related parties (1,153) (118) Current financial liabilities - 4,261 ------------------------- 328,751 136,448 Other non-current items, net (139) (4,022) ------------------------- Cash generated from operations 328,612 132,426 Interest paid (7,848) (9,097) Income taxes paid, net (19,087) (15,085) ------------------------- Net cash flows from operating activities 301,677 108,244 ------------------------- Of which discontinued operations (416) (619) The attached notes 1 to 34 form part of these consolidated financial statements. CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December 2006 2006 2005 Notes US$'000 US$'000 INVESTING ACTIVITIES Purchase of property, plant and equipment (58,332) (17,556) Acquisition of subsidiaries, net of cash acquired 11 (3,865) (4,073) Purchase of minority interest 11 - (1,644) Purchase of intangible oil & gas assets (6,187) (3,079) Purchase of available-for-sale financial assets (501) (691) Proceeds from disposal of property, plant 22,823 647 and equipment Proceeds from disposal of assets of discontinued operations classified as held for sale - 1,832 Proceeds from disposal of available-for-sale financial assets 2,250 4,545 Net foreign exchange differences 1,366 (135) Interest received 7,927 3,442 ------------------------- Net cash flows used in investing activities (34,519) (16,712) ------------------------- Of which discontinued operations 2 1,892 FINANCING ACTIVITIES Proceeds from interest-bearing loans and borrowings 766 28,339 Repayment of interest-bearing loans and borrowings (10,361) (32,026) Purchase of derivative financial instruments - (689) Shareholders loan note transactions, net 198 4,968 Transactions with employee share plans, net - 537 Treasury shares purchased 22 (8,127) - Exercise of option to acquire group shares 11 - (2,400) Equity dividends paid (15,069) (15,243) ------------------------- Net cash flows used in financing activities (32,593) (16,514) ------------------------- Of which discontinued operations - - NET INCREASE IN CASH AND CASH EQUIVALENTS 234,565 75,018 Cash and cash equivalents at 1 January 202,841 127,823 ------------------------- CASH AND CASH EQUIVALENTS AT 31 DECEMBER 20 437,406 202,841 ========================= The attached notes 1 to 34 form part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006 Attributable to Shareholders of Petrofac Limited Issued Capital share Share redemption Treasury Other Retained Minority Total capital premium reserve shares reserves earnings Total Interests equity US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 (note 24) Balance at 1 January 2006 8,629 66,210 10,881 (17) (12,426) 121,850 195,127 - 195,127 Foreign currency translation - - - - 7,449 - 7,449 - 7,449 Net gain on maturity of cash flow hedges recognised in income statement - - - - (2,378) - (2,378) - (2,378) Net changes in fair value of derivatives - - - - 22,931 - 22,931 - 22,931 Realised gains on the sale of available-for-sale financial assets recognised in income statement - - - - (1,671) - (1,671) - (1,671) Net changes in the fair value of available-for-sale financial assets - - - - 1,062 - 1,062 - 1,062 Transfers to reserve for share-based payments - - - - 4,644 - 4,644 - 4,644 ------------------------------------------------------------------------------ Total income and expenses for the year recognised in equity - - - - 32,037 - 32,037 - 32,037 Net profit for the year - - - - - 120,332 120,332 - 120,332 ------------------------------------------------------------------------------- Total income and expenses for the year - - - - 32,037 120,332 152,369 - 152,369 Treasury shares (note22) - - - (8,127) - - (8,127) - (8,127) Dividends (note 9) - - - - - (14,674) (14,674) - (14,674) Minority interests acquired (note 11) - - - - - - - 209 209 ------------------------------------------------------------------------------- Balance at 31 December 2006 8,629 66,210 10,881 (8,144) 19,611 227,508 324,695 209 324,904 ================================================================================= The attached notes 1 to 34 form part of these consolidated financial statements. CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2006 Attributable to Shareholders of Petrofac Limited Issued Capital share Share redemption Treasury Other Retained Minority Total capital premium reserve shares reserves earnings Total interests equity US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 (note 24) Balance at 1 January 2005 7,166 28,553 10,881 - 27,047 64,911 138,558 - 138,558 Foreign currency translation - - - - (4,248) - (4,248) - (4,248) Net gain on maturity of cash flow hedges recognised in income statement - - - - (5,628) - (5,628) - (5,628) Net changes in fair value of derivatives - - - - (28,549) - (28,549) - (28,549) Realised gains on the sale of available-for-sale financial assets recognised in income statement - - - - (2,390) - (2,390) - (2,390) Net changes in the fair value of available-for-sale financial assets - - - - 1,342 - 1,342 - 1,342 ------------------------------------------------------------------------------ Total income and expenses for the year recognised in equity - - - - (39,473) - (39,473) - (39,473) Net profit for the year - - - - - 74,582 74,582 - 74,582 ------------------------------------------------------------------------------ Total income and expenses for the year - - - - (39,473) 74,582 35,109 - 35,109 Petrofac Employee Share Ownership Plan transactions, net 65 1,398 - (17) - - 1,446 - 1,446 Conversion of debt instruments 1,398 36,259 - - - - 37,657 - 37,657 Exercise of option to acquire group shares (note 11) - - - - - (2,400) (2,400) - (2,400) Dividends (note 9) - - - - - (15,243) (15,243) - (15,243) ------------------------------------------------------------------------------- Balance at 31 December 2005 8,629 66,210 10,881 (17) (12,426) 121,850 195,127 - 195,127 ================================================================================= The attached notes 1 to 34 form part of these consolidated financial statements. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS At 31 December 2006 1 CORPORATE INFORMATION The consolidated financial statements of Petrofac Limited (the Company) for the year ended 31 December 2006 were authorised for issue in accordance with a resolution of the directors on 2 March 2007. Petrofac Limited is a limited liability company registered in Jersey under the Companies (Jersey) Law 1991 and is the holding company for the international group of Petrofac subsidiaries (together "the group"). The group's principal activity is the provision of facilities solutions to the oil & gas production and processing industry. A full listing of all group companies, including joint venture companies, is contained in note 34 to these consolidated financial statements. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale financial assets that have been measured at fair value. The presentation currency of the consolidated financial statements is United States dollars (US$), as a significant proportion of the group's assets, liabilities, income and expenses are US$ denominated. The consolidated financial statements are presented in US$ and all values are rounded to the nearest thousand (US$'000) except where otherwise stated. Statement of compliance The consolidated financial statements of Petrofac Limited and all its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) and applicable requirements of Jersey law. Basis of consolidation The consolidated financial statements comprise the financial statements of Petrofac Limited and its subsidiaries. The financial statements of subsidiaries are prepared for the same reporting year as the Company and where necessary, adjustments are made to the financial statements of the group's subsidiaries to bring their accounting policies into line with those of the group. Subsidiaries are consolidated from the date on which control is transferred to the group and cease to be consolidated from the date on which control is transferred out of the group. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group balances and transactions, including unrealised profits, have been eliminated on consolidation. Minority interests in subsidiaries consolidated by the group are disclosed separately from the group's equity and income statement. Losses attributable to minority in excess of minority's interest in net asset of the subsidiary are adjusted against the interest of the group unless there is a binding obligation on the part of the minority to contribute additional investment in the subsidiary. Accounting policies The group has adopted new and revised Standards and Interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2006. The principal effects of the adoption of these new and amended standards and interpretations are discussed below: IFRS 6 'Exploration for and Evaluation of Mineral Resources' The group has adopted IFRS 6 'Exploration for and Evaluation of Mineral Resources' with effect from 1 January 2006. IFRS 6 prescribes guidelines relating to the measurement and recognition of exploration and evaluation expenditures. The adoption of IFRS 6 does not affect the group's operating results or financial position as its policy for capitalisation of acquisition and appraisal expenditures is consistent with IFRS 6. IFRIC 4 'Determining whether an Arrangement Contains a Lease' The group has also adopted IFRIC 4 'Determining whether an Arrangement Contains a Lease' with effect from 1 January 2006 which did not have any impact on the current and the prior year financial position of the group. 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Accounting policies (continued) At the date of authorisation of the financial statements, the following Standards and Interpretations, which were in issue but not yet effective, have not been applied in these financial statements: IAS 1 Amendments - Capital disclosures IFRS 7 Financial instruments: Disclosures IFRS 8 Operating Segments IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of Embedded Derivatives IFRIC 10 Interim Financial Reporting and Impairment IFRIC 11 IFRS 2 - Group and Treasury Share Transactions IFRIC 12 Service Concession Arrangements The group anticipates that the adoption of the above Standards and Interpretations will not have any material impact on the financial statements of future periods as most of them do not apply to the group's business, except for additional disclosures of the group's capital management policies and financial instruments as a result of adoption of IAS 1 Amendments - Capital disclosures and IFRS 7 - Financial instruments: Disclosures, from periods beginning 1 January 2007. Significant accounting judgements and estimates Judgements In the process of applying the group's accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the financial statements: • Petrofac Resources (Ohanet) Jersey Limited (Petrofac Ohanet): the group acquired Petrofac Ohanet on 27 May 2005. Prior to its acquisition, the group consolidated Petrofac Ohanet in its consolidated financial statements as it determined it held significant operating and financial control over the company. • Revenue recognition on fixed-price engineering, procurement and construction contracts: the group recognises revenue on fixed price engineering, procurement and construction contracts on the percentage-of-completion method, based on surveys of work performed. The group has determined this basis of revenue recognition is the best available measure of progress on such contracts. Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: • Project cost to complete estimates: at each balance sheet date the group is required to estimate costs to complete on fixed price contracts. Estimating costs to complete on such contracts requires the group to make estimates of future costs to be incurred, based on work to be performed beyond the balance sheet date. • Impairment of goodwill: the group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the group to make an estimate of the expected future cash flows from each cash-generating unit and also to determine a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2006 was US$56,732,000 (2005: US$49,183,000). • Deferred tax assets: the group recognises deferred tax assets on unused tax losses where it is probable that future profits will be available for utilisation. This requires management to make judgements and assumptions regarding the amount of deferred tax that can be recognised as well as the timing of the future profits. The carrying amount of recognised tax losses at 31 December 2006 was US$1,851,000 (2005: US$4,235,000). Interests in joint ventures The group has a number of contractual arrangements with other parties which represent joint ventures. These take the form of agreements to share control over other entities ('jointly controlled entities') and commercial collaborations ('jointly controlled operations'). The group's interests in jointly controlled entities are accounted for by proportionate consolidation, which involves recognising its proportionate share of the joint venture's assets, liabilities, income and expenses with similar items in the consolidated financial statements on a line-by-line basis. Where the group collaborates with other entities in jointly controlled operations, the expenses the group incurs and its share of the revenue earned is recognised in the income statement. Assets controlled by the group and liabilities incurred by it are recognised in the balance sheet. Where necessary, adjustments are made to the financial statements of the group's jointly controlled entities and operations to bring their accounting policies into line with those of the group. Transactions in foreign currencies In the accounts of individual group companies, transactions in foreign currencies are recorded at the prevailing rate at the date of the transaction. At the year end, monetary assets and liabilities denominated in foreign currencies are retranslated at the rates of exchange prevailing at the balance sheet date. All foreign exchange gains and losses are taken to the income statement with the exception of exchange differences arising on monetary assets and liabilities that form part of the group's net investment in subsidiaries. These are taken directly to equity until the disposal of the net investment at which time they are recognised in the income statement. Foreign group companies The balance sheets of overseas subsidiaries and joint ventures are translated using the closing rate method, whereby assets and liabilities are translated at the rates of exchange ruling at the balance sheet date. The income statements of overseas subsidiaries and joint ventures are translated at average exchange rates for the year. Exchange differences arising on the retranslation of net assets are taken directly to equity. On the disposal of a foreign entity, accumulated exchange differences are recognised in the income statement as a component of the gain or loss on disposal. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Depreciation is provided on a straight-line basis at the following rates: Oil & gas assets unit-of-production Oil & gas facilities 10% - 12.5% Plant and equipment 4% - 33% Buildings and leasehold improvements 5% - 33% (or shorter of the lease term) Office furniture and equipment 25% - 100% Vehicles 20% - 33% No depreciation is charged on land or assets under construction. Borrowing costs Borrowing costs directly attributable to the construction of qualifying assets, which are assets that necessarily take a substantial period of time to prepare for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised as interest payable in the income statement in the period in which they are incurred. Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the net fair value of the identifiable assets, liabilities and contingent liabilities of the entity at the date of acquisition. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that such carrying value may be impaired. For the purpose of impairment testing, goodwill acquired is allocated to the cash-generating units that are expected to benefit from the synergies of the combination. Each unit or units to which goodwill is allocated represents the lowest level within the group at which the goodwill is monitored for internal management purposes and is not larger than a segment based on either the group's primary or the group's secondary reporting format determined in accordance with IAS14 'Segment Reporting'. Impairment is determined by assessing the recoverable amount of the cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than the carrying amount of the units and related goodwill, an impairment loss is recognised. Where goodwill has been allocated to cash-generating units and part of the operation within those units is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the cash-generating units retained. Intangible assets Intangible assets acquired in a business combination are initially measured at cost being their fair values at the date of acquisition. After initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets are amortised over their useful economic life using a straight line method unless a better method reflecting the pattern in which the assets future economic benefits are expected to be consumed can be determined. Any change in the useful life or pattern of consumption of the intangible asset is treated as a change in accounting estimate and is accounted for by changing the amortisation period or method. Intangible assets are tested for impairment whenever there is an indication that the asset may be impaired. Customer contracts Customer contracts arising from acquisition are amortised over the remaining years of the contracts on a straight line basis. Oil & gas assets Capitalised costs The group's activities in relation to oil & gas assets are limited to acquisition, appraisal and development. The group does not undertake oil & gas exploration activities. The group follows the successful efforts method of accounting for oil & gas assets, under which expenditure relating to the acquisition and appraisal of oil & gas interests, including an appropriate share of directly attributable overheads and relevant financing costs, are initially capitalised at cost as intangible assets, pending determination of commercial reserves. Intangible oil & gas assets Intangible oil & gas assets are carried forward, on a field-by-field basis, until declared part of a commercial development, at which point the relevant total cost is transferred to tangible oil & gas assets. All intangible oil & gas assets are assessed for any impairment prior to transfer and any impairment loss is recognised in the income statement. Costs relating to unsuccessful appraisals are charged to the income statement in the period in which the determination is made. Tangible oil & gas assets Tangible oil & gas assets are depreciated, on a field-by-field basis, using the unit-of-production method based on entitlement to proved reserves, taking account of estimated future development expenditure relating to those reserves. The group utilises proved reserves estimates in performing impairment testing on its oil & gas assets. Changes in unit-of-production factors Changes in factors which affect unit-of-production calculations are dealt with prospectively, not by immediate adjustment of prior years' amounts. Decommissioning Provision for future decommissioning costs is made in full when the group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made. The amount recognised is the present value of the estimated future expenditure. An amount equivalent to the initial provision for decommissioning costs is capitalised and amortised over the life of the underlying asset on a unit-of-production basis over proved reserves. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the oil & gas asset. The unwinding of the discount of future decommissioning provisions is included as a separate financial item in the income statement under finance costs. Available-for-sale financial assets Investments classified as available-for-sale are initially stated at fair value, including acquisition charges associated with the investment. After initial recognition, available-for-sale financial assets are measured at their fair value using quoted market rates. Gains and losses are recognised as a separate component of equity until the investment is sold or impaired, at which time the cumulative gain or loss previously reported in equity is included in the income statement. Impairment of assets (excluding goodwill) At each balance sheet date, the group reviews the carrying amounts of its tangible and intangible assets to assess whether there is an indication that those assets may be impaired. If any such indication exists, the group makes an estimate of the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. In assessing value in use, the estimated future cash flows attributable to the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment is treated as a revaluation increase. Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Cost comprises purchase price, cost of production, transportation and other directly allocable expenses. Costs of inventories, other than raw materials, are determined using the first-in-first-out method. Costs of raw materials are determined using the weighted average method. Work in progress and billings in excess of cost and estimated earnings Work in progress is stated at cost and estimated earnings less provision for any anticipated losses and progress payments received or receivable. Where the payments received or receivable for any contract exceed the cost and estimated earnings less provision for any anticipated losses, the excess is shown as billings in excess of cost and estimated earnings within current liabilities. Trade and other receivables Trade receivables are recognised and carried at original invoice amounts less an allowance for any amounts estimated to be uncollectible. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified. A proportion of the group's trading cycle is on average more than twelve months due to the long term nature of the contracts undertaken. Retentions relating to contract receivables are presented as a current asset although they may not be recovered within twelve months of the balance sheet date. Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Interest-bearing loans and borrowings All interest-bearing loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs directly attributable to the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Provisions Provisions are recognised when the group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised in the income statement as a finance cost. Derecognition of financial assets and liabilities Financial assets A financial asset (or, where applicable a part of a financial asset) is derecognised where: • the rights to receive cash flows from the asset have expired; • the group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a 'pass-through' arrangement; or • the group has transferred its rights to receive cash flows from the asset and either a) has transferred substantially all the risks and rewards of the asset, or b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. If an existing financial liability is replaced by another from the same lender, on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the income statement. Pensions and other long term employment benefits The group has various defined contribution pension schemes in accordance with the local conditions and practices in the countries in which it operates. The amount charged to the income statement in respect of pension costs is the contributions payable in the year. Differences between contributions payable during the year and contributions actually paid are shown as either accrued liabilities or prepaid assets in the balance sheet. Other long term employment benefits are provided in accordance with the labour laws of the countries in which the group operates, further details of which are given in note 26. Share-based payment transactions Employees (including directors) of the group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares ('equity-settled transactions'). Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Petrofac Limited ('market conditions'), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the relevant employees become fully entitled to the award (the 'vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the group's best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market condition, which are treated as vesting irrespective of whether or not the market condition is satisfied, provided that all other performance conditions are satisfied. Equity awards cancelled are treated as vesting immediately on the date of cancellation, and any expense not recognised for the award is recognised in the income statement. The group has taken advantage of the transitional provisions of IFRS 2 'Share-based payment' in respect of equity-settled awards and has applied IFRS 2 'Share-based payment' only to equity-settled awards granted after 7 November 2002 that had not vested before 1 January 2005. Employee Share Ownership Plan (ESOP) Through Petrofac ESOP, the Company temporarily warehouses ordinary shares that are expected, in the foreseeable future, to be offered to new or existing employees (including directors). The cost of shares temporarily held by Petrofac ESOP are reflected as treasury shares and deducted from equity. Petrofac ESOP acquires shares from the Company at fair value, and the Company extends an interest free loan to Petrofac ESOP to acquire these shares. The effects of share issue and repurchase transactions arising within Petrofac ESOP are taken directly to equity. Petrofac Employee Benefit Trust The Petrofac Employee Benefit Trust was established on 7 March 2006 to warehouse ordinary shares purchased as a result of various new share scheme awards made to the employees of the Company, which will be transferred to the members of the scheme on their respective vesting dates subject to satisfying the performance conditions of each scheme. The trust has been consolidated in the financial statements in accordance with SIC 12 'Special Purpose Entities'. The cost of shares temporarily held by Petrofac Employee Benefit Trust are reflected as treasury shares and deducted from equity. Leases The group has entered into various operating leases the payments for which are recognised as an expense in the income statement on a straight-line basis over the lease terms. The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date, or whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys the right to use the asset. Revenue recognition Revenue is recognised to the extent that it is probable economic benefits will flow to the group and the revenue can be reliably measured. The following specific recognition criteria also apply: Engineering, procurement and construction services (Engineering & Construction) Revenues from fixed-price lump-sum contracts are recognised on the percentage-of-completion method, based on surveys of work performed when the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Engineering, procurement and construction services (Engineering & Construction) (continued) Revenues from cost-plus-fee contracts are recognised on the basis of costs incurred during the year plus the fee earned measured by the cost-to-cost method. Provision is made for all losses expected to arise on completion of contracts entered into at the balance sheet date, whether or not work has commenced on these contracts. Incentive payments are included in revenue when the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payments can be measured reliably. Claims are only included in revenue when negotiations have reached an advanced stage such that it is probable the claim will be accepted and can be measured reliably. Facilities management, engineering and training services (Operations Services) Revenues from reimbursable contracts are recognised in the period in which the services are provided based on the agreed contract schedule of rates. Revenues from fixed-price contracts are recognised on the percentage-of-completion method, measured by milestones completed or earned value when the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Incentive payments are included in revenue when the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payments can be measured reliably. Claims are only included in revenue when negotiations have reached an advanced stage such that it is probable the claim will be accepted and can be measured reliably. Oil & gas activities (Resources) Oil & gas revenues comprise the group's share of sales from the processing or sale of hydrocarbons on an entitlement basis. Income taxes Income tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Deferred income tax is recognised on all temporary differences at the balance sheet date between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with the following exceptions: •where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; •in respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and •deferred income tax assets are recognised only to the extent that it is probable that a taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilised. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the balance sheet date. Income tax is charged or credited directly to equity if it relates to items that are credited or charged to equity. Otherwise, income tax is recognised in the income statement. Derivative financial instruments and hedging The group uses derivative financial instruments such as forward currency contracts and interest rate caps and swaps to hedge its risks associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate cap and swap contracts is determined by reference to market values for similar instruments. For the purposes of hedge accounting, hedges are classified as: •fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability; or •cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction. The group formally designates and documents the relationship between the hedging instrument and the hedged item at the inception of the transaction, as well as its risk management objectives and strategy for undertaking various hedge transactions. The documentation also includes identification of the hedging instrument, the hedged item or transaction, the nature of risk being hedged and how the group will assess the hedging instrument's effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. The group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in the hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. Any gains or losses arising from changes in the fair value of derivatives that do not qualify for hedge accounting are taken to the income statement. The treatment of gains and losses arising from revaluing derivatives designated as hedging instruments depends on the nature of hedging relationship, as follows: Fair value hedges For fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged; the derivative is remeasured at fair value and gains and losses from both are taken to the income statement. For hedged items carried at amortised cost, the adjustment is amortised through the income statement such that it is fully amortised by maturity. The group discontinues fair value hedge accounting if the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or the group revokes the designation. Cash flow hedges For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. 3 SEGMENT INFORMATION The group's primary continuing operations are organised on a worldwide basis into three business segments: Engineering & Construction, Operations Services and Resources. The accounting policies of the segments are the same as those described in note 2 above. The group accounts for inter-segment sales as if the sales were to third parties, that is, at current market prices. The group evaluates the performance of its segments and allocates resources to them based on this evaluation. The group's secondary segment reporting format is geographical. Geographical segments are based on the location of the group's assets. Sales to external customers disclosed in geographical segments are based on the geographical location of its customers. Business segments The following tables present revenue and profit information and certain asset and liability information relating to the group's business segments for the years ended 31 December 2006 and 2005. Included within the corporate, consolidation and eliminations columns are certain balances, which due to their nature, are not allocated to segments. Year ended 31 December 2006 Continuing operations Engineering Consolidation & Operations adjustment & Discontinued Total Construction Services Resources Corporate eliminations Total operations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Revenue External sales 1,079,236 722,850 62,125 - (338) 1,863,873 33 1,863,906 Inter-segment sales 2,043 6,390 - - (8,433) - - - ---------------------------------------------------------------------------------------- Total revenue 1,081,279 729,240 62,125 - (8,771) 1,863,873 33 1,863,906 ========================================================================================= Results Segment operating results 117,209 29,100 25,065 - 707 172,081 (1,577) 170,504 Unallocated corporate costs - - - (962) - (962) - (962) --------------------------------------------------------------------------------------- Profit / (loss) before tax and finance costs 117,209 29,100 25,065 (962) 707 171,119 (1,577) 169,542 Finance costs (347) (2,754) (470) (8,042) 4,445 (7,168) - (7,168) Finance income 10,040 438 236 3,027 (4,445) 9,296 2 9,298 --------------------------------------------------------------------------------------- Profit / (loss) before income tax 126,902 26,784 24,831 (5,977) 707 173,247 (1,575) 171,672 Income tax (expense)/income (31,522) (8,681) (10,466) (707) 36 (51,340) - (51,340) --------------------------------------------------------------------------------------- Profit / (loss) for the year 95,380 18,103 14,365 (6,684) 743 121,907 (1,575) 120,332 ======================================================================================= Business segments Year ended 31 December 2005 Continuing operations Engineering Consolidation & Operations adjustment & Discontinued Total Construction Services Resources Corporate eliminations Total operations Operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Revenue External sales 833,648 605,493 46,331 - - 1,485,472 204 1,485,676 Inter-segment sales 24,558 (162) - - (24,396) - - - --------------------------------------------------------------------------------------- Total revenue 858,206 605,331 46,331 - (24,396) 1,485,472 204 1,485,676 ======================================================================================= Results Segment operating results 52,592 25,250 18,495 - 740 97,077 (875) 96,202 Unallocated corporate costs - - - (8,474) - (8,474) - (8,474) --------------------------------------------------------------------------------------- Profit / (loss) before tax and finance costs 52,592 25,250 18,495 (8,474) 740 88,603 (875) 87,728 Finance costs (166) (2,043) (986) (7,782) 2,529 (8,448) - (8,448) Finance income 4,023 82 129 1,488 (2,529) 3,193 60 3,253 --------------------------------------------------------------------------------------- Profit / (loss) before income tax 56,449 23,289 17,638 (14,768) 740 83,348 (815) 82,533 Income tax (expense) / income (1,386) (7,711) 683 463 - (7,951) - (7,951) --------------------------------------------------------------------------------------- Profit / (loss) for the year 55,063 15,578 18,321 (14,305) 740 75,397 (815) 74,582 ======================================================================================= Business segments Year ended 31 December 2006 Consolidation adjustment Engineering & Operations Discontinued & eliminations Total Construction Services Resources Corporate operations Operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Assets and liabilities Segment assets 1,017,978 284,308 136,080 - 2,885 (66,824) 1,374,427 Inter-segment assets (63,221) (3,418) - - (185) 66,824 - Investments - - 1,726 - - - 1,726 ----------------------------------------------------------------------------------- 954,757 280,890 137,806 - 2,700 - 1,376,153 Unallocated assets - - - 22,792 - - 22,792 Income tax assets 3,849 628 3,679 995 - (6,249) 2,902 ----------------------------------------------------------------------------------- Total assets 958,606 281,518 141,485 23,787 2,700 (6,249) 1,401,847 =================================================================================== Segment liabilities 774,632 185,164 109,182 - 26,934 (155,622) 940,290 Inter-segment liabilities (10,898) (32,398) (86,787) - (25,539) 155,622 - ----------------------------------------------------------------------------------- 763,734 152,766 22,395 - 1,395 - 940,290 Unallocated liabilities - - - 100,814 - - 100,814 Income tax liabilities 30,181 8,289 2,118 500 - (5,249) 35,839 ----------------------------------------------------------------------------------- Total liabilities 793,915 161,055 24,513 101,314 1,395 (5,249) 1,076,943 =================================================================================== Other segment information Capital expenditures: Property, plant and equipment 35,411 4,702 17,888 