04 / Performance Against KPIs. Principal Risks

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1 Annual Report and Accounts

2 1 / Topaz at a Glance Who We Are Strategy Overview Performance Against Investment Case Principal Risks Business Highlights Industry Overview KPIs Overview Investment Case Drivers to long-term growth and value creation. Supportive Long-Term Industry Fundamentals Leading Fleet forecast for global offshore oil and gas capex globally average vessel age vs. 15 years for the global OSV fleet Established and Long-standing Client Relationships of Topaz s revenue stems from investment grade rated clients Robust Contract Backlog Providing Earnings Visibility of contract backlog The oil and gas sector demonstrates robust industry dynamics. In the face of the natural depletion of existing onshore reserves, increasing demand and projected sustained high oil prices, the need to identify new reserves has increased. Accordingly, exploration and production companies are increasingly focused on offshore projects. Capital expenditures on offshore projects globally are expected to continue to increase between and 2017 at CAGRs of 7.6%. Topaz s modern and diverse fleet of vessels has an average age of only seven years, well below the global average. This makes them highly competitive and attractive to charterers as they are safe, reliable and typically of high specification. We have established long-term relationships with our top clients as a result of our excellent operational and safety track record, technically advanced and modern fleet, and our overall commitment to superior client service. We benefit from a varied, blue chip client base, consisting of IOCs and NOCs as well as other reputable offshore service providers. The average length of our relationships with our top five clients spans over seven years. We have and continue to build a strong revenue backlog, that underpins future earnings. The size of our revenue backlog, the quality of the clients behind it and our historically high and stable EBITDA margins provide us with an attractive and visible stream of cash flows over the next few years. Excellent Safety Record Solid Growth with High and Stable Margins Experienced and Proven Management Team average core vessel utilisation over the last three years LTIs in EBITDA margin consistently since 2007 of relevant experience We have invested substantially in our fleet and in our operational processes in order to ensure the efficient performance of our fleet. For our clients, who prioritise efficiency and reliability, this is a key competitive advantage of Topaz. As a result we have continued to experience high utilisation rates across our operations, with utilisation rates for our core fleet increasing from 86% in 2011 to 91% in 2012 and 95% in. Our focus on high-quality personnel and training to optimize our practices has resulted in an excellent safety record, with zero lost time incidents in. Our fleet is compliant with relevant industry and quality standards relating to control of work processes and safety management, HSE standards and labour conventions, and we are a long-standing and active member of the International Marine Contractors Association. We are the recipient of several operational and safety awards by recognised shipping industry societies. Our operations have shown continued growth and profitability. In the period from 2010 to, our revenue and EBITDA increased at a CAGR of 15.5% and 8.9%, respectively, with an EBITDA margin consistently over 40%. These results were achieved despite difficult market conditions over that period, demonstrating the resilience of our business in the face of economic downturns. Our growth in EBITDA has primarily been driven by our higher utilisation, better cost management and an increased focus on returns on assets in our new vessel deployment. Topaz s seasoned and widely respected Board and management team have extensive and relevant experience in the offshore support vessel industry, in both our home and our growth markets. Our management team averages 26 years of relevant experience and combined expertise in all aspects of the commercial, technical, operational and financial areas of our business. 06 / Annual Report and Accounts Annual Report and Accounts / 07 2 / in Review Chairman s Statement Interview with the Financial Review Operational Review Industry Review Corporate Chief Executive Responsibility Operational Review 22 / Annual Report and Accounts Annual Report and Accounts / 23 2 / in Review Chairman s Statement Interview with the Financial Review Operational Review Industry Review Corporate Chief Executive Responsibility Corporate Responsibility Quality, Health, Safety, Security and the Environment Group QHSSE performance Topaz measures its QHSSE performance against set targets in several key indicators as below: KPI Our target Our performance in Our performance in 2012 Fatal Accident Rate The number of fatal incidents per 100 million man hours Lost Time Injuries Frequency (LTIf) The number of injuries resulting in lost time from work per one million man hours Environmental Incident Frequency The number of incidents resulting in environmental impact per one million man hours Total Recordable Case Frequency The total number of injuries and illnesses (not First Aid cases), incurred by the Company, per one million man hours Pro-Active Recordable Case Frequency The number of safety observations and near misses reported across the Company, per 200,000 man hours Location / Caspian Sea Longitude / 41 Latitude / 52 The Topaz vessel Islay, a 75-metre anchor handling tug supply vessel with 15,000 brake horsepower, tows the East Azeri Platform Deck to its offshore location in Azerbaijan Topaz has been present in the Caspian since 1990, through the fleet of BUE Marine, which the Group acquired in QHSSE ethos and management the International Convention for the 2014 Group QHSSE priorities Prevention of Pollution from Ships/Vessels Quality, health, safety, security and One of the top priorities for the Group (MARPOL 73/78), which in the Caspian environmental (QHSSE) standards are in terms of QHSSE this year is to build region strictly limits, and in some cases central to the Company s operational activities on the LTI-free achievement in and entirely prohibits, the discharge of waste and to its delivery of business excellence. ensure that all set KPI targets are achieved. (including garbage, grey water, sewage The Head of QHSSE for the entire Group The coming year will see the centralisation and oil). reports to the Chief Operating Officer and and standardisation of QHSSE policies is supported by a local QHSSE team in and reporting processes to ensure that Topaz has historically procured annual each of the business operating regions. they are uniform and clearly understood external audits of its compliance with the Topaz complies with industry best practice by all employees and stakeholders. standards referred to above and internal techniques in respect of QHSSE standards, Topaz also aims to move certification in audits are carried out by Topaz QHSSE including TapRoot Root Cause Analysis three core ISO standards 9001, teams on a regular basis. standards, ISM and ISPS-compliant and away from an individual business management systems and integration of unit basis into a single, holistic Group-level Topaz s position of strength in QHSSE many other industry-standard practices. procedural, documentation and certification is further enhanced by its strategic focus Topaz places great importance on the framework. We will continue the safety culture on a younger fleet. The average age of the pursuit of QHSSE excellence throughout the survey and the reporting on sustainability. vessels is significantly lower than the industry Group and believes high QHSSE standards average resulting in more modern, betterfunctioning equipment on average, which are central to the Group s reputation, Finally, we aim to build upon the successes client relationships, competitive advantage, and learnings from the Safety Culture is less likely to experience technical issues its ability to implement its strategy effectively, Survey. Action areas identified last year than substantially older equipment. The and a strong track record in these areas have either already been addressed, or are commitment to high quality is at the heart is a competitive advantage for Topaz. continuing to be addressed through a number of Topaz s strategic ambitions and has of active programmes, and we fully intend a positive impact on the QHSSE drive Topaz is subject to a number of international to build upon these lessons by delivering an and the resulting performance. conventions relating to minimum QHSSE improved version of the survey as part of this standards as well as periodic survey and ongoing exercise to engage and empower Topaz is also a member of the International inspection requirements. International all employees in QHSSE issues. Marine Contractors Association, an conventions with provisions that relate international trade association promoting to QHSSE include: safety within the offshore, marine and underwater engineering industries. the International Convention for the Safety of Life at Sea (SOLAS), which specifies minimum standards for the construction, equipping and operation of vessels; the International Safety Management Code for the Safe Operation of Ships and Pollution Prevention (the ISM Code); and 40 / Annual Report and Accounts Annual Report and Accounts / 41 From left: The anchor handling tug supply vessel Jura, towing the CWP installation in offshore Azerbaijan The platform supply vessel Caspian Qala, which is deployed as part of Topaz s fleet in Azerbaijan 1 / Topaz at a Glance Who We Are Strategy Overview Performance Against Investment Case Principal Risks KPIs Overview Business Highlights Topaz has achieved great progress on all fronts during the year. Below are the in a nutshell financial and operational successes of the Company in. Financial Highlights Revenue up 22% and EBITDA up 17% due to fleet expansion and a consistently high core vessel utilisation rate 10 / Annual Report and Accounts Annual Report and Accounts / 11 2 / in Review Chairman s Statement Interview with the Financial Review Operational Review Industry Review Corporate Chief Executive Responsibility Operational Review (continued) 24 / Annual Report and Accounts Annual Report and Accounts / 25 2 / in Review Revenue In, revenue increased by US$56.4 million or 32.9% to compared with US$171.2 million in Corporate Resposibility (continued) Community initiatives Our People Learning and development We aim to undertake initiatives which directly Vision and approach Believing that an investment in our people benefit the communities in which we operate. today will result in a stronger Topaz tomorrow, At Topaz, people are of intrinsic value, and As a company with strong roots in the maritime we are committed to providing relevant we aim to offer our talented people a dynamic industry, with many mariners and ex-mariners training programmes across the business, environment with a plethora of challenges among our staff, the well-being of seafarers allowing our people to gain the relevant skills and opportunities. At Topaz we value integrity, around the world is a top priority for Topaz. required to take on the challenges of the future creativity, passion and attitude and our aim is growth that our strategic direction promises. to build a talent pool for our business that can Topaz contributes to the upkeep of the Flying create long-term value. We believe in adopting Angel project, a UAE-based seafarer support Learning and development focus areas are: a partnership approach with our people in vessel owned and operated by the maritime order to improve business performance and charity, the Mission to Seafarers. Founded Technical/behavioural training we benchmark ourselves against the best in England in 1856, and operating in the programmes focus on improving the in the industry. Gulf since 1962, the Mission is a charitable skills and competency of the workforce. organisation devoted to seafarers around the This includes leadership programmes Our people are called on to be key enablers world, irrespective of colour, race, faith or belief. and continuing education courses, skill to success at every level in the organisation upgrade training for the operation of and in return we offer a safe, open, meritbased working environment that fosters In 2006, Reverend Stephen Miller, the Director various machinery and equipment, as well of the Mission in Dubai, had the vision to as training done internally, drawing upon professional and personal growth led by a commission the construction of a purposebuilt seafarer support vessel that could the expertise of employees. consistent yet dynamic leadership team that sets clear strategies and accountabilities. provide thousands of sailors who are at sea QHSSE programmes focus on for months at a time with the basic amenities increasing the safety leadership Topaz is built on a team of committed and that most of us take for granted, such as standards, heightening safety awareness performance-driven employees and it is communicating with loved ones. Today, the and building a proactive safety culture our aim to recruit and retain the best talent Flying Angel, still the only seafarer s support in the Company. The major programmes available. We have put in place policies, vessel of its kind, welcomes over 75 seafarers completed in include the first Annual standards and programmes that identify on board daily. Topaz is proud to be part of Safety Culture Survey, Risk Assessment competencies required for each role across this important initiative and to contribute to and Control of Work refresher courses the organisation, encourage and provide the improvement of the lives of mariners by and training on First Aid, Use of Fire a fair and objective performance review and supporting the Mission to Seafarers. Extinguishers, Root Cause Analysis reward scheme and help define a professional and DuPont STOP. development plan for every employee. In, the typhoon Haiyan devastated central Philippines where many of Topaz s Looking ahead, learning and development We firmly believe in providing opportunities seafarers have families. Topaz organised efforts will continue to be focused on technical or new graduates and trainees and roll-out a company-wide relief drive where the and behavioural competence, productivity, a number of Graduate and Trainee Programmes total amount collected was matched by compliance with standards in QHSSE and the across the business in order to fuel talent and the Company 100% and later distributed Code of Business Conduct and developing provide key skills and practical experience to affected staff and seafarers. and promoting Topaz s values. to support their academic capabilities and achievement. Other community initiatives in include Code of business conduct the sponsorship of Topaz s participation We provide equal opportunities and constantly As part of its mission to be one of the at the annual Pink Walkathon and the strive to maintain a diverse workforce in relation best-run businesses in our industry, Topaz contribution to the charity Gulf for Good. to ethnicity, nationality and gender mix. has adopted a Code of Business Conduct that sets the standards and clarifies the procedures and rules for running our day-to-day operations. It also provides practical guidance for dealing professionally with our business partners, customers, employees and the societies in which we operate. 42 / Annual Report and Accounts Operational cost savings of US$9 million due to reductions in crew cost and maintenance and repair costs US$350 million of five-year senior notes placed to fund growth strategy The parent company authorised the formation of Topaz s own Board to establish independence, with oversight from Renaissance through its representation on the Topaz Board Declared dividend of US$20 million Operational Highlights Achieved a core asset utilisation rate of 95% Delivered a consistently strong safety performance with zero LTIs and fatalities Seven new vessels, all PSVs, were added to the fleet in, five of which will be delivered in 2014 Secured a US$100 million contract with BP in Azerbaijan for the provision of two large platform supply vessels Won a multi-year, US$20 million charter for nine vessels in the Russian Filanovsky project and subsequently set up offices in Astrakhan Launched the first ever Safety Culture Survey, designed to directly engage employees and guide management in further strengthening key HSE elements and performance Accelerated our investment in hiring global talent to drive growth strategy by several high-level appointments Total backlog of medium- and long-term contracts up 25% to US$1.16 billion Astrakhan Azerbaijan Kazakhstan Business unit description Markets and clients Topaz has been present in the Caspian since Topaz Marine Caspian is the leading 1990, through the fleet of BUE Marine which international OSV operator in this market in the Group acquired in Headquartered terms of number of vessels, with an estimated in Baku, Azerbaijan with local offices in 38% market share in February 2014 (Source: Kazakhstan and Astrakhan, Topaz Marine IHS-Petrodata). Other OSV operators in Caspian operates the biggest fleet in the the Caspian include Caspian Mainport, Company with 60 vessels in total, 23 of which Wagenborg and GAC Marine. are deployed in Azerbaijan, 24 in Kazakhstan and 13 in the Russian sector of the Caspian Due to the high physical barriers to entry, Sea. The fleet has an average age of the Caspian market is typically dominated 7.7 years. by contracts with medium- to long-term tenures. Topaz Marine Caspian employs a total of 882 onshore and offshore staff as at Our clients in the Caspian are large 31 December. international oil companies such as BP, Total, Saipem, Agip and Ersai. Industry Overview Supportive dynamics underpin the offshore oil and gas industry with demand for modern OSVs set to increase over the long term. Global CAPEX in oil and gas development Actual and forecast US$ Billions Global oil demand forecast million b/d 1, Source: IHS September South America Russian & Caspian North America Med. & Middle East Europe Central America Asia-Pacific Africa Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Business Highlights Global supply vessel demand and fleet age 3,000 2,500 2,000 1,500 1, Global offshore oil production Source: IHS September Source: IHS September Non-OECD states fuelling future demand for oil and gas. Onshore -> Offshore Increased demand for global hydrocarbons forecast at 3 to 4% p.a. Shallow-water -> Deep-water Growth in offshore CAPEX of 7.6% p.a. Enhanced hydrocarbon recovery techniques Nearly 30% of total capital expenditure on upstream oil and gas in spent offshore For more detailed statistics and commentary behind these market dynamics, please refer to the Industry Review on pages 34 to 39. Industry Review Topaz staff and seafarer numbers as at end 31 December Onshore staff Local Expat Total Caspian Mena Global Corporate and Shared Services Total Offshore staff Local Expat Total Caspian Mena Global Total ,517 (million bpd) Highlights of Topaz Marine Caspian Financial items in US$ millions 2012 Revenue EBITDA Net assets Share of total Company EBITDA 61% 59% Share of total Company assets 58% 58% Onshore staff Offshore staff Share of total Company EBITDA % Industry Overview Robust OSV demand High exploration and with clients requiring production capex Increasing offshore activity newer tonnage Expected decline in oil Offshore oil and gas capital Clients of OSV operators production from existing fields expenditure increases at a increasingly demand that OSVs and the relatively high and faster growth rate than that are built to higher technical Strong energy demand stable energy prices are both of onshore oil and gas capital specifications and with additional expected to positively influence expenditure. Rig count and capabilities to be able to work the level of capital expenditure utilisation is forecast to remain safely in more challenging in the oil and gas industry. high until 2020 which will in conditions. 24% of global turn drive OSV demand. OSV are more than 25 years and as such poorly equipped to compete for contracts for global IOCs and NOCs. No. of vessels Source: IHS September Retired 36+ years years years years years 0-14 years Demand Ultra Deep-water (>5,000 feet) Deep-water (1,000 5,000 feet) Offshore < 1,000 feet Corporate Responsibility Annual Report and Accounts / 43 59% From left: Lorem The ERRV ipsum Baki, dolor which sit amet, in 2008 consecte received tuer the adipisc ing BP elit, President s praesent Award viverra for ullamcorper the safe recovery leo, suspend isse and transport vitae mi vitae of all potenti. CA platform personnel in Azerbaijan Duis vitae mi vitae enim ali amblandit risusnun ullam The Caspian corper id, Server com is ert one modo of Topaz s at eleifendsit amet 3,300 erts DWT, neque. platform supply vessels serving the giant Shah Deniz field Lorem offshore ipsum Azerbaijan dolor sit amet, consecte tuer adipiscing elit, praesent viverra ullamcorper leo. Caspian Mena Global Corporate The vessel Fortress is a 72-metre, 3,300 DWT platform supply vessel 1 / Topaz at a Glance Contents 1 / Topaz at a Glance 01 / Who We Are 02 / Strategy Overview 04 / Performance Against KPIs 06 / Investment Case 08 / Principal Risks Overview 10 / Business Highlights 11 / Industry Overview 7.6% CAGR 7 years 90% >US$1.16bn High Asset >90% Utilisation Zero >40% >25 years p06/07 p10/11 2 / in Review 12 / Chairman s Statement 14 / Interview with the Chief Executive 18 / Financial Review 20 / Operational Review 20 / Our Fleet 22 / Topaz Marine Caspian 26 / Topaz Marine Mena 30 / Topaz Marine Global 34 / Industry Review 40 / Corporate Responsibility Topaz Marine Caspian US$227.6m p22/23 p24/25 Topaz Marine Caspian 3 / Governance 44 / Topaz Energy and Marine Board 45 / Senior Management 46 / Corporate Governance Report 49 / Directors Report 52 / Principal Risks in Detail Zero Zero Zero Zero Zero 0.81 Zero < > 1,300 1,836 1,830 p40/41 p42/43 4 / Accounts and Notes 57 / Independent Auditor s Report 58 / of Comprehensive Income 59 / of Financial Position 60 / of Cash Flows 61 / of Changes in Equity 62 / Notes to the Consolidated Financial Statements 99 / Appendix Key Financial Statements / Corporate Information 102 / Glossary 103 / Awards and Accolades 104 / Corporate Directory

3 Who We Are Strategy Overview Performance Against Investment Case KPIs Principal Risks Overview Business Highlights Industry Overview Who We Are Topaz Energy and Marine 1 is a leading offshore support vessel ( OSV ) company providing marine solutions to the global energy industry with a primary focus on the Middle East and the Caspian Sea. Headquartered in Dubai with over 40 years of experience in the Middle East, Topaz operates a fleet of more than 90 offshore support vessels with an average age of 7 years and employs approximately 1,700 staff. For more information see p22/25 Topaz Marine Caspian What We Do Operating primarily in the Middle East and the Caspian Sea with selective contracts in the North Sea, Gulf of Mexico and West Africa, we offer vessels such as anchor handling, platform supply, emergency recovery and response, and crew transfer to many blue-chip clients in the offshore oil and gas industry. Our Strategy To be a leading global OSV operator that consistently delivers superior returns within the industry top quartile; our strategy is to continue to modernise and grow our fleet through a selective vessel acquisition and build programme while optimising current fleet utilisation, with a view to expanding our operations into new potentially high-growth regions in the offshore energy industry. We will continue to focus on delivering best-in-class service supported by an excellent QHSSE performance, long-term client relationships, a prudent financial policy and a robust organisational structure. ¹) All references to Topaz Energy and Marine Limited, the Company and the Group are references to Nico Middle East Limited and its subsidiary companies Our Strengths We operate a modern and capable fleet in attractive markets supported by long-term industry fundamentals. Our robust contract backlog and consistent high-asset utilisation allow us to enjoy solid growth with high and stable margins year on year. We have established long-standing client relationships as a result of our excellent operational and QHSSE track records and our experienced management team ensures that we maintain a sustainable competitive advantage, that we deploy our resources efficiently and that we generate the best possible returns for all our stakeholders. How We Do Business Our commitment to doing business ethically and profitably is underpinned by our uncompromising stance on safety and quality. We work across diverse geographies and often in challenging conditions but the protection of our employees and the environment is always paramount. We strive to deliver the quality of service our clients expect at all times while adhering to global standards of corporate governance and social responsibility. For more information see p26/29 Topaz Marine Mena For more information see p30/33 Topaz Marine Global Annual Report and Accounts / 01

4 1 / Topaz at a Glance Strategy Overview The business strategy supporting Topaz s investment proposition is consistent and proven. At the heart of Topaz s offering is our modern and capable OSV fleet, an operational team delivering best-in-class asset utilisation and QHSSE performance and our partnering approach with our clients. This has yielded, and will continue to yield, a globally competitive business that consistently delivers superior returns within the industry s top quartile. Strategic priorities Description Expand, renew and realign the OSV fleet We intend to expand our fleet both through the construction of new tonnage and selective acquisitions when opportunities present themselves, and we will continue to implement a policy of focusing on the rate of return on assets with respect to all our operations and future investments. With these new vessel acquisitions we will continue our focus on maintaining a modern fleet of vessels with an average age well below the global average in the industry, which is currently approximately 15 years (according to Clarkson Research). We also intend to optimise the fleet with strategic divestments of aging and non-strategic vessels in order to realign our fleet to focus on mid- to high-end OSVs, in the AHTSV, PSV, MPSV and ERRV segments, which are more versatile and can address a wider range of our clients needs. Expand the geographical reach of the business by growing with our clients We will continue our proven strategy of selectively pursuing opportunities and expanding into key strategic markets poised for future growth while maintaining our market-leading position in the Caspian Sea and Mena region. We believe that there are significant growth opportunities to be captured in West and East Africa, the Mexican sector of the Gulf of Mexico and Brazil. We intend to pursue this selective expansion by assessing contract opportunities and sourcing vessels based on secured contracts that meet our internal IRR requirements or on outstanding tenders for which we are the favoured bidder and by forming strategic alliances with experienced and capable local partners. We will also continue to support our clients as they expand their own operations into new regions. In addition, we intend to diversify our revenue and EBITDA to reduce our dependence on operations in any single market. Additionally, we intend to continue increasing our market share with our existing clients in our home markets. We also plan to continue expanding our market share with new top tier clients by seeking new opportunities to tender by leveraging our experience, fleet capabilities, and operational and safety excellence. Maintain a prudent financial policy with strong funding capability We strive to maintain a strong balance sheet with ample liquidity. We will achieve this through our robust backlog and by focusing on cash generation by achieving higher utilisation, improving our cost management and focusing on the return on assets in our operations and future investments. Through continuing to conduct our monthly detailed financial and operational vessel level reviews with senior and regional management involvement, we plan to continue our revenue optimisation and cost reductions and further improve our operational efficiencies. We will also continue to explore opportunities to optimise our capital structure by diversifying our sources of funding through a balance of bilateral debt with our relationship banks, access to the capital markets and equity injections from our Principal Shareholder and/or selectively from other investors. We intend to use our cash flows to deleverage our balance sheet and reduce our net debt to EBITDA ratio. We also intend to use our generated cash flows to fund our disciplined capital expenditure. Increase quality of earnings by building revenue backlog We will continue to implement a disciplined approach to vessel purchases, limiting such purchases to instances with final or close to final contracts in place, thus providing us with certainty on future cash flow by ensuring a predictable stream of revenues before we commit capital expenditure. We aim to create an optimal balance between long term contracts for most of our vessels, which provide visibility on cash flow at pre agreed day rates, and short to medium term contracts for some of the vessels we deploy in our Mena and Global operations, which provide us with flexibility for capitalising on buoyant market conditions with shorter term contracts at potentially higher day rates. This strategy enables us to maintain high fleet utilisation rates while maintaining our high EBITDA margins. We aim to maintain our substantial backlog and therefore visibility for our future revenue. Operational excellence It is our aim to continue winning market share in target markets by focusing on upholding our world class operating standards and health and safety record with the goal of being the provider of choice to these clients. We aim to remain a reliable partner to our clients, delivering a high-quality service that addresses our clients needs for competitive prices with safety as a priority. We intend to improve not only our performance, but also our efficiency, by sustaining operational excellence while increasing fleet utilisation, especially with respect to our core assets, and reducing the costs of operation. To achieve these operational efficiencies, we plan to continue to implement best in class operational processes such as introducing a platform with single information technology and process structure throughout our fleet and operations. 02 / Annual Report and Accounts

5 Who We Are Strategy Overview Performance Against KPIs Investment Case Principal Risks Overview Business Highlights Industry Overview Key achievements in Targets for 2014 Acquired seven new vessels, all DP2 PSVs, all deployed on contracts with above Company benchmark returns Divested three non-core vessels and three aging core vessels Maintained the average age of the fleet at seven years Successfully relocated two vessels from Brazil to West Africa due to inadequate returns Core fleet expansion with a focus on rate of return on assets Further divestments of non-core tonnage Maintain the average fleet age below eight years Entrenched our position in the West African market with several contract wins with global IOCs. Topaz now operates 10 vessels in West Africa Secured long-term contracts for several vessels in new markets with oil majors that are currently clients in our home markets Actively explore new opportunities in growth markets such as the Mexican Gulf, South America and the North Sea Diversify our geographical exposure by growing in our home markets while accelerating growth in our global footprint Secure term contracts with additional oil majors, NOCs and top-tier offshore contractors Raised a US$350 million bond to add non-amortising debt to its balance sheet Consolidated our banking affiliations to fewer relationship banks Explore various capital raising initiatives to fuel growth, maintain appropriate leverage and lower the cost of capital Secured a US$100 million long-term contract with BP in Azerbaijan and acquired two large platform supply vessels to service the contract Won a medium-term, US$20 million charter for nine vessels in the Russian Filanovsky project Achieved revenue backlog at an all-time high at US$1.2 billion at year end Secure new term contracts in unison with the expansion of the core fleet Maintain or expand backlog by securing new term contracts Ensure that all new contracts are secured on terms that appropriately secure our earnings visibility No fatalities and LTIs in the period Core fleet utilisation at 94.5% for the year Inaugural Safety Culture Survey completed, improvement areas identified and actions ongoing Maintain excellent safety record Zero fatalities Zero LTIs TRCf <1.4 Uphold or improve current core fleet utilisation rate Implement the NS5 Planned Maintenance System by ABS Launch the second annual Safety Culture Survey across the business Annual Report and Accounts / 03

6 1 / Topaz at a Glance Performance Against KPIs As a measure of Group performance, Topaz monitors financial and operating key performance indicators to assess progress against corporate objectives. Financial KPIs Revenue (US$m) Variance over 2012 What it measures For more information +22% The level of operating activity and growth of the business See pages EBITDA (US$m) Variance over 2012 What it measures For more information +17% The operating profitability of the business See pages EBITDA margin (%) Variance over 2012 What it measures For more information -2ppt How efficiently revenue is converted into EBITDA See pages Return on equity 2 (%) Variance over 2012 What it measures For more information +1.3ppt How efficiently Topaz generates net profits from its equity capital See pages Return on net assets 3 (%) Variance over 2012 What it measures For more information +1.3ppt How efficiently Topaz generates operating profits from its asset base See pages / Annual Report and Accounts

