THE BOARD OF DIRECTORS REPORT 2008 SONGA FLOATING PRODUCTION GROUP & SONGA FLOATING PRODUCTION ASA

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1 THE BOARD OF DIRECTORS REPORT 2008 SONGA FLOATING PRODUCTION GROUP & SONGA FLOATING PRODUCTION ASA Operations and Locations The name of the company was changed from Nortechs FPSO ASA to Songa Floating Production ASA during the Extraordinary General Meeting held in September The Songa Floating Production Group ( Group ) is made up of Songa Floating Production ASA ( Company ) with registered address in Oslo, Norway and its wholly owned subsidiary, Songa Floating Production Pte Ltd ( SFP Ltd ) with registered address in Singapore. The Group s main operations office is located in Singapore. The Group s business is based on a build-own-operate model, where existing tankers are converted into floating production storage and offloading ( FPSO ) vessels, which will then be leased to the Group s clients. However, depending on market conditions, the Group will also consider the sale of vessels. The Group completed the conversion of its first tanker, the 1983 built Toro Horten, into the FPSO East Fortune in January The FPSO is classified by Det Norske Veritas and is now ready for immediate deployment. In June 2008 SFP Ltd. entered into a contract with Peak Petroleum Industries Nigeria Ltd. ( Peak ) with regard to the delivery of the FPSO East Fortune for operations on the Bilabri Field, offshore Nigeria. However, having made an initial down-payment, Peak proved unable to fulfill their further material obligations, including payments, under the contract. As of May 2009 Peak have still not been able to raise the necessary financing. In June 2008 SFP Ltd. also entered into an agreement with Songa Shipping Pte. Ltd. for the purchase of the Songa Anette tanker with delivery due by March 2010 at the latest. The Group is currently bidding the Songa Anette as the candidate for a number of conversion projects. The Songa Anette will continue to trade for Songa Shipping Pte. Ltd. until delivery, when payment is due. 1

2 The two hull sections, purchased by SFP Ltd. in 2007, were sold for a total of USD 14.8 million in May 2008 and June 2008 respectively, yielding a small profit began optimistically with a total of 11 lease FPSO contracts awarded in the first quarter. However, as the financial crisis set in and oil prices crashed from their peak of above USD 140/bbl, the effect on the demand for FPSOs was dramatic, as projects were delayed, or in some cases cancelled. Since August 2008 not a single lease FPSO contract has been signed on a world-wide basis. Going Concern In accordance with the Accounting Act 3-3a the Board confirms that the annual accounts have been prepared under the assumption of a going concern. The basis for this assumption is that the conversion of the FPSO East Fortune was fully-financed and successfully completed in January 2009 and is now available for immediate deployment. The assumption is also based on the given equity ratio and the assumed outcome of a potential sale of the vessels if necessary. During the last year there has been a major reduction in the number of staff employed and operating costs have been reduced significantly. Income Statement and Balance Sheet The Group has implemented IFRS from 1 January 2007 and has applied IFRS 1 First time adoption. The revenue recognized in 2008 comprises mobilization fees amounting to USD 3.7 million, received to prepare the FPSO East Fortune for charter. Revenue recognition is to the extent of the mobilization costs actually incurred, given the uncertainty relating to the eventual outcome of the project. Mobilization costs incurred have been recognized as operating expenses. The Group made a loss of USD 13 million in Total assets and equity for the year 2008 are USD 86 million and USD 40 million respectively. This gives an equity ratio of 47% of total assets. Cash and cash equivalents as per 31 December 2008 were USD 4 million. In February 2009 the USD 40 million loan facility was refinanced with a new short-term bullet-loan facility of USD 24 million, of which USD 15 million was drawn down at the end of The Group s annual accounts have made a provision for a loss of USD 6 million in conjunction with the purchase of the Songa Anette from Songa Shipping Pte. Ltd. taking into consideration the current prevailing market situation. Risk The Company was able to secure financing for its first conversion project prior to the credit crisis and as the conversion of the FPSO East Fortune has now been completed and all suppliers have been paid in full; the Company s current exposure to financial risk is relatively limited. However, as the conversion was partly financed through the issuance of convertible bonds and bank financing, the Company will be exposed to prevailing market risks and other risks that may have an effect on the availability of financing when the current financing facilities expire. The key risk faced by the Company is without doubt the current low demand for FPSOs. The prospective clients of the Group are to a large degree small oil companies that are currently struggling to obtain financing for their projects and also, to a lesser degree, large oil companies with a strong financial basis. However, both groups of prospective clients are currently showing a tendency to delay, or even cancel, projects. Although the Group has no immediate capital requirements to fund existing projects and operations, the Group is likely to require additional financing in the future; either to continue marketing activities, or to fund further modification works as a result of the requirements of any contracts entered into. The due date on the current USD 24 million short term bullet loan facility is 30 October 2009 and the Group will work 2