1,446 - - 59,447 Intangible oil & gas assets - - 12,926 - - - 12,926 Other intangible assets - 1,561 - - - - 1,561 Goodwill - 668 - - - - 668 =================================================================================== Charges: Depreciation 10,049 3,433 15,042 402 - (804) 28,122 Amortisation - 390 - - - - 390 Impairment losses - - - - 295 - 295 Other long term employment benefits 3,814 430 67 (7) - - 4,304 Share-based payments 358 287 65 571 - - 1,281 =================================================================================== Business segments Year ended 31 December 2005 Consolidation Engineering & Operations Discontinued adjustment Total Construction Services Resources Corporate operations& eliminations operations US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Assets and liabilities Segment assets 700,186 205,160 113,071 - 2,961 (45,875) 975,503 Inter-segment assets (42,964) (2,774) (33) - (104) 45,875 - Investments - - 2,413 - - - 2,413 -------------------------------------------------------------------------------- 657,222 202,386 115,451 - 2,857 - 977,916 Unallocated assets - - - 3,158 - - 3,158 Income tax assets 603 736 7,750 922 - (4,435) 5,576 -------------------------------------------------------------------------------- Total assets 657,825 203,122 123,201 4,080 2,857 (4,435) 986,650 ================================================================================ Segment liabilities 561,368 133,081 101,112 - 25,435 (130,157) 690,839 Inter-segment liabilities (1,726) (19,891) (83,776) - (24,764) 130,157 - -------------------------------------------------------------------------------- 559,642 113,190 17,336 - 671 - 690,839 Unallocated liabilities - - - 95,353 - - 95,353 Income tax liabilities 2,142 5,610 1,861 153 - (4,435) 5,331 -------------------------------------------------------------------------------- Total liabilities 561,784 118,800 19,197 95,506 671 (4,435) 791,523 ================================================================================ Other segment information Capital expenditures: Property, plant and equipment 10,174 3,492 3,812 78 - - 17,556 Intangible oil & gas assets - - 4,825 - - - 4,825 Goodwill - 5,405 - - - - 5,405 ================================================================================ Charges: Depreciation 10,948 2,216 14,099 141 - (813) 26,591 Amortisation - - - 440 - - 440 Impairment losses - - - - 250 - 250 Other long term employment benefits 2,206 636 36 25 - - 2,903 Share-based payments 685 102 - 110 - - 897 ================================================================================ Geographical segments The following tables present revenue, assets and capital expenditure by geographical segments for the years ended 31 December 2006 and 2005. Year ended 31 December 2006 Middle East Commonwealth of Independent & Africa States / Asia Europe Americas Consolidated US$'000 US$'000 US$'000 US$'000 US$'000 Segment revenue Continuing operations 886,359 271,082 700,757 5,675 1,863,873 Discontinued operations - - - 33 33 ---------------------------------------------------------------------- 886,359 271,082 700,757 5,708 1,863,906 ====================================================================== Carrying amount of segment assets 945,062 147,541 302,749 6,495 1,401,847 ====================================================================== Capital expenditure: Property, plant and equipment 19,501 27,314 12,514 118 59,447 Intangible oil & gas assets - - 12,926 - 12,926 Other intangible assets - 1,561 - - 1,561 Goodwill - 668 - - 668 --------------------------------------------------------------------- Year ended 31 December 2005 Middle East Commonwealth of Independent & Africa Union / Asia Europe Americas Consolidated US$'000 US$'000 US$'000 US$'000 US$'000 Segment revenue Continuing operations 354,326 609,270 518,175 3,701 1,485,472 Discontinued operations - - - 204 204 ----------------------------------------------------------------------- 354,326 609,270 518,175 3,905 1,485,676 ======================================================================= Carrying amount of segment assets 488,164 306,209 185,153 7,124 986,650 ======================================================================= Capital expenditure: Property, plant and equipment 3,755 9,920 3,843 38 17,556 Intangible oil & gas assets - 2,070 2,755 - 4,825 Goodwill - - 5,405 - 5,405 ======================================================================= 4 REVENUES AND EXPENSES a. Revenue 2006 2005 US$'000 US$'000 Rendering of services 1,840,519 1,478,187 Sale of crude oil 15,656 - Sale of processed hydrocarbons 7,698 7,285 ----------------------------- 1,863,873 1,485,472 ============================= Included in revenues from rendering of services are Operations Services revenues of a 'pass-through' nature with zero or low margins amounting to US$221,790,000 (2005: US$152,928,000). b. Cost of sales Included in cost of sales for the year ended 31 December 2006 is US$11,635,000 (2005: US$252,000) gain on disposal of property, plant and equipment used to undertake various engineering and construction contracts. c. Other income 2006 2005 US$'000 US$'000 Gain on sale of investments 1,671 2,390 Foreign exchange gains 2,201 1,200 Gain on sale of property, plant and equipment 46 19 Other income 952 1,614 ---------------------- 4,870 5,223 ====================== d. Other expenses 2006 2005 US$'000 US$'000 Foreign exchange losses 931 2,302 Other expenses 202 189 -------------------- 1,133 2,491 ===================== e. Selling, general and administration expenses 2006 2005 US$'000 US$'000 Staff costs 57,548 40,893 Depreciation 3,312 2,221 Amortisation 390 440 Other operating expenses 41,779 31,374 ----------------------- 103,029 74,928 ======================= In the year ended 31 December 2005, other operating expenses include US$6,311,000 of legal and professional expenses in relation to the Company's listing on the London Stock Exchange in October 2005. f. Staff costs 2006 2005 US$'000 US$'000 Total staff costs: Wages and salaries 443,437 359,860 Social security costs 25,111 23,494 Defined contribution pension costs 9,160 7,252 Other long term employee benefit costs (note 26) 4,304 2,903 Expense of share-based payments (note 23) 1,281 897 ---------------------- 483,293 394,406 ====================== Of the US$483,293,000 of staff costs shown above, US$425,745,000 (2005: US$353,513,000) are included in cost of sales. The average number of persons employed by the group during the year was 7,482 (2005: 6,598). Equity-settled transactions On 29 April 2005 the Company introduced a Long Term Incentive Plan (LTIP) for senior employees (including directors). Under the scheme rules, participatory interests in ordinary shares are granted to eligible employees. Unless varied by the Trustees of the scheme, 25% of the participatory interests in ordinary shares granted vest on award date with the balance vesting equally over the following three years, provided the recipients remain employees of the group. The scheme rules also stipulate participatory interests in ordinary shares will vest immediately on the occurrence of certain events, including the admission of the Company's shares to the Official List and to trading on the London Stock Exchange. Equity-settled transactions (continued) In 2005, 53,000 participatory interests in US$1.00 ordinary shares were granted under the LTIP scheme rules. The fair value of the interests granted, as determined using a net asset based formula, was US$897,000 or US$16.93 per US$1.00 ordinary share. As a result of the Company's listing on the London Stock Exchange on 7 October 2005, as governed by the LTIP scheme rules, all then unvested awards of participatory interests in ordinary shares vested immediately. Consequently, the group recognised a total expense of US$897,000 during 2005 in relation to these equity-settled transactions. g. Auditors' remuneration (including out-of-pocket expenses) 2006 2005 US$'000 US$'000 Audit fees 914 651 Fees for other services: Assurance services related to the Company's Initial Public - 2,262 Offering Tax services 78 154 Other 180 67 --------------------- 1,172 3,134 ===================== 5 FINANCE COSTS / (INCOME) 2006 2005 US$'000 US$'000 Interest payable: Long-term borrowings 5,166 5,954 Other interest, including short-term loans and overdrafts 1,595 1,938 "A" ordinary shares - 556 Unwinding of discount on deferred consideration and decommissioning provisions 407 - --------------------- Total finance cost 7,168 8,448 ===================== Bank interest receivable (9,049) (2,952) Other interest receivable (247) (241) --------------------- Total finance income (9,296) (3,193) ====================== Other interest receivable Other interest receivable includes shareholder loan interest receivable on loans advanced to employees for the purchase of participatory interests in ordinary shares of the Company (note 16). The offer to purchase participatory interests in ordinary shares was extended through the Petrofac Limited Executive Share Scheme (ESS), which is administered by Petrofac ESOP. The rules of the ESS, unless varied by the Trustee, required a down-payment on acquisition of participatory interests with the balance structured as an interest bearing shareholder loan note, payable over three years. Shareholder loan notes bear interest at rates between 3.5% and 3.8% (2005: between 3.4% and 4.5%) dependent on the year of issue. "A" ordinary shares During 2005, the conditions allowing the Company to call upon 3i Group plc to convert its unsecured variable rate loan notes to equity (as "A" ordinary shares) were satisfied. Under IAS 32 'Financial Instruments: Disclosure and Presentation', the Company classified the "A" ordinary shares as a financial liability, as the then Articles of Association of the Company provided the shares with priority of dividends, including the right to an annual 5% fixed dividend. The finance cost of US$556,000 in 2005 reflects the 5% dividend accruing on the "A" ordinary shares between the date of issue on 21 June 2005 and the date the "A" ordinary shares were reclassified as ordinary shares on listing of the Company in the London Stock Exchange. 6 INCOME TAX a. Tax on ordinary activities The major components of income tax expense are as follows: 2006 2005 US$'000 US$'000 Current income tax Current income tax charge 49,512 13,495 Adjustments in respect of current income tax of previous years (364) (590) Deferred income tax Relating to origination and reversal of temporary differences 1,963 (4,929) Adjustments in respect of deferred income tax of previous years 229 (25) --------------------- Income tax expense reported in the income statement 51,340 7,951 ===================== b. Reconciliation of total tax charge Under Article 123A of the Income Tax (Jersey) law 1961, as amended, the company has obtained Jersey exempt company status and is therefore exempt from Jersey income tax on non Jersey source income and bank interest (by concession). An annual exempt company fee is payable by the Company. A reconciliation between the income tax expense and the product of accounting profit on continuing operations multiplied by the Company's domestic tax rate is as follows: 2006 2005 US$'000 US$'000 Profit from operating activities before income tax 173,247 83,348 ======================= At Jersey's domestic income tax rate of 20% (2005: 20%) 34,649 16,670 Profits exempt from Jersey income tax (34,649) (16,670) Higher income tax rates of other countries, including 55,083 17,212 withholding taxes Overhead allowances - high rate jurisdiction (8,248) (112) Expenditure not allowable for income tax purposes - high rate 2,586 2,328 --------------------- jurisdiction Adjustments in respect of previous periods (135) (615) Tax effect of utilisation of tax losses not previously (83) (12,030) recognised Unrecognised tax losses 1,797 1,549 Tax recognised on un-remitted overseas dividends 340 (381) ---------------------- 51,340 7,951 ====================== The significant increase in the effective tax rate for the year ended 31 December 2006 compared to 2005 is principally due to a combination of increased profits being earned by the E&C division in higher taxable jurisdictions and the impact in 2005 of an income tax credit of US$8,943,000 relating to previously unrecognised tax losses on the Cendor project in Malaysia. c. Deferred income tax Deferred income tax relates to the following: Consolidated Consolidated Balance Sheet Income Statement 2006 2005 2006 2005 US$'000 US$'000 US$'000 US$'000 Deferred income tax liabilities Un-remitted overseas dividends - 366 (366) (378) Fair value adjustment on 2,393 1,746 39 - acquisitions Other timing differences 401 1,009 (117) 363 ------------------ Gross deferred income tax liabilities 2,794 3,121 ================== Deferred income tax assets Losses available for offset 1,851 4,235 2,384 (4,235) Tax assets utilised - 33 33 192 ------------------ 1,851 4,268 Decelerated depreciation for tax 407 808 401 (485) purposes Other timing differences 644 500 (182) (411) ------------------- Gross deferred income tax assets 2,902 5,576 =================== Deferred income tax charge / -------------------- (credit) 2,192 (4,954) ==================== d. Unrecognised tax losses The group has unrecognised tax assets including net operating losses (at 35%) in the US of US$12,137,000 (2005: US$11,859,000) and in the UK ring-fenced pre-trading expenses (at minimum 30%) of US$3,090,000 (2005: US$1,770,000) that are potentially available for offset against future taxable profits of the companies in which the losses arose, and a further US$603,000 (2005: US$1,549,000) of project related tax losses in various jurisdictions. 