7 Who We Are Strategy Overview Performance Against KPIs Investment Case Principal Risks Overview Business Highlights Industry Overview Operating KPIs Core fleet utilisation (%) Variance over 2012 What it measures For more information +4ppt The average operational uptime of our core fleet See page Backlog (US$bn) Variance over 2012 What it measures For more information +25% The Company s secured revenue and visibility of future earnings See page 06 Not tracked LTIf (lost time injury frequency) Variance over 2012 What it measures For more information The Group s safety performance See pages ¹) Adjusted 2011 EBITDA of US$135 million is calculated as unadjusted 2011 EBITDA of US$121 million plus one-off costs: IPO costs of US$8.1 million, unamortised arrangement fee of US$1.8 million, provision against a tax claim of US$1.9 million, and impairment of receivables of US$1.8 million. ²) Net profit/total equity. ³) NOPAT/fixed assets + net working capital. Annual Report and Accounts / 05

8 1 / Topaz at a Glance Investment Case Drivers to long-term growth and value creation. Supportive Long-Term Industry Fundamentals 7.6% CAGR forecast for global offshore oil and gas capex globally The oil and gas sector demonstrates robust industry dynamics. In the face of the natural depletion of existing onshore reserves, increasing demand and projected sustained high oil prices, the need to identify new reserves has increased. Accordingly, exploration and production companies are increasingly focused on offshore projects. Capital expenditures on offshore projects globally are expected to continue to increase between and 2017 at CAGRs of 7.6%. Leading Fleet 7 years average vessel age vs. 15 years for the global OSV fleet Topaz s modern and diverse fleet of vessels has an average age of only seven years, well below the global average. This makes them highly competitive and attractive to charterers as they are safe, reliable and typically of high specification. Established and Long-standing Client Relationships 90% of Topaz s revenue stems from investment grade rated clients We have established long-term relationships with our top clients as a result of our excellent operational and safety track record, technically advanced and modern fleet, and our overall commitment to superior client service. We benefit from a varied, blue chip client base, consisting of IOCs and NOCs as well as other reputable offshore service providers. The average length of our relationships with our top five clients spans over seven years. Robust Contract Backlog Providing Earnings Visibility >US$1.16bn of contract backlog We have and continue to build a strong revenue backlog, that underpins future earnings. The size of our revenue backlog, the quality of the clients behind it and our historically high and stable EBITDA margins provide us with an attractive and visible stream of cash flows over the next few years. 06 / Annual Report and Accounts

9 Who We Are Strategy Overview Performance Against KPIs Investment Case Principal Risks Overview Business Highlights Industry Overview High Asset >90% Utilisation average core vessel utilisation over the last three years We have invested substantially in our fleet and in our operational processes in order to ensure the efficient performance of our fleet. For our clients, who prioritise efficiency and reliability, this is a key competitive advantage of Topaz. As a result we have continued to experience high utilisation rates across our operations, with utilisation rates for our core fleet increasing from 86% in 2011 to 91% in 2012 and 95% in. Excellent Safety Record Zero LTIs in Our focus on high-quality personnel and training to optimize our practices has resulted in an excellent safety record, with zero lost time incidents in. Our fleet is compliant with relevant industry and quality standards relating to control of work processes and safety management, HSE standards and labour conventions, and we are a long-standing and active member of the International Marine Contractors Association. We are the recipient of several operational and safety awards by recognised shipping industry societies. Solid Growth with High and Stable Margins Experienced and Proven Management Team >40% EBITDA margin consistently since 2007 >25 years of relevant experience Our operations have shown continued growth and profitability. In the period from 2010 to, our revenue and EBITDA increased at a CAGR of 15.5% and 8.9%, respectively, with an EBITDA margin consistently over 40%. These results were achieved despite difficult market conditions over that period, demonstrating the resilience of our business in the face of economic downturns. Our growth in EBITDA has primarily been driven by our higher utilisation, better cost management and an increased focus on returns on assets in our new vessel deployment. Topaz s seasoned and widely respected Board and management team have extensive and relevant experience in the offshore support vessel industry, in both our home and our growth markets. Our management team averages 26 years of relevant experience and combined expertise in all aspects of the commercial, technical, operational and financial areas of our business. Annual Report and Accounts / 07

10 1 / Topaz at a Glance Principal Risks Overview Risk is an inherent component of Topaz s business activities. The ability to effectively identify, assess, measure, respond, monitor and report on risk in our business activities is critical to the achievement of Topaz s vision and strategic objectives. To help accomplish this mission, Topaz utilises an Enterprise-wide Risk Management (ERM) process designed to provide the Board and management with the capabilities needed to identify, assess and manage the full spectrum of risks inherent to our industry. Principal risk Nature of risk Potential impact Key controls and mitigation strategies Financing Risk The Group requires significant funding to finance Capex to support the continued growth of its business. The Group s ability to secure additional debt will depend on financial, economic and other factors, many of which are beyond Topaz s control. An inability to obtain sufficient financing on reasonable terms or at all may prevent the Group from effectively pursuing its growth strategy, which may have a material adverse effect on the Group s business, results of operations, financial condition and prospects. Topaz has established banking relationships with a number of local and international banks and has raised different forms of project financing such as conventional shipping loans, Islamic loans and export credit financing in addition to accessing the public bond markets. This diversified lender base will help mitigate against any future financing risk. Industry Risk Topaz primarily provides its services and products to clients in the upstream oil and gas industry; its revenue depends on the level of expenditure by that industry on exploration, development and production that may be volatile and is beyond the Group s control. Any decline in expenditures by the oil and gas industry may result in decreased demand for Topaz s services which may result in a material adverse effect on the Group s business, results of operations, financial condition and prospects. Topaz s exposure to industry spend is effectively diversified among a large number of clients, sectors and geographies. Many of Topaz s clients are NOCs that to a large extent continue to invest through market downcycles. Further, many of Topaz s long-term contracts straddle business cycles and therefore smoothes the impact of shortterm volatility. Health, Safety and Environmental Risk The Group s operations exposes it to a number of risks such as adverse weather conditions, piracy, mechanical failures, collisions, sabotage and hazardous substance spills. Any health, safety or environmental accident in which the Group is involved could result in significant reputational damage and have a material adverse effect on the Group s results of operations, financial condition and prospects. Topaz operates an integrated management system in compliance with industry and regulatory requirements. Topaz continuously invests in training of its front line staff and reinforcing its culture of safety. The Company is appropriately insured against financial losses associated with HSE incidents. 08 / Annual Report and Accounts

11 Who We Are Strategy Overview Performance Against KPIs Investment Case Principal Risks Overview Business Highlights Industry Overview Principal risk Nature of risk Potential impact Key controls and mitigation strategies Political/ Market Risk Topaz has historically generated most of its revenue from operations in the Caspian, West Africa and Mena regions where economic, political and social conditions can be volatile and may deteriorate in the future. Any of the risks described could have a material adverse effect on Topaz s business, results of operations, financial condition and prospects. Topaz monitors the changing landscape of political risk, particularly for countries that are regarded as high political risk environments. The Company operates in numerous markets and through this diversified presence the Company is less exposed to any one market or region. The Company continuously strives to achieve high proportions of local staff and thereby further entrenching the Company s local presence and acceptance. Counterparty Risk Topaz provides its services and products to a variety of clients and is subject to the risk of non-payment for services it has rendered. This counterparty risk is further compounded by the fact that Topaz is exposed to high levels of client concentration, particularly in the Caspian region. Non-payment by a client of Topaz could have a material adverse effect on the Group s cash flows, results of operations and financial condition. Topaz generally does business with relatively large companies, including NOCs and IOCs, who are generally well funded and rated investment grade. Nonetheless, the Group also has policies and procedures in place to monitor credit risk on its receivables and take appropriate action where necessary. Liquidity Risk Risk that Topaz will not be able to meet its financial obligations associated with its financial liabilities that are settled by delivering cash or other financial assets. The risk also includes changes in market interest rates to the Group s long-term debt obligations with floating interest rates. Currency risk also exists on sales and purchases denominated in currencies other than US Dollars, which is the functional and reporting currency of Topaz. An inability to repay various financial obligations to vendors or banks timely may prevent the Group from effectively pursuing its growth strategy and risking damage to the Company s reputation, which may have a material adverse impact. Topaz s approach to managing liquidity is to ensure, as far as possible, that it always has sufficient liquidity to meet its liabilities when due including servicing its financial obligations, without incurring unacceptable losses. Topaz limits its liquidity risk by ensuring banking facilities are available. The Company also manages its interest rate exposure through using a mix of fixed and variable interest rate debts. Currency risk is mitigated by hedging 100% of the estimated foreign currency exposure in respect of its forecast capital commitments. Topaz uses forward currency contracts to hedge its currency risk. Annual Report and Accounts / 09

12 1 / Topaz at a Glance Business Highlights Topaz has achieved great progress on all fronts during the year. Below are the in a nutshell financial and operational successes of the Company in. Financial Highlights Revenue up 22% and EBITDA up 17% due to fleet expansion and a consistently high core vessel utilisation rate Operational cost savings of US$9 million due to reductions in crew cost and maintenance and repair costs US$350 million of five-year senior notes placed to fund growth strategy The parent company authorised the formation of Topaz s own Board to establish independence, with oversight from Renaissance through its representation on the Topaz Board Declared dividend of US$20 million Operational Highlights Achieved a core asset utilisation rate of 95% Delivered a consistently strong safety performance with zero LTIs and fatalities Seven new vessels, all PSVs, were added to the fleet in, five of which will be delivered in 2014 Secured a US$100 million contract with BP in Azerbaijan for the provision of two large platform supply vessels Won a multi-year, US$20 million charter for nine vessels in the Russian Filanovsky project and subsequently set up offices in Astrakhan Launched the first ever Safety Culture Survey, designed to directly engage employees and guide management in further strengthening key HSE elements and performance Accelerated our investment in hiring global talent to drive growth strategy by several high-level appointments Total backlog of medium- and long-term contracts up 25% to US$1.16 billion 10 / Annual Report and Accounts

13 Who We Are Strategy Overview Performance Against KPIs Investment Case Principal Risks Overview Business Highlights Industry Overview Industry Overview Supportive dynamics underpin the offshore oil and gas industry with demand for modern OSVs set to increase over the long term. Global CAPEX in oil and gas development Actual and forecast Global supply vessel demand and fleet age US$ Billions 1, Source: IHS September High exploration and production capex No. of vessels 3,000 2,500 2,000 1,500 1, Increasing offshore activity Source: IHS September Robust OSV demand with clients requiring newer tonnage Retired 36+ years years years years years 0-14 years Demand Strong energy demand Expected decline in oil production from existing fields and the relatively high and stable energy prices are both expected to positively influence the level of capital expenditure in the oil and gas industry. Offshore oil and gas capital expenditure increases at a faster growth rate than that of onshore oil and gas capital expenditure. Rig count and utilisation is forecast to remain high until 2020 which will in turn drive OSV demand. Clients of OSV operators increasingly demand that OSVs are built to higher technical specifications and with additional capabilities to be able to work safely in more challenging conditions. 24% of global OSV are more than 25 years and as such poorly equipped to compete for contracts for global IOCs and NOCs. Global oil demand forecast Global offshore oil production million b/d Source: IHS September Non-OECD states fuelling future demand for oil and gas. South America Russian & Caspian North America Med. & Middle East Europe Central America Asia-Pacific Africa (million bpd) Source: IHS September Onshore -> Offshore Ultra Deep-water (>5,000 feet) Deep-water (1,000 5,000 feet) Offshore < 1,000 feet Increased demand for global hydrocarbons forecast at 3 to 4% p.a. Growth in offshore CAPEX of 7.6% p.a. Shallow-water -> Deep-water Enhanced hydrocarbon recovery techniques Nearly 30% of total capital expenditure on upstream oil and gas in spent offshore For more detailed statistics and commentary behind these market dynamics, please refer to the Industry Review on pages 34 to 39. Annual Report and Accounts / 11

14 2 / in Review Chairman s Statement We are reporting strong financial performance with revenues up 22% and EBITDA up 17% over the same period in 2012 On behalf of the Board of Directors of Topaz, it gives me great pleasure to present to you the Company s audited accounts for the 12-month period ending 31 December. We are reporting strong financial performance with revenues up 22% and EBITDA up 17% over the same period in This growth is primarily attributable to the core fleet expansion, better utilisation, and improved operational performance across our core fleet. Samir J. Fancy Chairman of the Board Dividend The Board of Topaz has approved a dividend of US$20 million for the year. Due to the turnaround in the Company s performance during the year, growth was delivered across all relevant financial measures, enabling the Board to approve a level of dividend that rewards shareholders and allows the Company to retain sufficient earnings to invest in its future growth strategy. Governance structure As a public company, our parent, Renaissance, has in place the requisite Board, Committees, Internal Audit and other appropriate functions and processes to ensure good governance. The Group is committed to transparency, responsibility and accountability. In, we established a new Board and Committees for Topaz, which are functioning while being formalised. I, as Renaissance Chairman, two Renaissance Directors and the Renaissance CEO are members of the Topaz Board, alongside the executive directors comprising the Topaz CEO and CFO. Renaissance Directors are members of the Topaz Audit Committee, and a Renaissance Director and the Renaissance CEO are members of the Topaz Compensation and Remuneration Committee. The Renaissance CFO attends the Topaz Board and Topaz Audit Committee meetings as the Owner s Representative. It is our intention that the Topaz Board will appoint Independent Non-executive Directors with relevant industry, market or professional expertise. These appointments will be made in the course of this year. We have already made the first appointment of an independent Director on the Topaz Board, who is also the independent Chairman of the Topaz Audit Committee and a member of the Topaz Compensation and Remuneration Committee. The reason for this important initiative is straightforward: Renaissance wants to establish absolute focus on Topaz and on good governance. In addition, we have stated our intention to consider listing Topaz on a major capital market, such as the London Stock Exchange. So an IPO, in the foreseeable future, is one option under consideration as a means to achieve value recognition in a substantial market with access to significant resources of capital for a capital-intensive business model. With the appointment of René Kofod-Olsen as the new Topaz CEO in 2012 and the formation of his full management team, Topaz has the strength and breadth of leadership to operate as an independent company, accountable to the Topaz Board. Financial independence In the third quarter of, we reported that Topaz had successfully priced its inaugural bond offering of US$350 million senior notes due in Demand exceeded US$2.5 billion. The funds raised are being used to refinance a small portion of existing bank debt, materially fund capital expenditure and increase cash on the balance sheet. In this process Topaz was rated by S&P and Moody s. This is an endorsement that the Company has the financial disciplines demanded by international financial markets. The significance of this successful initiative beyond the obvious capital markets entry and all those positive implications is that it establishes the Company s financial independence. We are no longer dependent on our parent company for growth and have a direct ability to tap into international capital markets. 12 / Annual Report and Accounts

15 Chairman s Statement Interview with the Financial Review Operational Review Industry Review Corporate Chief Executive Responsibility Dividend Topaz Board approved a dividend of US$20m for the year. Bond offering Topaz successfully priced its inaugural bond offering of US$350m senior notes due in The due diligence process and investor scrutiny applied for the Topaz bond initiative in international capital markets of Europe, the Middle East and the USA, further supports the Company s credentials of governance and management. International capital markets appreciate our business model; the management team; key credit strengths such as stable and healthy operating margins and cash flows; a contract backlog of more than US$1 billion; a healthy balance between the sustainability of longterm contracts and the flexibility of short-term contracts; and an excellent operational and safety track record with blue chip international oil and gas clients. Year in review was the year in which the benefits of decisions taken by our new management team to deliver a turnaround to growth became evident. Across all parameters, financial and operational, the Company performed strongly against the key performance indicators set by the Board. The return to growth was largely delivered by bringing new focus to the business. The realigned structure of the Group allowed the new management team to focus on developing a world-leading pure play OSV provider to the world s oil majors; a market that offers potentially significant growth potential as an increasing proportion of oil and gas exploration and production moves offshore. During the year, the Company had committed to investing a total of US$280 million in core assets, which supported the growth seen in, and which will also generate future growth over the medium to long term. Current client relationships in the home markets of the Caspian and the Middle East were reviewed and assessed to ensure that we consistently support our clients needs while providing an outstanding service offering of some of the newest and most technologically advanced OSV vessels combined with an ability to deliver locally. A series of contract wins announced during the year with some of our key oil major clients underlined the continued success of the product offering to oil majors requiring OSV support. While developing the growth potential of our home markets, we also continued the development of new markets as part of our global expansion strategy. During the year, we successfully grew our West Africa franchise with several contract wins, and moved significant, modern assets into the buoyant and growing markets of Nigeria and Angola. Our shareholders can expect our West African operations to contribute positively to the 2014 results in a material way. As part of our turnaround strategy, our management reviewed underperforming assets and contracts and successfully negotiated exits from many of these positions. As part of this remedial action, we exited the Brazilian market, which proved to be unprofitable under the terms of the existing contract, to redeploy our assets to more profitable contracts elsewhere. Brazil remains a target market for the future, but only when the projected returns meet the Company s targeted thresholds. The Company was transformed not only financially but also operationally. A new performance culture, based on objective, data-driven analysis and decision-making, was launched across the entire business. Our employees are now increasingly driving their own objectives and are being encouraged to take full ownership. This new culture has fed through directly to the operational and, ultimately, the financial performance of the business. Underlining all of this is our embedded safety culture. OSV is a sector with inherent risk. Enhanced safety training and data capture systems were rolled-out across the business during the year, which resulted in an outstanding safety record of zero Lost Time Injuries (LTI). We congratulate every member of the Company for this impeccable track record. Safety is the highest priority in our Company! Looking ahead I would like to take this opportunity to recognise the achievements of the senior management team and each and every member of the Company for an outstanding outcome to the year gone by. In, we have put in place a separate governance structure for Topaz; secured our financial independence through a bond placement on international capital markets; turned around underperforming assets; and invested for growth in new core vessels. In 2014, the Company is structured for sustainable, profitable growth for the years ahead. This provides us with the platform to continue to deliver outstanding service to our customers and build enduring value for all our stakeholders. Samir J. Fancy Chairman of the Board Annual Report and Accounts / 13

16 2 / in Review Interview with the Chief Executive Exceptional Year of Performance on all Key Parameters Chief Executive Officer, René Kofod-Olsen, reflects on Topaz s progress during and outlines the Company s strategic drivers and operational performance which underpin its long-term financial targets. René Kofod-Olsen Chief Executive Officer Can you give us a quick summary of the results? In a nutshell, we had an exceptional year of performance on all key parameters. We grew revenue by 22% and EBITDA by 17% over 2012, mainly on the back of the expansion of our fleet and a consistently high utilisation rate of 95% in our core fleet. Importantly, this was accomplished with a solid safety record with zero lost time injuries (LTIs) for the year. We achieved all of this by committing to invest a total of US$280 million worth of new OSVs to ensure a continued sustainable growth of our business. What were the key drivers of the Company s transformation? The business had encountered some significant turbulent waters in and I was appointed by the Board in 2012 with a mandate to turn around the business, return it to a profitable trajectory and forge the new strategy. Having made an assessment of the business, optimised the management team, and implemented a range of initiatives to change the business, we have already harvested positive results evidenced in our financial delivery. Topaz is now a highly customer centric organisation where we re not limited to the commercial function leading the way in delivering our customer value proposition. Through partnering with our clients we always strive to deliver bespoke solutions for, and with, our customers, at the right price and with safety as a priority! We have today a far more return-focused and data-driven management team, with the tools available to make both timely and accurate decisions. Our focus on analysis has resulted in resolving a number of legacy underperforming assets and businesses in our operations, with a visible impact on our return profile. Safety and productivity, as part of our core DNA, were enhanced during the year. As a crucial link in the oil and gas chain, OSV companies licence to operate depends on the ability to deliver services safely and with efficiency. We have achieved worldclass safety performance levels, which is only achievable through investing in training and development of all our people, and the constant ownership from all Topaz employees in the maintenance and reinforcement of a strong safety culture. Our leadership team has gone to great lengths in ensuring organisational clarity throughout the business. We continue to ensure that the right people are in the right positions and in the right structures to deliver maximum impact for the benefit of the business. Consistent with our performance culture, during the year we implemented an enhanced company-wide incentive scheme developed in line with global best practice. This was done to further encourage performance in long-term alignment with shareholders rightful expectations of sustainable returns. How is Topaz a different company under your stewardship today? Topaz is today a pure play OSV company with the clear focus of remaining an industry top quartile operator serving the offshore production value chain of our NOC and IOC clients. With this ambition, we now have an established strategy based on a strong and inherent culture of performing to the highest standards in all we do and forged in true marine craftsmanship. 14 / Annual Report and Accounts

17 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility Operations 95% Core fleet utilisation. Safety Zero LTIs We strive to deliver a true difference that matters, for all our stakeholders! Under the guidance of our parent company, Renaissance s Board of Directors, an independent corporate structure for Topaz has been developed and implemented, which has brought increased focus, responsibility and accountability. Today Topaz operates as an independent company within the Group, accountable to the Topaz Board. This means Topaz is able to operate in the image of an independent public company, while still retaining the coverage, protection and support of ultimate fiduciary oversight from the Renaissance Board. In line with our strategy of achieving financial independence, we obtained credit ratings from both S&P and Moody s ahead of raising a highly successful US$350 million bond in the international capital markets. Securing ratings from both S&P and Moody s confirmed the strength of Topaz s financial disciplines, while the market demand for our inaugural bond confirmed our growth prospects and the future value of our strategy. Why did you decide to raise a bond? Topaz has historically been funded through its existing banking relationships but the bond route was considered a strong instrument to add to the toolbox, creating a more balanced capital structure. The proceeds were predominantly deployed to acquire new vessels, and paying down certain existing amortising debt. This allowed us to improve free cash flow, thereby enabling increased investment for growth. As ever, additional free cash will be deployed towards capital expenditure in core vessel acquisitions in a highly disciplined and return-focused manner. Through the bank debt repayment enabled by the bond, we also took the opportunity to consolidate the bank group into a smaller group of relationship banks from 15 to 9. The bond was the Company s first international capital markets issue; a door has now been opened to a deep and liquid pool of capital to finance Topaz s growth aspirations. What sets you apart from other OSV companies? Topaz s fleet has an average age profile of 7 years, which stands out against an overall industry average of 15 years. That s a key competitive advantage in our model as it enables us to consistently serve clients safely, cost-effectively and efficiently. We enjoy strong market positions in our home markets of the Caspian and the Middle East. Those have been built over many years and we work diligently to expand on those positions by serving our clients exceedingly well, investing in modern tonnage and by creating in-country value by localising our offering in partnership with local enterprises of repute. Our contracting model and resultant revenue backlog are hugely important as they provide tremendous visibility on cash flows and support the underlying business when temporary blips in the markets occur. I firmly believe that our people and the way we run the Company will continue being of paramount advantage and a differentiator in the years to come. When every employee truly owns his or her deliverables and sees them through to successful delivery no matter what, that is when a company moves from good to great, and consistently so! The Topaz Arrow, a 60-metre, 2,400 BHP multipurpose supply vessel, installing mats at the DWG complex offshore Azerbaijan Annual Report and Accounts / 15

18 2 / in Review Interview with the Chief Executive (continued) How do you define your growth strategy? Topaz will retain a clear focus on building and maintaining a world-leading OSV fleet. We will concentrate on technologically advanced and modern, medium- to large-size vessels from reputed shipyards and owners. We have clearly defined which markets we want to invest in and only do so against robust projected return levels. Through our capital disciplines and scalability we will consider M&A opportunities based on a clearly defined fit within our strategy and culture. To be successful we must relentlessly maintain the highest level of operating and QHSSE standards, while deepening and expanding our long-term key client relationships with IOCs and NOCs into existing and new markets. How will you grow outside of your home markets? Our home markets provide a stable base of cash flows that enables us to grow our businesses in our current and selective new markets. We see expansion opportunity primarily in West Africa, South America and the North Sea, all with their own distinct opportunities, and all with their own set of challenges. In entering these new or nascent markets, we will leverage our decade-long client relationships to identify and capitalise on prospects. We re continuously reviewing geographical areas of interest where we can deploy our expertise and where we can build sufficient scale to generate the returns on our capital that we demand. How are you building the right team to lead the Company into the future? We have developed and implemented a performance measurement system structured around the balanced scorecard terminologies. This is assisting our ambition to fairly and transparently assess our people s performance and accordingly reward for excellence. We have likewise developed a competency framework, which will enable us to identify our strong performers throughout the organisation and ensure they are retained and developed. When we complement our internal talent pool we have a track record of being able to attract and recruit talent, both offshore and onshore. Operationally, we have an existing and expanding base of seasoned marine craftsmen. In view of the global shortage of qualified OSV seafarers, we will need to retain this talent and enable recruitment of new candidates by investing in localised pools, continued training and collaborating with marine academies by providing opportunities for cadet training programmes and internships. Why are you investing in continuously modernising and renewing your fleet? It s our fundamental belief that a modern fleet is at the heart of a safe, efficient and cost-effective OSV services offering. Our view is that a modern fleet correlates closely with higher operational utilisation, lower maintenance and repair cost, lower fuel cost for clients, reduced emissions and retained value. We work for large IOCs and NOCs demanding exacting standards regarding fleet age and technology such as DP2. Safety is at the heart of the Company s operations 16 / Annual Report and Accounts

19 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility transformation The results of the changes made are evidenced in our financial delivery. Fleet investments A modern fleet is at the heart of safe, efficient and cost-effective OSV services. The safety of our people and operational efficiency will always be core attributes of the way we run the Company. How do you see the industry dynamics supporting Topaz s growth? The industry conditions are generally strong, with energy companies remaining focused on further offshore development and production as a means to balance depleting onshore reserves and to ensure production can meet demand levels. Global offshore E&P capex from to 2017 is forecast to grow at a compound annual growth rate of 7.6%, which we believe will support healthy rig activity levels and field development both key drivers of a solid OSV demand. We believe the industry is entering a new phase, characterised by capital discipline and focus on cost-efficiency by the oil majors, which only serves to add to our resolve to partner with our clients and assume the responsibility for continuously finding ways to run a cost-efficient and reliable operation. Only by supporting clients in reducing their unit cost of production can an OSV company truly thrive. Topaz is well placed in this regard thanks to our modern and technologically advanced fleet with very high operational uptime and relatively low operating costs. How do you manage risk? In the OSV industry, where real physical risk exists over and above normal business risk, effective and proactive risk management is crucial to creating and preserving stakeholder value. oversight by the Board and its various committees assisted by the Internal Audit function. The management risk agenda is led and consolidated under an Enterprise Risk Management system by a dedicated risk function with input from each key operational area. This approach ensures that we quantify, prioritise and appropriately mitigate the risk the business faces. In terms of industry risk we mitigate the risk associated with industry down-cycles by maintaining meaningful exposure only to the development and production segments of the oil extraction cycle, as opposed to the more volatile exploration segment. As our financial results through the latest industry downturn demonstrate, we also enjoy a great deal of protection by our portfolio of long-term contracts with tier one clients. The physical risks related to health, safety and environmental protection are managed by keeping an integrated management system in compliance with industry and regulatory requirements, and naturally also by maintaining adequate and customary insurance cover. Risk is best mitigated by relentlessly investing in training and development of all employees and by constantly reinforcing our existing safety culture safety first! René Kofod-Olsen Chief Executive Officer At the corporate level, strategic business risk is ultimately managed through independent Seafarers wearing their personal protective equipment during an Abandon Ship Drill aboard the Topaz Installer Annual Report and Accounts / 17