3 closely with its bankers to secure further financing if needed. The Group may also require funding as a result of unforeseen liabilities or potential acquisitions, joint ventures or other business opportunities that may be presented to it. The Company s success in obtaining such future financing in a timely manner, and on acceptable terms, will be highly dependent on prevailing market conditions, which are currently far from optimum. The Company s and the Group s exposure to currency risk is relatively limited as loans, interest expenses and the majority of the Company s expenses are in the same currency as the income (USD). Future Prospects The Group will continue to focus on the South-East Asian and West African FPSO markets. The Group will also consider other suitable projects on a project-by-project basis. Market reports suggest that over the next 5 years there could be over 100 field developments requiring the use of an FPSO within the areas being targeted by the Group. However, it is clear that the speed at which such projects are developed will be highly dependent on the oil price and access to financing. HSE and Corporate Governance A continuous focus on health, safety and environmental (HSE) issues is of critical importance to the Group. The working environment is good. During 2008, leave of absence due to illness for the Group totaled 59.5 days (193 days in 2007), approximately equal to1.1% (2.1% in 2007) of the total workings hours for the Group. No incidents or work related accidents resulting in personal injury or material damage were recorded during The conversion of the FPSO East Fortune was completed without any lost time incidents, with a total of over 1.5 million man-hours of work being carried out by SFP Ltd. at Drydocks World Singapore Pte. Ltd. during the execution of the project. The Group aims to be a workplace with equal opportunities with regards to sex, race and religion. The Group currently has 22 employees, from 8 different countries, with 30% female. Two of the five board members are female. All Group activities are executed in accordance with the Group s operational procedures and policies and all non conformities are reported. The group is already certified to the ISO 9001:2000 quality standard and aims to achieve certification to the ISO 14001:2004 environmental standard within the next 12 months. Allocation of net income The parent company shows a loss of USD and the Board of Directors has proposed that the net loss of Songa Floating Production ASA be attributed as follows: Loss carried forward USD Statement by the Board of Directors and the CEO We confirm that, to the best of our knowledge, the financial statements for 2008, prepared in accordance with approved accounting standards (IFRS), give a true and fair view of the Group s and the Company s consolidated assets, liabilities, financial position as of 31 December 2008 and of the results of the Group s and the Company s operations during the fiscal year

4 Oslo, 19'h May 2 99 Songa Floating Productio n ASA Chair man 5~ Lisbeth Schou Tolpinrud Director e idi M. Petersen Director ( ~~~~~~ ~nnar Hvammen Director Per-Christian Endsjo Director Eirik Barclay CEO 4

5 Songa Floating Production Group Songa Floating Production Group Consolidated Income Statement For the years ended 31 December Amounts in USD Note REVENUE Revenue Other revenue TOTAL REVENUE Salaries and other personnel costs Other operating expenses 6, Operating profit (loss) before depreciation and amortization ( ) ( ) Depreciation and amortization Operating profit (loss) ( ) ( ) FINANCIAL ITEMS Financial income Financial expense 10 ( ) ( ) Net financial items ( ) Profit (loss) before tax ( ) ( ) Income tax expense Profit (loss) for the year ( ) ( ) Earnings per share 12 (11,20) (5,03) Diluted earnings per share 12 (11,20) (5,03) Annual Report 2008 Songa Floating Production Group 1

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7 Songa Floating Production Group Songa Floating Production Group Consolidated statement of cash flow Amounts in USD Note Cash flow from operating activities Profit for the period ( ) ( ) Adjustments for: Tax expense Depreciation Provisions Warrants expenses ( ) ( ) Change in trade and other receivables ( ) ( ) Change in prepayments Change in trade and other payables Net cash from operating activities ( ) ( ) Cash flows from investing activities Purchases/investment in vessel 9 ( ) ( ) Proceeds from disposal of hull Net cash used in investing activities ( ) ( ) Cash flows from financing activities Proceeds from issue of share capital Proceeds from issue of convertible notes Proceeds from borrowings Repayment of borrowings 16 ( ) Net cash from (used in) financing activities Net decrease in cash and cash equivalents ( ) Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December Annual Report 2008 Songa Floating Production Group 3