7 DISCONTINUED OPERATIONS On 29 April 2003, the group sold certain assets of Petrofac Inc., a wholly owned subsidiary, for cash consideration. The assets sold comprised substantially all of the operating assets of Petrofac Inc. although the group retained contractual responsibility for the work in hand at the date of the sale. All physical work relating to residual projects within the business of Petrofac Inc. is complete, subject to a number of relatively minor commercial issues, principally relating to ongoing legal disputes. The results of Petrofac Inc. are presented below: 2006 2005 US$'000 US$'000 Revenue 33 204 Cost of sales (126) (375) ---------------------- Gross loss (93) (171) Selling, general and administration expenses (1,484) (784) Other income - 80 ---------------------- Operating loss from discontinued operations (1,577) (875) Finance income, net 2 60 ---------------------- Pre tax loss from discontinued operations (1,575) (815) Income tax - - ---------------------- Net loss attributable to discontinued operations (1,575) (815) ====================== Assets of discontinued operation classified as held for sale of US$1,372,000 (2005: US$1,667,000) represent freehold land and buildings valued at the lower of cost and fair value less costs to sell. An impairment provision of US$295,000 has been recognised during the year ended 31 December 2006 (2005: US$250,000) in relation to a freehold office property, reflecting its anticipated fair value, net of selling costs. This charge is included within the selling, general and administration expense of the discontinued operation. The Company expects that the asset will be disposed of in the next twelve months. Cash flow The cash flows of Petrofac Inc. have been disclosed on the face of the Consolidated Cash Flow Statement. Earnings per share The earnings per share from discontinued operations are as set out below. 2006 2005 Earnings per share (US cents): Basic (0.46) (0.27) Diluted (0.46) (0.24) 8 EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders, after adding interest relating to convertible share warrants, by the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of dilutive warrants, options on ordinary shares and ordinary shares granted under employee share award schemes which are held in trust. The following reflects the income and share data used in calculating basic and diluted earnings per share: 2006 2005 US$'000 US$'000 Continuing and discontinued operations Net profit attributable to ordinary shareholders for basic earnings per share 120,332 74,582 Income statement charge on variable rate unsecured loan notes - 1,873 --------------------- Net profit attributable to ordinary shareholders for diluted earnings per share 120,332 76,455 Continuing operations Add net loss for the period from discontinued operation 1,575 815 --------------------- Net profit attributable to ordinary shareholders for diluted earnings per share 121,907 77,270 ===================== 2006 2005 Number Number '000 '000 Weighted average number of ordinary shares for basic earnings per share 344,003 304,141 Convertible share warrants - 39,361 Ordinary share option - 1,134 Unvested portion of LTIP shares - 166 Weighted average number of ordinary shares granted under share-based payment 1,117 - schemes held as treasury shares Adjusted weighted average number of ordinary shares for diluted earnings per share 345,120 344,802 ======================= To calculate discontinued earnings per share, the weighted average number of ordinary shares for both basic and diluted is as set out above. The following reflects the loss figure used as the numerator: 2006 2005 US$'000 US$'000 Net loss attributable to ordinary shareholders from discontinued operations for basic and diluted earnings per share (1,575) (815) ====================== 9 DIVIDENDS PAID AND PROPOSED 2006 2005 US$'000 US$'000 Declared and paid during the year Equity dividends on ordinary shares: Final dividend for 2004: 2.30 cents per share - 6,586 Final dividend for 2005: 1.87 cents per share 6,425 - Interim dividend 2006 2.40 cents per share 8,249 - 2005 pre-listing dividend: 3.01 cents per share - 8,657 ----------------------- 14,674 15,243 ======================= 2006 2005 US$'000 US$'000 Proposed for approval at AGM (not recognised as a liability as at 31 December) Equity dividends on ordinary shares Final dividend for 2006: 6.43 cents per share (2005: 1.87 cents per share) 22,228 6,454 ======================= 10 PROPERTY, PLANT AND EQUIPMENT Land, buildings Office and furniture Capital Oil & Oil & gas leasehold Plant and and work in gas assets facilities improvements equipment Vehicles equipment progress Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 Cost At 1 January - 123,373 20,006 21,661 9,683 14,446 - 189,169 2005 Transfers - - - (342) 55 287 - - Additions 2,765 1,218 937 1,620 3,940 7,076 - 17,556 Acquisition of - - - - - 81 - 81 subsidiaries Transfers from intangible oil & gas assets 8,467 - - - - - - 8,467 Disposals - - (376) (401) (627) (1,621) - (3,025) Exchange difference - - (1,284) (881) (57) (783) - (3,005) -------------------------------------------------------------------------------- At 1 January 11,232 124,591 19,283 21,657 12,994 19,486 - 209,243 2006 Additions 17,548 149 7,258 10,130 1,127 14,160 9,075 59,447 Acquisition of - - - 43 - - - 43 subsidiaries Disposals - - (6,652) (11,618) (7,522) (868) - (26,660) Exchange difference - - 1,573 774 85 1,667 - 4,099 -------------------------------------------------------------------------------- At 31 December 2006 28,780 124,740 21,462 20,986 6,684 34,445 9,075 246,172 --------------------------------------------------------------------------------- Depreciation At 1 January - (33,871) (4,454) (14,580) (4,188) (8,663) - (65,756) 2005 Transfers - - - 110 (3) (107) - - Charge for the - (13,009) (3,394) (2,628) (3,432) (4,128) - (26,591) year Disposals - - 239 241 503 1,598 - 2,581 Exchange difference - - 137 352 26 439 - 954 -------------------------------------------------------------------------------- At 1 January 2006 - (46,880) (7,472) (16,505) (7,094) (10,861) - (88,812) Charge for the year (802) (13,289) (2,695) (1,659) (2,781) (6,896) - (28,122) Disposals - - 6,167 3,504 5,148 699 - 15,518 Exchange difference - - (288) (502) (63) (727) - (1,580) --------------------------------------------------------------------------------- At 31 December 2006 (802) (60,169) (4,288) (15,162) (4,790) (17,785) - (102,996) ---------------------------------------------------------------------------------- Net carrying amount: At 31 December 2006 27,978 64,571 17,174 5,824 1,894 16,660 9,075 143,176 ================================================================================== At 31 December 2005 11,232 77,711 11,811 5,152 5,900 8,625 - 120,431 ----------------------------------------------------------------------------------- No interest has been capitalised within oil & gas facilities during the year (2005: nil) and the accumulated capitalised interest, net of depreciation at 31 December 2006, was US$2,427,000 (2005: US$2,927,000). Included in oil & gas assets is US$990,000 (2005: nil) of capitalised decommissioning costs provided on the PM 304 asset in Malaysia and advance capital expenditure payments made on behalf of the vendor of US$2,846,000 (2005: nil) under the terms of the acquisition of a 45% interest in the Chergui concession, Tunisia which was not completed until after the balance sheet date (note 33). Of the total charge for depreciation in the income statement for continuing operations, US$24,810,000 (2005: US$24,370,000) is included in cost of sales and US$3,312,000 (2005: US$2,221,000) in selling, general and administration expenses. Capital work in progress comprises of expenditures incurred on the construction of a new office building in Sharjah, United Arab Emirates. 11 BUSINESS COMBINATIONS Acquisitions in 2006 PPS Process Control and Instrumentation Services Limited On 28 April 2006, the group acquired a 100% interest in the share capital of PPS Process Control and Instrumentation Services Limited (subsequently renamed, and hereafter referred to as, Petrofac (Cyprus) Limited), a company incorporated in Cyprus which is also the holding company of the subsidiaries listed below. The Petrofac (Cyprus) Limited subsidiaries provide operations and maintenance training on Sakhalin Island, Russia, and process control and instrumentation services in Singapore, Malaysia and Indonesia. The total consideration for the acquisition inclusive of transaction costs of US$211,000 and earn-out provision of US$189,000 was US$2,000,000. The consideration of US$1,600,000 (excluding transaction costs and earn-out provision) was settled by a cash payment of US$527,000 and the extinguishment of receivables due from the vendor of US$1,073,000. The fair values of the identifiable assets and liabilities of Petrofac (Cyprus) Limited and its subsidiaries at the date of acquisition are analysed below. Recognised on Carrying acquisition value US$'000 US$'000 Property, plant and equipment 43 43 Intangible assets (note 13) 1,561 - Trade and other receivables 616 616 Income tax receivable 56 56 Cash and short-term deposits 169 169 ----------------------- Total assets 2,445 884 ----------------------- Less: Trade and other payables (748) (748) Minority interest (209) 6 Deferred tax liability (156) - ------------------------ Total liabilities (1,113) (742) ------------------------ Fair value of net assets acquired 1,332 142 ======== Goodwill arising on acquisition (note 12) 668 ---------- Consideration 2,000 ========== Cash outflow on acquisition: Cash acquired with subsidiary 169 Cash paid on acquisition (527) Legal expenses paid on acquisition (211) -------- Net cash outflow on the acquisition of subsidiary (569) ======== The subsidiaries of Petrofac (Cyprus) Limited acquired by the group during the period were as follows: Name of Company Country of % shareholding incorporation PKT Technical Services Ltd Russia 50% PKT Training Services Ltd Russia 100% Pt PCI Indonesia Indonesia 80% Process Control and Instrumentation Singapore 100% Services Pte Ltd Process Control and Instrumentation Malaysia 100% Sendirian Berhad Sakhalin Technical Training Centre Russia 80% Intangible assets recognised on acquisition comprise customer contracts which are being amortised over their remaining economic useful life of three years on a straight line basis. From the date of acquisition, Petrofac (Cyprus) Limited and its subsidiaries have contributed a loss of US$3,000 to the net profit for the group. If the combination had taken place at the beginning of the year, net profit for the group for the year ended 31 December 2006 would have been US$120,362,000 and revenue from continuing operations would have been US$1,865,080,000. PPS Process Control and Instrumentation Services Limited (continued) The residual goodwill above comprises the fair value of expected synergies in the Group's Training division arising from the acquisition. Petrofac (Malaysia-PM304) Limited During the year, contingent consideration of US$4,450,000 was paid in respect of the acquisition of 100% issued and outstanding shares of Petrofac (Malaysia-PM304) Limited (formally Amerada Hess (Malaysia-PM304) Limited), which the group acquired on 16 June 2004. Petrofac (Malaysia-PM304) Limited held a 40.5% interest