20 2 / in Review Financial Review Revenue (in US$ millions) Caspian Mena Global 12 months ended 31 Dec Dec 2012 Variance (0.3) Total Revenue increased by 21.6% or US$67.0 million to US$376.5 million in compared with US$309.5 million in This increase is primarily due to: (i) the addition of two new vessels along with the full-year impact of five vessels purchased in 2012 contributing US$49.7 million, (ii) better utilisation and increase in vessel day rates resulting in an increase of US$9.8 million, (iii) deployment of vessels in the Russian sector of the Caspian resulting in an increase of US$6.1 million, and (iv) proceeds from the sale of three vessels resulting in an increase of US$7.2 million. The increase in revenue was partially offset by the loss of hire due to the sale of one vessel in 2012 (US$2.2 million) and the loss of revenue due to vessel off-hire or revised day rates on two of our vessels (US$1.2 million and US$2.3 million, respectively). Geographical segments Caspian: In, revenue increased by US$56.4 million or 32.9% to US$227.6 million compared with US$171.2 million in This increase was primarily due to the addition of two new vessels contributing US$7.5 million in the period and the full-year impact of four vessels purchased in 2012 contributing US$36.7 million, proceeds from the sale of one vessel contributing US$6.7 million and deployment of vessels in the Russian sector resulting in an increase in revenue of US$6.1 million. Mena: In, revenue increased by US$10.9 million or 13.4% to US$92.4 million compared with US$81.5 million in This increase was primarily due to the full-year impact of one vessel purchased in 2012 contributing US$5.5 million and better utilisation of vessels deployed in Saudi Arabia resulting in an increase of US$5.4 million. Global: In, revenue slightly decreased by US$0.3 million to US$56.5 million compared with US$56.8 million in the year This decrease was primarily due to loss of revenue of two AHTSVs working in West Africa. Direct costs (in US$ millions) Crew cost Technical maintenance Depreciation Bareboat charges Others 12 months ended 31 Dec Dec 2012 Variance Total Direct costs in increased proportionately to revenue by US$37.8 million or 19.6% to US$230.5 million as compared with US$192.7 million in The increase in bareboat charges is mainly due to two large vessels taken on bareboat and mobilised to the Caspian region in Q However, these vessels have now been acquired and will not contribute to bareboat charges in Other cost increases are mainly due to amortisation of the mobilisation cost of the above two vessels amounting to US$5.7 million, US$1.9 million mobilisation cost for other vessels, US$2.5 million relating to book value of asset disposed, US$1.4 million relating to brokerage/ commission in Nigeria and Brazil, and a US$1.8 million increase in catering cost. EBITDA (in US$ millions) Caspian Mena Global Corporate/adj 12 months ended 31 Dec (9.7) 31 Dec 2012 Variance (2.9) (8.0) (6.8) Total EBITDA increased by US$23.9 million or 17.1% to US$163.4 million in compared with US$139.5 million in This increase is primarily due to: (i) the addition of two new vessels along with the full-year impact of three vessels purchased in 2012 contributing US$16.3 million, (ii) better utilisation and increase in vessel day rates resulting in an increase of US$10.7 million, (iii) deployment of vessels in the Russian sector of the Caspian resulting in an increase of US$5.0 million, and (iv) proceeds from vessel sold contributing US$2.8 million. The increase in EBITDA was partially offset by US$1.1 million due to the full-year impact of the bareboat cost of two vessels purchased in 2012, increase in overhead cost by US$9 million, which mainly relates to provision for doubtful debts and provision against advances. Caspian: The increase in EBITDA by US$26.9 million is mainly due to the addition of two new vessels contributing US$5.0 million, the full-year impact of two vessels purchased in 2012 contributing US$7.9 million, the deployment of vessels on a term contract in the Russian Filanovsky project contributing US$5.0 million and better vessel utilisation contributing US$5.9 million. Mena: The increase in EBITDA by US$11.8 million is mainly due to the full-year impact of one vessel purchased in 2012 contributing US$3.5 million, better utilisation of vessels deployed in Saudi Arabia contributing US$4.9 million and better utilisation of other vessels contributing US$3.0 million. Global: The decrease in EBITDA by US$8.0 million is due to a debt provision on a contract in Nigeria amounting to US$3.6 million and also due to the increase in operating costs along with lower utilisation of certain vessels operating in Nigeria and Brazil. Topaz has since redeployed the two vessels operating in Brazil to West Africa. Administrative expenses Administrative expenses increased by US$6.4 million or 18.3% to US$40.3 million in compared with US$33.9 million in the same period last year. This increase was primarily driven by the opening of our office in Astrakhan, Russia and costs reflecting the investment Topaz made during the period in hiring global talent to drive its growth strategy. Finance costs Finance costs increased by US$7.6 million or 20.9% to US$44.0 million in the period compared with US$36.4 million in the same period last year. The increase in interest expense was primarily due to an increase in secured debt as a result of the acquisition of new vessels, refinancing of certain existing debt, along with interest charges on senior notes raised in Q4 in line with the strategic plan. Income tax expense Income tax expense increased by US$6.3 million or 50.4% to US$18.8 million in the period compared with US$12.5 million in the same period last year. This increase is in line with the increase in revenue and is also due to the increase in the deferred tax provision. Total comprehensive income Total comprehensive income for the year increased by US$9.9 million or 26.6% to US$47.1 million in the period compared with US$37.2 million in the same period last year. This increase was a result of an increased number of vessels and cost efficiencies achieved. 18 / Annual Report and Accounts

21 Chairman s Statement Interview with the Financial Review Chief Executive Operational Review Industry Review Corporate Responsibility Revenue Revenue increased by 21.6% or US$67.0 million to US$376.5m in compared with US$309.5 million in EBITDA EBITDA increased by 17.1% or US$23.9 million to US$163.4m in compared with US$139.5 million in Non-controlling interest Non-controlling interest in total comprehensive income increased by US$7.6 million or 65.5% to US$19.2 million in the period compared with US$11.6 million in the same period last year. This increase is mainly due to new vessels deployed in the Caspian under a joint venture agreement with the existing partner. Backlog The company s backlog at the end of stood at US$1.16 billion compared to US$930 million as at the end of 2012, reflecting a high level of contract intake during. Cash flow The cash generation as a percentage of EBITDA has been 100% (2012: 99%). The table on the right sets out a breakdown of cash flow for the 12-month periods ended 31 December and 31 December Cash used in investing activities for the year ended 31 December reflects capital expenditure on two new vessels of US$86 million, advances paid for new vessels under construction of US$54 million and other vessel maintenance/upgradation capex. Financing On 4 November, the Group issued US$350 million aggregate principal amount of 8.625% senior notes (the Senior Notes) that will mature on 1 November The senior notes pay interest semi-annually in arrears on 1 May and 1 November of each year, commencing 1 May Interest has been accrued from the issue date. On and after 1 November 2016, the Group may redeem some or all of the senior notes at the redemption prices (expressed as percentages of principal amount) equal to % for the 12-month period beginning 1 November 2016, % for the 12-month period beginning 1 November 2017 and 100% beginning 1 October 2018, plus accrued and unpaid interest and additional amounts, if any, to the redemption date. (in US$ millions) EBITDA Changes in working capital Cash generated from Operations Cash conversion Income tax paid Interest paid Net cash generated from operating activities Cash used in investing activities Cash provided by financing activities Increase/(decrease) in cash and cash equivalents Cash and cash equivalents Floating Rate Senior secured loans Fixed Rate Senior secured loans Other loans / senior notes¹ Subordinated Shareholding Funding Total debt Total equity Total capitalisation Net debt Total debt/ltm EBITDA Net debt/ltm EBITDA 1 Recorded as per International Financial Reporting Standards (IFRS) Capitalisation The table above sets out Topaz s consolidated cash, total indebtedness, shareholders funds, total capitalsation and net debt as of December and December Capital expenditure Capital expenditure on property, plant and equipment was higher during the year at US$199 million as compared to US$98.2 million for the year The majority of the capital expenditure was on marine vessels including capital work in progress. There were no significant asset disposals during. 12 months ended 31 Dec (0.1) % (13.9) (38.1) (165.5) Dec 2012 Variance (0.8) % (11.3) (38.7) 88.7 (121.4) 25.1 (7.6) (in US$ millions) (2.6) (44.1) Dec 13 Dec 12 Growth (541) 1, Return on net assets (494) 1, The Company s return on net assets for the year was 8.4% as against 7.8% for the previous year This improvement is attributed to better utilisation, tighter cost control and better returns on new assets. Dividend and distribution The Company proposes a dividend of US$20 million for the year ended 31 December. 142 (33) 190 (47) Annual Report and Accounts / 19

22 2 / in Review Operational Review Our Fleet AHTSVs PSVs MPSVs ERRVs Topaz has a fleet of 94 offshore support vessels as at 31 December, with an average age of 7 years. AHTSVs / Anchor Handling Tug Supply Vessels PSVs / Platform Supply Vessels MPSVs / Multipurpose Support Vessels ERRVs / Emergency Recovery and Response Vessels Topaz has 40 vessels classified as others, with an average age of 7 years. This category of vessels includes crewboats, barges, small tugs, multicrafts, etc. 20 / Annual Report and Accounts

23 Chairman s Statement Interview with the Financial Review Operational Review Chief Executive Industry Review Corporate Responsibility Topaz has 28 AHTSVs, with an average age of 5.1 years AHTSVs are designed for anchor handling, towing offshore platforms, barges, production modules and vessels and providing supply services and may have equipment for firefighting, oil recovery and rescue duties. Topaz has 13 PSVs, with an average age of 6.2 years PSVs are designed for transporting supplies and equipment to and from offshore installations. They may be used to supply stores, drilling equipment, drilling bulks, fluids and pipes. Topaz has 10 MPSVs, with an average age of 11.7 years MPSVs are multifunctional vessels designed to accommodate a range of offshore activities. They may also supply stores and drilling products and support inspection, maintenance, repair, diving and construction activities. Topaz has 3 ERRVs, with an average age of 7.8 years ERRVs provide safety support to offshore installations. Typical features include onboard hospitals, fast rescue craft and firefighting and oil recovery capabilities. ERRVs may also carry out duties such as interfield cargo operations, towage assistance and pollution control. Annual Report and Accounts / 21

24 2 / in Review Operational Review Topaz Marine Caspian Topaz has been present in the Caspian since 1990, through the fleet of BUE Marine, which the Group acquired in Location / Caspian Sea Longitude / 41 Latitude / 52 The Topaz vessel Islay, a 75-metre anchor handling tug supply vessel with 15,000 brake horsepower, tows the East Azeri Platform Deck to its offshore location in Azerbaijan 22 / Annual Report and Accounts

25 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility From left: The anchor handling tug supply vessel Jura, towing the CWP installation in offshore Azerbaijan The platform supply vessel Caspian Qala, which is deployed as part of Topaz s fleet in Azerbaijan Annual Report and Accounts / 23

26 2 / in Review Operational Review Topaz Marine Caspian (continued) Astrakhan Azerbaijan Kazakhstan Revenue In, revenue increased by US$56.4 million or 32.9% to US$227.6m compared with US$171.2 million in Business unit description Topaz has been present in the Caspian since 1990, through the fleet of BUE Marine which the Group acquired in Headquartered in Baku, Azerbaijan with local offices in Kazakhstan and Astrakhan, Topaz Marine Caspian operates the biggest fleet in the Company with 60 vessels in total, 23 of which are deployed in Azerbaijan, 24 in Kazakhstan and 13 in the Russian sector of the Caspian Sea. The fleet has an average age of 7.7 years. Topaz Marine Caspian employs a total of 882 onshore and offshore staff as at 31 December. Markets and clients Topaz Marine Caspian is the leading international OSV operator in this market in terms of number of vessels, with an estimated 38% market share in February 2014 (Source: IHS-Petrodata). Other OSV operators in the Caspian include Caspian Mainport, Wagenborg and GAC Marine. Due to the high physical barriers to entry, the Caspian market is typically dominated by contracts with medium- to long-term tenures. Our clients in the Caspian are large international oil companies such as BP, Total, Saipem, Agip and Ersai. 24 / Annual Report and Accounts

27 Chairman s Statement Interview with the Financial Review Operational Review Chief Executive Industry Review Corporate Responsibility From left: Lorem The ERRV ipsum Baki, dolor which sit amet, in 2008 consecte received tuer the adipisc ing BP elit, President s praesent Award viverra for ullamcorper the safe recovery leo, suspend isse and transport vitae mi vitae of all potenti. CA platform personnel in Azerbaijan Duis vitae mi vitae enim ali amblandit risusnun ullam The Caspian corper id, Server com is ert one modo of Topaz s at eleifendsit amet 3,300 erts DWT, neque. platform supply vessels serving the giant Shah Deniz field Lorem offshore ipsum Azerbaijan dolor sit amet, consecte tuer adipiscing elit, praesent viverra ullamcorper leo. Highlights of Topaz Marine Caspian Financial items in US$ millions 2012 Revenue EBITDA Net assets Share of total Company EBITDA Share of total Company assets Onshore staff Offshore staff % 58% % 58% Share of total Company EBITDA 2012 Caspian Mena Global Corporate 61% 59% The vessel Fortress is a 72-metre, 3,300 DWT platform supply vessel Annual Report and Accounts / 25

28 2 / in Review Operational Review Topaz Marine Mena Lorem ipsum dolor sit amet, consectetuer adipisc ing elit. Praesent viverra ullamcorper leo, suspend isse potenti. Duis vitae mi vitae enim aliqu am blan Topaz dit. Ut Marine risus nunc, Mena ullam is managed corper id, from com Doha, ert modo Qatar eleifend and overseas sit amet erts additional neque. satellite Donec offices sap ienip in sum Dubai, lacinia the quis UAE facilisis and Al sed. Khobar, Saudi Arabia. Location / Qatar Location Longitude / North / 25 Sea Longitude Latitude // Latitude The DMS / 3 Challenger II, one of Topaz s Project/Contract multi-purpose supply / Lorem vessels ipsum dolor currently sit amet, consectetuer deployed as adipiscing part of the elit. Mena Praesent fleet viverra ullamcorper leo, suspendisse potenti. Duis ast vitae mi vitae enim aliqu am blandit. Ut risus nunc, ullam corper id, com ert modo at eleif end sit amet erts neque. 26 / Annual Report and Accounts

29 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility From left: The MPSV Topaz Rayyan during lifting operations at the PS1 field offshore Qatar The Topaz Khobar, an anchor handling tug supply vessel currently deployed with Saudi Aramco Annual Report and Accounts / 27

30 2 / in Review Operational Review Topaz Marine Mena (continued) Saudi Arabia Qatar UAE Revenue In, revenue increased by US$10.9 million or 13.4% to US$92.4m compared with US$81.5 million in Business unit description Topaz Marine Mena is managed from Doha, Qatar and oversees additional satellite offices in Dubai, UAE and Al Khobar, Saudi Arabia. Its fleet, which is almost exclusively deployed in the Arabian Gulf, consists of 22 vessels and has an average age of 6.4 years. Topaz operates predominantly in three distinct geographies within the Mena market; Qatar, Saudi Arabia and the United Arab Emirates. As at 31 December, Topaz Mena employs a total of 648 staff and seafarers. Markets and clients The Mena region is host to a large number of operators and as such the market is generally fragmented with no single dominating player. The five major participants control approximately 40% of the market share in the AHTSV and 30% in the PSV segments, respectively. Topaz s market share is 6% in total which makes it the fourth largest OSV operator in the Mena region after Tidewater, Bourbon and Zamil. Charter contracts for vessels in the region are often on shorter tenures. Charter contracts for Topaz Mena s vessels range from spot market, short- and medium-term and have typical charter periods of between three months and three years. Key clients in Mena include Saudi Aramco, Oxy, Maersk, Total, McDermott and Dubai Petroleum. 28 / Annual Report and Accounts

31 Chairman s Statement Interview with the Financial Review Operational Review Chief Executive Industry Review Corporate Responsibility From left: Lorem The anchor ipsum handling dolor sit tug amet, supply consecte vessel, tuer Topaz adipisc ing Salalah, elit, praesent during a viverra firefighting ullamcorper exercise leo, suspend isse vitae mi vitae potenti. The Topaz Jebel Ali alongside in Dubai port Duis vitae mi vitae enim ali amblandit risusnun ullam corper id, com ert modo at eleifendsit amet erts neque. Lorem ipsum dolor sit amet, consecte tuer adipiscing elit, praesent viverra ullamcorper leo. Highlights of Topaz Marine Mena Financial items in US$ millions 2012 Revenue EBITDA Net assets Share of total Company EBITDA Share of total Company assets Onshore staff Offshore staff % 27% % 30% Share of total Company EBITDA 2012 Caspian Mena Global Corporate 24% 22% A platform in the Arabian Gulf served by the Topaz fleet Annual Report and Accounts / 29

32 2 / in Review Operational Review Topaz Marine Global Lorem ipsum dolor sit amet, consectetuer adipisc ing elit. Praesent viverra ullamcorper leo, suspend Topaz isse potenti. Marine Duis Global vitae oversees mi vitae our enim growing aliqu am blan West dit. Ut Africa risus nunc, operations ullam and corper manages id, com our ert modo selective at eleifend contracts sit amet in erts the neque. North Donec Sea and sap ienip the sum Mexican lacinia quis sector facilisis of the sed. Gulf of Mexico. Location / North Sea Longitude / 56 Latitude / 3 The Topaz Installer performing a delicate ROV survey and pull-in cable operation around the Dolwin Alpha station in Borkum West II windfarm in German waters, July. 30 / Annual Report and Accounts

33 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility Topaz Installer, Topaz s cable laying vessel featuring a horizontal carousel, is part of Topaz s modern and highly capable offshore fleet and is on contract supporting the offshore windfarm industry in the North Sea Annual Report and Accounts / 31

34 2 / in Review Operational Review Topaz Marine Global (continued) North Sea Gulf of Mexico West Africa Revenue In, revenue decreased by US$0.3 million or (2)% to US$56.5m compared with US$56.8 million in Business unit description Topaz Marine Global oversees our growing West Africa operations and manages our selective contracts in the North Sea and the Mexican sector of the Gulf of Mexico. The fleet consists of 13 vessels including the specialised cable-lay vessel, Topaz Installer, and has an average age of 5.7 years. As at 31 December, Topaz Marine Global employs a total of 163 staff and seafarers. Markets and clients Topaz Marine Global competes in the global OSV marketplace and as such competes against a wide variety of OSV competitors in various markets. In its largest market footprint, West Africa, Topaz Marine Global has a small but growing market share and competes predominantly with companies such as Tidewater, Bourbon and Swire Pacific. Charter contracts for vessels in the Global fleet are a mix of short-term and mediumterm tenures. Topaz Marine Global s key clients include ABB, Global Spectrum and BOA Marine Services. 32 / Annual Report and Accounts

35 Chairman s Statement Interview with the Financial Review Operational Review Chief Executive Industry Review Corporate Responsibility From left: Lorem The Topaz ipsum Amani, dolor one sit amet, of five consecte platform supply tuer adipisc ing vessels elit, praesent acquired viverra by Topaz ullamcorper in, now leo, working suspend isse for an vitae oil major mi vitae in West potenti. Africa Duis The Topaz vitae mi Captain, vitae enim a UT745 ali amblandit design risusnun ullam multi-purpose corper id, supply com ert vessel, modo on at contract eleifendsit amet in the erts Gulf neque. of Mexico Lorem ipsum dolor sit amet, consecte tuer adipiscing elit, praesent viverra ullamcorper leo. Highlights of Topaz Marine Global Financial items in US$ millions 2012 Revenue EBITDA Net assets Share of total Company EBITDA Share of total Company assets Onshore staff Offshore staff % 27% % 30% 150 Share of total Company EBITDA % 17% Caspian Mena Global Corporate 24% 61% 22% 59% The multi-purpose support vessel, Topaz Commander, was acquired in 2010 and has strengthened our deep-water capabilities Annual Report and Accounts / 33

36 2 / in Review Industry Review Supporting the Growth of the Global Energy Industry Topaz operates within the offshore support vessel (OSV) industry. It owns and operates OSVs which support clients engaged in the exploration, development and production phases of the offshore oil and gas industry. A) Oil industry dynamics Overview of the offshore drilling industry The demand for offshore drilling services is primarily driven by oil and gas companies anticipation of oil and gas prices and worldwide demand for oil and gas. Volatility in oil and gas prices has historically led to fluctuations in expenditure on drilling services. Variations in market conditions during such cycles impact different segments of the industry with a different magnitude, largely dependent on the length of drilling contracts. Contracts in shallow waters for jackup rig activities, for example, are typically shorter term compared to contracts in deepwater regions for semi-submersible rigs and drillships, and are therefore generally more sensitive to price fluctuations. Relative price stability During, Brent crude oil traded mostly in a relatively narrow band of US$98/bbl to US$119/bbl (source: Reuters) with no supply or demand imbalances, high levels of inventories of crude oil, increasing OPEC spare production capacity and a strengthening global economy. Particularly from the third quarter of and onwards the price has been stable, trading in a band of US$103/bbl to US$112/bbl. The charts below set out historic and forecast oil and gas prices and gas prices outlook. Historic and forecast oil and gas prices US$/barrel (2011 prices) US$ per MMBtu Source: IHS September Global gas prices outlook 0 Jan 2005 Jan 2007 Jan 2009 Jan 2010 Jan Jan 2015 Jan 2017 Source: IHS September Notes: (1) Henry Hub Index is an index showing the average price for natural gas futures contracts traded on the New York Mercantile Exchange. (2) Brent is the price of Brent Crude Oil, a type of crude oil commonly used as an oil price benchmark. Brent oil (nominal) Brent oil ( prices) NBP (UK spot) Border Contract Tracker Germany Henry Hub (USA) Japan LNG average import price 34 / Annual Report and Accounts

37 Chairman s Statement Interview with the Financial Review Operational Review Industry Review Chief Executive Corporate Responsibility Non-OECD states fuelling future demand for oil Historically, the countries comprising the Organisation for Economic Co-operation and Development (OECD) have been the largest consumers of oil. However, non-oecd countries, in particular China and India, and regions including the Caspian and Mena, are expected to consume an increasing proportion of the world s oil, as well as related petroleum and petrochemical products and gas. Non-OECD countries demand for oil increased from 33.7 million bpd in 2005, to 42.8 million in 2012, representing an increase of 27%. (Source: OPEC World Oil Outlook 2007 and ). Non-OECD countries are also forecast to generate significant future demand for oil as development in these regions accelerates. The OPEC s World Oil Outlook predicts that in 2015 the oil demand of the non-oecd countries will surpass the OECD demand. By 2020, 54% of global oil demand is projected to stem from non-oecd countries. Compound annual growth in oil demand of approximately 2.1% over the period is expected to be fuelled, in particular, by economic growth in China and India. Increased oil capital expenditure anticipated It is estimated that conventional crude output from existing fields will fall by more than 40 million barrels per day by 2035 (World Energy Outlook ). Meanwhile, global demand for oil and gas will continue to increase. IHS expects that significant investment by oil and gas companies will be required in order to ensure that production can meet demand. The expected decline in oil production from existing fields and the relatively stable energy prices are both expected to have a positive influence on the level of capital expenditure in the oil and gas industry. Between 2003 and 2008, global upstream capital expenditure on onshore and offshore field development of oil and gas (E&P, Pipelines and LNG) increased significantly from US$202 billion to US$586 billion. After staying relatively constant between 2008 and 2010, the expenditure rose sharply in 2011 and From 2012, the yearly increase has been approximately 5%, a growth level that is forecast to continue in the near future. (Source: IHS.) Global oil demand forecast million b/d Source: IHS September Global CAPEX in oil and gas development Actual and forecast US$ Billions 1, Increased capital expenditure expected in offshore oil and gas As existing onshore fields gradually deplete, anticipated demand is expected to drive increasing amounts of future oil and gas production offshore. IHS estimates that in approximately US$189 billion of capital expenditure was invested in offshore production, representing nearly 30% of the US$661 billion total capital expenditure on upstream oil and gas in. It is forecast that offshore oil and gas capital expenditure will increase from levels at a faster growth rate than that of onshore oil and gas capital expenditure. IHS estimates offshore oil and gas capital expenditure to be around US$243 billion in 2017, representing a CAGR of 7.6%, compared to an expected increase in onshore oil and gas capital expenditure from US$312 billion in to US$359 billion in 2017, representing a CAGR of 3.6% South America Russian & Caspian North America Med. & Middle East Europe Central America Asia-Pacific Source: IHS September Africa Annual Report and Accounts / 35

38 2 / in Review Industry Review (continued) Global offshore oil production CAGR Capex 8% 7% 6% 5% 4% 3% 2% 1% (million bpd) Ultra Deep-water (>5,000 feet) Deep-water (1,000 5,000 feet) Offshore < 1,000 feet 0 Onshore Offshore Source:Topaz compilation, based on information from IHS September Source: IHS September New techniques and harsher operating environments to make up shortfall Given the expected depletion of existing fields, it is anticipated that exploration and development will take place in both new onshore and offshore assets as well as through enhanced hydrocarbon recovery techniques. Offshore, there has been a recent trend in exploration and development towards deeper and harsher environments, with the offshore oil and gas industry seeing an increase in the importance of deep-water activity. For example, the proportion of oil production represented by production from deep-water fields (>1,000 feet) increased from 3.6% in 2000 to 6.3% in and is expected to increase further to 7.8% in (Source: IHS.) The chart above presents the historical and forecast (from 2012 to 2020) offshore global oil production, and the relationship between shallow-water and deep-water offshore oil production. What does this mean for Topaz? The market dynamics of the oil and gas industry are of significant importance to Topaz as its main area of operation are intrinsically linked to the level and type of investment in the oil and gas industry, which in turn are influenced by the global demand for energy. The energy market fundamentals are robust and are predicted to remain so in the longer term. In the following sections we analyse in more depth the impact of these favourable market dynamics at an operational level. B) Offshore Support Vessel (OSV) industry 1) OSV market dynamics Providing indispensable services to the offshore oil and gas industry The OSV industry deploys vessels to support offshore exploratory and developmental drilling rigs and offshore production facilities. OSVs also support general offshore construction and subsea maintenance and repair activities. Different types of OSVs provide indispensable services at each of the exploration, development and production phases for the offshore oil and gas industry. The following table outlines the typical involvement in each of these phases. 36 / Annual Report and Accounts

39 Chairman s Statement Interview with the Financial Review Operational Review Industry Review Chief Executive Corporate Responsibility Phase Exploration Development Production Typical length of phase 3 to 5 years 2 to 4 years Throughout a field s production life Description Involves conducting seismic surveys and exploratory drilling on the ocean bed to ascertain potential oil and gas reserves and establish accurate locations for drilling Involves the drilling of development wells and the building of oil and gas production facilities, including the installation of (i) offshore production platforms, (ii) floating production, storage and offloading vessels ( FPSOs ), and (iii) submerged pipelines in ocean beds Involves the extraction, storage and offloading of oil and gas Typical role of OSVs Conducting seismic surveys, which involve the exploration of ocean beds to locate oil and gas reserves Refuelling and resupplying seismic survey vessels Providing surveillance services, warning other ships against encroachment where seismic surveys are under way Towing and anchor handling of drilling rigs and mooring them to specified coordinates Towing floating equipment and barges Transporting general supplies Mobilising and demobilising FPSOs and offshore construction vessels Towing, anchor handling and mooring of crane barges and pipe-laying vessels, drilling rigs Supporting diving operations Supporting pipeline inspections Transporting fuel, water, general supplies and personnel Providing safety and emergency response services Providing security services to patrol offshore fields Towing and mooring of FPSOs/FSOs Transporting cargo, waste components and raw materials such as cement, mud, brine, pipes, machinery, equipment and general supplies Transporting personnel Providing repair and maintenance support services for pipelines and production platforms Providing safety and emergency response services Providing security services to patrol offshore fields and onshore terminals Annual Report and Accounts / 37

