Annual Report

the lessor) are charged to the income statement on a straight-line basis
over the period of the lease.
Financial leases
Leases in which the company assumes the better part of the risk and
dividend associated with ownership of the asset, are financial leases. At
the beginning of the lease, financial leases are entered at a sum equal to
market value or the present value of the minimum lease sum, whichever
is lower, with accumulated depreciation and write-downs deducted.
When calculating the present value of the lease, the implicit interest rate
cost in the lease is used, if it can be calculated. If not, the company’s
marginal loan interest rate is used. Expenses directly connected to the
establishment of the lease are included in the cost price of the asset.
The depreciation period is the same as for the company’s other depreciable
assets. If there is no reasonable certainty of the company assuming
ownership when the lease expires, the asset is written off over the term
of the lease or for the asset’s financial service life, whichever is shortest.
Operational leases
Lease contracts in which the better part of the risk and dividend in
associated with ownership of the asset are classified as operational
lease contracts. Lease payments are classified as operating costs and
entered using the straight line method over the contract period.
2.20 Capitalisation of borrowing cost
Borrowing costs incurred for the construction of any qualifying asset
are capitalised during the period of time that is required to complete
and prepare the asset for its intended use. Other borrowing costs are
expensed.
Note 3 – Financial risk management
Financial risk factors
The Group’s activities are exposed to a variety of financial risks: market
risk (including currency risk, fair value interest rate risk and price risk)
and credit risk (trade receivables and liquidity risk). The Group’s overall
risk management program focuses on the unpredictability of financial
markets and seeks to minimise potential adverse effects on the Group’s
financial performance. Risk management is carried out by the Finance
Director, together with Senior Management.
Market risk
Market demand for Marine Subsea’s barges and vessels will be driven
by, inter alia, global demand for oil prices for crude oil, actions by OPEC,
worldwide inventory levels, changes in technology, and the availability
and sustainability of competitive fuels. Furthermoremarket demand
for Marine Subsea’s barges and vessels could be impacted by the
actions of competitors, availability of similar vessels, ability of suppliers
and subcontractors to perform on a timely basis or at all under their
agreements, political stability and the actions of governments or other
in the countries and territorial waters of operations.
i) Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of
a financial instrument will fluctuate because of changes in the market
interest rates. The Group’s exposure to the risk of changes in the market
interest rates relates to the Group’s long-term export credit facilities (Sarah
and Karianne loan) with floating interest rate (e.g. 3 months LIBOR).
However, the latter exposure is offset by the 12 months LIBOR adjustment
incorporated in the MS Sarah Ltd and MS Karianne Ltd Service
Agreements with Sonangol P&P. The exchange bonds are fixed rate.
ii) Foreign exchange risk
Foreign currency risk is the risk that the fair value of future cash flows
of a financial instrument will fluctuate because of changes in foreign
exchange rates. Foreign exchange risk arises from future commercial
transactions, recognized assets and liabilities and net investments in
foreign operations. The Group operates internationally and is exposed to
foreign exchange risk arising from currency fluctuations, primarily NOK/
USD. The future charter income and operating expenses will mainly be
in USD. The remaining commitment to Ulstein Yard for the construction
of the Karianne vessel is hedged through a forward contract to buy NOK
481,8 million and sell USD 83,2 million. The USD will be made available
under the Karianne loan facility upon delivery of the Karianne. At 31st
December 2009, the fair value of this forward contract is deemed to
be of immaterial value. Marine Subsea uses no other derivative financial
instruments to hedge currency risk exposure. The Group’s interest
expenses arise from USD denominated loans.
iii) Commodity price risk
The Group is affected by the volatility of the marine gas oil (MGO)
prices in various areas, with emphasis on the Angolan market. The MGO
prices are historically positively correlated with the oil price. The Group’s
vessels operating activities require a continuous supply of MGO. These
costs are directly covered or fully reimbursed by charterer. The Company
covers the cost of MGO if the vessels go offhire. Currently, the Company
uses no derivative financial instruments to hedge the above mentioned
risk exposures.
iv) Supply rate risk/Contract risk
The profitability and cash flow of Marine Subsea’s operations will be
dependent upon the market conditions for construction support vessels
and well intervention vessels in West Africa. The African Lifter is still
without contract,and African caribe is on a contract ending June 2010,
and African Installer is on a 6 month contract ending in September 2010
without any firm backlog. Current market conditions indicate that the
barges should secure work at levels similar to African Installer’s current
contract, but this cannot be guaranteed.
Credit risk
With reference to the synopsis on the African Challenger project (Marine
Subsea & Consafe) in the Annual Report 2008, Yantai has agreed to
acquire Consafe MSV AB’s interest in the joint-venture. Yantai has
further agreed to take delivery of African Challenger for its own account
and lease the unit to the JV under a 10-year bareboat lease with
30 Marine Subsea Annual Report 2009