in a Production Sharing Contract (PSC) in Block PM304 and under pre-emption rights contained within the PSC, Petrofac (Malaysia-PM304) Limited sold a 10.5% interest of the PSC to one of the partners in the PSC on the same commercial terms and conditions of the acquisition and received US$1,154,000 as contingent consideration during the year. The net cash outflow of these related transactions amounting to US$3,296,000 is shown in the consolidated cash flow statement within the acquisition of subsidiaries line. Acquisitions in 2005 Plant Asset Management On 20 October 2005, the group acquired the remaining 49% minority interest stake in Plant Asset Management Limited (Plant Asset Management) for a total consideration of US$1,644,000 including transaction costs of US$52,000. The consideration was settled in cash. The difference between the consideration paid and the fair value of assets acquired of US$1,644,000 has been allocated as goodwill and included in this goodwill recognised are certain intangible assets that cannot be individually separated and reliably measured due to their nature. Prior to acquisition, the group did not carry a minority interest balance in relation to Plant Asset Management as the company had net liabilities and the group had no rights of recovery against the minority shareholders. Petrofac Ohanet On 27 May 2005, following the group's voluntary prepayment of non-recourse project finance provided by GE Structured Finance in relation to the Ohanet project, the group exercised its option to acquire Petrofac Resources (Ohanet) Jersey Limited (Petrofac Ohanet) for US$2,400,000. The consideration was settled in cash. The option to acquire Petrofac Ohanet was established in May 2002 as part of the group's corporate reorganisation and the investment by 3i Group plc. Prior to exercising the option, the group consolidated the financial results of Petrofac Ohanet in its consolidated financial statements as the group held significant operating and financial control over the company. The consideration paid to exercise the option has been taken to equity. Rubicon Response On 28 January 2005, the group acquired 100% of the issued and outstanding shares of Rubicon Response Limited (Rubicon Response), a leading provider of emergency response management consultancy and training services to the upstream oil & gas exploration and production markets. Total consideration for the acquisition of the shares inclusive of transaction costs of US$82,000, was US$6,326,000. The fair value of the net assets acquired was US$2,565,000. The difference of US$3,761,000 between the consideration and fair value of net assets acquired has been recognised as goodwill, which comprises the fair value of expected synergies in the Group's Training division arising from the acquisition. The cash outflow on the acquisition amounted to US$4,073,000, net of cash acquired with the subsidiary of US$2,253,000. 12 GOODWILL A summary of the movements in goodwill is presented below: 2006 2005 US$'000 US$'000 At 1 January 49,183 49,653 Acquisitions during the year (note 11) 668 5,405 Exchange difference 6,881 (5,875) ------------------------- At 31 December 56,732 49,183 ========================= Goodwill acquired through business combinations has been allocated to three groups of cash-generating units, which are reportable segments, for impairment testing as follows: • Facilities Management (comprising Petrofac Facilities Management and Plant Asset Management) • Training (comprising Petrofac Training, Chrysalis Learning, Rubicon Response and PPS Process Control & Instrumentation) • Resources (comprising Petrofac Resources International Limited) These represent the lowest level within the group at which the goodwill is monitored for internal management purposes. Facilities Management and Training cash-generating units The recoverable amounts for the Facilities Management and Training units have been determined based on value in use calculations, using discounted pre-tax cash flow projections. Management has adopted a ten year projection period to assess each unit's value in use as it considers the life of the goodwill for both the Facilities Management and Training cash-generating units to significantly exceed the five year impairment test period referred to in IAS 36. The cash flow projections are based on financial budgets approved by senior management covering a five year period, extrapolated, thereafter at a growth rate of 5% per annum. Management considers this is a conservative long-term growth rate relative to both the economic outlook for the units in their respective markets within the oil & gas industry and the growth rates experienced in the recent past by each unit. Resources cash-generating units The recoverable amount of the Resources unit is also determined on a value in use calculation using discounted pre-tax cash flow projections based on financial budgets and economic parameters for the unit approved by senior management and covering a five year period, as recommended under IAS 36. Carrying amount of goodwill allocated to each group of cash-generating units 2006 2005 US$'000 US$'000 Facilities Management unit 30,091 26,117 Training unit 24,424 20,849 Resources unit 2,217 2,217 ----------------------- At 31 December 56,732 49,183 ======================= Key assumptions used in value in use calculations The calculation of value in use for both the Facilities Management and Training units is most sensitive to the following assumptions: • Market share • Growth rate • Net profit margins; and • Discount rate Market share: The assumption relating to market share for the Facilities Management unit is based on the unit re-securing those existing customer contracts in the UK which are due to expire during the projection period; for the Training unit, the key assumptions relate to management's assessment of maintaining the unit's market share in the UK and developing further the business in international markets. Growth rate: estimates are based on management's assessment of market share having regard to macro-economic factors and the growth rates experienced in the recent past by each unit. A growth rate of 5% per annum has been applied for the remaining five years of the ten year projection period. Net profit margins: estimates are based on management's assumption of achieving a level of performance at least in line with the recent past performance of each of the units. Discount rate: management has used a pre-tax discount rate of 8.0% (2005: 9.1%) per annum which is derived from the estimated weighted average cost of capital of the group. This discount rate has been calculated using an estimated risk free rate of return adjusted for the group's estimated equity market risk premium and the group's cost of debt. The calculation of value in use for the Resources unit is most sensitive to the following assumptions: • Financial returns • Discount rate; and • Oil prices Financial returns: estimates are based on the unit achieving returns on existing investments (comprising both those that are currently cash flowing and those which are in development and which may therefore be consuming cash) at least in line with current forecast income and cost budgets during the planning period; Discount rate: management has used an estimate of the pre-tax weighted average cost of capital of the group plus a risk premium to reflect the particular risk characteristics of each individual investment. The discount rates range between 10% and 15% (2005: 9.9% and 17.0%). Oil prices: management has used a prudent oil price assumption of US$40 per barrel for the impairment testing of its individual oil & gas investments. Sensitivity to changes in assumptions With regard to the assessment of value in use of the cash generating units, management believes that no reasonably possible changes in any of the above key assumptions would cause the carrying value of the relevant unit to exceed its recoverable amount, after giving due consideration to the macro-economic outlook for the oil & gas industry and the commercial arrangements with customers underpinning the cash flow forecasts for each of the units. 13 INTANGIBLE ASSETS 2006 2005 US$'000 US$'000 Intangible oil & gas assets At 1 January 2,982 6,721 Additions 12,926 4,825 Transferred to tangible oil & gas assets - (8,467) Exchange difference 880 (97) ------------------------ At 31 December 16,788 2,982 ------------------------ Other intangible assets At 1 January - - Additions (note 11) 1,561 - Amortisation (390) - ------------------------ At 31 December 1,171 - ------------------------ Total intangible assets 17,959 2,982 ======================== On 9 February 2006, the group increased its interest in the Crawford field from 5.58% to 60.88% for a consideration of US$18,580,000, consisting of cash consideration of US$2,400,000 and a deferred consideration of up to US$16,180,000. The group simultaneously sold 31.88% of its interest to the existing partners in the field on the same commercial terms and conditions associated with the purchase of the field. The group has treated the purchase and sale transaction as a single investment transaction based on its substance and this forms part of the additions to intangible oil & gas assets shown above. The net consideration consists of an initial net cash payment of US$1,000,000 and a net deferred contingent payment of up to US$6,743,000 for a further 23.42% interest in the field. On 18 December 2006, the group acquired a 60% interest in part of Block 211/18a in the UK North Sea containing the Don Southwest discovery for a consideration of US$4,431,000, including transaction costs and other capitalised costs of US$295,000. There are cash outflows relating to capitalised costs of US$400,000 in the current year arising from pre-development activities pertaining to oil and gas reserves (2005: US$1,843,000). There are no assets other than intangible assets, liabilities, income or expenses arising from pre-development activities in the current year (2005: nil). Other intangible asset additions relate to the acquisition of interests in fields. Other intangible assets comprise the fair values of customer contracts arising on acquisition (note 11). Customer contracts are being amortised over their remaining economic useful life of three years on a straight line basis and the related amortisation charge included in selling, general and administrative expenses (note 4e). 14 INTEREST IN JOINT VENTURES In the normal course of business, the group establishes jointly controlled entities and operations for the execution of certain of its operations and contracts. A list of these joint ventures is disclosed in note 34. The group's share of assets, liabilities, revenues and expenses relating to jointly controlled entities and operations are as follows: 2006 2005 US$'000 US$'000 Revenue 92,800 159,041 Cost of sales (71,103) (150,802) ------------------------- Gross profit 21,697 8,239 Selling, general and administration expenses (1,140) (883) Finance income, net 45 21 -------------------------- Profit before income tax 20,602 7,377 Income tax (616) (373) -------------------------- Net profit 19,986 7,004 ========================== Current assets 63,009 96,266 Non-current assets 4,459 12,314 -------------------------- Total assets 67,468 108,580 -------------------------- Current liabilities 40,993 100,276 Non-current liabilities 299 290 -------------------------- Total liabilities 41,292 100,566 -------------------------- Net assets 26,176 8,014 ========================== 15 AVAILABLE-FOR-SALE FINANCIAL ASSETS 2006 2005 US$'000 US$'000 Shares - listed 1,212 2,413 Units in a mutual fund 514 - ----------------------- 1,726 2,413 ======================= Available-for-sale financial assets consist of investments in ordinary shares and units in a mutual fund and therefore have no fixed maturity date or coupon rate. 16 OTHER FINANCIAL ASSETS 2006 2005 US$'000 US$'000 Other financial assets - non-current Fair value of derivative instruments 1,925 672 Other 22 8 ----------------------- 1,947 680 ======================= Other financial assets - current Fair value of derivative instruments 7,483 461 Interest receivable 1,479 140 Restricted cash 883 1,648 Short-term notes receivable from shareholders 216 414 Other 72 1,838 --------------------- 10,133 4,501 ====================== Restricted cash is comprised of deposits with financial institutions securing various guarantees and performance bonds associated with the group's trading activities. 