40 2 / in Review Industry Review (continued) Ageing OSV fleets The total supply of OSVs in a given market is affected by factors including: the size and age profile of the existing fleet combined with client requirements related to the age of OSVs deployed the rate of delivery of new vessels the rate of decommissioning of existing vessels the number of vessels undergoing repair or upgrade work, and the number of idle vessels that are available for deployment after a period of recommissioning or refurbishment. As at August, an estimated 24% of the global fleet of OSVs was more than 25 years old and the average age of the global OSV fleet was approximately 15 years old (Source: IHS and Clarkson Research). By contrast, Topaz s OSV fleet is relatively young with an average of circa 7 years. Demand for newer OSVs As the importance of deep-water activity increases, Topaz expects clients of OSV operators to increasingly demand that OSVs are built to higher technical specifications and with additional capabilities to be able to work safely in the harsher environments and more challenging conditions that are generally found at deep-water oil and gas fields. In general there will be an increased demand for: Bridging the shortfall Although the overall supply of OSVs is forecast to exceed demand throughout the period up to 2017, the proportion of OSVs that are younger than 25 years in age and thereby meet the technical and safety standards typically required by oil and gas companies in charter contracts is expected by Topaz to fall short of forecast demand beginning in the near future. Global supply vessel demand forecast Vessel Years (365 days basis) 2,500 2,000 1,500 1, What does this mean for Topaz? Topaz s OSV fleet is newer and therefore more technologically advanced than many of its competitors, which is a key factor behind its high historical utilisation rates. Topaz believes that the age and specification of vessels, particularly regarding standards of safety and reliability, is of increasing importance to its oil and gas customers as energy production becomes more challenging in harsher offshore environments. Topaz s fleet profile and health and safety track record make it a highly attractive partner for its energy clients. AHTS 23,000+ bhp AHTS 18-22,999 bhp AHTS 15-17,999 bhp AHTS 10-14,999 bhp AHTS 6-9,999 bhp PSV 4,000+ dwt PSV 3-3,999 dwt PSV 2-2,999 dwt PSV <2,000 dwt newer, safer vessels larger vessel dimensions Source: IHS September increased technological sophistication and capability improved operational reliability increased power and winch capacity lower fuel consumption, and flexibility to operate in harsh environments The following two charts present the historical and forecast annual demand for different vessel types for the period from 2003 to 2017 as well as the forecast supply of vessels by vessel age. Global supply vessel demand and fleet age No. of vessels 3,000 2,500 2,000 1,500 1, Retired 36+ years years years years years 0-14 years Demand Source: IHS September 38 / Annual Report and Accounts

41 Chairman s Statement Interview with the Financial Review Operational Review Industry Review Chief Executive Corporate Responsibility 2) OSV market Competitive landscape The ownership of the global OSV fleet is relatively fragmented, with the top 19 operators accounting for approximately 58% of the operating fleet, and no single operator accounting for more than 8%. (Source: IHS.) Tidewater Bourbon Offshore Edison Chouest GulfMark Swire Pacific Hornbeck Farstad Operations characterised by distinct local markets The majority of operators focus on a combination of important, regional markets, including Brazil, the Gulf of Mexico, the Middle East, the North Sea, South-East Asia and West Africa. Each regional market is affected by specific political, operating and economic factors, which have resulted in the creation of numerous, distinct OSV markets. Historically, Topaz has focused primarily on the Caspian and Mena regions, and has also established a solid presence in West Africa. In addition, Topaz constantly monitors a number of potential markets such as South America, the Mexican Gulf and the North Sea. A summary of the key markets in which Topaz operates is provided below. Caspian The Caspian region presents challenging operating conditions for OSVs. Due to the region s geography, there are significant barriers to entry which make it difficult for new entrants to mobilise equipment into the region. OSVs can only access the Caspian via the Volga Baltic or Volga Don rivers and their respective canal systems, both of which present the following restrictions and requirements: Seasonal restrictions: each river and canal system typically freezes over from November to March, forcing their closure during such periods. Vessel modification requirements: modifications such as the removal of masts, wheelhouses or the entire bridge may be required to allow vessels to pass through the river and canal systems. Such modifications come at considerable cost and can take between one and four weeks, including reassembly and recommissioning upon arrival at the final destination. Towage contracts: vessels that have been modified or are flagged in any state other than Russia are required to be towed. Towage contracts typically involve significant costs, depending on the route and availability of towage vessels. Regulatory requirements: customs and other governmental agencies inspections, authorisations and approvals are required to be completed and all require fees paid. Topaz believes that, in order for operators other than Topaz to be able to meet client service standards and regulatory (including health, safety and environmental) requirements, significant investment would be required in infrastructure and fleet capabilities, which acts as a further barrier to entry for new operators in the region. These barriers to entry, among other factors, have led to the OSV market in the Caspian region becoming highly concentrated with only nine OSV suppliers. Topaz is the largest operator with four times as many vessels as the second largest operator and with almost 50% of the total Caspian OSV fleet. Supply vessel demand in the Caspian Sea is expected to grow 2.7% p.a. on average in the period The most popular vessels are small capacity AHTSVs, AHTSVs with 15-18,000 bhp and mid-size PSVs, and the average fleet age is 11 years. Mena The Mena region is a large, fragmented market for OSV operators, with limited barriers to entry. 38% of the OSV fleet in the Middle East is managed across five operators of which Topaz is one, with the remainder spread out over 72 managers. The average fleet age for this group of 72 managers is 16 years. The supply vessel market in the Mena region is dominated by the use of small capacity AHTSVs and PSVs for shallow/benign waters. IHS has forecast that supply vessel demand in the Middle East will stay relatively stable up to 2017, but given the present age composition of the fleet, the effective demand for modern tonnage is likely to increase. Source: Topaz compilation based on information from IHS September Maersk Supply Services Seacor Marine Topaz Marine Other (400 managers) Global The global market comprises all the regions not covered by the Caspian fleet and the Mena fleet. Currently Topaz is present in the Mexican Gulf and the North Sea, with one vessel in each. Furthermore, Topaz has a significant presence of 10 vessels in West Africa. West Africa constitutes a significant offshore market for OSV deployment but presents a challenging operating environment for OSV operators in particular owing to its lack of developed infrastructure, high security requirements and political instability in some countries in the region. Demand growth for deep/harsh-water supply vessels is forecast by analysts at a CAGR of 5.5% between and 2017, and demand growth for shallow/benign-water vessels is forecast at a CAGR of 1.5% in the same period. (Source: IHS.) What does this mean for Topaz? Topaz has a strong OSV operational track record in locations of strategic importance to the oil and gas industries, in particular the Caspian and Mena regions. In addition, it has established a foothold in West Africa as an expanding market, thus strengthening its geographical diversity and ability to work with leading global clients. Annual Report and Accounts / 39

42 2 / in Review Corporate Responsibility Quality, Health, Safety, Security and the Environment Group QHSSE performance Topaz measures its QHSSE performance against set targets in several key indicators as below: KPI Our target Our performance in Our performance in 2012 Fatal Accident Rate Zero Zero Zero The number of fatal incidents per 100 million man hours Lost Time Injuries Frequency (LTIf) Zero Zero 0.81 The number of injuries resulting in lost time from work per one million man hours Environmental Incident Frequency The number of incidents resulting in environmental impact per one million man hours Zero Total Recordable Case Frequency The total number of injuries and illnesses (not First Aid cases), incurred by the Company, per one million man hours < Pro-Active Recordable Case Frequency The number of safety observations and near misses reported across the Company, per 200,000 man hours > 1,300 1,836 1, / Annual Report and Accounts

43 Chairman s Statement Interview with the Financial Review Operational Review Industry Review Corporate Chief Executive Responsibility QHSSE ethos and management Quality, health, safety, security and environmental (QHSSE) standards are central to the Company s operational activities and to its delivery of business excellence. The Head of QHSSE for the entire Group reports to the Chief Operating Officer and is supported by a local QHSSE team in each of the business operating regions. Topaz complies with industry best practice techniques in respect of QHSSE standards, including TapRoot Root Cause Analysis standards, ISM and ISPS-compliant management systems and integration of many other industry-standard practices. Topaz places great importance on the pursuit of QHSSE excellence throughout the Group and believes high QHSSE standards are central to the Group s reputation, client relationships, competitive advantage, its ability to implement its strategy effectively, and a strong track record in these areas is a competitive advantage for Topaz. Topaz is subject to a number of international conventions relating to minimum QHSSE standards as well as periodic survey and inspection requirements. International conventions with provisions that relate to QHSSE include: the International Convention for the Safety of Life at Sea (SOLAS), which specifies minimum standards for the construction, equipping and operation of vessels; the International Safety Management Code for the Safe Operation of Ships and Pollution Prevention (the ISM Code); and the International Convention for the Prevention of Pollution from Ships/Vessels (MARPOL 73/78), which in the Caspian region strictly limits, and in some cases entirely prohibits, the discharge of waste (including garbage, grey water, sewage and oil). Topaz has historically procured annual external audits of its compliance with the standards referred to above and internal audits are carried out by Topaz QHSSE teams on a regular basis. Topaz s position of strength in QHSSE is further enhanced by its strategic focus on a younger fleet. The average age of the vessels is significantly lower than the industry average resulting in more modern, betterfunctioning equipment on average, which is less likely to experience technical issues than substantially older equipment. The commitment to high quality is at the heart of Topaz s strategic ambitions and has a positive impact on the QHSSE drive and the resulting performance. Topaz is also a member of the International Marine Contractors Association, an international trade association promoting safety within the offshore, marine and underwater engineering industries Group QHSSE priorities One of the top priorities for the Group in terms of QHSSE this year is to build on the LTI-free achievement in and ensure that all set KPI targets are achieved. The coming year will see the centralisation and standardisation of QHSSE policies and reporting processes to ensure that they are uniform and clearly understood by all employees and stakeholders. Topaz also aims to move certification in three core ISO standards 9001, and away from an individual business unit basis into a single, holistic Group-level procedural, documentation and certification framework. We will continue the safety culture survey and the reporting on sustainability. Finally, we aim to build upon the successes and learnings from the Safety Culture Survey. Action areas identified last year have either already been addressed, or are continuing to be addressed through a number of active programmes, and we fully intend to build upon these lessons by delivering an improved version of the survey as part of this ongoing exercise to engage and empower all employees in QHSSE issues. Annual Report and Accounts / 41

44 2 / in Review Corporate Resposibility (continued) Community initiatives We aim to undertake initiatives which directly benefit the communities in which we operate. As a company with strong roots in the maritime industry, with many mariners and ex-mariners among our staff, the well-being of seafarers around the world is a top priority for Topaz. Topaz contributes to the upkeep of the Flying Angel project, a UAE-based seafarer support vessel owned and operated by the maritime charity, the Mission to Seafarers. Founded in England in 1856, and operating in the Gulf since 1962, the Mission is a charitable organisation devoted to seafarers around the world, irrespective of colour, race, faith or belief. In 2006, Reverend Stephen Miller, the Director of the Mission in Dubai, had the vision to commission the construction of a purposebuilt seafarer support vessel that could provide thousands of sailors who are at sea for months at a time with the basic amenities that most of us take for granted, such as communicating with loved ones. Today, the Flying Angel, still the only seafarer s support vessel of its kind, welcomes over 75 seafarers on board daily. Topaz is proud to be part of this important initiative and to contribute to the improvement of the lives of mariners by supporting the Mission to Seafarers. In, the typhoon Haiyan devastated central Philippines where many of Topaz s seafarers have families. Topaz organised a company-wide relief drive where the total amount collected was matched by the Company 100% and later distributed to affected staff and seafarers. Other community initiatives in include the sponsorship of Topaz s participation at the annual Pink Walkathon and the contribution to the charity Gulf for Good. Our People Vision and approach At Topaz, people are of intrinsic value, and we aim to offer our talented people a dynamic environment with a plethora of challenges and opportunities. At Topaz we value integrity, creativity, passion and attitude and our aim is to build a talent pool for our business that can create long-term value. We believe in adopting a partnership approach with our people in order to improve business performance and we benchmark ourselves against the best in the industry. Our people are called on to be key enablers to success at every level in the organisation and in return we offer a safe, open, meritbased working environment that fosters professional and personal growth led by a consistent yet dynamic leadership team that sets clear strategies and accountabilities. Topaz is built on a team of committed and performance-driven employees and it is our aim to recruit and retain the best talent available. We have put in place policies, standards and programmes that identify competencies required for each role across the organisation, encourage and provide a fair and objective performance review and reward scheme and help define a professional development plan for every employee. We firmly believe in providing opportunities or new graduates and trainees and roll-out a number of Graduate and Trainee Programmes across the business in order to fuel talent and provide key skills and practical experience to support their academic capabilities and achievement. We provide equal opportunities and constantly strive to maintain a diverse workforce in relation to ethnicity, nationality and gender mix. Learning and development Believing that an investment in our people today will result in a stronger Topaz tomorrow, we are committed to providing relevant training programmes across the business, allowing our people to gain the relevant skills required to take on the challenges of the future growth that our strategic direction promises. Learning and development focus areas are: Technical/behavioural training programmes focus on improving the skills and competency of the workforce. This includes leadership programmes and continuing education courses, skill upgrade training for the operation of various machinery and equipment, as well as training done internally, drawing upon the expertise of employees. QHSSE programmes focus on increasing the safety leadership standards, heightening safety awareness and building a proactive safety culture in the Company. The major programmes completed in include the first Annual Safety Culture Survey, Risk Assessment and Control of Work refresher courses and training on First Aid, Use of Fire Extinguishers, Root Cause Analysis and DuPont STOP. Looking ahead, learning and development efforts will continue to be focused on technical and behavioural competence, productivity, compliance with standards in QHSSE and the Code of Business Conduct and developing and promoting Topaz s values. Code of business conduct As part of its mission to be one of the best-run businesses in our industry, Topaz has adopted a Code of Business Conduct that sets the standards and clarifies the procedures and rules for running our day-to-day operations. It also provides practical guidance for dealing professionally with our business partners, customers, employees and the societies in which we operate. 42 / Annual Report and Accounts

45 Chairman s Statement Interview with the Chief Executive Financial Review Operational Review Industry Review Corporate Responsibility Topaz staff and seafarer numbers as at end 31 December Onshore staff Local Expat Total Caspian Mena Global Corporate and Shared Services Total Offshore staff Local Expat Total Caspian Mena Global Total ,517 Annual Report and Accounts / 43

46 3 / Governance Topaz Energy and Marine Board Samir J. Fancy Chairman Stephen R. Thomas, OBE Non-executive Director Ali bin Hassan Sulaiman Non-executive Director Mr. Samir J. Fancy is the Chairman of the Topaz Board. Mr. Fancy also holds senior positions as the Chairman of Renaissance Services SAOG since 1996 and Chairman of Tawoos Group since 1983, Mr. Fancy is also the Vice Chairman of Samena Capital. Mr. Fancy is actively involved in charitable work including the establishment of a (not for profit) microfinance bank in Oman and support for the Early Intervention Centre for children with disabilities. He was nominated for Ernst & Young s Middle East Entrepreneur of the Year award in Mr. Fancy also founded the Oman Chapter of the Young Presidents Organization. Mr. Stephen R. Thomas, OBE is a Director of Topaz and has also served as Chief Executive Officer of Renaissance Services SAOG since Mr. Thomas spent the early part of his career with Grand Metropolitan Group plc. Mr. Thomas serves on the Board of National Hospitality Institute SAOG and has previously served as Chairman of the Oman Society for Petroleum Services. In the 2010 United Kingdom New Year s Honours List, Mr. Thomas was appointed an Officer of the Most Excellent Order of the British Empire for services to business abroad and services to the community in Oman. Mr. Ali bin Hassan Sulaiman is a Director of Topaz and is also a member of the Board of Renaissance since its foundation in 1996 and was appointed Deputy Chairman in He is also a Director of Oman-based companies National Hospitality Institute SAOG and Majan Glass Manufacturing Co SAOG. Mr. Sulaiman is a founder of Ali and Abdul Karim Group, a manufacturing and services group with interests in the oil and gas, construction, FMCG consumer goods, and wireless networking. He has over 25 years of experience in managing FMCG, manufacturing and services companies with global operations. Sunder George Non-executive Director Philip Gore-Randall Non-executive Director Mr. Sunder George is a Director of Topaz and is also a Director of the Board of Renaissance since He has over 35 years of international banking and finance experience and is the Chief Adviser to the Board of BankMuscat SAOG. Mr. George also sits on the Board of Directors of other companies in Oman. Mr. George was one of the few Indian Nationals accorded Omani Citizenship in the year 2001 for his dedicated services to Oman. He is a Fellow of the Chartered Institute of Bankers London and an Associate of the Indian Institute of Bankers. Mr. Gore-Randall is a Chartered Accountant with extensive experience, in the UK and overseas, at a senior level in large organisations. Mr. Gore-Randall was the COO of HBOS plc in and prior to that COO of Aon UK Limited, following a period as Chairman and Chief Executive of Aon Risk Services. Mr. Gore-Randall spent the first 25 years of his career at Andersen, was elected UK Managing Partner in 1997 and became Managing Partner and COO for the worldwide practice in / Annual Report and Accounts

47 Topaz Energy and Marine Board Senior Management Corporate Governance Report Directors Report Principal Risks in Detail Senior Management Executive Committee René Kofod-Olsen Chief Executive Officer Roy Donaldson Chief Operating Officer Pernille Fabricius Chief Financial Officer Jay Daga Deputy Chief Financial Officer Ealbra Moradkhan HR Director Corporate Gary Strange Head of Legal Ian Trebinski Head of QHSSE Neil Graham Head of Technical Services Rahul Mathur Head of Risk and Compliance Rashmi More Head of Treasury Robert Desai Head of Corporate Planning, IR and Communications Operations Caspian Paul Jarkiewicz Area Manager Caspian Mena Richard Ayling Regional Director Mena Atul Verma Finance Manager Mena Global Rune Zeuthen Regional Director Global Sachin Suvarna Finance Manager Global Annual Report and Accounts / 45

48 3 / Governance Corporate Governance Report The Board and the Management of Topaz Energy and Marine ( Topaz or Company ) recognises its responsibility to ensure good governance of the Company in order to help fulfil its obligations to all stakeholders, including its shareholders. Topaz is therefore strongly committed to the highest standards of corporate governance. As a subsidiary of Renaissance Services SAOG, a publicly listed company on the Muscat Securities Market (MSM), it follows as best practice the corporate governance principles set out in the Principles of Corporate Governance and the provisions of the Code of Corporate Governance, set out in the Capital Market Authority s (CMA) Code for companies listed on the MSM. The Company believes that the Code prescribes a minimum framework for the governance of a business. The Company s philosophy is to develop this minimum framework and institutionalise its principles as an ingredient of its corporate culture. Topaz s objective is to ensure long-term value creation for its shareholders. We believe that the best way to achieve this goal is through a value-based performance culture, stringent ethical requirements and a code of conduct that promotes personal integrity and respect for the environment. Topaz s corporate governance is therefore based on the Company s corporate values and ethical guidelines. In addition, the work of the Board of Directors is based on the existence of a clearly defined division of roles and responsibilities between the shareholders, the Board of Directors and the management of Topaz. The following principles underline our approach to corporate governance: All shareholders will be treated equally. Topaz will ensure that all shareholders have access to up-to-date, reliable and relevant information about the Company s activities. The Board focuses on achieving alignment of interests between owners, the Board of Directors and the Company s management. In order that it can effectively discharge its governance responsibilities, the Board ensures that the majority of Board members are non-executive. The Board of Directors bases its practical work on the principles for good corporate governance applicable at all times. Board of Directors In, Topaz established a new Board and Committees for Topaz, which are functioning while being formalised. It consists of five Non-executive Directors and two Executive Directors. Four Non-executive Directors on the Board are shareholders/representatives of shareholders and one Director is an Independent Non-Shareholder Director. The two Executive Directors representing management are the Topaz Chief Executive Officer and the Topaz Chief Financial Officer. As per the best practices corporate governance structure, the Topaz Board is assisted by the Topaz Audit Committee, which is chaired by the Independent Non-executive Director, and a Topaz Remuneration Committee comprising Non-executive Directors. The parent company CFO attends the Topaz Board and Topaz Audit Committee meetings in an observer capacity. The intention is that the Topaz Board will appoint more independent Non-executive Directors with relevant industry, market or professional expertise. These appointments shall be made in the course of this year. We have already made the first appointment of an Independent Director on the Topaz Board, who is also an Independent Director and Chairman of the Topaz Audit Committee and a member of the Topaz Remuneration Committee. The reason for this important initiative is to establish absolute focus on each business and on good governance. This means Topaz is now able to operate in the image of an independent public company, while still retaining the coverage, protection and support of ultimate fiduciary oversight from the Renaissance Board. The Composition and Category of Directors, Attendance of Board Meetings Sr. No. Name of Director Position Category Samir J. Fancy Sunder George Ali bin Hassan Sulaiman Stephen R. Thomas, OBE Philip Gore-Randall René Kofod-Olsen Pernille Fabricius* Chairman Director Director Director Director Audit Committee Chairman Topaz CEO Topaz CFO Non-executive Non-executive Non-executive Non-executive Independent Non-executive Executive Executive No. of Board meetings held during last year No. of Board meetings attended * Joined the Company in October 46 / Annual Report and Accounts

49 Topaz Energy and Marine Board Senior Management Corporate Governance Directors Report Principal Risks Report in Detail The Board has the authority, and is accountable to shareholders, to ensure that the Company is appropriately managed and achieves the strategic objectives agreed. The Board discharges those responsibilities by supervising overall budgetary planning and corporate strategies. The Board reviews the Company s internal controls and risk management policies and approves its governance structure and Code of Business Conduct. The Board appraises and approves financing, investment and contractual decisions in excess of defined thresholds as per approval protocols. In addition to these items, the Board evaluates and monitors the performance of the Company as a whole. This includes: Engaging at Board meetings with the CEO and other senior members of the Company as appropriate, on the financial and operating performance of Topaz and external issues material to Topaz s prospects. Evaluating progress toward the achievement of the Group s financial and business objectives and annual plans. Monitoring, through reports received directly or from various committees, the key risks facing the Company. The Board has overall responsibility for succession planning for the CEO and other senior members. The Board has given the CEO broad authority to operate the business of the Company and the CEO is accountable for, and reports to, the Board on business performance. Chairman and CEO A clear separation is maintained between the responsibilities of the Chairman and the CEO. The Chairman is responsible for leadership of the Board and creating the conditions for overall Board and individual Director effectiveness, while the CEO is responsible for overall performance of the Group including the responsibility for arranging the effective day-to-day management controls over the running of the Group. Information and professional development As part of the annual Board evaluation process, the Board expressed its satisfaction that the information provided in the Board papers is of the right quality, format and length to allow a full understanding of all the relevant issues with respect to the matters under consideration. It was similarly satisfied that the Board is kept informed of all areas of major importance to the Company. The Board is also kept informed through monthly reports. All Directors are made aware that they may take independent professional advice at the expense of the Company in the furtherance of their duties. Ongoing support and resources are provided to Directors in order to enable them to extend and refresh their skills, knowledge and familiarity with the Company. Professional development and training is provided in three complementary ways: Regular updating on changes and proposed changes in laws and regulations affecting the Company or its businesses Arrangements, including site visits, to ensure Directors are familiar with the Group s operations. Opportunities for professional and skills training. In addition to the committees of the Board a Corporate Executive Committee ( CEC ) has been formed, which is a management committee comprising the CEO, Chief Operating Officer, CFO, Deputy CFO and the HR Director, who meet weekly to discuss the overall performance of the Company. In addition, the CEC meets once every month with the senior managers of the Company s business units to discuss individual business unit performance and future plans. Shareholders Dialogue with shareholders The CEO and CFO have regular meetings with shareholders. Financial results are provided monthly to the parent company. The Topaz Board is responsible for internal control in Topaz and for reviewing its effectiveness. Procedures have been designed for safeguarding assets against unauthorised use or disposition for maintaining proper accounting records and for the reliability of financial information used within the business or for publication. Such procedures are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement, errors, losses or fraud. Annual Report and Accounts / 47

50 3 / Governance Corporate Governance Report (continued) The key procedures that the Board of Directors have established are designed to provide effective internal control within Topaz and accord with best practices of internal control. Topaz key internal control procedures include the following: Authority to operate the various subsidiaries, as well as responsibilities for capital expenditure and for financial performance against plans, is defined as per limits set by the Board of Directors of Topaz. Sub-delegation of authority from the Board to individuals requires these individuals, within their respective delegation, to maintain a clear and appropriate apportionment of significant responsibilities, and to oversee the establishment and maintenance of systems of controls appropriate to the business as defined by the Management Manual of Authority. The appointment of executives to the most senior positions in the Company requires the approval of the Board of Directors. Systems and procedures are in place in Topaz to identify, assess and prioritise the major risks. The operational risks are managed by each key operational function and consolidated under an Enterprise Risk Management approach at the Corporate level through a dedicated Risk function. This approach assists in assessing, prioritizing and managing risks proactively. Exposure to fraud risks and Code of Business Conduct violations is monitored through the Ethics line, a phone-line enabling anonymous reporting of violations of the Code of Business Conduct, whistle-blowing etc. supported by the HR Director, the Head of Risk and Compliance and the Head of Legal. Periodic strategic and business plans, along with rolling forecasts, are prepared for the business as a Group and for its support functions. Rolling forecasts are prepared and adopted by all Topaz business units, and set out the key business initiatives and the likely financial effects of those initiatives. Centralised functional control is exercised over all computer system developments and operations. Common systems are employed for similar business processes wherever practicable. In addition, functional management at the Company s Head Office is responsible for setting policies, procedures and standards in the following areas of risk: liquidity, operational, information technology, insurance, accounting, tax, legal and regulatory compliance, human resources and communication. Policies to guide subsidiary companies and management at all levels in the conduct of business to safeguard the Company s reputation are established by the CEC. The internal audit function, which is centrally controlled at the parent company, monitors the effectiveness of internal control structures across the whole of Topaz. The work of the internal audit function is determined by a risk-based approach. The head of this function reports to the newly formed Topaz Audit Committee. Professional profile of the statutory auditors PwC is a global network of firms operating in 157 countries with more than 184,000 people who are committed to delivering quality in assurance, tax and advisory services. PwC also provides corporate training and professional financial qualifications through PwC s Academy. Established in the Middle East for 40 years, PwC employs over 2,780 people and has 21 offices across 12 countries: Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, the Palestinian Territories and the United Arab Emirates. PwC has been established in Oman for over 40 years and the firm comprises three partners, including one Omani national, and over 135 professionals and support staff. Expert assurance, tax and advisory professionals are able to combine internationally acquired specialist consulting and technical skills with relevant local experience. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see for further details. As per article 9 (para b) of the code of corporate governance pertaining to the rotation of external auditors, PwC have completed two years as statutory auditors of the Company by the end of and therefore are eligible for re-appointment as a statutory auditor of the Company for the financial year / Annual Report and Accounts