8 Songa Floating Production Group Songa Floating Production Group Consolidated statement of changes in equity for the year ended 31 December 2008 Amounts in USD Share Capital Share premium Other reserves Retained earnings Total equity Balance at 1 January ( ) Net profit/loss for the year 2007 ( ) ( ) Total recognised income and expense ( ) ( ) Issue of share capital Expenses share issue ( ) ( ) Issue of convertible bonds Balance at 31 December ( ) Net profit/loss for the year 2008 ( ) ( ) Total recognised income and expense ( ) ( ) Warrants expense Balance at 31 December ( ) Annual Report 2008 Songa Floating Production Group 4

9 Songa Floating Production Group NOTES Note 1 General information The Board of Directors approved Songa Floating Production Group's consolidated financial statements for the year ended at 31 December 2008 at its meeting on 19 May The Songa Foating Production Group (Group) is made up of Songa Floating Production ASA (SFP ASA) with registered address in Oslo, Norway and its wholly owned subsidiary, Songa Floating Production Pte. Limited (SFP Ltd) with registered address in Singapore. The Group s main operations office is located in Singapore. Note 2 Basis for the preparation of the consolidated accounts The Group s financial statements are presented in US-dollar (USD). The Group s consolidated financial statements are presented in accordance with the EU-approved International Financial Reporting Standards (IFRS) and the appurtenant interpretations, and in addition disclosures required by the Accounting act, as applied at 31 December The Group s consolidated financial statements have been prepared on an historical cost basis except for the following assets and liabilities: Share based payment cf. Note 7. Uncertainty associated with estimates and the evaluation of the accounting policy During the preparation of the financial statements, the company's management has applied its best estimates and assumptions considered to be realistic based on historical experience. The estimates are reviewed on an ongoing basis. Situations can arise that alter the estimates and assumptions, and which will in turn affect the company's assets, liabilities, revenues and expenses. Modified estimates are recognised in the period in which the estimates are changed and in future periods where relevant. For more detailed information about uncertainty associated with estimates which could have a significant impact on amounts recognised in the next financial year, please see the following notes: Vessel cf. Note 9. - Useful life and components accounting Share based payment cf. Note 7. - Volatility and share price For more details about significant areas requiring discretionary judgement relating to the application of accounting policy that have the most significant effect on the amounts recognised in the consolidated financial statements, reference is made to the following notes: Functional currency (cf. Note 3 b): The judgement of considering USD as functional currency for all of the companies in the Group. Note 3 Summary of significant accounting principles The Songa Floating Production Group has implemented IFRS from 1. January 2007 and has applied IFRS 1 First time adoption. For detailed information regarding the first time adoption please see Note 26. The Group has applied the policies consistently after first time adoption. a) Basis for consolidation Subsidiaries The companies in which Songa Floating Production ASA has control are recognised in the consolidated financial statements as subsidiaries. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Control is usually achieved when the Group, directly or indirectly, owns more than 50 per cent of the shares in the entity, or when the Group is able to exert control over the entity through agreements or statutes. In assessing control, account is taken of potential votes that can immediately be exercised or are convertible. New subsidiaries are recognised at their fair value on the date of acquisition. Fair value is allocated to identified assets and liabilities. Excess value that cannot be allocated to specific assets is classified as goodwill. New subsidiaries are included in the consolidated accounts from the date of acquisition. The date of acquisition is the date on which Songa Floating Production obtains control of the acquired company. Ordinarily, control will be achieved when all the terms of the agreement are satisfied. A lack of satisfaction will result in cancellation of the agreement. Examples can be the approval of the Board of Directors, the general meeting or the competent authorities. For business combinations achieved in stages, the financial statements are based on the values at the time the Group obtained control. Excess value in the form of goodwill is calculated on each individual acquisition. Entities that constitute the Group are listed in Note 22 List of Group entities. Subsidiaries disposed of during the year are included in the consolidated financial statement until the date on which the control ceases. Ordinarily, control will cease when all terms in the agreement are satisfied. A lack of satisfaction will result in the cancellation of the agreement. Operations disposed of during the period and which constitute independent business segments are presented as discontinued operations on a separate line on the income statement for the entire financial year and in the comparative figures. Elimination of transaction Intra-Group balances and unrealised gains and losses that arise between Group entities are eliminated upon consolidation. Unrealised gains from transactions with associates are eliminated proportionally against the investment. Unrealised losses are eliminated correspondingly, unless they are related to impairment. All intra-group transactions are eliminated in the consolidation process. b) Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of the parent company and the subsidiary which is US-dollar at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Monetary assets and liabilities are for instance trade receivables, other receivables, trade payables and other financial liabilities in foreign currency. Gains and losses related to the retranslated monetary items in the normal operating cycle are classified as operating revenues and expenses. Other gains and losses related to monetary items in foreign currency are classified as financial income or expenses. Functional currency is the currency of the primary economic environment in which the entity operates. The primary economic environment in which an entity operates is normally the one in which it primarily generates and expends cash. As the charter is priced and influenced by USD, the market value of vessels are in USD, loans and equity are in USD and some of other expenses are also influenced by USD, the managements judgement is that Annual Report 2008 Songa Floating Production Group 5