17 INVENTORIES 2006 2005 US$'000 US$'000 Crude oil 763 - Processed hydrocarbons 227 163 Stores & spares 697 698 Raw materials 256 295 ----------------------- 1,943 1,156 ======================= Included in the income statement are costs of inventories expensed of US$7,535,000 (2005: US$4,414,000). 18 WORK IN PROGRESS AND BILLINGS IN EXCESS OF COST AND ESTIMATED EARNINGS 2006 2005 US$'000 US$'000 Cost and estimated earnings 1,714,647 1,453,455 Less: Billings (1,346,778) (1,218,408) --------------------------- Work in progress 367,869 235,047 ============================ Billings 359,079 210,582 Less: Cost and estimated earnings (234,089) (140,806) ---------------------------- Billings in excess of cost and estimated earnings 124,990 69,776 ============================ Total cost and estimated earnings 1,948,736 1,594,261 ============================ Total billings 1,705,857 1,428,990 ============================ 19 TRADE AND OTHER RECEIVABLES 2006 2005 US$'000 US$'000 Contract trade receivables 293,803 290,313 Retentions receivable 4,591 5,408 Advances 10,754 18,256 Prepayments and deposits 12,323 9,213 Other receivables 9,044 2,526 ----------------------- 330,515 325,716 ======================= 19 TRADE AND OTHER RECEIVABLES Contract receivables are non-interest bearing and are generally on 30 to 60 days' terms. Retentions relating to contract receivables are presented as a current asset although they may not be recovered within twelve months of the balance sheet date. Advances represent payments made to certain of the group's sub-contractors for projects in progress, on which the related work had not been performed at the balance sheet date. Certain trade and other receivables will be settled in currencies other than the reporting currency of the group, mainly in Sterling and Kuwaiti Dinars. 20 CASH AND SHORT-TERM DEPOSITS 2006 2005 US$'000 US$'000 Cash at bank and in hand 120,003 91,339 Short-term deposits 337,845 117,557 ----------------------- Total cash and bank balances 457,848 208,896 ======================= Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the group, and earn interest at respective short-term deposit rates. The fair value of cash and bank balances is US$457,848,000 (2005: US$208,896,000). For the purposes of the cash flow statement, cash and cash equivalents comprise the following: 2006 2005 US$'000 US$'000 Cash at bank and in hand 120,003 91,339 Short-term deposits 337,845 117,557 Bank overdrafts (note 25) (20,442) (6,055) ----------------------- 437,406 202,841 ======================= 21 SHARE CAPITAL On 15 September 2005, conditional upon listing on the London Stock Exchange, the shareholders of the Company approved the reclassification of the issued "A" ordinary shares as ordinary shares and, immediately following the reclassification, a 40:1 share split for all ordinary shares then authorised such that the nominal value of ordinary shares reduced from US$1.00 per share to US$0.025 per share. The shareholders also conditionally approved the redemption of the "B" deferred share at its nominal value. On 7 October 2005 the Company's shares were admitted to the Official List and to trading on the London Stock Exchange, at which time the reclassification of the "A" ordinary shares and the subsequent share split became unconditional, and the "B" deferred share was redeemed at its nominal value. The share capital of the Company as at 31 December was as follows: 2006 2005 US$'000 US$'000 Authorised 750,000,000 ordinary shares of US$0.025 each (2005: 750,000,000 ordinary shares of US$0.025 each) 18,750 18,750 ======================= Issued and fully paid 345,159,920 ordinary shares of US$0.025 each (2005: 345,159,920 ordinary shares of US$0.025 each) 8,629 8,629 ======================= The movement in the number of issued and fully paid ordinary shares is as follows: Number Ordinary shares: Balance of ordinary shares of US$1.00 each at 1 January 2005 7,166,330 Issued in period to 7 October 2005 47,486 Reclassification of "A" ordinary shares of US$1.00 each as ordinary shares of US$1.00 each 1,397,557 ------------ Balance of ordinary shares of US$1.00 each at 7 October 2005 and immediately prior to share split 8,611,373 ------------ Balance of ordinary shares of US$0.025 each 344,454,920 Issued during the period 7 October 2005 to 31 December 2005 705,000 ------------ Balance of ordinary shares of US$0.025 each at 1 January 2006 345,159,920 Movement during the year - ------------- Balance of ordinary shares of US$0.025 each at 31 December 2006 345,159,920 ============== "A" ordinary shares Balance at 1 January 2005 - Issued during the year 1,397,557 Reclassification as ordinary shares of US$1.00 each (1,397,557) -------------- Balance at 31 December 2005 - ============== Balance at 31 December 2006 - =============== Between 21 June 2005, being the date of issue, and 7 October 2005, being the date of reclassification, the "A" ordinary shares were classified as a financial liability (see share options note below). Petrofac ESOP During 2005 through Petrofac ESOP, the Company temporarily warehoused ordinary shares that were expected, in the foreseeable future, to be offered to new or existing employees (including directors). There were no movements during 2006 in the warehousing of ordinary shares as noted below: 2006 2005 Number Number Share transactions prior to the Company's 40:1 share split New issue of US$1.00 ordinary shares of the Company acquired by Petrofac ESOP - 47,486 ================== Existing US$1.00 ordinary shares of the Company acquired by Petrofac ESOP - 185,989 ================== US$1.00 ordinary shares of the Company sold by Petrofac ESOP - (198,100) ================== US$1.00 ordinary shares granted under LTIP awards by Petrofac ESOP - (35,375) ================== Share transactions after the Company's 40:1 share split New issue of US$0.025 ordinary shares of the Company acquired by Petrofac ESOP - 705,000 ================== Existing US$0.025 ordinary shares of the Company acquired by Petrofac ESOP - 40,000 ================== US$0.025 ordinary shares granted under LTIP awards by Petrofac ESOP - (705,000) ================== The net difference between the acquisition (including new shares issued and acquired by Petrofac ESOP) and sales cost of US$ nil (2005: US$1,398,000) has been credited to the share premium account of the Company. At 31 December 2006, Petrofac ESOP held 40,000 ordinary shares (2005: 40,000) of US$0.025 each in the Company and, in respect of which, had an indebtedness to the Company of US$17,000 (2005: US$17,000). Share options In 2002 the Company extended an option to a director of the Company to acquire up to 75,000 ordinary shares of US$1.00 each at US$25.00 per share. On 18 May 2005, this option agreement was cancelled. As part of an investment agreement entered into in May 2002, 3i Group plc (3i) was issued one "B" ordinary share. The Company also granted an option to 3i to acquire shares representing 13.0% of the Company's share capital, as so enlarged (the Option Shares), subject to adjustment to 20.0% in the event of the 3i variable rate unsecured loan notes remaining unpaid. On 21 October 2004, this option was amended, providing 3i with a revised right to acquire shares representing 16.2% of the Company's share capital, as so enlarged, subject to adjustment to 23.2% in the event of the 3i variable rate unsecured loan notes remaining unpaid. The option was exercisable by 3i at any time until 30 June 2009 and by the Company upon the fulfilment of certain conditions. During the year, the conditions allowing the Company to call upon 3i to subscribe for the Options Shares were satisfied and, on 21 June 2005, the aggregate subscription amount was satisfied by the cancellation of the loan notes and the issue of 1,397,557 "A" ordinary shares to 3i. In addition, and as part of the consideration for the Option Shares, the one "B" ordinary share held by 3i was converted to a deferred ordinary share (Class "B"). This deferred ordinary share had no right to receive notice of general meetings of the Company or rights to attend or vote at general meetings and on 7 October 2005 was redeemed at its nominal value. Under IAS 32, the Company classified the "A" ordinary shares as a financial liability, as the then Articles of Association of the Company provided the shares with priority of dividends, including the right to an annual 5% fixed dividend. The then Articles of Association of the Company also provided that certain matters, including the approval of certain ordinary share dividends, the conversion of "A" ordinary shares to ordinary shares and the approval of certain ordinary share transfers, required the approval of the holders of 75% or more of the "A" ordinary shares. 22 TREASURY SHARES During the year, the Company acquired 1,460,135 of its own shares at a cost of US$8,127,000 for the purpose of making awards under its employee share schemes and these shares are held by the Petrofac Employee Benefit Trust and classified for balance sheet purposes as treasury shares within equity. 23 SHARE-BASED PAYMENT PLANS On 13 September 2005, the Company established three share schemes for the benefit of employees of the group, being a Performance Share Plan, a Deferred Bonus Share Plan and an approved Share Incentive Plan. A further share scheme, the Restricted Share Plan, was established during the year. All of these share schemes are equity settled award schemes. These share schemes are described below. Further details of the schemes can be found in the Directors' Remuneration Report on pages 31 to 33. Performance Share Plan (PSP) Under the Performance share plan of the Company, share awards are granted to executive directors and a restricted number of other senior executives of the group. The shares cliff vest at the end of three years subject to continued employment from the date of the award and on achieving certain pre-defined non-market and market based performance conditions. The non-market based condition, representing 50% of the total Performance Share Plan, is subject to achieving between 15% and 25% earning per share (EPS) growth targets over a three year period. The fair value of the equity-settled award relating to the EPS part of the scheme was estimated based on the quoted closing market price of 353p per Company share at the date of grant with an assumed vesting rate of 97% per annum (subsequently trued up for the year ending 31 December 2006 to 100% based on the actual leaver rate during the period from award date to year end) over the three year vesting period of the plan. The remaining 50% market performance based part of these awards is dependent on the total shareholder return (TSR) of the group compared to an index composed of selected relevant companies. The shares vesting under this portion of the award were fair valued at 234p per share by an independent valuer using a Monte Carlo simulation model taking into account the terms and conditions of the plan rules and using the following assumptions at the date of grant: Expected share price volatility 28.0% (based on median of comparator group's three year volatilities) Share price correlation with comparator group 10.0% Risk-free interest rate 4.6% Expected life of share award three years The number of ordinary shares awarded in the year in relation to PSP was 431,194 and all of these awards were still outstanding but not exercisable at 31 December 2006. The charge recognised in the current year amounted to US$536,000. Deferred Bonus Share Plan (DBSP) Executive directors and selected employees are eligible to participate under this scheme. Participants may be invited to elect or in some cases, be required, to receive a proportion of any bonus in ordinary shares of the Company ("Invested Awards"). Following such award, the Company will generally grant the participant an additional award over a number of shares bearing a specified ratio to the number of his or her invested shares ("Matching Shares"). The awards vest over a period of three years from the grant date provided that the participant does not leave the group's employment, subject to a limited number of exceptions. The invested awards are fully recognised as an expense in the period to which the bonuses relate. At the year end the values of the bonuses settled by shares cannot be determined until all employees have confirmed the voluntary portion of their bonus they wish to be settled by shares rather than cash and until the Remuneration Committee has approved the mandatory portion of the employee bonuses