51 Topaz Energy and Marine Board Senior Management Corporate Governance Directors Report Principal Risks Report in Detail Directors Report The Directors submit their report together with the audited consolidated financial statements of Nico Middle East Limited ( the Company ) and its subsidiaries (together, the Group ) for the year ended 31 December. The Group reported consolidated net profit of US$45 million in (2012: US$34 million) on revenue of US$376 million (2012: US$309 million). The period has seen continued strong and profitable growth with revenues up 22% and EBITDA up 17%. This growth is primarily attributable to the additional vessels that have joined our fleet and the improved utilisation we have achieved across our core fleet. We have focused on maintaining tight control of our costs and this has resulted in significant cost savings benefiting us in the short term and over the coming years. We have won a number of new contracts during the period resulting in a total backlog of mediumand long-term contracts amounting to US$1.16 billion. Business highlights Safety performance consistently strong zero Lost Time Injuries ( LTI ) and fatalities Robust performance for the entire business attributable to expansion of core fleet and focus on cost control High and stable utilisation of core vessel fleet at 94.5% for the year Seven new vessels, all Platform Supply Vessels ( PSV ), were commissioned to the fleet in, five of which are to be delivered in 2014 This improving performance includes new growth, but also turnaround of a number of non-performing assets. We are responding to growing opportunity and demand in our core home markets of the Arabian Gulf and the Caspian Sea, while developing a growing presence off the oil-producing coast of West Africa. The Group has invested and has committed to invest a total of US$280 million in core assets in. The benefits of these investments shall be seen as growth in Consolidated revenue (US$ million) EBITDA (US$ million) EBITDA margin (%) Net profit (US$ million) Net profit margin (%) Return on net assets Core vessel utilisation Backlog (US$ billion) External revenue Caspian Mena Global In, we have put in place a separate governance structure; secured financial independence through a bond placement in international capital markets; turned around non-performing assets; invested for growth in new vessels; while winning new contracts and business opportunities for growth in our business. In 2014, the Company is structured for sustainable and profitable growth for the years ahead. This provides us with the platform to continue to deliver outstanding service to our customers and create an enduring value for our shareholders. Dividend The Board proposed a dividend of US$20 million for the year ended 31 December. Financial review Revenue increased by US$67.0 million or 21.6% to US$376.5 million in the year compared with US$309.5 million in the year This increase is primarily due to: (i) the addition of two new vessels along with the full-year impact of five vessels purchased in 2012 contributing US$49.7 million, (ii) better utilisation and increase in vessel day rates resulting in an increase of US$9.8 million, (iii) deployment of vessels in the Russian sector of the Caspian resulting in an increase of US$6.1 million, and (iv) proceeds from 12 months ended the sale of three vessels resulting in an increase of US$7.2 million. The increase in revenue was partially offset by loss of hire due to the sale of one vessel in 2012 (US$2.2 million) and loss of revenue due to vessel off-hire or revised day rates on two of our vessels (US$2.3 million and US$1.2 million, respectively). Geographical segments 2012 % change % % 8.4% 94.5% % % 7.8% 91.1% months ended 31 Dec US$ million Dec 2012 US$ million % +17.1% 1.7ppt +30.2% +0.8ppt +0.6ppt +3.4ppt +24.7% Variance US$ million (0.3) Total Caspian: In the year, revenue increased by US$56.4 million or 32.9% to US$227.6 million compared with US$171.2 million in the year This increase was primarily due to the addition of two new vessels contributing US$7.6 million in the period and the full-year impact of four vessels purchased in 2012 contributing US$36.6 million, proceeds from the sale of one vessel contributing US$6.7 million and deployment of vessels in the Russian sector resulting in an increase in revenue of US$6.1 million. Mena: In the year, revenue increased by US$10.9 million or 13.4% to US$92.4 million compared with US$81.5 million in the year This increase was primarily due to the full-year impact of one vessel purchased in 2012 contributing US$5.5 million and better utilisation of vessels deployed in Saudi Arabia resulting in an increase of US$5.4 million. Annual Report and Accounts / 49

52 3 / Governance Directors Report (continued) Global: In the year, revenue slightly decreased by US$0.3 million to US$56.5 million compared with US$56.8 million in the year This decrease was primarily due to loss of revenue of two Anchor Handling Tug Supply Vessels ( AHTSV ) working in West Africa. Direct costs Direct costs for the year increased proportionately to revenue by US$37.8 million or 19.6% to US$230.5 million as compared with US$192.7 million in the year The increase in bareboat charges is mainly due to two large vessels taken on bareboat and mobilised to the Caspian region in Q However, these vessels have now been acquired and will not contribute to bareboat charges in Other cost increases are mainly due to amortisation of the mobilisation cost of the above two vessels amounting to US$5.7 million, US$1.9 million mobilisation cost for other vessels, US$2.5 million relating to book value of asset disposed, US$1.4 million relating to brokerage/commission in Nigeria/ Brazil and US$1.8 million increase in catering costs. EBITDA EBITDA increased by US$23.9 million or 17.1% to US$163.4 million in the year compared with US$139.5 million in This increase is primarily due to: (i) the addition of two new vessels along with the full-year impact of three vessels (out of five) purchased in 2012 contributing US$16.2 million, (ii) better utilisation and increase in vessel day rates resulting in an increase of US$10.7 million, (iii) deployment of vessels in the Russian sector of the Caspian resulting in an increase of US$5.0 million, and (iv) proceeds from a vessel sold contributing US$2.8 million. The increase in EBITDA was partially offset by US$1.1 million due to the full-year impact of the bareboat cost of two vessels purchased in 2012, increase in overheads cost by US$9 million, which mainly relates to provision for doubtful debts and provision against advances. Direct costs Crew cost Technical maintenance Depreciation Bareboat charges Others EBITDA Caspian Mena Global Corporate/Elimination Caspian: The increase in EBITDA by US$27.5 million is mainly due to the addition of two new vessels contributing US$5.0 million, the full-year impact of two vessels purchased in 2012 contributing US$7.8 million, the deployment of vessels on a term contract in the Russian Filanovsky project contributing US$5.0 million and better vessel utilisation contributing US$5.8 million. Mena: The increase in EBITDA by US$11.8 million is mainly due to the full-year impact of one vessel purchased in 2012 contributing US$3.5 million, better utilisation of vessels deployed in Saudi Arabia contributing US$4.9 million and better utilisation of other vessels contributing US$3.0 million. Global: The decrease in EBITDA by US$7.7 million is due to a debt provision on a contract in Nigeria amounting to US$3.6 million and also due to the increase in operating costs along with lower utilisation of certain vessels operating in Nigeria and Brazil. The Group has since redeployed the two vessels operating in Brazil to West Africa. Administrative expenses Administrative expenses increased by US$5.3 million or 17.7% to US$35.3 million in the year compared with US$30.0 million in the same period last year. This increase was primarily driven by the opening of our office in Astrakhan, Russia and costs reflecting the investment made during the period in hiring global talent to drive the Group s growth strategy. Finance costs 12 months ended 31 Dec US$ million months ended 31 Dec US$ million (10.3) 31 Dec 2012 US$ million Dec 2012 US$ million (2.6) Variance US$ million Total Variance US$ million (7.7) (7.7) Total Finance costs net increased by US$7.6 million or 21.0% to US$44.0 million in the period compared with US$36.4 million in the same period last year. The increase in interest expense was primarily due to an increase in secured debt as a result of the acquisition of new vessels, refinancing of certain existing debt along with interest charges on senior notes raised in Q4 in line with the strategic plan. 50 / Annual Report and Accounts

53 Topaz Energy and Marine Board Senior Management Corporate Governance Directors Report Principal Risks Report in Detail Income tax expense Income tax expense increased by US$6.3 million or 50.4% to US$18.8 million in the period compared with US$12.5 million in the same period last year. This increase is in line with the increase in revenue and is also due to the increase in the deferred tax provision. Cash flow The cash generation as a percentage of EBITDA has been 100% (2012: 99%). The table on the right sets out a breakdown of cash flow for the 3- and 12-month periods ended 31 December : Cash flow EBITDA Changes in working capital (including EOSB paid) Cash generated from operations Cash conversion Income tax paid Interest paid Net Cash generated from operating activities Cash used in investing activities Cash provided by financing activities Increase/(decrease) in cash and cash equivalents 12 months ended 31 Dec US$ million (0.1) % (13.9) (38.1) (165.5) Dec 2012 US$ million (0.8) % (11.3) (38.7) 88.7 (121.4) 25.1 (7.6) Variance US$ million (2.6) (44.1) Cash used in investing activities for the year ended December reflects capital expenditure on two new vessels of US$86 million, advances paid for new vessels under construction of US$54 million and other capital expenditures for vessel maintenance and upgrade of existing vessels. Operational review has seen continued strong growth across the Group s activities. We have enjoyed consistent and improved utilisation across our core fleet within our Caspian business and especially the Azerbaijan market as a standout performer. Utilisation in our other asset fleet has improved significantly over the previous year due to the Russian Filanovsky development where we now have 13 assets deployed. The Mena business has delivered a solid performance both in Qatar and in Saudi Arabia. We expect to grow further in both these markets through our strong working relationships with clients such as Maersk Oil, Oxy and Saudi Aramco. Our Global business has made significant inroads into West Africa with 10 vessels now operating there. We have recently won a medium-term contract with an oil major in West Africa for two large PSVs and will be looking to deploy further assets there throughout Our safety performance has been strong and we report zero fatalities and zero LTIs in the period. Financial independence On 4 November, we successfully priced our inaugural bond offering of US$350 million senior notes due in Demand exceeded US$2.5 billion. The funds raised are being used primarily to fund capital expenditure and increase cash on the balance sheet. In this process we were successfully rated by S&P and Moody s. This is an endorsement that the Company has the financial disciplines demanded by international best practices. The significance of the success of this initiative is that it establishes financial independence, no longer dependent on direct financial injection from the parent company for growth. The due diligence process and investor scrutiny applied to our bond initiative in the international capital markets of Europe, the Middle East and the USA further emphasise the Company s credentials in governance and management. It is clear that these international markets appreciate our business model; the management team; key credit strengths such as stable and healthy operating margins, a more than US$1 billion contract backlog; a healthy balance of the sustainability of long-term contracts and the flexibility of shortterm contracts; and an excellent operational and safety track record with blue chip international oil and gas clients. Outlook The Group has delivered a year of growth as we focus on driving our strategy of investing in our core fleet to ensure we maintain a young and technologically advanced fleet for our clients, the world s leading oil and gas companies. Our ability to support their production strategies in a large number of projects has resulted in a growing level of long-term contracts and high vessel utilisation rates. With the investment we have made in the business over the course of in terms of vessels, technology and, most importantly, our people we remain confident for the prospects of our 2014 results. Stephen R. Thomas, OBE Director René Kofod-Olsen Director Annual Report and Accounts / 51

54 3 / Governance Principal Risks in Detail We operate in a dynamic environment and are subject to various known and unknown risks and uncertainties. These risks, some of which are detailed below, are inherent to our business and may materially adversely affect our results of operations, financial condition, business, performance or industry results and cause them to be materially different from our expectations. While these risks cannot be entirely eliminated, we seek to reduce their probability and severity through various measures, policies and control processes. Additionally, we are exposed to certain risks which are industryspecific and hence not under our control. Thus, we can only strategically plan against such risks. Furthermore, the risks detailed below are not exhaustive. As we operate in a very competitive and rapidly changing environment, we may face new risks from time to time, and we are not able to predict all such risks, nor can we assess the impact of all such risks on our business. Given these risks and uncertainties, undue reliance should not be placed on any forward-looking statements within this Annual Report as a prediction of actual results. Industry risks Our business depends on the level of expenditure by the oil and gas industries, which may be affected by global economic conditions. The success of our business is dependent upon the level of expenditure on exploration, development and production by the international and national oil and gas companies that make up a significant proportion of our client base. The oil and gas exploration and production industry historically has been characterised by significant changes in the levels of exploration and development activities. The global economic downturn has contributed to oil and gas price volatility in recent years and future economic downturns may again impact prices adversely. As a result, the levels of expenditure on exploration, development and production activities have varied over long periods and may continue to do so. Any prolonged downturn in the overall level of exploration and development activities could materially and adversely affect our business, financial condition and results of operations. Global and regional oil and gas exploration, development and production activity is affected by numerous factors beyond our control, including: the demand for energy; oil and gas production by countries not members of the Organization of Petroleum Exporting Countries, the policies and laws of various governments regarding the exploration, development and production of their oil and gas reserves, energy sources and energy efficiency requirements, the costs of exploration, development and production; political and economic uncertainty and socio-political unrest, the level of exploration, development and production activity; the availability and prices of alternative energy sources; and advances in exploration, development and production technology. The occurrence of any of the above listed factors, among others, could result in future substantial and extended declines in the level of activity in the oil and gas industry. This reduction of activity could lead to a decline in the demand for our services and therefore either a reduction in our utilisation or downward price pressure on day rates, or both, which may in turn result in us offering our services at reduced prices, securing fewer and less profitable new contracts and securing fewer extensions or renewals of existing contracts, among other consequences. In addition, we occasionally do not have client contracts in place for new vessels prior to acquisition, but rather invest in new vessels based on perceived market opportunities, particularly in the Mena and Global regions. In the event of reduced activity and expenditure by the oil and gas exploration and production industry, we may not be able to generate the revenue anticipated from such vessels and may be required to sell them in order to repay debts or generate cash flows to fund other parts of our business. The occurrence of any of the events discussed above may have a material adverse effect on our business, results of operations, financial condition and prospects. Mitigants and Controls: Our exposure to industry expenditure is effectively diversified among a large number of clients, sectors and geographies. Importantly, we target revenue generation opportunities from the development and production segments of the sector, both of which offer far more predictable sources of revenue compared to exploration associated revenue opportunities. Many of our clients are NOCs that, to a large extent, continue to invest through market down-cycles. Further, many of our long-term contracts straddle business cycles that smooth out earnings over the long term, mitigating the impact of short-term volatility. Our strategic vessel purchasing programme and general corporate planning also reduce our overall opportunity risk. We may be adversely affected by economic, political and other conditions in the countries in which we operate, or may operate in the future. We have historically generated most of our revenue from operations in the Caspian and Mena regions and, in particular, from Azerbaijan, Kazakhstan, Qatar and Saudi Arabia. Economic, political and social conditions in these regions, as well as other regions in which we operate, can be volatile and may deteriorate in the future. In particular, since January 2011, many countries in the Mena region have experienced heightened levels of political instability, civil disturbances, labour unrest and violence that have resulted in the resignation or removal of national leaders in Tunisia and Egypt, armed conflict in Libya, and the involvement of Saudi Arabia and the UAE in efforts to maintain stability in Bahrain, among other adverse consequences. Additionally, the Caspian region has been historically characterised by disputes relating to the maritime borders among five states that border the Caspian Sea. The current disputes along Azerbaijan s maritime borders with Turkmenistan and Iran could potentially impact future development plans. Mitigants and Controls: We constantly monitor and assess the changing landscape of political risk in the countries in which we operate, particularly in countries that are regarded as high political risk environments, and corresponding implications on our corporate and operational strategy within these countries. We operate in numerous markets and are thus less exposed to any one market or region. We continuously strive to achieve high levels of local staff employment and build a local presence through joint ventures and partnerships, which both result in stronger local connections and assist in reducing our exposure to political risk. The nature of our business involves substantial risks that are beyond our control. We are subject to increasingly stringent laws and regulations relating to environmental protection in conducting the majority of our 52 / Annual Report and Accounts

55 Topaz Energy and Marine Board Senior Management Corporate Governance Directors Report Report Principal Risks in Detail operations, including laws and regulations governing emissions into the air, discharges into waterways, and the generation, storage, handling, treatment and disposal of waste materials. We incur, and expect to continue to incur, capital and operating costs to comply with environmental laws and regulations. The technical requirements of environmental laws and regulations are becoming increasingly expensive, complex and stringent. Although clients take complete responsibility for oilfield-related environmental pollution under our contracts, we remain responsible for vessel-related pollution. Additionally, clients may attempt to pass increasing liability onto contractors such as us over time as part of their risk management policies, and there can be no guarantee that we will successfully resist such changes. Furthermore, natural or other disasters may result in an increase in environmental regulations and restrictions. These laws may provide for strict liability for damage to natural resources or threats to public health and safety. Certain environmental laws provide for joint and several strict liability for the remediation of spills and releases of hazardous substances. We perform a significant portion of our operations offshore, which exposes us to a number of risks such as adverse weather and sea conditions, mechanical failures, navigational errors, collisions, sabotage and hazardous substance spills. Our current and planned future offshore operations may also be subject to the risk of piracy, particularly with respect to vessels passing through the Gulf of Aden or operating in West Africa. In addition, a significant portion of our operations relate to the oil and gas industry, for which incidents, both onshore and offshore, can have significant negative consequences, including liability for environmental damage caused by events such as uncontrollable flows of oil. We may also be liable for, and suffer reputational damage as a result of, acts and omissions of subcontractors, fellow bid consortium members or JV partners that cause loss or damage. We generally seek to agree back-to-back terms with such parties in order to limit our liability for such loss or damage. Mitigants and Controls: In response to the non-controllable risks that we face, we operate an integrated management system in compliance with industry standards and regulatory requirements. We continuously invest in training front line staff and reinforcing our culture of safety. We are appropriately insured against financial losses associated with HSE incidents. We may be unable to attract and retain qualified personnel and senior management. Our ability to maintain and grow our business depends, in part, on our ability to attract and retain personnel with relevant technical and industry expertise. To execute our growth strategy, we will need to hire a significant number of additional vessel crew and onshore personnel. However, we may face challenges in hiring such qualified personnel in a timely fashion. Additionally, in a number of the countries where we operate, we are legally required to hire some of our personnel locally. However, there may be shortages in qualified local personnel in certain regions in which we operate, such as the Caspian and Mena regions, particularly if demand for such personnel increases. In Saudi Arabia, we have paid and expect to continue to have to pay fines relating to Saudisation requirements for the non-employment of a certain number of Saudi nationals. Such fines have, to date, not been material to our operations but we cannot be certain that they will continue to be immaterial in the future. In addition, we may face delays and other obstacles, such as minimum education requirements or in securing work permits for foreign workers. If we are unable to hire sufficient qualified personnel in a timely fashion and in compliance with relevant laws, this may result in fines, service delays, reputational damage and lost revenue, which could have a material adverse effect on our business, results of operations, financial condition and prospects. Our ability to maintain and grow our business also depends, in part, on the leadership and performance of our senior management, which we rely on for the running of our daily operations as well as for the planning and execution of our strategy. Our key clients place an emphasis on the industry and business experience of our senior management. A loss of any member of senior management without timely and adequate replacements could have a material adverse effect on our business, results of operations, financial condition and prospects. Mitigants and Controls: We are one of the world s leading OSV operators and have been able to attract high-quality talent through our human resources policies, including our compensation and welfare benefits policies that are benchmarked against similar companies across the world. We could be adversely affected by violations of applicable anti-corruption laws. We are an international business with operations in emerging markets and in countries that are high on the Corruption Perceptions Index published by Transparency International. We are committed to doing business in accordance with our own code of ethics and with all applicable laws, including the US Foreign Corrupt Practices Act (the FCPA ), the United Kingdom Bribery Act 2010 (the Bribery Act ) and similar worldwide anti-corruption laws that generally prohibit companies and their intermediaries from making, offering or authorising improper payments to government officials, private individuals or companies for the purpose of obtaining or retaining business. We operate in several countries where compliance with anti-corruption laws may conflict with local customs and practices and are subject to the risk that we, our affiliated entities or our or their respective officers, directors, employees and agents may take actions determined to be in violation of such anti-corruption laws. Some of these countries lack a developed legal system and have high levels of corruption. Even though some of our local agents, JVs with local partners or strategic partners may not themselves be subject to the FCPA, the Bribery Act or other anti-corruption laws to which we are subject, if our agents or JV partners make improper payments in connection with our work, we could be found liable for violation of such anti-corruption laws and could incur civil and criminal penalties and other sanctions, and such costs could have a material adverse effect on our business, financial position, results of operations and cash flows. We have policies and procedures designed to assist our compliance with applicable laws and regulations and have trained our employees to comply with such laws and regulations, and to consider the policies, procedures and behaviour of third parties before entering into contracts with them. Finally, we may be subject to competitive disadvantages to the extent that our competitors are able to secure business, licences or other preferential treatment by making payments to government officials and others in positions of influence, or using other methods that US, UK and foreign laws and regulations and our own policies prohibit us from using. Annual Report and Accounts / 53

56 3 / Governance Principal Risks in Detail (continued) Mitigants and Controls: We have adopted a global standard code of conduct and compliance programme to ensure our stakeholders and employees understand our commitment to operating as an ethical company. There are classroom training programmes for locally based employees and these programmes cover FCPA, Bribery Act and anti-corruption laws of the local countries where we operate. Both prevention and detection compliance programmes are designed to prevent any violations of any applicable laws. We may be adversely affected by changes in fiscal regimes. Our profitability is impacted by the levels of direct and indirect taxation levied on our profits and services. We are subject to taxation in Azerbaijan, Kazakhstan, Qatar, Saudi Arabia and other jurisdictions, and may in the future be subject to further taxation as a result of our geographic expansion. Any increases in the taxes levied on us may adversely affect our results of operations, financial condition and prospects, and could be applied retroactively. In addition, any change in the tax guidelines, interpretations, rules or legislation relevant to us may lead us to adjust aspects of our operations and any change in taxation affecting our clients may affect the demand for our services and products, either of which may also have a material adverse effect on our business, results of operations, financial condition and prospects. Mitigants and Controls: Through our tax planning and advisory recommendations, we regularly update ourselves with new laws and regulations relating to taxation. This practice assists in preparing for and mitigating exposures resulting from changes in taxation rules. Company risks In any given period, we may rely on a small number of key clients or contracts for a significant proportion of our revenue. We generate a significant portion of our revenue from certain key clients. In addition, our operations within specific countries in the Caspian region are exposed to high levels of client concentration. There can be no assurance that our clients will enter into future contracts or renew existing contracts with us or that any future contracts they enter into will be on equally favourable terms. If demand for our services or products by any of our key clients declines, a key contract is terminated, or a key client or contract proves less profitable than we expected, it may have a material adverse effect on our results of operations, financial condition or prospects. Mitigants and Controls: We have longterm relationships with key clients in those countries where concentration risk exists. Due to the balanced terms and long-term nature of our contracts in these countries and the associated high barriers to entry, we believe that concentration risk is mitigated to an acceptable level. We may experience increases in the costs of fulfilling our contractual obligations. We may suffer cost increases as a result of increases in crew wages or the cost of maintenance services including, as a result of inflation, increases in the amount of maintenance or the number of crew required for our vessels and, where the vessels we charter are leased from third parties, increases in the costs of the vessels themselves. The majority of our revenue comes from contracts with terms of over one year, which increases the challenges we faced in accurately estimating the future costs associated with these contracts. We negotiate approximately half of our client contracts on the basis of a fixed daily rate, which means that we usually bear the increases in the costs of operating a vessel over the length of a contract. While we seek to match the lease terms on any leased vessels we charter to the length of the relevant charter contracts, it may not always be feasible to do so. The actual costs over the life of a contract, particularly costs relating to staffing crew on-board, technical maintenance and operational maintenance, may be higher than the estimated costs that we used in negotiating our contracts. If actual costs on a project exceed those anticipated at the time of contracting, the contract may be less profitable than expected or cause us to incur losses, which may have a material adverse effect on our business, results of operations, financial condition and prospects. Mitigants and Controls: Due to the longterm nature of our business, this is an inherent risk and we manage this risk with a robust planning process and clear internal financial guidelines for minimum returns to be achieved over the length of the contract. The risk is also mitigated by a thorough country entryanalysis of both the country s macro- and micro-environment including any inflationary costs over the number of years. As a standard commercial policy, we seek to contractually protect ourselves from the potential risk of cost escalation of any long-term contracts. Our client contracts are subject to early termination, non-renewal, variation, alternative interpretation or renegotiation. Our client contracts provide for early termination by the client upon a default or non-performance by us or, in many cases, upon the payment of a specified amount or following a specified notice period. There can be no assurance that clients will not contract with us for services provided by our vessels that they later decide are not sufficient for their purposes or that we will be able to redeploy such vessels without incurring any costs. Many of our contracts also allow for renewal at the option of the client following the initial term. A small proportion of our client contracts also provide for variation under limited circumstances. While the amount charged by us for such variations is usually negotiated at the time of variation, in some circumstances the amount or the basis for determining the amount may be specified in the initial contract, which may result in us realising reduced profits or losses in relation to such variations. Additionally, certain of our longterm contracts may contain provisions that allow for downward revisions of the charter day rates. Our clients may also seek to renegotiate contract terms, particularly during periods when economic or industry conditions deteriorate. We may agree to renegotiations in order to avoid contract terminations or legal costs or to maintain client relationships. Contract terminations, non-renewals, variations, alternative interpretations and renegotiations may result in anticipated revenue, including amounts reflected in our backlog, being realised later than anticipated or not at all, and may also result in unanticipated costs, such as the costs associated with refitting or transporting vessels for redeployment, being borne by us. The occurrence of any of these events may have a material adverse effect on our results of operations, financial condition and prospects. Mitigants and Controls: Early termination, non-renewal, and similar contractual risks are inherent risks in the industry in which we operate. We manage this risk through healthy relationships with counterparties, bona fide negotiations and fleet planning. 54 / Annual Report and Accounts

57 Topaz Energy and Marine Board Senior Management Corporate Governance Directors Report Report Principal Risks in Detail The long-term nature of our contracts also assists us in reducing this risk. Historically, we have experienced non-material incidents of contract cancellations and non-take-up of contractual extensions options. An inability to raise capital on favourable terms or at all could have a negative impact on our and our clients business. Our business requires a significant amount of capital to purchase vessels, in addition to paying crew and other operational and administrative costs, and depends on the level of expenditure by the oil and gas industry. Disruptions in the capital and credit markets, such as those experienced during the recent global economic crisis, could adversely affect our and our clients ability to access needed liquidity for working capital and growth. Sustained weakness in general economic conditions and/or financial markets could adversely affect our and our clients ability to raise capital on favourable terms or at all, including with respect to refinancing existing debt, which could result in a general decline in the level of activity in the oil and gas industry, which could adversely impact our ability to sustain our businesses and would likely increase our capital costs, which could materially and adversely affect our financial condition and results of operations. Mitigants and Controls: We have established banking relationships with a number of local and international banks and have raised different forms of financing. Such financing includes project financings, such as conventional shipping loans, Islamic loans and export credit financing in addition to debt financing via accessing the public bond markets. Our diversified lender base and debt maturity profile is designed to mitigate against any future financing risk. We may be unable to maintain our competitive position. The industries in which we operate are highly competitive, with competition principally based on the technical sophistication, durability, range, timeliness and price of the services and products offered; relationships with clients and intermediaries; the proportion of employees who are nationals of the relevant jurisdiction; compliance with HSE standards; and reputational strength. We may face increasing competition as a result of new market entrants, consolidation in the oil and gas industry, the deployment of additional OSVs in the regions in which we operate, or other factors. In particular, our Mena operations are subject to intense competition due to the fragmented nature of the markets in that region. The global market is also subject to intense competition, although our Global operations do not directly compete with large, global operators, because we undertake global contracts where we encounter suitable opportunities, rather than contending for global contracts. Any failure by us to maintain our competitive position could result in us offering our services and products at reduced prices and securing fewer new contracts or fewer renewals and extensions of existing contracts, any of which could have a material adverse effect on our results of operations, financial condition and prospects. Mitigants and Controls: Our strategic objective is to be among the top tier of OSV service providers globally. Through our financial and operational performance we are a highly competitive business. Specifically, our commercial advantage is based on a combination of highly trained, skilled and motivated onshore and offshore employees, market positions, client relationships, operational track record, competitive utilisation and charter rates and a young fleet. We rely on local partners in the operation of our business and we may be adversely affected by risks associated with our JV arrangements. We rely on local partners to gain access to local crew, help finance capital expenditures, and strengthen and maintain our relationships with clients and regulatory authorities. For example, we have entered into a number of JVs with local partners in order to finance the acquisition of new vessels and other investments and to meet certain clients or potential clients expectations with regard to local participation and to facilitate and promote our operations locally, particularly in relation to local governmental and regulatory authorities. In the future, we may enter into other arrangements with local sponsors who facilitate and promote our operations, particularly in relation to local governmental and regulatory authorities. Any such arrangements may not be effective, may result in losses for us or may be terminated in a manner that is harmful to us. The success of our JVs is subject to risks including our inability to maintain a good relationship with current and future business partners, the reliance on the local expertise of our JV partner, and divergent economic and commercial interests between us and our business partners. Additionally, many of our JV agreements are subject to change of control provisions. In the event of a change of control of the Company, these clauses would be triggered and could result in the termination or rescission of these agreements, which could have a material adverse effect on our business. Such risks may adversely affect our results or financial condition or cause a loss of investments in such partnerships. If such partnerships and JVs are not successful, our business, financial condition and expected results of operations may be adversely affected. Mitigants and Controls: We manage risks associated with our JVs by limiting reliance on our local partners to local administrative functions and business development roles. Operational delivery is internally managed, which reduces complete reliance on our local partners. Furthermore, we maintain professional relationships with our JV partners. We may be unable to dispose of assets in the future on attractive terms. As part of our effort at maintaining an optimal fleet of vessels, we dispose of certain of our vessels from time to time when such vessels no longer fit our strategic objectives. Our ability to dispose of these non-strategic vessel assets could be affected by various factors, including the availability of purchasers willing to purchase such assets at prices acceptable to us, and a delay or failure to dispose of our non-strategic vessel assets could impair the quality of our vessel fleet and could have an adverse effect on our results of operation. Mitigants and Controls: We continuously review our asset base to ensure we have the optimum fleet size, age and economic value to deliver the returns required by our current and future business plans, to ensure capital is being deployed optimally. We currently maintain, and plan to continue to maintain, and operate a fleet of vessels with an average age that is currently significantly less than the global industry average as part of our strategy. We also maintain an extensive network of brokers and companies to ensure that we have a ready market for any assets that we decide to divest. Annual Report and Accounts / 55

