Annual Report 2011 - PGS

Board of Directors’ report
dollars and various other currencies. Thus,
regarding expenses and revenues in currencies
other than US dollars, such expenses will
typically exceed revenues.
A stronger US dollar reduces our operating
expenses as reported in US dollars. We
estimate that a 10-percent change of the US
dollar against our two most significant non-
USD currencies, NOK and GBP, would have an
annual impact on operating profit of $20 million
to $24 million and $9 million to $11 million,
respectively, before currency hedging.
We hedge part of our foreign currency
exposure related to operating income and
expenses by entering into forward currency
exchange contracts. While we enter into
these contracts with the purpose of reducing
our exposure to exchange rate fluctuations,
we do not treat these contracts as hedges
unless they are specifically designated as
hedges of firm commitments or certain cash
flows. Consequently, these forward currency
exchange contracts are recorded at estimated
fair value with gains and losses included in
the line Currency exchange gain (loss) in the
consolidated statement of operations.
As of December 31, 2011, we had net open
forward contracts to buy/sell British pounds,
Norwegian kroner, Euro, Singapore dollars,
and Brazilian real. The total nominal amount
of these contracts was approximately $139.5
million, compared with $240.5 million at
year-end 2010. Of the total notional amounts
of forward exchange contracts, $23.7 million
were accounted for as fair value hedges as of
December 31, 2011 and none were accounted
for as fair value hedges as of December
31, 2010. There were no designated foreign
currency cash flow hedges in 2011 or in 2010.
Outstanding contracts at year-end 2011 had
a net negative fair value of $4.6 million,
compared with a net positive fair value of $0.1
million at year-end 2010.
A 10 percent appreciation of the US dollar
against each of the currencies in which we
hold derivative contracts, would decrease the
fair value of these contracts by approximately
$3.1 million. The profit and loss effect of such a
change would be a $4.3 million loss.
All interest-bearing debt is denominated in US
dollars.
Credit Risk
Our accounts receivable are primarily from
multinational, integrated oil companies and
larger-sized independent oil and natural gas
companies, including companies that are
owned in whole or in part by governments. We
manage our exposure to credit risk through
ongoing credit evaluations of customers. We
believe our exposure to credit risk is relatively
limited due to the nature of our customer base,
the long-term relationships we have with most
of our customers, and the low level of losses
on our accounts receivable incurred over the
years.
We monitor the counterparty credit risk of
our banking partners, including derivatives
counterparties and the institutions in which
our cash is held on deposit. The Company is
also exposed to credit risk related to remaining
refund claims against the Spanish shipyard
Factorias Vulcano.
Liquidity Risk
As of December 31, 2011, PGS had an
unrestricted cash balance of $424.7 million and
a total liquidity reserve, including available
unutilized drawing facilities, of $774.7 million,
compared with $432.6 million and $777.9
million respectively at year-end 2010. We have
a structured approach to monitoring our credit
risk as to financial counterparties, and have
no reason to doubt their ability to meet their
funding commitments if and when called upon
to do so.
Based on the year-end cash balance, available
liquidity resources, and the current structure
and terms of our debt, it is the Board’s opinion
that PGS has adequate liquidity to support its
operations and investment programs.
The credit agreement for the $600 million
(remaining balance $470.5 million) Term Loan
B and the $350 million revolving credit facility
has certain terms that place limitations on the
Company. The revolving credit facility contains
a covenant whereby the total leverage ratio (as
defined) cannot exceed 2.75:1. As of December
31, 2011, the total leverage ratio was 1.80:1.
The credit agreement generally requires the
Company to apply 50 percent of excess cash
flow (as defined in the agreement) to repay
outstanding borrowings when the senior
leverage ratio exceeds 2.00:1 or if the total
leverage ratio exceeds 2.50:1 for the financial
year.
We have a robust debt structure as to existing
debt, with duration of approximately 3.9 years.
The convertible notes mature in December
2012 and we intend to redeem the outstanding
amount before or on maturity with cash at
hand. After 2012, there will be no material
maturities before 2015, when our Term Loan
B and the revolving credit facility mature.
Financial covenants on the facilities we have
in place are not unduly restrictive. However,
materially adverse future market developments
could require us to implement measures to
meet financial covenants or refinance debt.
62 PGS Annual Report 2011