10 Songa Floating Production Group the functional currency is USD for both parent company and the subsidiary. Translation of foreign operation The subsidiary s functional currency is the same as the Groups presentation currency and therefore the translation is not applicable. c) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates and sales taxes. The following specific recognition criteria must also be met before revenue is recognised: Charter Revenues derived from floating production and storage contracts or other assignments are recognised as income in the period that services are rendered at rates established in the relevant contracts. Certain contracts include mobilisation fees payable at the start of the contract. In cases where the fee covers a general upgrade of a vessel or equipment which increases the value of the vessel of equipment beyond the contract period, the fee is recognised as revenue over the contract period; the investment is depreciated over the remaining lifetime of the asset. In cases where the fee covers specific upgrades or equipment specific to the contract, the mobilisation fees are recognised as revenue over the estimated contract period. The related investment is depreciated over the estimated contract period. In cases where the fee covers specific operating expenses at the start-up of the contract, the fees are recognised in the same period as the expenses. d) Income tax expense Income tax expenses on the financial statements include tax payable and the change in deferred tax for the period. The change in deferred tax reflects the future tax payable resulting from the current year's activities. Deferred tax is based on accumulated profit, but which will be payable in subsequent accounting periods. Deferred tax is calculated on net taxincreasing differences between the balance sheet items used for accounting purposes and those used for taxation purposes, adjusted for deductible temporary tax differences and tax losses carried forward according to the liability method. Deferred tax assets are only capitalised to the extent that it is probable that there will be future taxable income available for reducing the difference. Deferred tax assets are assessed for each period and will be reversed if it is no longer probable that the deferred tax asset can be used. e) Financial income and financial expense Financial income consists of interest income and foreign currency gain. Interest income is recognised as it accrues using the effective interest method. Financial expenses consist of interest expenses, foreign currency losses. Interest expenses are recognised gradually as they accrue using the effective interest method. f) Vessels and equipments Vessels and equipments are recognised at cost less accumulated depreciation and impairment loss. Cost includes expenses that are directly attributable to the acquisition of the assets. Vessels and equipments are depreciated on a straightline basis over their expected useful life. When individual parts of a vessel or equipment have different useful lives, and the cost is significant in relation to total cost, these are depreciated separately. Expected residual value is taken into account when stipulating the depreciation schedule. Remaining estimated useful life and estimated residual value are reviewed annually. Expenses incurred after production equipment is in use, such as ongoing maintenance, are recognised, but other expenses which are expected to offer future financial advantages are capitalised. g) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale, are capitalised as part of the cost of the respective assets. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds as amortisation of borrowing costs. h) Impairment non-financial assets All non-financial assets, with the exception of inventories and deferred tax assets, are reviewed for each reporting period to determine whether there are indications of impairment. Where indications of impairment exist, recoverable amounts are calculated. The recoverable amount of an asset or cash-generating unit is its value in use or fair value less costs to sell, whichever is higher. In estimating value in use, expected future cash flows are discounted to net present value using a discount rate before tax that reflects today's market assessments of the time value and the specific risk attached to the asset. The recoverable amount is calculated using the estimated future cash flow based on the analysis of expected day rates and brokers valuation. Impairment is recognised if the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. A cashgenerating unit is the smallest identifiable group that generates a cash inflow that is largely independent of other assets or groups. Impairment related to cash-generating units is intended first to reduce the carrying amount of any goodwill allocated to the unit and then to reduce the carrying amount of the other assets in the unit on a pro rata basis. These assets will normally be property, plant and equipment, and other intangible assets. Assets which have been subject to impairment losses are reviewed during each period to determine whether there are indications that the impairment loss has been reduced or no longer exists. Reversals of earlier impairments are made only to the extent of the carrying amount the assets might have had after depreciation and amortisation, if no impairment loss had been recognised. i) Financial Instruments Financial assets and liabilities Financial assets and liabilities consist of derivatives, trade receivable and other receivables, cash and cash equivalents, borrowings, trade payable and other payable liabilities. A financial instrument is recognised when the Group becomes party to the instrument's contractual provisions. Upon initial recognition, financial assets and liabilities are assessed at fair value plus directly attributable expenses. An ordinary purchase or sale of financial assets is recognised and derecognised from the time an agreement is signed. Financial assets are derecognised when the Group's contractual rights to receive cash flows from the assets expire, or when the Group transfers the asset to another party and without retaining control, or transfers practically all risk and rewards associated with the asset. Financial liabilities are derecognised when the Group's obligation as specified by contract has been satisfied, discharged or cancelled. Annual Report 2008 Songa Floating Production Group 6