58 3 / Governance Principal Risks in Detail (continued) Our insurance policies may not fully cover every potential loss to which we are exposed. Although we have comprehensive insurance in place for our OSVs, our insurance policies may not fully cover every potential loss to which we are exposed. For example, if any of our vessels are damaged, our insurance may not cover the losses that may be incurred as a result of any interruption in the vessel s operations. There may also be delays in receiving reimbursements for claims from our insurers and any claims made are likely to cause our premiums to increase. Moreover, the cost of maintaining this level of insurance may increase in the future and become uneconomical to maintain. The occurrence of a loss that is not fully covered by insurance may have a material adverse effect on our results of operations, financial condition and prospects. Mitigants and Controls: We manage insurance-related risk by outsourcing it to insurance underwriters. We maintain comprehensive cover on Hull and Machinery and Protection and Indemnity for each vessel in our fleet. We also cover our crew through Kidnap and Ransom insurance. General Insurances and Workmen compensation cover are taken for each employee. A periodic review is undertaken with the help of insurance brokers to ensure adequacy of coverage. We are exposed to interest and exchange rate fluctuations. Our revenue and costs are largely denominated in US Dollars. However, we receive some revenue and, to a greater extent, pay some operating and administrative costs in other currencies in the regions in which we operate, including the Caspian and Mena regions, and our exposure to non-us Dollar currencies may increase in the future. A number of currencies in the Mena region, including the UAE Dirham, are pegged to the US Dollar at a fixed rate. There has in the past been speculation on the possibility of removing the UAE Dirham peg and allowing a floating exchange regime or pegging the UAE Dirham to a basket of currencies instead, which could result in increased exchange rate exposure and greater hedging requirements for us, particularly as a portion of our financing arrangements are denominated in UAE Dirham. In the event that the UAE Dirham, or other currencies in which we operate, are depegged from, or experience volatility in their value relative to, the US Dollar, there may be a material adverse effect on our results of operations and financial condition, particularly given that we report our results in US Dollars. From time to time, we also make significant payments, such as vessel purchases or vessel charter payments, in other currencies, such as Norwegian Kroner, Singapore Dollars and Euros. We normally purchase forward contracts to hedge our exchange rate exposure on such purchases, but these arrangements may not provide coverage against every adverse exchange rate fluctuation that may affect such purchases. A majority of our financing arrangements are provided on the basis of a floating interest rate linked to LIBOR or another interbank rate. We often enter into hedging arrangements in relation to potential increases in applicable interest rates but these arrangements may not provide coverage in the event of an increase in the interest rates applicable to us. Any failure by a counterparty to perform its obligations under any such hedging arrangements or any adverse movement in exchange rates or interest rates to which we are exposed may have an adverse effect on our results of operations. Mitigants and Controls: We manage our interest rate exposure through a combination of fixed and variable interest rate debts. Currency risk is mitigated by hedging 100% of our estimated foreign currency exposure in respect of forecast capital commitments through forward currency contracts. We are exposed to client credit risk. We provide our services to a variety of clients and are subject to the risk of non-payment for services we have rendered and nonreimbursement of costs we have incurred. These risks are heightened when conditions in the industries in which our clients operate, or general economic conditions, deteriorate. In addition, our client contracts often require significant expenditure by us in advance of the relevant payment from the client becoming due, which can result in significant exposure to a particular client at a given time. There can be no assurance that the procedures we have in place to monitor credit risk will prevent the occurrence of credit losses that could have a material adverse effect on our cash flows, results of operations and financial condition. Mitigants and Controls: We generally do business with relatively large companies, including NOCs and IOCs, who are generally well-funded and rated investment grade. Additionally, the Group also has policies and procedures in place to monitor credit risk on its receivables and take appropriate action where necessary. 56 / Annual Report and Accounts

59 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements 2011 Independent Auditor s Report to the shareholders of Nico Middle East Limited Report on the Consolidated Financial Statements We have audited the accompanying Consolidated Financial Statements of Nico Middle East Limited ( the Company ) and its subsidiaries (together, the Group ) which comprise the of Financial Position as at 31 December and the Consolidated Statements of Comprehensive Income, Changes in Equity and Cash Flows for the year then ended and a summary of significant accounting policies and other explanatory information. Management s responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these Consolidated Financial Statements in accordance with International Financial Reporting Standards, and for such internal control as management determines necessary to enable the preparation of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the Consolidated Financial Statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the Consolidated Financial Statements. The procedures selected depend on the auditor s judgement, including the assessment of the risks of material misstatement of the Consolidated Financial Statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the Consolidated Financial Statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the Consolidated Financial Statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying Consolidated Financial Statements present fairly, in all material respects, the financial position of the Group as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. PricewaterhouseCoopers 3 March 2014 Annual Report and Accounts / 57

60 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries of Comprehensive Income for the year ended 31 December Revenue Direct costs Gross profit Administrative expenses Impairment losses Other income Profit before finance costs and income tax Finance costs Finance income Finance costs net Profit before income tax Income tax expense 10 Notes 6 376,446 (230,515) ,931 (35,321) (4,839) 1, ,663 (45,444) 1, ,490 (192,738) 116,752 (30,013) (3,935) ,391 (37,400) 1,000 (44,040) (36,400) 63,623 (18,836) 46,991 (12,546) Profit for the year 11 44,787 34,445 Other comprehensive income Items that may be subsequently reclassified to profit or loss Changes to cash flow hedges 9 2,276 2,715 Other comprehensive income for the year 2,276 2,715 Total comprehensive income for the year 47,063 37,160 Profit attributable to: Owners Non-controlling interest 25,563 19,224 22,801 11,644 Profit for the year 44,787 34,445 Total comprehensive income attributable to: Owners Non-controlling interest 27,839 19,224 25,516 11,644 Total comprehensive income for the year 47,063 37,160 The independent auditors report is set out on page 57. The attached notes on pages 62 to 98 form part of these consolidated financial statements. 58 / Annual Report and Accounts

61 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements 2011 Nico Middle East Limited and its Subsidiaries of Financial Position for the year ended 31 December Assets Non-current assets Property, plant and equipment Intangible assets and goodwill Long-term receivables and prepayments Deferred tax asset Current assets Inventories Accounts receivable and prepayments Due from related parties Bank balances and cash Notes ,121,815 26,766 7,546 2, ,193 26,846 14,464 4,770 1,158,231 1,026,273 4, ,433 17, ,297 8,045 98,321 19,340 32, , ,648 Total assets 1,456,237 1,184,921 Equity and liabilities Equity Share capital Statutory reserve Hedging reserve Retained earnings Total equity attributable to equity holders of the Company Non-controlling interest , , ,241 92, , (2,118) 165, ,402 73,449 Total equity 540, ,851 Non-current liabilities Term loans Loan due to Holding Company Employees end of service benefits Accounts payable and accruals Fair value of derivatives Current liabilities Accounts payable and accruals Bank overdraft Term loans Loan due to Holding Company Due to related parties Income tax payable Fair value of derivatives , ,000 3,072 4, , ,360 2,593 5,818 2, , ,418 84,947 51,136 28,000 1,045 14,567 1,887 54,195 5,846 82,204 5,424 2,795 12,313 3, , ,652 Total liabilities 915, ,070 Total equity and liabilities 1,456,237 1,184,921 The consolidated financial statements were approved and authorised for issue by the Board of Directors on 3 March 2014 and signed on its behalf by: Stephen R. Thomas, OBE René Kofod-Olsen The independent auditors report is set out on page 57. The attached notes on pages 62 to 98 form part of these consolidated financial statements. Annual Report and Accounts / 59

62 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries of Cash Flows for the year ended 31 December Profit before income tax from continuing operations Adjustments to reconcile profit (loss) before tax to net cash flows: Charge on discontinuance of hedge accounting Fair value changes of derivative financial instruments Impairment losses on property, plant and equipment Impairment loss on trade accounts receivables Provision for slow moving inventory Provision for employees end of service benefits Profit on sale of property, plant and equipment Finance income Finance costs Depreciation, amortisation and mobilisation Advances write off Working capital adjustments: Inventories Marine vessels classified as inventories and sold during the year Accounts receivables, prepayments and other assets Accounts payable, accruals and other liabilities Due from related parties Due to related parties Notes ,623 2,116 (3,205) 4, (315) 45,444 67,617 1,500 3,868 2,795 (17,451) (5,631) 2,242 (4,604) ,991 2,508 (2,772) 2,200 1, ,401 (234) (736) 37,400 53,945 (202) (4,452) 16,093 (18,319) 3,100 Net cash from operations 163, ,094 Operating activities Income tax paid Interest paid End of service benefits paid 22 (13,915) (38,057) (442) (11,297) (38,724) (408) Net cash flows generated from operating activities 111,294 88,665 Investing activities Purchase of property, plant and equipment Advance paid for vessels Payments for intangible assets Proceeds from disposal of property, plant and equipment Change in long term receivable Net movement in restricted cash (155,066) (10,197) (1,282) 1,000 (98,256) (1,714) (248) 801 (18,990) (3,000) Net cash flows used in investing activities (165,545) (121,407) Financing activities Loans borrowed Loans paid Loan due to Holding Company Repayment of loan due to Holding Company Dividend paid to Owner Dividend paid to non-controlling interests 511,805 (281,569) (32,784) 266,582 (257,502) 49,600 (30,000) (3,500) Net cash flows generated from financing activities 197,452 25,180 Decrease in cash and cash equivalents Cash and cash equivalents at 1 January Less: cash and cash equivalent at 1 January relating to related party 143,201 15,096 (7,562) 32,766 (10,108) Cash and cash equivalents at 31 December ,297 15,096 The independent auditors report is set out on page 57. The attached notes on pages 62 to 98 form part of these consolidated financial statements. 60 / Annual Report and Accounts

63 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements 2011 Nico Middle East Limited and its Subsidiaries of Changes in Equity for the year ended 31 December Balance at 1 January 2012 Profit for the year Net changes in fair value of cash flow hedges (refer to note 9) Share capital 241,818 Statutory reserve 2,622 Attributable to Owners of the Company Hedging reserve (4,832) 2,715 Translation reserve 634 Retained earnings 151,611 22,801 Total 391,853 22,801 2,715 Non-controlling interests 66,369 11,644 Total equity 458,222 34,445 Total comprehensive income for the year 2,715 22,801 25,516 11,644 37,160 Transactions with the Owners Dividend paid to noncontrolling interests (refer to note 35) Conversion of Holding Company loan into share capital Transfer to Income Statement Transfer to related party Acquisition of non-controlling interest Reclassification 15,000 (2,584) (1) (896) 262 (8,775) 27 15,000 (896) (11,097) 26 (3,500) (763) (275) (26) 2,715 (3,500) 15,000 (896) (11,860) Total transactions with the Owners 15,000 (2,584) (1) (634) (8,748) 3,033 (4,564) (1,531) Balance at 31 December , (2,118) 165, ,402 73, ,851 (275) Balance at 1 January Profit for the year Net changes in fair value of cash flow hedges (refer to note 9) Share capital 256,818 Attributable to Owners of the Company Statutory reserve 38 Hedging reserve (2,118) 2,276 Retained earnings 165,664 25,563 Non-controlling Total interests 420,402 25,563 2,276 73,449 19,224 Total equity 493,851 44,787 Total comprehensive income for the year 2,276 25,563 27,839 19,224 47,063 Balance at 31 December 256, , ,241 92, ,914 2,276 The independent auditors report is set out on page 57. The attached notes on pages 62 to 98 form part of these consolidated financial statements. Annual Report and Accounts / 61

64 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements for the year ended 31 December 1. Activities Nico Middle East Limited ( the Company ) is a limited liability company incorporated in Bermuda. The Company is a wholly owned subsidiary of Topaz Energy and Marine Limited ( the Holding Company ), an Offshore company registered in the Jebel Ali Free Zone. The address of the registered office of the Company is P.O. Box 1022, Clarendon House, Church Street West, Hamilton HM DX, Bermuda. The Ultimate Holding Company is Renaissance Services SAOG ( the Ultimate Holding Company ), a joint stock company incorporated in the Sultanate of Oman. The consolidated financial statements of the Company as at and for the year ended 31 December comprises the Company and its subsidiaries (together referred to as the Group and individually as the Group entities ) and the Group s interest in jointly controlled entities. The principal activities of the Group are fabrication and maintenance services to the oil and gas industry, ship building and provision of ship repair services, provision of offshore supply vessels and other marine vessels on charter primarily to the oil and gas industry. 2. Subsidiaries and Jointly Controlled Entities i) Subsidiaries of Nico Middle East Limited Registered percentage shareholding Company Country of incorporation 2012 Principal activities Topaz Energy and Marine DMCC United Arab Emirates 100% 100% Ship management/marine services Nico World II Limited Vanuatu 100% 100% Charter of marine vessels Topaz Marine Mena (Formerly Nico World) Panama 100% 100% Charter of marine vessels Nico Far East Pte Limited Singapore 100% 100% Charter of marine vessels TEAM I Limited Vanuatu 100% 100% Charter of marine vessels TEAM II Limited St. Vincent 100% 100% Charter of marine vessels TEAM III Limited St. Vincent 100% 100% Charter of marine vessels TEAM IV Limited St. Vincent 100% 100% Charter of marine vessels TEAM V Limited St. Vincent 100% 100% Charter of marine vessels TEAM VI Limited St. Vincent 100% 100% Charter of marine vessels TEAM VII Limited [refer to note 2 (a)] St. Vincent 50% 100% Charter of marine vessels TEAM VIII Limited St. Vincent 100% 100% Charter of marine vessels TEAM IX Limited St. Vincent 100% 100% Charter of marine vessels TEAM X Limited [refer to note 2 (f)] St. Vincent 100% 100% Charter of marine vessels TEAM XII Limited St. Vincent 100% 100% Charter of marine vessels TEAM XIII Limited St. Vincent 100% 100% Charter of marine vessels TEAM XV Limited [refer to note 2 (a)] St. Vincent 50% 100% Charter of marine vessels TEAM XVI Limited St. Vincent 100% 100% Charter of marine vessels TEAM XVII Limited [refer to note 2 (a)] St. Vincent 50% 100% Charter of marine vessels TEAM XVIII Limited [refer to note 2 (a)] St. Vincent 50% 100% Charter of marine vessels TEAM XX Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXI Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXII Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXIII Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXIV Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXV Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXVI Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXVII Limited [refer to note 2 (f)] Marshall Islands 100% 100% Charter of marine vessels TEAM XXVIII Limited Marshall Islands 100% 100% Charter of marine vessels TEAM XXIX Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels TEAM XXX Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels TEAM XXXI Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels TEAM XXXII Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels 62 / Annual Report and Accounts

65 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated statement Consolidated Financial of changes in equity Statements Appendix Key Financial Statements Subsidiaries and Jointly Controlled Entities (continued) Registered percentage shareholding Company Country of incorporation 2012 Principal activities TEAM XXXIII Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels TEAM XXXIV Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels TEAM XXXV Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels BUE Marine Limited United Kingdom 100% 100% Charter of marine vessels Adyard Abu Dhabi LLC ( Adyard ) United Arab Emirates 49% Offshore and onshore projects and fabrication Topaz BUE Limited United Arab Emirates 100% 100% Charter of marine vessels Topaz Doha Holdings I Limited St. Vincent 100% 100% Charter of marine vessels Topaz Doha Holdings II Limited St. Vincent 100% 100% Charter of marine vessels Caspian Fortress Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Pride Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Baki Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Citadel Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Gala Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Server Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Breeze Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Protector Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Power Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Provider Limited [refer to note 2 (a)] St. Vincent 50% 50% Charter of marine vessels Caspian Islay Limited [refer to note 2 (a)] St. Vincent 50% Charter of marine vessels Caspian Jura Limited [refer to note 2 (a)] St. Vincent 50% Charter of marine vessels Topaz Marine Saudi Arabia Limited Saudi Arabia 95% 50% Operation services and technical support for ships Flying Angel Limited St. Vincent 100% 100% Commercial financial lending and borrowing activities Nemo Limited St. Vincent 100% 100% Commercial financial lending and borrowing activities Topaz Khobar Limited Marshall Islands 100% 100% Charter of marine vessels Topaz Khuwair Limited Marshall Islands 100% 100% Charter of marine vessels Topaz Khalidiya Limited Marshall Islands 100% 100% Charter of marine vessels Topaz Karama Limited Marshall Islands 100% 100% Charter of marine vessels Topaz Karzakkan Limited Marshall Islands 100% 100% Charter of marine vessels Topaz Khubayb Limited Marshall Islands 100% 100% Charter of marine vessels Ererson Shipping Limited Cyprus 100% 100% Charter of marine vessels Heatberg Shipping Limited Cyprus 100% 100% Charter of marine vessels Topaz Marine Limited Bermuda 100% 100% Charter of marine vessels Topaz Marine S.A. Luxembourg 100% 100% Investment company Topaz Marine Azerbaijan Limited United Arab Emirates 100% 100% Charter of marine vessels Topaz Astrakhan Limited [refer to note 2 (d)] Marshall Islands 100% Charter of marine vessels Topaz Riverside PTY Limited [refer to note 2 (d)] Australia 100% Charter of marine vessels Annual Report and Accounts / 63

66 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 2. Subsidiaries and Jointly Controlled Entities (continued) ii) Subsidiaries of BUE Marine Limited Registered percentage shareholding Company Country of incorporation 2012 Principal activities BUE Caspian Limited Scotland 100% 100% Vessel management BUE Kazakhstan Limited Scotland 100% 100% Vessel management BUE Cygnet Limited Scotland 100% 100% Vessel management BUE Bulkers Limited Scotland 100% 100% Vessel management BUE Shipping Limited Scotland 100% 100% Vessel management Roosalka Shipping Limited Scotland 100% 100% Vessel management BUE Aktau LLP Kazakhstan 100% 100% Vessel management BUE Bautino LLP Kazakhstan 100% 100% Vessel management BH PSV Limited Cayman Islands 100% Dormant company BH Jura Limited Cayman Islands 100% Dormant company BH Standby Limited Cayman Islands 100% Dormant company Roosalka Shipping Limited Cayman Islands 100% 100% Dormant company BH Bulkers Limited Cayman Islands 100% Vessel management BH Islay Limited Cayman Islands 100% 100% Dormant company BUE Kyran Limited Scotland 100% 100% Vessel management BUE Marine Turkmenistan Limited [refer to note 2 (f)] Scotland 100% 100% Vessel management XT Shipping Limited Scotland 100% 100% Vessel management BUE Kashagan Limited Cayman Islands 100% Vessel management BUE Maritime Services Limited Scotland 100% 100% Vessel management River Till Shipping Limited Scotland 100% 100% Vessel management iii) Subsidiaries of Topaz Doha Holdings II Limited Registered percentage shareholding Company Country of incorporation 2012 Principal activities Doha Marine Services WLL State of Qatar 49% 49% Vessel management DMS Marine WLL Formerly named DMS Jaya State of Qatar 100% 100% Charter of marine vessels a) Caspian Fortress Limited, Caspian Pride Limited, Caspian Baki Limited, Caspian Citadel Limited, Caspian Gala Limited, Caspian Server Limited, Caspian Breeze Limited, Caspian Power Limited, Caspian Protector Limited, Caspian Provider, Team VII, Team XV, Team XVII, Team XVIII, Caspian Islay and Caspian Jura have been considered as subsidiaries as the Group is exposed to, or has rights to, variable returns from its involvement with these entities and has the ability to affect those returns through its power over these entities under management agreements with the respective shareholders. b) Topaz Marine Limited owns the entire issued share capital of Topaz Marine Azerbaijan Limited. c) BUE Caspian Limited owns the entire issued share capital of BUE Maritime Services Limited and BUE Marine Turkmenistan Limited, companies incorporated and registered in Scotland. d) Topaz Astrakhan, Topaz Riverside, Team XXIX, Team XXX, Team XXXI, Team XXXII, Team XXXIII, Team XXXIV and Team XXXV were incorporated in the current year for the purposes of charter of marine vessels. The Group owns the entire issued capital of these companies. e) The Group owns 49% of the shareholding in Doha Marine Services WLL ( DMS ), an entity incorporated in the State of Qatar. In addition to the above mentioned 49% ownership interest, the Group also has a beneficial interest in a further 51% in DMS through its Holding Company. Accordingly, the Group has the power to govern the financial and operating policies of DMS, and therefore, DMS has been consolidated as a subsidiary in these consolidated financial statements. f) During the year, the Group transferred their interest in two jointly owned vessels to TEAM XXVII and TEAM X. Accordingly, 50% of share of these companies are now beneficially owned by the joint venture partner through a joint venture agreement. 64 / Annual Report and Accounts

67 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Basis of Preparation Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Basis of measurement The consolidated financial statements are prepared under the historical cost convention, modified to include the measurement at fair value of derivative financial instruments. Functional currency and presentation currency The consolidated financial statements are presented in United States Dollars, which is the Group s presentation currency. The Group s subsidiaries may have functional currencies other than US Dollars, in which case the respective local currency is the functional currency. A significant proportion of the Group s assets, liabilities, income and expenses are in US Dollars, AED and Qatari Riyal (QR), to which the AED and QR is currently pegged at approximately AED 3.67 equals US$1 and QR 3.46 equals to US$1 respectively. All values are rounded to the nearest thousand except where otherwise indicated. Use of estimates and judgements The preparation of consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and it also requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimate is revised and in any future periods affected. In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are described in note 33. The accounting policies set out below, which comply with IFRS have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by the Group entities. 4. Significant Accounting Policies The accounting policies set out below, which comply with IFRS have been applied consistently to all periods presented in these consolidated financial statements and have been applied consistently by the Group entities. Basis of consolidation The consolidated financial statements include the financial statements of the Company and each of the entities that it controls together with its interest in jointly controlled entities. Also refer to note 2. Subsidiaries Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. Losses applicable to the non-controlling interests in a subsidiary are attributed to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Upon loss of control, the Group derecognises the assets and liabilities of the subsidiary, any non-controlling interests and other components of equity related to the subsidiary. Any surplus or deficit arising on loss of control is recognised in the consolidated statement of comprehensive income. If the Group retains any interest in the previous subsidiary, then such interest is measured at fair value at the date that the control is lost. Subsequently, it is accounted for as an equity accounted investee or as an available-for-sale financial asset depending on the level of influence retained. The financial statements of the subsidiaries are prepared for the same reporting year using constant accounting policies. Annual Report and Accounts / 65

68 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 4. Significant Accounting Policies (continued) Joint arrangements The Group has applied IFRS 11 to all joint arrangements as of 1 January Under IFRS 11 investments in joint arrangements are classified as either joint operations or joint ventures depending on the contractual rights and obligations of each investor. The Company has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method. Under the equity method of accounting, interests in joint ventures are initially recognised at cost and adjusted thereafter to recognise the Group s share of the post-acquisition profits or losses and movements in other comprehensive income. When the Group s share of losses in a joint venture equals or exceeds its interests in the joint ventures (which includes any long-term interests that, in substance, form part of the Group s net investment in the joint ventures), the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the joint ventures. Unrealised gains on transactions between the Group and its joint ventures are eliminated to the extent of the Group s interest in the joint ventures. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of the joint ventures have been changed where necessary to ensure consistency with the policies adopted by the Group. The change in accounting policy has been applied as from 1 January The change in accounting policies has no impact on the financial position, comprehensive income and the cash flows of the Group at 1 January 2012 and 31 December The change in accounting policy has had no impact on earnings per share. Transactions and balances eliminated on consolidation Intra-group balances and transactions, and any unrealised gain arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are also eliminated. Accounting for business combinations The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Group recognises any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either at fair value or at the non-controlling interest s proportionate share of the recognised amounts of acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred If the business combination is achieved in stages, the acquisition date carrying value of the acquirer s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date; any gains or losses arising from such remeasurement are recognised in profit or loss. Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognised in accordance with IAS 39 either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity. The excess of the consideration transferred the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the identifiable net assets acquired is recorded as goodwill. If the total of consideration transferred, non-controlling interest recognised and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognised directly in the statement of comprehensive income. Disposal of subsidiaries When the Group ceases to have control, any retained interest in the entity is remeasured to its fair value at the date when control is ceased, with the change in carrying amount recognised in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. Non-controlling interest Non-controlling interest represents the portion of profit or loss and net assets not held by the Group and are presented separately in the consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from owners equity. Acquisition of non-controlling interests is accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests arising from transactions that do not involve the loss of control are based on a proportionate amount of the net assets of the subsidiary. 66 / Annual Report and Accounts