to be settled in shares. Once the voluntary and mandatory portions of the bonus to be settled in shares is determined, the final bonus liability to be settled in shares is transferred to the reserve for share-based payments. The costs relating to the matching shares are recognised over the three year vesting period. The fair value of the equity-settled matching shares granted during the year in respect of the plan was estimated based on the quoted closing market price of 353p per Company share at the date of grant with an assumed vesting rate of 97% per annum (subsequently trued up at 31 December 2006 to 93% based on the actual leaver rate during the period from award date to year end) over the three year vesting period of the plan. During the year 597,167 shares as invested awards and 548,214 matching shares were granted to the participants in the scheme and 1,104,503 of these share awards were outstanding but not exercisable at 31 December 2006. The charge recognised in the year in relation to matching share awards amounted to US$666,000. Share Incentive Plan (SIP) All UK employees, including UK resident directors, are eligible to participate in the scheme. Employees may invest up to GBP1,500 per tax year of gross salary (or, if less, 10% of salary) to purchase ordinary shares in the Company. There is no holding period for these shares. Restricted Share Plan (RSP) During the year, the Company established a Restricted Share Plan (RSP) for senior employees other than the Directors of the Company. Under the scheme, senior employees are granted shares in the Company over a restricted vesting period which may or may not be, at the direction of the Remuneration Committee of the Board of Directors, subject to the satisfaction of performance conditions. At present there are no performance conditions applying to this scheme nor is there currently any intention to introduce them in the future. The fair value of the awards granted under the plan at various grant dates during the year is based on a weighted average quoted price of 278p over the period with an assumed vesting rate of 91% per annum over the three year vesting period. The Company awarded 161,101 shares to participants in the scheme during the year and recognised a charge of US$79,000 in the current year income statement. At 31 December 2006, there were still 161,101 share awards outstanding but not exercisable at this date. The group has recognised a total charge of US$1,281,000 in the income statement during the year relating to the above employee share-based schemes (note 4f) 24 OTHER RESERVES Net unrealised gains on Net unrealised available-for- (losses) / Foreign Reserve for sale-financial gains on currency share-based assets derivatives translation payments Total US$'000 US$'000 US$'000 US$'000 US$'000 Balance at 1 January 2005 2,395 22,964 1,688 - 27,047 Foreign currency translation - - (4,248) - (4,248) Net gain on maturity of cash flow hedges recognised in income statement - (5,628) - - (5,628) Net changes in fair value of - (28,549) - - (28,549) derivatives Realised gains on the sale of available-for-sale financial assets recognised in income (2,390) - - - (2,390) statement Changes in fair value of available-for-sale financial assets 1,342 - - - 1,342 -------------------------------------------------------------- Balance at 1 January 2006 1,347 (11,213) (2,560) - (12,426) Foreign currency translation - - 7,449 - 7,449 Net gain on maturity of cash flow hedges recognised in income statement - (2,378) - - (2,378) Net changes in fair value of - 22,931 - - 22,931 derivatives Realised gains on the sale of available-for-sale financial assets recognised in income (1,671) - - - (1,671) statement Changes in fair value of available-for-sale financial assets 1,062 - - - 1,062 Transfer during the year - - - 4,644 4,644 ---------------------------------------------------------------- Balance at 31 December 2006 738 9,340 4,889 4,644 19,611 ================================================================= Nature and purpose of other reserves Net unrealised gains on available-for-sale financial assets This reserve records fair value changes on available-for-sale financial assets held by the group. Net unrealised gains / (losses) on derivatives The portion of gains or losses on hedging instruments in cash flow hedges that are determined to be effective hedges are included within this reserve. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements in foreign subsidiaries. It is also used to record exchange differences arising on monetary items that form part of the group's net investment in subsidiaries. Reserve for share-based payments The reserve for share-based payments is used to wholly recognise the cost of share-based payment in the income statement and is transferred on the vesting of the original share awards. The transfer during the year includes the transfer of the current year portion of the three year vesting period of the matching shares award amounting to US$1,281,000 and the transfer from accrued expenses within trade & other payables of the remaining bonus liability relating to the year ended 2005 bonus of US$3,363,000 which has been voluntarily elected or mandatorily obliged to be settled in shares during the year (see note 23 for further information on this share-based payment scheme). 25 INTEREST-BEARING LOANS AND BORROWINGS The group had the following interest-bearing loans and borrowings outstanding: 31 December 31 December Effective 2006 2005 Actual Actual interest Maturity 2006 2005 interest interest rate% rate% rate% US$'000 US$'000 Current Revolving credit (i) - US LIBOR + US LIBOR + on demand - 2,400 facility (a) 1.50% 1.50% Revolving credit (i) US LIBOR + US LIBOR + US LIBOR + 2008 - 6,500 facility (b) 0.875% 1.75% 1.75% Short term loan (ii) KD Discount KD Discount KD Discount 2007 6,033 6,228 Rate + 1.50% Rate + 2.00% Rate + 2.00% Bank overdrafts (iii) UK LIBOR + UK LIBOR + UK LIBOR + 0.875%, US 1.25%, US 1.25% , US LIBOR + LIBOR + 1. LIBOR + 1.50% 0.875% ,KD 50% ,KD , KD Discount Discount Rate Discount Rate + 2.0% on demand 20,442 6,055 + 1.50% Rate + 2.0% Other loans: Project term (iv) - US LIBOR + US LIBOR + 2006 - 7,000 loan 2.00% 2.00% Current portion (v) - US/UK LIBOR 5.39% to - 2,500 of term loan + 1.375% 6.26% (2005: 5.48% to 6.20%) ------------------ 26,475 30,683 ================= Non-current Revolving credit (vi) US/UK LIBOR + US/UK LIBOR 5.73% to 2013 8,864 8,077 facility 0.875% + 1.75% 6.04% (2005: 6.20% to 6.29%) Revolving credit (i) US LIBOR + US LIBOR + 5.18% 2008 6,500 - facility (b) 0.875% 1.75% Term loan (v) US/UK LIBOR + US/UK LIBOR 5.39% to 2008-2013 77,111 69,522 0.875% + 1.375% 6.26% (2005: 5.48% to 6.20%) ---------------- 92,475 77,599 Less: Debt acquisition costs, net of accumulated (1,770) (1,412) amortisation 90,705 76,187 ================ Details of the group's interest-bearing loans and borrowings are as follows: (i) Revolving credit facilities (a) This revolving credit facility relates to US$ denominated borrowings repaid during 2006. (b) This facility, provided by The Royal Bank of Scotland / Halifax Bank of Scotland (RBOS/HBOS), was previously committed until 30 September 2006. In December 2006 this facility was revised to being committed until 30 September 2008 and has been reclassified as non-current. This facility is subject to annual review after 30 September 2008. The coupon interest rate has also been revised to US LIBOR + 0.875%, effective 31 December 2006. (ii) Short term loan The short term loan is denominated in Kuwaiti Dinars (KD) and relates to funding provided for a project in Kuwait. The loan is committed until 30 November 2007 and subject to annual review thereafter. In November 2006, the interest rate has been revised from KD Discount Rate + 2.0% to KD Discount Rate + 1.5, effective 31 December 2006. (iii) Bank overdrafts Bank overdrafts are drawn down in US dollar, Kuwaiti Dinars and Sterling denominations to meet the group's working capital requirements. These are repayable on demand. (iv) Project term loan The project term loan relates to project funding provided for the group's Ohanet investment in Algeria and was repaid in full in January 2006. (v) Term loan In October 2004, the group secured new term loan facilities with RBOS/HBOS. The term loan at 31 December 2006 comprised drawings of US$35,310,000 denominated in US$ and US$41,801,000 denominated in Sterling. Both elements of the loan were previously repayable over a period of five years commencing 31 December 2006 but in December 2006, the terms of the loan were revised and the repayment was rescheduled to commence from 31 December 2008 and end on 30 September 2013. The coupon interest rate was also revised to LIBOR + 0.875% from LIBOR + 1.375%. (vi) Revolving credit facility The drawings against this facility, which is also provided by RBOS/HBOS, will be converted to a term loan on 30 September 2010 to be repaid over a period of three years ending 30 September 2013. The drawing at 31 December 2006 comprised US$2,400,000 denominated in US$ and US$6,464,000 denominated in Sterling. The group's credit facilities and debt agreements contain covenants relating to cash flow cover, cost of borrowings cover, dividends and various other financial ratios. With the exception of Petrofac International Ltd, which under its existing bank covenants is restricted from making upstream cash payments in excess of 70 per cent. of its net income in any one year, none of the Company's subsidiaries is subject to any material restrictions on their ability to transfer funds in the form of cash dividends, loans or advances to the Company. 26 PROVISIONS Other long term employment benefits Provision for provision decommissioning Total US$'000 US$'000 US$'000 At 1 January 2006 8,284 - 8,284 Arising during the year 4,304 1,115 5,419 Utilised (1,222) - (1,222) Unwinding of discount - 17 17 ---------------------------------------- At 31 December 2006 11,366 1,132 12,498 ======================================== Other long term employment benefits provision Labour laws in certain countries in which the group operates require employers to provide for other long term employment benefits. These benefits are payable to employees at the end of their period of employment. The provision for these long term benefits is calculated based on the employees' last drawn salary at the balance sheet date and length of service, subject to the completion of a minimum service period in accordance with the local labour laws of the jurisdictions in which the group operates. Provision for decommissioning The decommissioning provision primarily relates to the Company's obligation for the removal of facilities and restoration of the site at the PM304 field in Malaysia. The liability is discounted at the rate of 3.5% and the unwinding of the discount is classified as finance cost (note 5). The Company estimates that the cash outflow against this provision will arise in the year 2014. 27 OTHER FINANCIAL LIABILITIES 2006 2005 US$'000 US$'000 Other financial liabilities - non-current Deferred consideration 7,373 - Fair value of derivative instruments - 1,097 Other - 125 --------------------- 7,373 1,222 ===================== Other financial liabilities - current Interest payable 172 858 Fair value of derivative instruments - 10,502 Deferred consideration - 4,450 --------------------- 172 15,810 ===================== 28 TRADE AND OTHER PAYABLES 2006 2005 US$'000 US$'000 Trade payables 122,683 91,490 Advances received from customers 118,117 64,170 Accrued expenses 83,125 49,652 Other taxes payable 15,696 9,936 Other payables 7,085 4,177 ---------------------- 346,706 219,425 ====================== Trade payables are non-interest bearing and are normally settled on between 30-day and 60-day terms. Advances from customers represent payments received for contracts on which the related work had not been performed at the balance sheet date. Included in other payables are retentions held against subcontractors of US$1,532,000 (2005: US$3,197,000). Certain trade and other payables will be settled in currencies other than the reporting currency of the group, mainly in Sterling, Euros and Kuwaiti Dinars. 29 ACCRUED CONTRACT EXPENSES 2006 2005 US$'000 US$'000 Accrued contract expenses 432,003 362,609 Reserve for contract losses - 861 --------------------- 432,003 363,470 ====================== MORE TO FOLLOW This information is provided by RNS The company news service from the London Stock Exchange

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