11 Songa Floating Production Group Classification The Group classifies financial assets and liabilities in the following categories: i) financial assets and liabilities held to maturity, and ii) other financial liabilities. Receivables and liabilities related to operations are measured at their amortised cost, which in practice implies their nominal value with any impairment for expected losses. The Group's borrowings are considered financial liabilities held to maturity. These are recognised at their amortised cost using the effective interest rate method. Impairment financial assets Where there is objective evidence that a financial asset's value is lower than its cost, the asset will be impaired through profit or loss. Impairment in the value of assets measured at amortised cost is calculated by taking the difference between the carrying amount and the net present value of the estimated future cash flow discounted by the original effective interest rate. Compound financial instruments Compound financial instruments issued by the Group comprise convertible notes that can be converted to share capital at the option of the holder, and the number of shares to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognised initially at the fair value of a similar liability that does not have an equity conversion option. The equity component is recognised initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their initial carrying amounts. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at mortised cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. j) Classification Assets related to normal operating cycles or that fall due within 12 months from the balance sheet date are classified as current assets. Other assets are classified as non-current. Similarly, liabilities related to normal operating cycles or that fall due within 12 months from the balance sheet date are classified as current liabilities. Other liabilities are classified as non-current. k) Receivable Trade receivable and other receivables are recognised at their nominal values less any impairment. Trade receivable in foreign currencies are recognised at the exchange rates on the balance sheet date. l) Cash and cash equivalents Cash includes cash-in-hand, bank deposits and short-term liquid investments that can be immediately converted to a given sum of money, with a maximal maturity of three months. m) Share capital Ordinary shares/costs related to equity transactions Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. n) Provisions Provisions are recognised when the Group has an obligation as a result of past events, and when it is probable that there will be a financial settlement as a result of this obligation and the amount can be measured reliably. Generally speaking, provisions are based on historical data and a weighting of possible outcomes against the probability they will occur. If the time value is significant, the provision will be the net present value of the amount expected to be required to meet the obligation. o) Employee benefits Defined contribution pension plans The companies in the Group contribute to local pension plans all defined contribution pension plans. The contributions are expensed as they accrue. Share based payment Leading employees of the Group receive remuneration in the form of share based payment transactions, whereby employees render services as consideration for the equity instruments as warrants. The costs of warrants are measured at fair value on the date they are granted. The fair value is determined using Black and Scholes model. The cost of warrants is recognised over the period when the services are rendered with a corresponding increase in other contributed equity. p) Segment A segment is an identifiable Group entity that offers related products and services or products (business segment) or services within specific fields (geographical segment), with risk and rewards that are different from other segments. The Group has only one business and operates only in one segment; namely the leasing of FPSO vessels. Geographically the market is world wide and therefore not concentrated within specific geographical areas. q) Earnings per share The Group presents ordinary earnings per share and earnings per share after dilution. Ordinary earnings per share are calculated as the ratio between the net profit/(loss) for the year that accrues to the ordinary shareholders and the weighted average number of ordinary shares outstanding. The figure for diluted earnings per share is the result that accrues to the ordinary shareholders, and the number of weighted number of shares outstanding, adjusted for all diluting effects related to share options. r) IFRS and IFRIC have been adopted by the EU/EEA but not yet implemented IFRS and interpretations approved by the EU/EEA up until 19 March 2009 and which were not mandatory at 31 December 2008, have not been applied by Songa Floating Production. IFRS and IFRIC interpretations expected to be applied as from 1 January 2009: IFRS 8 Operating segments IAS 1 (revised) Presentation of financial statements IFRIC 13 Customer loyalty programmes IFRIC 14 IAS 19 the limit on a defined benefit asset, minimum funding requirements and their interaction IFRS and IFRIC interpretations expected to be applied as from 1 January 2010 or later: IFRS 3 (revised) Business combinations Annual Report 2008 Songa Floating Production Group 7

