Annual Report 2011 - PGS

Notes to the consolidated financial statements
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The management of the capital structure involves active monitoring and adjustments to it in light of changes in economic
conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure the Company
may refinance its debt, buy or issue new shares or debt instruments, sell assets or return capital to shareholders.
The Company monitors debt on the basis of the leverage ratio and other covenants in credit agreements. This ratio is calculated
as gross indebtedness divided by EBITDA less non pre-funded MultiClient library investments. At 31 December 2011 the gross
indebtedness was $978.8 million and EBITDA less non pre-funded MultiClient library was $544.0 million. In addition the
Company monitors a leverage ratio based on net debt. Net debt is calculated as total indebtedness (including “current and longterm
debt” as shown in the consolidated statement of financial position) less cash and cash equivalents. The Company
generally seeks to keep net debt below 1 or 2 times EBITDA dependent on where we are in the business cycle. It implies below
1 times EBITDA in strong market and below 2 times EBITDA in weak part of the cycle. The Company is of the opinion that the
policy would generally satisfy the requirements for a BB –rating (Standard and Poor’s)/Ba2-rating (Moody’s). The gross leverage
ratio at December 31, 2011 and 2010 was 1.80 and 1.92, respectively while the net leverage ratio was 1.02 and 0.99,
respectively.
The Company’s treasury function monitors and manages the financial risks related to the operations of the Company. The
treasury function may seek to manage the effect of these risks by using derivative financial instruments to hedge risk exposures.
The use of financial derivates is governed by the Company policies approved by the Board of Directors, which provide written
principles on foreign exchange rate risk, interest rate risk, credit risk and the use of financial derivative and non-derivative
instruments.
The treasury function continuously monitors counterparties to mitigate funding, excess cash investment, cash in operation and
derivative risks. Guidelines are set out in the Company policies to provide limits in respect of exposure to individual
counterparties and monitoring procedures are in place to identify risk factors as they arise.
The treasury function reports regularly to the Company management and any breach of limits set in the policy shall be reported
to the Board of Directors.
Interest rate exposure
The Company is subject to interest rate risk on debt, including finance leases. The risk is managed by using a combination of
fixed- and variable- rate debt, together with interest rate swaps, where appropriate, to fix or lower the borrowing costs.
As of December 31, 2011, the Company has outstanding interest rate swaps in the aggregate notional amount of $500 million,
of which $200 million are forward starting swaps, ($300 million as of December 31, 2010) relating to the Term Loan established
in June 2007 (see Note 25). Under the interest rate swap agreements the Company receives floating interest rate payments and
pays fixed interest rate payments. The weighted average fixed interest rates under the contracts are as follows:
December 31, 2011 December 31, 2010
Notional
Notional
Matures in:
amounts
($ thousands)
Weighted average
fixed interest rate
amounts
($ thousands)
Weighted average
fixed interest rate
1 year 200,000 5.13% --- ---
1 – 2 years --- --- 200,000 5.05%
2 – 3 years 200,000 3.93% --- ---
3 – 4 years 100,000 2.64% 100,000 5.18%
4 – 5 years --- --- --- ---
Total 500,000 4.15% 300,000 5.09%
The aggregate negative fair value of these interest rate swap agreements at December 31, 2011 and 2010 was approximately
$25.5 million and $28.1 million, respectively.
The following table indicates the maturity analysis of the interest rate swaps as at reporting date:
Total
expected
Discounted cash
Cash flow matures in,
(In thousands of dollars)
Notional
amount
carrying
amount
flow
(gross)