69 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Significant Accounting Policies (continued) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable, and represents amounts receivable for goods supplied, stated net of discounts, returns and value added taxes. The Group recognises revenue when the amount of revenue can be reliably measured; when it is probable that future economic benefits will flow to the entity; and when specific criteria have been met for each of the Group s activities, as described below. The Group bases its estimate of return on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Marine charter Revenue comprises operating lease rent from charter of marine vessels, mobilisation income, and revenue from provision of on-board accommodation, catering services and sale of fuel and other consumables. Lease rent income is recognised on a straight-line basis over the period of the lease. Revenue from provision of on-board accommodation and catering services is recognised over the period of hire of such accommodation, while revenue from sale of fuel and other consumables is recognised when delivered. Income generated from the mobilisation or demobilisation of the vessel to or from the location of charter under the vessel charter agreement is recognised over the period of the related charter party contract. Sale of vessels Revenue from the sale of vessels is recognised in consolidated income statement when pervasive evidence exists, usually in the form of an executed sales agreement, that significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated cost and possible return of goods can be estimated reliably, there is no continuing management involvement with the vessels and the amount of revenue can be measured reliably. Dividend Dividend income is recognised in consolidated income statement on the date that the Group s right to receive payment is established. Finance income and expenses Finance income comprises interest income on funds invested and gains on hedging instruments that are recognised in consolidated income statement. Interest income is recognised in consolidated income statement as it accrues, using the effective interest rate method. Finance expense comprises interest expense on borrowings and losses on hedging instruments that are recognised in consolidated statement of comprehensive income. All borrowing costs are recognised in consolidated statement of comprehensive income using the effective interest rate method. However, borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of that asset, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. Foreign currency gains and losses are reported on a net basis as either finance income or finance cost depending on whether the foreign currency movements are in a net gain or net loss position. Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of the Group entities at exchange rates ruling 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 ruling at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in functional currency at the beginning of the year, adjusted for effective interest and payments during the year and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in the consolidated income statement except for differences arising in retranslation of a financial liability designated as a hedge of the net investment in a foreign operation, or qualifying cash flow hedges, to the extent these hedges are effective, which are recognised in other comprehensive income. Annual Report and Accounts / 67

70 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 4. Significant Accounting Policies (continued) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to US Dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to US Dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and are presented in the translation reserve in equity. However, if the operation is a non-wholly owned subsidiary then the relevant proportionate share of the translation difference is allocated to the noncontrolling interests. When a foreign operation is disposed of such control, significant influence or joint control is lost, the cumulative amount in translation reserve related to that foreign operation is reclassified to the consolidated statement of comprehensive income as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to the non-controlling interests. When the Group disposes of only part of its interest in an associate or a joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is reclassified to consolidated statement of comprehensive income. Foreign exchange gains and losses arising from a monetary item receivable from or payable to a foreign operation, the settlement of which is neither planned nor likely in the foreseeable future, are considered to form part of net investment in a foreign operation and are recognised in other comprehensive income, and are presented in translation reserve in equity. Income tax Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in the consolidated income statement except to the extent that it relates to a business combination, or items that are recognised directly in equity or in other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of prior years. Current tax payable also includes any tax liability arising from the declaration of dividends. Deferred tax Deferred tax is provided in respect of temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the temporary differences reverse, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets are recognised for all deductible temporary differences, unused tax losses and tax credits to the extent that it is probable that taxable profit will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax assets and liabilities and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities, but they intend to settle current tax assets and liabilities on a net basis or their tax assets and liabilities will be realised simultaneously. In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes and interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgements about future events. New information may become available that causes the Group to change its judgement regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact tax expense in the period that such a determination is made. Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group s other components. Operating segments are reported in a manner consistent with the internal reporting provided to the Group s Chief Operating Decision Maker (CODM), i.e. the Company s Board of Directors. All operating segments operating results are reviewed regularly by the CODM to make decisions about the resources to be allocated to the segment and to assess its performance and for which discrete financial information is available. Segment results that are reported to the Company s Board of Directors include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly corporate assets and head office expenses. Segment capital expenditure is the total cost incurred during the year to acquire property, plant and equipment, and intangible assets other than goodwill. 68 / Annual Report and Accounts

71 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Significant Accounting Policies (continued) Earnings per share The Group presents basic and diluted earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year, adjusted for own shares held. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares. Property, plant and equipment Items of property, plant and equipment are stated at cost or valuation less accumulated depreciation and any impairment in value. Cost of marine vessels includes purchase price paid to a third party including registration and legal documentation costs, all directly attributable costs incurred to bring the vessel into working condition at the area of planned use, mobilisation costs to the operating location, sea trial costs, significant rebuild expenditure incurred during the life of the asset and financing costs incurred during the construction period of vessels. In certain operating locations where the time taken for mobilisation is significant and the customer pays a mobilisation fee, certain mobilisation costs are charged to profit or loss. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The estimated useful lives for the current and comparative periods are as follows: Life in years Buildings Plant, machinery, furniture, fixtures and office equipment Marine vessels revalued (from the date of latest revaluation) Marine vessels acquired (including boats) Expenditure on marine vessel dry docking (included as a component of marine vessels) 5 to 25 3 to to 30 3 Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is capitalised and ready for use. Depreciation method, useful lives and residual values are reviewed at each reporting date. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately is capitalised and the carrying amount of the component that is replaced is written off. Other subsequent expenditure is capitalised only when it is probable that future economic benefits associated with the expenditure will flow to the Group. All other expenditure is recognised in the consolidated statement of comprehensive income as incurred. Gains and losses on disposal of an item of property, plant and equipment, other than vessels, are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment, and are recognised within other income or other expense in the consolidated statement of comprehensive income. The Company disposes off vessels in the normal course of business. Vessels that are held for sale are transferred to inventories at their carrying value. The sale proceeds are accounted for subsequently under revenue. Capital work in progress Capital work in progress is stated at cost until the construction is complete. Upon the completion of construction, the cost of such assets together with costs directly attributable to construction, including capitalised borrowing costs are transferred to the respective class of asset. No depreciation is charged on capital work in progress. Dry docking costs The expenditure incurred on vessel dry docking, a component of property, plant and equipment, is amortised over the period from the date of dry docking, to the date on which the management estimates that the next dry docking is due in 2 to 3 years. Annual Report and Accounts / 69

72 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 4. Significant Accounting Policies (continued) Vessel refurbishment costs Owned assets Cost incurred to refurbish owned assets are capitalised within property, plant and equipment and then depreciated over the shorter of the estimated economic life of the related refurbishment or the remaining life of the vessel. Intangible assets Goodwill Goodwill that arises with acquisition of subsidiaries is presented within intangible assets. Goodwill is initially measured at the fair value of consideration transferred plus the recognised amount of any non-controlling interest in the acquiree plus, if the business combination is achieved in stages, the fair value of pre-existing equity interest in the acquiree less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. Any negative goodwill is immediately recognised in profit or loss. 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 the carrying value may be impaired. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets and liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and is not larger than an operating segment determined in accordance with IFRS 8 Operating Segments. Impairment is determined by assessing the recoverable amount of the cash-generating unit (or groups of cash-generating units), to which the goodwill relates. Where the recoverable amount of the cash-generating unit (or groups of cash-generating units) is less than the carrying amount, an impairment loss is recognised in profit or loss. An impairment loss in respect of goodwill is not reversed. Where goodwill forms part of a cash-generating unit (or groups of cash-generating units) and part of the operation within that unit 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 unit retained. Other intangible assets Other intangible assets that are acquired by the Group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill, is recognised in profit or loss as incurred. Amortisation is charged on a straight line basis over the estimated useful life of five years, from the date they are available for use. Amortisation method, useful lives and residual values are reviewed at each reporting date. Financial instruments Non-derivative financial assets Classification The Group classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. a) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if expected to be settled within 12 months, otherwise they are classified as non-current. 70 / Annual Report and Accounts

73 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Significant Accounting Policies (continued) b) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after the end of the reporting period. These are classified as non-current assets. c) Available-for-sale financial assets Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures or management intends to dispose of it within 12 months of the end of the reporting period. Recognition and measurement Regular purchases and sales of financial assets are recognised on the trade date the date on which the Group commits to purchase or sell the asset. Investments are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value, and transaction costs are expensed in the consolidated statement of comprehensive income. Financial assets are derecognised when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership. Available-for-sale financial assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortised cost using the effective interest method. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the consolidated statement of comprehensive income in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the consolidated statement of comprehensive income as part of other income when the Group s right to receive payments is established. Changes in the fair value of monetary and non-monetary securities classified as available for sale are recognised in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the statement of comprehensive income as gains and losses from investment securities. Interest on available-for-sale securities calculated using the effective interest method is recognised in the statement of comprehensive income as part of finance income. Dividends on available-for-sale equity instruments are recognised in the statement of comprehensive income as part of other income when the Group s right to receive payments is established. Non-derivative financial liabilities All the financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Group s non-derivative financial liabilities include loans and borrowings, bank overdrafts, accounts and other payables and balances due to related parties. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. Offsetting Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Derivative financial instruments, including hedge accounting The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. On initial designation of the hedge, the Group formally documents the relationship between the hedging instrument and hedged item, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be highly effective in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80% to 125%. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect the reported consolidated income statement. Annual Report and Accounts / 71

74 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 4. Significant Accounting Policies (continued) Derivatives are recognised initially at fair value; attributable transaction costs are recognised in the consolidated income statement as incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are accounted for as described below. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect the consolidated statement of comprehensive income, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in the consolidated statement of comprehensive income. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income and presented in the hedging reserve in equity remains there until the forecast transaction affects the consolidated statement of comprehensive income. When the hedged item is a non-financial asset, the amount recognised in other comprehensive income is transferred to the carrying amount of the asset when the asset is recognised. If the forecast transaction is no longer expected to occur, then the balance in other comprehensive income is recognised immediately in the consolidated statement of comprehensive income. In other cases the amount recognised in other comprehensive income is transferred to the consolidated statement of comprehensive income in the same period that the hedged item affects the consolidated statement of comprehensive income. Other non-trading derivatives When a derivative financial instrument is not designated in a hedge relationship that qualifies for hedge accounting, all changes in its fair value are recognised immediately in the consolidated statement of comprehensive income. Impairment Financial assets A financial asset is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group on terms that the Group would not consider otherwise and indications that a debtor or issuer will enter bankruptcy, adverse changes in payment status of borrowers or issuer and economic conditions that correlate with defaults. The Group considers evidence of impairment of financial assets at both a specific asset and collective level. All individually significant financial assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Financial assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognised in the consolidated statement of comprehensive income and reflected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through the consolidated statement of comprehensive income. Non-financial assets The carrying amounts of the Group s non-financial assets, other than goodwill, inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in the consolidated income statement. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to that cash-generating unit and then to reduce the carrying amounts of the other assets in that cash-generating unit on a pro rata basis. The recoverable amount of an asset or its cash-generating unit is the greater of its value in use over its useful life The recoverable amount of an asset or its cash-generating unit is the greater of its value in use over its useful life and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of time value of money and risks specific to the asset or cash-generating unit. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or cash-generating unit. 72 / Annual Report and Accounts

75 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Significant Accounting Policies (continued) Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Inventories Inventories are measured at lower of cost and net realisable value after making due allowance for any obsolete or slow-moving items. The cost of inventories is based on the weighted average principle, and includes expenditure incurred in acquiring the inventories and other costs incurred in bringing them to their existing location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. Cash and cash equivalents Cash and cash equivalents comprise cash at hand, bank balances and short-term deposits with an original maturity of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Trade and other payables Liabilities are recognised for amounts to be paid in the future for goods or services received, whether billed by the supplier or not. Interest-bearing borrowings Interest-bearing borrowings are recognised initially at the fair value of the consideration received less directly attributable transaction costs. Subsequent to initial recognition interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the statement of comprehensive income over the period of the borrowings on an effective interest basis. Fees paid on the establishment of loan facilities are recognised as transaction costs of the interest-bearing borrowings to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates. Employees end of service benefits Pursuant to IAS 19 Employee benefits, end of service benefit obligations are measured using the projected unit credit method. The objective of the method is to spread the cost of each employee s benefits over the period that the employee is expected to work for the Group. The allocation of the cost of benefits to each year of service is achieved indirectly by allocating projected benefits to years of service. The cost allocated to each year of service is then the value of the projected benefit allocated to that year. Defined benefit plans A defined benefit plan is a pension plan that is not a defined contribution plan. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. Annual Report and Accounts / 73

76 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 4. Significant Accounting Policies (continued) The liability recognised in the statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past service costs are recognised immediately in income. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term cash bonus or profit sharing plans if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. Provisions A provision is recognised if, as a result of past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. Leases Group as a lessee Leased asset Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Subsequent to initial recognition, leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term, unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases and are not recognised in the Group s statement of financial position. Lease payments In respect of finance leases, lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the consolidated statement of comprehensive income. Operating lease payments are recognised as an expense in the consolidated statement of comprehensive income on a straight-line basis over the lease term. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Group as a lessor Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated income statement on a straight-line basis over the period of the lease. Leases where the Group has transferred substantially all the risks and rewards of ownership are classified as finance leases. The present value of the lease payments is recognised as a receivable. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance income. The lease rentals are allocated between finance income and repayment of principal in each accounting period in such a way that finance income will emerge as a constant rate of return on the lessor s net investment in the lease. 74 / Annual Report and Accounts

77 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Significant Accounting Policies (continued) Dividends distribution Dividends are recognised as a liability in the year in which the dividends are approved by the Company s shareholders. New and amended standards, and interpretations mandatory for the first time for the financial year beginning 1 January IAS 1 (amendment), Presentation of Financial Statements effective from 1 July ; IAS 19 (amendment), Employee benefits effective from 1 January ); IAS 27 (amendment), Separate financial statements (effective from 1 January ); IFRS 7 (amendment), Financial Instruments effective from 1 January ; IFRS 10 (standard), Consolidated financial statements (effective from 1 January ); IFRS 11 (standard), Joint arrangements (effective from 1 January ); IFRS 12 (standard), Disclosures of interests in other entities (effective from 1 January ); and IFRS 13 (standard), Fair value measurement (effective from 1 January ). The adoption of the new and amended standards did not have a material impact on the Group. New standards, amendments and interpretations issued but not effective for the financial year beginning 1 January and not yet early adopted IAS 32 (amendment), Financial Instruments: Presentation (effective from 1 January 2014); and IFRS 9, Financial Instruments (effective date not yet determined). The Group is in the process of assessing the impact of the new standards and amendments and intends to adopt these no earlier than their respective effective dates. These standards and amendments are not expected to have significant impact on the Group s accounting policies and are expected to result in additional disclosures only. 5. Determination of Fair Values Certain of the Group s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Forward exchange contracts and interest rate swaps The fair value of forward exchange contracts is based on their quoted price, if available. If a quoted price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a credit-adjusted risk-free interest rate (based on government bonds). The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty when appropriate. Other non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of the future principal and interest cash flows, discounted at the market rate of interest at the reporting date. Annual Report and Accounts / 75

78 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 6. Revenue Charter and other revenues from marine vessels Income from mobilisation of marine vessels Sale of marine vessels 360,954 7,794 7, ,959 4,231 1, , , Other Income Unclaimed balances written back Gain on disposal of property, plant and equipment Miscellaneous income 129 1, , Miscellaneous income includes expense claim settlement with a customer, vessel insurance claim settlement and other miscellaneous income. 8. Impairment Losses Impairment loss on accounts receivable (refer to note 15) Impairment loss on property, plant and equipment (refer to note 12) 4, ,735 2,200 4,839 3, Finance Income and Costs Recognised in profit or loss Interest income Exchange gain Fair value changes of derivative financial instruments (refer to (i) below and note 29) Charge on discontinuance of hedge accounting ,205 (2,116) 2012 Finance income 1,404 1,000 Interest expense Exchange loss 45, Finance costs 45,444 37,400 Recognised in other comprehensive income Effective portion of changes in the fair value of cash flow hedges (refer to note 19) Reclassification on discontinuance of hedge accounting(refer to note 19) Finance income 2,276 2, , ,772 (2,508) 37, ,508 (i) This represents a gain on fair valuation of interest rate swaps that are not designated as hedging instruments under IAS 39 Financial Instruments: Recognition and Measurement and therefore recognised in profit or loss. 76 / Annual Report and Accounts

79 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Income Tax Tax expense relates to corporation tax payable on the profits earned by certain Group entities which operate in taxable jurisdictions, as follows: Current taxation Foreign tax Corporation tax 14,467 1, Total current tax 16,170 14,500 Deferred tax Current year Prior year 2, ,969 2,531 Total deferred tax 2,666 (1,954) Tax expense for the year 18,836 12,546 Tax liabilities 14,567 12,313 (2,657) 703 The Group s consolidated effective tax rate is 30% for (2012: 27%). The charge for the period can be reconciled to the profits of the Group attributable to entities registered in the United Kingdom, Oman and Qatar as follows: 2012 Profit before income tax of Group entities operating in taxable jurisdictions Less: non-taxable profits earned by these entities 46,950 (3,428) Profit subject to tax included in the profit/(loss) for the year 43,522 14,731 Tax at the applicable average UK tax rate of 23.25% (2012: 26%) based on profits generated by Group entities registered in UK Tax effect of expenses that are not deductible in determining taxable profit Effect of different tax rates of subsidiaries operating in jurisdictions other than UK Prior year movement on deferred tax Effect of change in rate of deferred tax recognition 10, , Tax expense for the year 18,836 12,546 In some jurisdictions, the tax returns for certain years have not been reviewed by the tax authorities. However, the Group s management is satisfied that adequate provisions have been made for potential tax contingencies. 23,122 (8,391) 2, , Profit for the Year Profit for the year is stated after charging: 2012 Staff costs (all operations and administration staff costs) 101,127 90,897 Rental operating leases 34,884 12,120 Depreciation (note 12) 55,686 53,895 Staff costs include personnel costs of all segments. Annual Report and Accounts / 77

80 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 12. Property, Plant and Equipment Cost: At 1 January 2012 (restated) Additions Transfers Transfer to related party Transfer to current assets Disposals/write-offs At 31 December 2012 Additions Transfers Transfer from related party Disposals/write-offs Buildings 29,608 (25,848) 3, Plant, machinery furniture, fixtures and office equipment 63, (50,566) (451) 13,196 1,286 (225) (2) Marine vessels 1,089,026 80,493 44,183 (1,204) (18,765) (9,531) 1,184, ,386 4,530 (6,656) Jetty and land development 5,342 (5,342) Motor vehicles 3, (3,062) (28) (376) Capital work in progress 59,586 16,703 (44,183) (1,098) (2,934) (41) 28,033 59,125 (4) Total 1,250,754 98,257 (87,120) (21,699) (10,051) 1,230, ,983 4,530 (7,034) At 31 December 3,958 14,255 1,320, ,154 1,426,620 Depreciation: At 1 January 2012 (restated) Charge for the year Impairment charge for the year (note 8) Transfer to current assets Relating to disposals/write-offs Transfer to related party At 31 December 2012 Charge for the year Transfer Relating to disposals/write-offs Amortisation of mobilisation costs 9, (9,669) ,513 1,844 (445) (29,411) 9,501 1,572 (130) (3) 210,234 51,869 2,200 (15,783) (9,012) (347) 239,161 53,860 (3,861) 3,411 1,964 (1,964) 3, (27) (2,420) (376) 262,931 53,895 2,200 (15,783) (9,484) (43,811) 249,948 55,686 (4,240) 3,411 At 31 December , , ,805 Net carrying amount At 31 December 3,363 3,315 1,027, ,154 1,121,815 At 31 December ,424 3, ,041 28, ,193 Marine vessels with a net book value of US$591,815,000 (2012: US$855,093,000) are pledged against bank loans obtained. Buildings with a net book value of US$ Nil (2012: US$361,000) are pledged against bank overdrafts (refer to note 20). Capital work in progress includes costs incurred for construction of marine vessels. During the year, the Group has capitalised borrowing costs amounting to US$2,217,000 (2012: US$ Nil). Borrowing costs were capitalised at the weighted average rate of 9.2%. The depreciation charge has been allocated as follows: Direct costs Administrative expenses 54, , ,686 53, / Annual Report and Accounts

81 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Intangible Assets and Goodwill At 1 January Additions Amortisation Less: transfer to related party Goodwill 26, Computer software 672 (80) Total 26,846 (80) Goodwill 26,848 (674) Computer software Total At 31 December 26, ,766 26, ,846 Cost (gross carrying amount) Accumulated Amortisation Less: transfer to related party 26,174 1,947 (1,355) 28,121 (1,355) 26,848 (674) (50) 1,947 (1,275) Net carrying amount 26, ,766 26, ,846 27, (50) (674) 28,795 (1,275) (674) Amortisation of intangible assets has been allocated to administrative expenses in the consolidated statement of comprehensive income. Goodwill comprises the following: a) goodwill arising from the acquisition of BUE Marine Limited with effect from 1 July b) goodwill arising from the acquisition of Doha Marine Services WLL with effect from 8 May Goodwill has been allocated to three individual cash-generating units for impairment testing as follows: BUE Marine cash-generating unit; and Doha Marine Services cash-generating unit. Carrying amount of goodwill at 31 December allocated to each of the cash-generating units is as follows: BUE Marine Limited Unit Doha Marine Services Unit 18,383 7, ,383 7,791 26,174 26,174 The recoverable amount of each cash-generating unit is determined based on a value in use calculation, using cash flow projections based on financial budgets approved by senior management. Key assumptions used in discounted cash flow projection calculations Key assumptions used in the calculation of recoverable amounts are discount rates, terminal value calculations and budgeted EBITDA. These assumptions are as follows: Discount rate The discount rate used for value in use calculation in is 11.32% (2012: 10%). Terminal value calculations The discounted cash flow calculations for all the cash-generating units are based on the current year actual free cash flows determined from EBITDA. These cash flows then form the basis of perpetuity cash flows used in calculating the terminal value. Growth rate Growth rate used for value in use calculation in is 3% (2012: 3%). Sensitivity to changes in assumptions Management believes that there is adequate headroom as some of the key assumptions are conservative, particularly the expected growth rate. For the year ended 31 December, there have been no events or changes in circumstances to indicate that the carrying values of goodwill of the above three cash-generating units may be impaired. Annual Report and Accounts / 79

82 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 14. Inventories Stores, spares and consumables Marine vessel held for sale Provision for slow-moving inventories 4,280 (102) ,613 2,982 (550) 4,178 8,045 Movement in the provision for slow moving inventories were as follows: At 1 January Charge for the year Write-off during the period Less: transfer to related party At 31 December (550) 102 2, (2,242) 15. Accounts Receivable and Prepayments Trade accounts receivable Allowance for impairment of receivable Deferred mobilisation costs Value added tax (VAT) recoverable Prepaid expenses Advance to suppliers Retention receivable Other receivables Less: non-current portion of deferred mobilisation costs 85,219 (4,892) 80,327 14,901 5,265 2,941 1,944 3,028 6, ,979 (7,546) ,904 (4,705) 61,199 22,602 8,485 2,186 5,642 12, ,785 (14,464) 107,433 98,321 At 31 December, trade receivables with a nominal value of US$4,892,000 (2012: US$4,705,000) were impaired. Movement in the allowance for impairment of receivables were as follows: At 1 January Charge for the year (refer to note 8) Amounts written-off Less: transfer to related party 4,705 4,839 (4,652) 2012 At 31 December 4,892 4,705 7,317 1,735 (161) (4,186) The maximum exposure to credit risk for trade receivables at the reporting date by geographic region was: GCC Caspian Others 13,847 56,609 9, ,026 39,892 8,281 At 31 December 80,327 61, / Annual Report and Accounts

83 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Accounts Receivable and Prepayments (continued) As at 31 December, the ageing of unimpaired trade receivables is as follows: ,327 61,199 Neither past due nor impaired 56,763 46,001 <30 days 6,199 8,932 Past due but not impaired days 3,639 2, days 1,954 1, days 1, >120 days 10, Unimpaired receivables are expected, on the basis of past experience, to be fully recoverable. It is not the practice of the Group to obtain collateral over receivables and the vast majorities are, therefore, unsecured. 16. Cash and Cash Equivalents Cash and cash equivalents included in the consolidated statement of cash flows include the following: Cash at bank Deposits under lien (refer to (i) below) Current accounts Cash in hand Bank overdraft Cash and bank balances Less: deposits under lien 11, , , , ,297 (11,000) ,000 20,237 32, ,942 (5,846) 27,096 (12,000) Cash and cash equivalents 158,297 15,096 (i) These represent deposits with a commercial bank held under lien against term loans obtained by the Group (refer to note 20). (ii) Overdraft facility is secured against pari-passu mortgage over its property, plant and equipment. 17. Share Capital 2012 Authorised 400,000,000 shares of US$1 each (2012: 400,000,000 shares of US$1 each) 400, ,000 Issued and fully paid 256,817,094 shares of US$1 each (2012: 256,817,094 shares of US$1 each) 256, ,818 Annual Report and Accounts / 81

84 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 18. Statutory Reserve As required by the UAE Commercial Companies Law of 1984 (as amended) and the Articles of Association of subsidiaries incorporated in the UAE, 10% of the profit for the year is required to be transferred to statutory reserve. The subsidiaries may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up capital of the individual entities being consolidated. 19. Hedging Reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedges related to hedged transactions that have not yet affected the consolidated income statement. During the year, in addition to the fair value changes of US$160,000, an amount of US$2,116,000 was charged to the income statement due to the discontinuance of hedge accounting. 20. Term Loans $350m 8.625% senior notes due 2018 Term loan, at LIBOR plus 4.00% p.a. repayable by August 2017 Term loan, at LIBOR plus 3.75% p.a. repayable by June 2018 Term loan, at LIBOR plus 3.50% p.a. repayable by June 2020 Term loan, at LIBOR plus 2.65% p.a. repayable by July 2022 Term loan, at 5.75% p.a. repayable by October 2017 Term loan, at LIBOR plus 3.95% p.a. repayable by October 2017 Term loan, at LIBOR plus 3.95% p.a. repayable by May 2018 Term loan, at LIBOR plus 4% p.a. repayable by July 2017 Term loan, at LIBOR plus 2.88% p.a. repayable by July 2017 Term loan, at LIBOR plus 2.50% p.a. repayable by March 2018 Term loan, at LIBOR plus 4.25% p.a. repayable by November 2016 Term loan, at LIBOR plus 0.35% p.a. repayable by December 2016 Short-term loan, at SCB treasury plus 3.45% p.a. repayable by February Term loan, at 5.90% p.a. repayable by September 2015 Term loan, at LIBOR plus 1.10% p.a. repayable by June 2015 Term loan, at LIBOR plus 5% p.a. repayable by September 2016 Term loan, at LIBOR plus 0.75% p.a. repayable by June 2015 Term loan, at EIBOR plus 3.50% p.a. repayable by April 2014 Term loan, at LIBOR plus 0.75% p.a. repayable by December 2014 Term loan, at LIBOR plus 0.75% p.a. repayable by July 2015 Term loan, at LIBOR plus 3.75% p.a. repayable by December Term loan, at LIBOR plus 1.00% p.a. repayable by July Current portion 338, ,595 61,526 51,933 18,668 17,261 10,359 10, ,889 (51,136) ,816 20,558 19,436 12,668 9,189 51,236 41,463 30,055 23,916 14,234 10,000 7,282 5,100 4,981 3,125 2,866 2,813 2, ,749 (82,204) Non-current portion 619, ,545 (i) On 4 November, the Group issued US$350 million aggregate principal amount of 8.625% senior notes (the Senior Notes) and will mature on 1 November The senior notes pay interest semi-annually in arrears on 1 May and 1 November of each year, commencing 1 May Interest has been accrued from the issue date. On and after 1 November 2016, the Group may redeem some or all of the Senior Notes at the redemption prices (expressed as percentages of principal amount) equal to % for the 12-month period beginning 1 November 2016, % for the 12-month period beginning 1 November 2017 and 100% beginning 1 October 2018, plus accrued and unpaid interest and additional amounts, if any, to the redemption date. The senior notes has been issued by Topaz Marine S.A., a wholly-owned subsidiary of Nico Middle East Ltd., incorporated in Luxembourg. The senior notes have been admitted for trading on the Global Exchange Market of the Irish Stock Exchange. 82 / Annual Report and Accounts