12 Songa Floating Production Group IAS 27 (revised) Consolidated and separate financial statements Amendment to IAS 39 Financial instruments recognition and measurement eligible hedged items IFRIC 16 Hedges of a net investment in a foreign operation IFRIC 17 Distributions of non-cash assets to owners The implementation of the amendments listed above is not expected to have a significant impact on the consolidated accounts on the date of implementation. IASB's annual improvement projects The amendments implemented in several standards will enter into effect in The following is a list of the most important changes that can affect recognition, measurement and information disclosure in the notes: IFRS 5 Non-current assets held for sale and discontinued operations IAS 1 Presentation of financial statements IAS 19 Employee benefits IAS 28 Investments in associates, and IAS 31 Interests in joint ventures IAS 36 Impairment of assets IAS 39 Financial instruments recognition and measurement None of the amendments will lead to changes in the Group's application of accounting policies or disclosure of information in the notes. s) New IFRS and IFRIC applied to the accounts in 2008 Songa Floating Production has applied IFRIC 11 and 14 without any significant impact on the reported figures. Note 4 Fair value Songa Floating Production s consolidated accounting principles and disclosures require the calculation of fair value on financial and non-financial assets and liabilities. For both measurement and disclosure purposes, fair value has been estimated as described below in the disclosures. Where relevant, further disclosures will be provided in the notes about the assumptions used to calculate fair value on the individual assets and liabilities. Share-based payment The fair value of employees' options is estimated using the Black and Scholes model. The model requires the following input data: Share price on the date of balance sheet recognition, strike price, expected volatility, expected dividends and the no-risk interest rate based on government bond. Convertible loan The fair value is based on the net present value of future interest payments and repayment of the principal discounted by the anticipated market interest rate for a similar loan at 31 December. The anticipated market interest is based on the USD Swap Rate, adding a margin reflecting the credit risk. Note 5 Financial risk management The Group has exposure to the following risks from its use of financial instruments: - credit risk - liquidity risk - market risk management of capital. Further quantitative disclosures are included throughout theses consolidated financial statements. The Group s overall risk management is focus on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Group s financial performance. Risk management is carried out under policies and guidance by the board of directors. The board of directors provides guidance for the establishment and oversight of the Group s risk management framework and setting appropriate risk limits and controls. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group s receivables from customers and investment securities. Trade and other receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer is the first year with income, and the Group has only one major customer. The customer has at this stage no satisfactory financing in place and has therefore not been able to meet scheduled payments related to the mobilisation works. The Group continually evaluates the credit risk associated with customers and when considered necessary, requires certain guarantees either in the form of advance payments or escrow account. The Group s exposure for this customer is limited since the charter contract was signed on an advance basis. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The direction of the Group s Management will be that of a prudent liquidity risk management which includes maintaining sufficient cash and cash equivalents, availability of funding to meets its obligation. Please refer to Note 16 for the detail exposure. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return. Currency risk The Group is exposed to currency risk on purchases and borrowings that are denominated in a currency other than the respective functional currencies of Group entities, primarily Singapore Dollar (SD) and Norwegian Kroner (NOK). The Group has no specific policy of entering into forward foreign exchange contracts to cover foreign currency payments. The Group have taken action by transacting as much as possible in the functional currency of the Group to mitigate the impact on currency risk. Interest rate risk The Group s exposure to risk in market interest rates relates primarily to the Group s short bullet loan. Please refer to notes 16 for the detail exposure. Capital management The Board s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. This note present information about the Group s exposure to each of the above risks, the Group s objectives, policies and processes for measuring and managing risk, and the Group s Annual Report 2008 Songa Floating Production Group 8

13 Songa Floating Production Group Note 6 Segmental information Business segments The Group only operates in one business segment, namely: The conversion and operation of Floating, production, storage and offloading (FPSO) vessels A floating offshore oil production vessel has facilities for producing, treating and separating oil or gas from several producing wells and storing it until the oil or gas can be offloaded on to waiting tankers for shipment to refineries. has therefore not been able to meet the scheduled payments related to the mobilisation work. The Group has its head office in Singapore and an engineering and management office in Norway. Revenue The revenue recognized in 2008 comprises mobilization fees amounting to USD received to prepare the FPSO vessel for charter. Revenue recognition of these fees is to the extent of the mobilization costs incurred, given the uncertainty relating to the eventual outcome of the project. Mobilization costs incurred are recognised as operating expenses. Geographical segments The floating production and storage segment is managed on a worldwide basis. The Group has only one vessel ready to operate. This vessel is contracted to operate in Nigeria. The customer has at this stage no satisfactory financing in place and Note 7 Personnel expenses Personnel expenses refer to all expenses associated with the remuneration of personnel employed by the Group. Amounts in USD Salaries Social security tax Pension expenses Sharebased payment Other benefits Total personnel expenses Pension Both entities in the Group have contribution plans. At 31 December 2008 the pension scheme includes 3 employees in Norway and 18 employees in Singapore. At 31 December 2007 the number was 3 in Norway and 15 in Singapore. In Norway the entity is required to have an occupational pension scheme in accordance with the Norwegian law on required occupational pension. The entity's pension scheme is a defined contribution pension plan which meets the requirements of that law. In Singapore, it is a mandatory requirement for an employer to participate and contribute to the statutory Central Provident Fund in respect of its employees who are either Singapore citizens or permanent residents. The Central Provident Fund scheme is a social saving plan and its administering body sets out the amount of contribution which is proportionate to the individual employee s salary, subject to a maximum cap. Average full-time equivalents (FTEs)/employees Norway 3,33 2,33 Singapore 30,09 21,42 Total 33,42 23,75 The figures represent the average no. of FTEs in 2008 and Annual Report 2008 Songa Floating Production Group 9

14 Songa Floating Production Group Warrants to leading employees and members of the Board of Directors In the extraordinary general meeting 17 July 2007, warrants were issued in accordance with the Norwegian Public Limited Act The warrants may be granted to and subscribed by the Company's leading employees as resolved by the Board of Directors. In connection with the issue of the warrants, the board may establish terms and conditions for exercise and impose restrictions on sale and acquisition of shares issued as a result of the exercise of the warrants. There shall be no subscription price for the warrants. Each warrant shall give the right to subscribe one share. The subscription period shall be two years from 17 July The warrants can not be transferred. The subscription price for shares issued following exercise of the warrant shall be USD 65 per share. The subscription rights can be exercised at times as decided by the Board, but no later than 17 July Number of warrants outstanding at 1 Jan. Number of warrants granted Number of warrants canceled (18 000) Number of warrants exercised Number of warrants expired Warrants outstanding at 31 Dec The exercise price is USD 65 for all warrants granted, cancelled and outstanding. USD was recognised as an expense for warrants for employees and Board members in There were no warrants granted in Outstanding warrants carry the following terms and conditions Expiration date Strike price in USD Number Value per warrant in USD at 31 Dec jan ,91 02.jun ,34 01.sep ,02 The warrants are recognised at fair value at the grant-date by using a options pricing model Black and Scholes. The fair value on the grant date of the warrants granted is recognised as an expense, with corresponding increase in other equity over the vested period. The following assumptions are based on estimating fair value of the warrants: 2008 Grant date Fair value pr warrant on the grant date 10,91 3,34 1,02 Market value of the share 48,44 32,76 24,20 Exercise price 65,00 65,00 65,00 Expected volatility 40,00 % 40,00 % 40,00 % Contractual life of warrants (years) 3,5 3,1 2,9 Expected dividend Risk-free rate 2,69 % 2,82 % 2,51 % It is assumed that all employees will exercise their warrants on their maturity date 17 July Fair value The shares of Songa Floating Production ASA are not regularly traded, and the market value is not available at grant date. The market value is therefore estimated using the average change in market value of two FPSO-shares listed in Norway, from 17 July 2007 until grant date. The expected volatility is estimated based on the historical volatility (in 1,5 year) for the same FPSO-shares used to estimate the market value. The risk-free rate is USD Daily Treasury Yield Curve Rates for approximately the remaining exercise-time. Uncertainty of estimates Both expected volatility and market value are estimates using the method described above. Using another method or other assumptions could change the fair value of the warrants. The cost of warrants is not considered to be material, and changes in estimates will not lead to material changes in the profit or equity. Annual Report 2008 Songa Floating Production Group 10

15 Songa Floating Production Group Note 8 Remuneration to the auditor Amounts in USD Parent company Subsidiary abroad Total Parent company Subsidiary abroad Total Group auditor Helge Østvold AS: Statutory audit Other assurance services Tax consultancy Services other than auditing Total remuneration Helge Østvold AS: Auditor subsidiary: Audit fees VAT is included in the audit fee. Note 9 Property, plant and equipment Office machinery Vessel under construction Amounts in USD Equipment Hull Totalt Cost 01.jan Additions Disposals (9 205) (9 205) 31 Dec Additions Disposals ( ) ( ) 31 Dec Accumulated depreciation and impairment loss 01.jan Depreciation for the year Disposals (1 762) (1 762) 31 Dec Depreciation for the year Disposals 31 Dec Carrying amount at 1 Jan Carrying amount at 31 Dec Carrying amount at 1 Jan Carrying amount at 31 Dec Useful life 3-5 year 3 year The vessel (FPSO East Fortune), originally the tanker M/T Toro Horten, has been converted and upgraded at the Drydocks World yard in Singapore. All cost directly attributable to the reconstruction of the vessel including borrowing cost, are capitalised. Borrowing cost which consists of interest paid and amortization, is capitalised with USD in 2008 and USD in The vessel was completed in January 2009 and has not been depreciated in Impairment The Group has one vessel at year-end. In December 2008 the Group had an unbiased valuation of the vessel. The market value supports the carrying value. Annual Report 2008 Songa Floating Production Group 11

16 Songa Floating Production Group Note 10 Financial income and financial expenses Recognised in the result Amounts in USD Note Interest income Exchange gain Financial income Interest expenses Exchange loss Other financial expenses Financial expenses Net financial items recognised in the profit and loss statement ( ) Note 11 Income tax Income tax expense Amounts in USD Tax payable Change in deferred tax Income tax expenses Effective tax rate Amounts in USD Profit before taxes ( ) ( ) Estimated tax based on a tax rate of 28 per cent ( ) ( ) The effect of tax rate differences between Norway and Singapore Currency effect ( ) (63 390) Other permanent differences ( ) Deferred tax asset not recognised Income tax expenses Income tax expense in the income statement Income tax expenses Deferred tax and deferred tax liabilities Amounts in USD Deferred tax assets Tax loss to be carried forward Provisions Deferred tax assets - gross Deferred tax liabilities Vessel and equipment Convertible loan Deferred tax liabilities - gross Net tax assets The deferred tax assets are not recognised because of the uncertainty to utilise the tax loss. The currency effect is a result of different currency for taxation- and presentation purposes. Annual Report 2008 Songa Floating Production Group 12

17 Songa Floating Production Group Note 12 Earnings per share Amounts in USD The net loss of the year attributable to the shareholders Loss of the year after taxes ( ) ( ) Net loss of the year/diluted loss attributable to owners of ordinary shares ( ) ( ) Average weighted number of shares outstanding at 31 Dec. Number of shares Issued ordinary shares at 1 January Effect of shares issued in July Average weighted number of ordinary shares at 31 Dec Effect of converting convertible loan Effect of employee warrants Average weighted number of shares outstanding at 31 Dec. - diluted Amounts in USD Earnings per share for the year (11,20) (5,03) Earnings per share for the year, diluted (11,20) (5,03) Net loss of the year and diluted loss are equal because the interest paid for the convertible loan is capitalised on the vessel, cf. Note 8: Property, plant and equipment. Note 13 Receivables Amounts in USD Deposits Net trade receivables Other receivables Prepayments to suppliers Total receivables Amounts in USD Trade receivables Provision for bad debts Total net trade receivables Credit Risk The carrying amount for financial assets represents the Group's maximum credit exposure. The maximum exposure to credit risk on the balance sheet date was: Amounts in USD Note Receivables Cash and short-term deposits Total exposure to credit risk Group management continuously monitors the exposure to credit risk. At 31 Dec 2008 the Group had only one major customer. The credit risk is concentrated to this customer which is a local Nigeria s oil company. The customer has at this stage no satisfactory financing in place and has therefore not been able to meet the scheduled payments related to the mobilisation work. The Group Management had taken action not to start any further mobilisation works relating to this contract and thus no further risk is involved. The Group Management continually evaluates the credit risk associated with the customer and in this case upfront advance mobilisation fees, advance day rate and escrow account was imposed in the contract. Annual Report 2008 Songa Floating Production Group 13