85 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Term Loans (continued) (ii) In 2012, the Group successfully restructured its existing liabilities amounting to US$129.4 million under various facilities. As a result of this restructuring, on 16 May 2012, the Group entered into an agreement with a syndicate of banks for a financing facility of US$203 million. The existing liabilities under the target restructure loans were prepaid and replaced by a new term loan amounting to US$203 million. The new term loan carries interest at the rate of three months LIBOR plus 4% and is repayable in quarterly instalments till August In December 2012, the Group has signed a bilateral term sheet for a facility of US$125 million. The Group has used this facility to refinance certain term loan facilities and to finance a vessel under construction. Through the additional proceeds from the aforementioned restructuring, the Group also prepaid liabilities due under these term loans. (iii) The term loans of the Group are denominated either in US Dollars or AED and are secured by a first preferred mortgage over selective assets of the Group, the assignment of marine vessel insurance policies, corporate guarantees, lien on fixed deposits and the assignment of the marine vessel charter lease income (refer to notes 13 and 18). The term and senior notes are repayable as follows: Due within one year Due between two to five years Due after five years 51, ,680 25, , ,433 22, , ,749 The borrowing arrangements include undertakings to comply with various covenants including senior interest cover, current ratio, debt to EBITDA ratio, tangible debt to net worth ratio and equity ratio as well as an undertaking to maintain a minimum tangible net worth which shall not be less than US$350 million until 31 December and thereafter it shall be the greater of US$450 million or 35% of total assets. At the reporting date, the Group has complied with all financial covenants. 21. Loan Due to Holding Company Term loan, at 7.25% p.a. repayable by October Term loan, at 7% p.a. repayable by November 2019 (refer to (i) below) Term loan, at 8.50% p.a. repayable by September 2017 (refer to (ii) below) Term loan, at 6.75% p.a. repayable by January 2014 Current portion 30, , ,000 (28,000) ,184 49, ,000 10, ,784 (5,424) Non-current portion 106, ,360 The loan is repayable as follows: Due within one year Due between two to five years Due after five years 28,000 86,000 20,000 5, , , ,784 (i) This represents a loan obtained from the Ultimate Holding Company for the purpose of financing the acquisition of certain vessels US$30 million and is subordinated to other indebtedness. (ii) This represents a subordinated loan payable in four equal instalments of US$26 million, starting from November 2014 carrying a mark up at the rate of 8.5% p.a. compounded on a quarterly basis. Annual Report and Accounts / 83

86 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 22. Employees End of Service Benefits The Group provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees salary and length of service, subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. This is unfunded defined benefit scheme. Principal actuarial assumptions at the reporting date are as follows: Normal retirement age: 60 to 65 years. Mortality, withdrawal and retirement: 5% turnover rate. Due to the nature of the benefit, which is a lump sum payable on exit due to any cause, a combined single decrement rate has been used for maturity, withdrawal and retirement. Discount rate: 4.5% p.a. Salary increases: 3% to 5% p.a. Movement in the provision is recognised in the consolidated statement of financial position is as follows: Provision as at 1 January Provided during the year End of service benefits paid Transfer to a related party Other movements 2012 Provision as at 31 December 3,072 2,593 2, (442) 51 10,315 1,401 (408) (8,912) Accounts Payable and Accruals Current Trade accounts payables Accrued expenses Advance from customers Deferred income Other payables 44,577 26,065 1,156 5,095 8, ,462 20,567-5,390 4,776 84,947 54,195 Non-current Deferred income 4,190 5,818 4,190 5, / Annual Report and Accounts

87 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Related Party Transactions Related parties represent associated companies, major shareholders, directors and key management personnel of the Group, and entities controlled, jointly controlled or significantly influenced by such parties. Pricing policies and terms of these transactions are approved by the Group s management. Transactions with related parties included in the consolidated statement of comprehensive income are as follows: Revenue Purchases 2012 Revenue 2012 Purchases Related parties Compensation of key management personnel The remuneration of directors and other members of key management during the year was as follows: Short-term benefits Employees end of service benefits Due from related parties Directors Topaz Engineering Ltd Topaz Energy and Marine Plc, UK Due to related parties Renaissance Services SAOG Others 2, , ,620 2, , ,275 17,098 19, , ,045 2, Deferred Tax Asset At 1 January Credit/(Debit) to profit or loss Less: transfer to related party 4,770 (2,666) 2012 Provision as at 31 December 2,104 4,770 3,095 1,955 (280) The deferred tax balance at 31 December comprises depreciation in excess of capital allowances of US$1,446,000 (2012: US$4,243,000) and short-term timing differences of US$382,000 (2012: US$527,000). The UK corporation tax rate will reduce from 28% to 20% over a period of four years from The next reductions in the UK corporation tax rate from 23% to 21% and then 20% will be effective from 1 April 2014 and 1 April 2015 respectively. This has reduced the Group s future current tax charge accordingly. As the rate change from 23% to 20% had been substantively enacted before the balance sheet date it has reduced the rate at which deferred tax is recognised. As a result of this change from 23% to 20% the deferred tax asset has reduced by US$274,000 (refer to note 10). Annual Report and Accounts / 85

88 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 26. Contingencies and Claims Contingent liabilities Letters of credit Letters of guarantee 1,011 16, ,011 12,735 17,865 13,746 These are non-cash banking instruments like bid bond, performance bond, refund guarantee, retention bonds, etc., which are issued by banks on behalf of Group companies to customers/suppliers under the non-funded working capital lines with the banks. These lines are secured by the corporate guarantee from various Group entities. The amounts are payable only in the event when certain terms of contracts with customers/ suppliers are not met. 27. Non-Cancellable Leases a) Operating leases receivable The Group leases its marine vessels under operating leases. The leases typically run for a period between three months to ten years and are renewable for similar periods after the expiry date. The lease rental is usually renewed to reflect market rentals. Future minimum lease rentals receivable for the initial lease period under non-cancellable operating leases as of 31 December are as follows: 2012 Within one year Between one and five years More than five years 265, ,970 63, , , , , ,244 b) Operating leases payable The Group has commitments for future minimum lease payments under non-cancellable operating leases for marine vessels as follows: Within one year Between one and five years More than five years 48,079 76,543 10, , ,434 26, , ,710 During the year an amount of US$34,884,000 (2012: US$12,120,000) was recognised as an expense in profit or loss in respect of bareboat charter of marine vessels obtained on operating lease. 28. Commitments 2012 Capital expenditure commitment: Purchase of marine vessels 134, , / Annual Report and Accounts

89 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Derivative FInancial Instruments The table below shows the fair values of derivative financial instruments, which are equivalent to the market values, together with the notional amounts analysed by the term to maturity. The notional amount is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding at year end and are neither indicative of the market risk nor credit risk. Notional amounts by term to maturity Negative fair value Notional amount total Within 1 year Between 1 year to 5 years Over 5 years 31 December Interest rate swaps 2, ,822 29, , December 2012 Interest rate swaps 5, , ,056 41,460 The term loan facilities of the Group bear interest at US LIBOR plus applicable margins (refer to note 23). In accordance with the financing documents, the Group has fixed the rate of interest through Interest Rate Swap Agreements ( IRS ) as follows: US$ Nil (2012: US$40,000,000) at a fixed interest rate of 3.95% (2012: 3.95%) per annum, excluding margin; US$38,360,000 (2012: Nil) at a fixed margin of 2.5% (2012: 2.5%) per annum, excluding margin; US$ Nil (2012: US$50,000,000) at the rate of 2% (2012: 2%) per annum, excluding margin; and An amount of US$68,002,000 (2012: US$46,500,000) at the rate of 0.83% (2012: 1.97%) per annum, excluding margin. During the year, the Group prepaid the term loan facilities relating to the following IRS: An amount of US$4,687,000 (2012: US$5,930,000) at the rate of 3.25% (2012: 3.25%) per annum, excluding margin; and An amount of US$36,772,000 (2012: US$46,500,000) at the rate of 1.97% (2012: 1.97%) per annum, excluding margin. At 31 December, the US LIBOR was approximately 0.35% (2012: 0.51%) per annum. Accordingly, the gap between US LIBOR and fixed rate under IRS was approximately Nil%, 2.15%, Nil%, 2.9%, 2.74%, 1.62% and 0.48% (2012: approximately 3.44%, Nil%, 1.49%, 2.74% and 1.46%) per annum. Based on the interest rate gap, over the life of the IRS, the indicative losses were assessed at approximately US$2,613,000 (2012: US$5,977,000) by the counter parties to IRS. Consequently, in order to comply with International Accounting Standard 39 Financial Instruments: Recognition and Measurement fair value of the hedge instruments indicative losses in the amount of approximately US$2,613,000 (2012: US$5,977,000) has been recorded under current and non-current liabilities and the impact for the year amounting to US$1,089,000 (2012: US$264,000) has been recorded under finance income (refer to note 10) and US$(2,276),000 (2012: US$(2,715),000) has been recognised in the hedging reserve. Annual Report and Accounts / 87

90 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 30. Risk Management The Group have exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk This note presents 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 management of capital. Risk management framework The Board of Directors has overall responsibility for the establishment and oversight of the Group s risk management framework. Senior Group management are responsible for developing and monitoring the Group s risk management policies and report regularly to the Board of Directors on their activities. The Group s current financial risk management framework is a combination of formally documented risk management policies in certain areas and informal risk management practices in others. The Group s risk management policies (both formal and informal) are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Audit Committee oversees how management monitors compliance with the Group s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group Audit Committee is assisted in its oversight role by internal audit. Internal audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Group s principal financial liabilities, other than derivatives, comprise bank loans and overdrafts, accounts payables and accruals and balances due to the Holding Company and other related parties. The main purpose of these financial liabilities is to raise finance for the Group s operations. The Group has various financial assets such as accounts and other receivables, bank balance and cash, long-term receivables and due from related parties which arise directly from its operations. The Group also enters into derivative transactions, primarily interest rate swaps. The purpose is to manage the interest rate risk and currency risk arising from the Group s operations and its sources of finance. It is, and has been throughout the current year and previous year, the Group s policy that no trading in derivatives shall be undertaken. 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 receivable from customers, retention and other receivables, due from related parties, long-term receivables and balances with banks. 88 / Annual Report and Accounts

91 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Risk Management (continued) Trade accounts and other receivables The Group s exposure to credit risk is influenced mainly by the individual characteristics of each customer. However, management also considers the demographics of the Group s customer base, including the default risk of the industry and country in which the customers operate, as these factors may have an influence on credit risk. Approximately 19% (2012: 17%) of the Group s revenue is attributable to sales transactions with a single customer. The Group s ten largest customers account for 66% (2012: 56%) of the outstanding trade accounts receivable as at 31 December. Geographically the credit risk is significantly concentrated in the Mena region and the Caspian region. The management has established a credit policy under which each new customer is analysed individually for creditworthiness before the Group s standard payment and delivery terms and conditions are offered. Purchase limits are established for each customer, which represents the maximum open amount without requiring approval from the senior Group management; these limits are reviewed periodically. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade accounts and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Balances with banks The Group limits its exposure to credit risk by only placing balances with reputable financial institutions. Given the profile of its bankers, management does not expect any counterparty to fail to meet its obligations. Guarantees The Group s policy is to facilitate bank guarantees only on behalf of wholly owned subsidiaries and the Group entities over which the Group has financial and management control or joint control. Exposure to credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Trade accounts receivable net Other receivables and accrued income Due from related parties Cash at bank 80,327 18,726 17, , ,199 13,369 19,340 32, , ,145 Annual Report and Accounts / 89

92 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 30. Risk Management (continued) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations associated with its financial liabilities that are settled by delivering cash or other financial assets. The Group s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. The Group limits its liquidity risk by ensuring bank facilities are available. The Group s credit terms require the amounts to be paid within 90 days from the date of invoice. Accounts payable are also normally settled within 90 days of the date of purchase. Typically the Group ensures that it has sufficient cash on demand to meet expected operational expenses, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. As of 31 December, the Group had the following undrawn facilities of US$20.4 million and a bank overdraft facility of US$8 million. The table below summarises the maturity profile of the Group s financial liabilities at 31 December, based on contractual undiscounted payments. Contractual cash flows At 31 December Non-derivative financial liabilities Accounts payables and accruals Term loans Loan due to Holding Company Due to related parties Carrying amount 78, , , Total (78,696) (892,261) (164,928) (963) Due within 1 year (78,696) (95,298) (38,610) (963) Due in 1 to 5 years (767,256) (105,152) Due after 5 years (29,707) (21,166) Total 884,548 (1,136,848) (213,567) (872,408) (50,873) At 31 December 2012 Non-derivative financial liabilities Accounts payables and accruals Term loans Loan due to Holding Company Due to related parties Bank overdraft Carrying amount 48, , ,784 2,795 5,846 Total (48,805) (523,300) (211,524) (2,795) (5,846) Contractual cash flows Due within 1 year (48,805) (102,052) (18,650) (2,795) (5,846) Due in 1 to 5 years (392,089) (190,664) Due after 5 years (29,159) (2,210) Total 658,979 (792,270) (178,148) (582,753) (31,369) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates 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 optimising the return. The Group used floating-to-fixed interest rate swaps, and avails opportunities of restructuring of existing financial liabilities, in order to manage market risks. All such transactions are carried out within the guidelines set by the Board of Directors of the Group. Generally the Group seeks to apply hedge accounting in order to manage volatility in the consolidated income statement. 90 / Annual Report and Accounts

93 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Risk Management (continued) Interest rate risk The Group s exposure to the risk of changes in market interest rates relates primarily to the Group s long-term debt obligations with floating interest rates. The Group s policy is to manage its interest rate exposure through using a mix of fixed and variable interest rate debts. The Group s policy is to maintain at least 40% of its borrowings at fixed rates of interest. To manage this, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. These swaps are designated to hedge underlying debt obligations. At 31 December, after taking into account the effect of interest rate swaps, approximately 79% of the Group s borrowings are at a fixed rate of interest (2012: 67%) of which 8% (2012: 8%) are linked to hedging instruments designated as such in accordance with IFRS. Profile At the reporting date the interest rate profile of the Group s interest-bearing financial instruments was: Fixed rate instruments Financial assets Financial liabilities Variable rate instruments Financial liabilities Carrying amount 11,000 (489,504) ,000 (193,502) (315,385) (408,031) (315,385) (408,031) Fair value sensitivity analysis for fixed rate instruments The Group does not account for any fixed rate financial assets and liabilities at fair value through profit or loss, and the Group does not designate derivatives (interest rate swaps) as hedging instruments under a fair value hedge accounting model. Therefore a change in interest rates at the reporting date would not affect profit or loss. Cash flow sensitivity for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same basis for Profit or loss Equity 100 bp increase 100 bp decrease 100 bp increase 100 bp Decrease 31 December Variable rate instruments (3,153) 3,153 (3,153) 3, December 2012 Variable rate instruments (4,080) 4,080 (4,080) 4,080 Annual Report and Accounts / 91

94 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 30. Risk Management (continued) Currency risk The Group is exposed to currency risk on sales and purchases denominated in currencies other than AED which is the functional currency of the Group, US Dollars to which AED is pegged and other currencies which are pegged to US Dollars. At any point in time the Group hedges 100% of its estimated foreign currency exposure in respect of its forecast capital commitments. The Group uses forward currency contracts to hedge its currency risk, with a maturity of less than one year from the reporting date. The Group s exposure to foreign currency risk was as follows based on notional amounts: 31 December Bank balances Accounts payables EUR AZN KZT RUB GBP NOK JPY SGD 53 (652) 49 (1,542) 17,392 (66) 1, (341) (2,335) Net statement of financial position exposure (599) (1,493) 17,326 1,117 (273) (2,335) (227) 11 (227) December 2012 Bank balances Accounts payables EUR AZN KZT RUB GBP NOK JPY SGD 18 (394) 61 (403) 6,447 (7,430) Net statement of financial position exposure (376) (342) (983) (153) (745) (655) (61) (153) (745) 11 (666) (61) The following significant exchange rates applied during the year: Euro (EUR) Azerbaijan New Manat (AZN) Kazakhstan Tenge (KZT) Great Britain Pounds (GBP) Norwegian Kroner (NOK) Japanese Yen (JPY) Singapore Dollars (SGD) Average rate Reporting date spot rate / Annual Report and Accounts

95 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Risk Management (continued) Sensitivity analysis A strengthening of the US Dollars, as indicated below, against the Euro, Azerbaijan New Manat, Kazakhstan Tenge, Great Britain Pounds, Norwegian Kroner, Japanese Yen and Singapore Dollars at 31 December would have increased (decreased) profit or loss by the amounts shown below. This analysis is based on foreign currency exchange rate variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for Effect on profit before tax Euro (EUR) Azerbaijan New Manat (AZN) Kazakhstan Tenge (KZT) Great Britain Pounds (GBP) Norwegian Kroner (NOK) Singapore Dollars (SGD) Strengthening by 5% Weakening by 5% (45) (98) (28) (19) Effect on profit before tax 2012 Euro (EUR) Azerbaijan New Manat (AZN) Kazakhstan Tenge (KZT) Great Britain Pounds (GBP) Norwegian Kroner (NOK) Singapore Dollars (SGD) Strengthening by 5% Weakening by 5% (26) (26) (12) (7) (2) 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. The Board of Directors monitors the return on capital, which the Group defines as Result from operating activities divided by Total shareholders equity, excluding non-controlling interests. The Board of Directors also monitors the level of dividends to ordinary shareholders. The Group s capital employed consists mainly of capital, legal reserve and retained earnings. Management believes that the current level of capital is sufficient to sustain the profitability of the Group s continuing operations and to safeguard its ability to continue as a going concern. The Group s debt to adjusted capital ratio at the end of the reporting period was as follows: Interest-bearing loans and borrowings Bank overdraft Less: cash and short-term deposits Net debt Equity Add: cash flow hedge reserve included in equity 804,889 (169,297) 635, ,913 (158) ,533 5,846 (32,942) 574, ,851 2,118 Adjusted equity 540, ,969 Capital and net debt 1,176,347 1,070,406 Gearing ratio 54.03% 53.66% There were no changes in the Group s approach to capital management during the year. Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements. Annual Report and Accounts / 93

96 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 31. Fair Values of Financial Instruments Financial instruments comprise financial assets and financial liabilities. The fair value of derivatives is set out in note 34. The fair values of other financial instruments are not materially different from their carrying values. Fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Level 1 Level 2 Level 3 Total 31 December Derivative financial liabilities 2,613 2, December 2012 Derivative financial liabilities 5,977 5, Operating Segments Management has determined the operating segments based on the information reviewed by the chief operating decision-maker for the purposes of allocating resources and assessing performance. The Group operates under three primary geographical segments. The geographic segments are organised and managed separately according to the nature of the services provided, with each segment representing a strategic operating unit that offers different services. Geographic segments For management purposes, the Group is currently organised into three major geographic segments. These segments are the basis on which the Group reports its primary segmental information. These are: Mena Global Caspian Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit after income tax, as included in the internal management reports that are reviewed by the chief operating decision-maker. Segment profit is used to measure performance as management believes that such information is most relevant in evaluating the results of certain segments relative to other entities that operate within these geographic segments. 94 / Annual Report and Accounts

97 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Operating Segments (continued) The following table presents segmental information about these businesses: Operating segment Revenue Direct costs Gross profit (loss)/segment results Administrative expenses Impairment loss on account receivable Other income Finance cost, net Income tax expense Caspian 227,640 (130,026) 97,614 (14,625) 305 (19,246) (15,251) Mena 93,633 (57,115) 36,518 (8,702) (1,234) 567 (9,773) (2,510) Global 59,298 (45,307) 13,991 (3,419) (3,605) 1,020 (7,192) (1,075) Corporate (1,467) (1,467) (8,575) (7,829) Elimination (4,125) 3,400 (725) Total 376,446 (230,515) 145,931 (35,321) (4,839) 1,892 (44,040) (18,836) Profit/(loss) for the year 48,797 14,866 (280) (17,871) (725) 44,787 Depreciation and amortisation 29,810 16,076 9, ,763 Assets Liabilities 770, , , , ,017 54, , ,197 17,545 (2,608) 1,455, ,998 Operating segment 2012 Revenue Direct costs Gross profit/ segment results Administrative expenses Impairment loss on account receivable Impairment loss on property, plant and equipment Other income Finance cost, net Income tax expense Caspian 170,847 (101,364) 69,483 (14,566) (411) (14,686) (8,234) Mena 82,338 (51,649) 30,689 (12,326) (1,324) (2,200) 587 (9,313) (2,863) Global 57,583 (40,353) 17,230 (3,711) (1,449) Corporate (3,121) (8,690) Elimination (1,278) 628 (650) Total 309,490 (192,738) 116,752 (30,013) (1,735) (2,200) 587 (36,400) (12,546) Profit/(loss) for the year 31,586 3,250 12,070 (11,811) (650) 34,445 Depreciation and amortisation 31,123 13,922 7, ,945 Assets Liabilities 626, , , , ,200 95,231 28, ,039 40,375 1,184, ,070 Annual Report and Accounts / 95

98 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 33. Key Sources of Estimation Uncertainty Estimation uncertainty The Group makes estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the consolidated financial statements are as follows. 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 the cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December was US$26,174,000 (2012: US$26,174,000). Also refer to note 13. Impairment of vessels The Group determines whether its vessels are impaired when there are indicators of impairment as defined in IAS 36. This requires an estimation of the value in use of the cash-generating unit, which is the vessel owning and chartering segment. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from this cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying value of the vessels as at 31 December was US$1,028,289,000 (2012: US$945,041,000). Also refer to note 12. Impairment of accounts receivable An estimate of the collectible amount of trade accounts receivable is made when collection of the full amount is no longer probable. For individually significant amounts, this estimation is performed on an individual basis. Amounts which are not individually significant, but which are past due, are assessed collectively and a provision is applied according to the length of time past due, based on historical recovery rates. At the reporting date, gross trade accounts receivable were US$85,219,000 (2012: US$65,904,000) and the provision for doubtful debts was US$4,892,000 (2012: US$4,705,000). Any difference between the amounts actually collected in future periods and the amounts expected to be impaired will be recognised in consolidated income statement. Also refer to note 17. Impairment of inventories Inventories are held at the lower of cost and net realisable value. When inventories become old or obsolete, an estimate is made of their net realisable value. For individually significant amounts this estimation is performed on an individual basis. Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and a provision is applied according to the inventory type and the degree of ageing or obsolescence, based on historical selling prices, consumption trend and usage. At the reporting date, gross inventories were US$4,280,000 (2012: US$8,595,000) with provisions for old and obsolete inventories of US$102,000 (2012: US$550,000). Any difference between the amounts actually realised in future periods and the amounts provided will be recognised in the consolidated income statement. Also refer to note 15. Useful lives of property, plant and equipment The useful lives, residual values and methods of depreciation of property, plant and equipment are reviewed, and adjusted if appropriate, at each financial year end. In the review process, the Group takes guidance from recent acquisitions, as well as market and industry trends. Provision for tax The Group reviews the provision for tax on a regular basis. In determining the provision for tax, laws of particular jurisdictions (where applicable entity is registered) are taken into account. The management considers the provision for tax to be a reasonable estimate of potential tax liability after considering the applicable laws and past experience. Effectiveness of hedge relationship At the inception of the hedge, the management documents the hedging strategy and performs hedge effectiveness testing to assess whether the hedge is effective. This exercise is performed at each reporting date to assess whether the hedge will remain effective throughout the term of the hedging instrument. As at the reporting date the cumulative fair value of the interest rate swap was US$2,613,000 (2012: US$5,977,000). 96 / Annual Report and Accounts

99 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements Key Sources of Estimation Uncertainty (continued) Accounting for investments The Group reviews its investment in entities to assess whether the Group has control, joint control or significant influence over the investee. This includes consideration of the level of shareholding held by the Group in the investee as well as other factors such as representation on the Board of Directors of the investee, terms of any agreement with the other shareholders, etc. Based on the above assessment the Group decides whether the investee needs to be consolidated, proportionately consolidated or equity accounted in accordance with the accounting policy of the Group (also refer to note 2). Leases Management exercises judgements in assessing whether a lease is a finance lease or an operating lease. The judgement as to which category applies to a specific lease depends on management s assessment of whether in substance the risks and rewards of ownership of the assets have been transferred to the lessee. In the instances where management estimates that the risks and rewards have been transferred, the lease is considered as a finance lease, otherwise it is accounted for as an operating lease. The Group s property, plant and equipment include marine crafts such as barges and other vessels of a specialist nature capable of operating in difficult climatic conditions. Although these vessels are currently leased to a customer under contracts, which contain purchase options, the leases have been judged by management to be operating leases. Management have based this judgement on a number of factors that indicate that, in substance the risks and rewards of owning these vessels remain with the Group, which include: the lease periods are generally for a short term (ten years) when compared with the overall estimated economic life of the vessels (30 years or more); the leases do not automatically transfer the ownership of the vessels at the end of the lease term; the Group is responsible for regular dry-docking and insurance in addition to maintenance of the vessels; the customer is unlikely to want to bear the cost and responsibility of owning and maintaining these specialised vessels and is, therefore, unlikely to exercise options to purchase; the recent renewal by a customer of one major leasing contract for a secondary period despite the purchase option being available to the lessee; and the expectation that the customer would wish to renew its contracts for the leases of the vessels from the Group due to the Group s proven track record and established support and services infrastructure in the region of operation. Management has reached an in-principle agreement with the customer, for the removal of the option to purchase clauses in the contracts and are concluding formal variations to contracts, which is subject to fulfilment of certain conditions. Current and non-current classification of bank borrowings The Group s management has exercised significant judgement during the year in determining the current and non-current classification of bank borrowings. The classification is based on the repayment terms agreed with the bank, assessing the events and circumstances which can render a loan becoming payable on demand and the status of any negotiations and communications with the creditor banks in this regard. The Group s management has further exercised judgement in determining the current and non-current classification of amounts due from related parties at the reporting date. In determining the current and non-current classification, the Group s management makes a judgement based on the estimated future cash flows in respect of the settlement of the outstanding balance between the parties involved and the intention of management of the time frame within which these balances would be repaid. 34. Dividens At a meeting of the Board of Directors held on 18 February 2014, the Board proposed a dividend of US$20 million for the year ended 31 December. Annual Report and Accounts / 97

100 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Notes to the Consolidated Financial Statements (continued) for the year ended 31 December 35. Reclassification Comparative figures as at 31 December 2012 relating to long-term receivables amounting to US$7.4 million has been reclassified as current. 36. Summarised Financial Information on Subsidiaries with Material Non-Controlling Interests Set out below are the summarised combined financial information of the subsidiaries that has non-controlling interests. The non-controlling interest for all these subsidiaries is the same party. Summarised statement of financial position Current Assets Liabilities Total current net assets Non-current Assets Liabilities 12, , ,161 38,705 (141,040) (27,544) 458, , , ,500 Total non-current net assets 326, ,444 Net assets 185, ,900 Summarised statement of comprehensive income 2012 Revenue 72,926 44,919 Profit before income tax Income tax expense/benefit Profit for the year from continuing operations Profit for the year from discontinued operations Other comprehensive income 38,823 (290) 38,533 Total comprehensive income for the year 38,533 23,288 Total comprehensive income allocated to non-controlling interests 19,224 11,644 Dividends paid to non-controlling interests 3,500 23,288 23,288 Summarised statement of cash flows Cash flows from operating activities Cash generated from operations Income taxes paid Interest paid End of service benefits paid 184,839 (290) (12,283) Net cash generated from operating activities 172,266 Net cash used in investing activities (187,096) Net cash used in financing activities 16,783 Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at 1 January 1,953 10,314 Cash and cash equivalents at 31 December 12,267 The information above is the amount before inter-company eliminations. 98 / Annual Report and Accounts

101 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements 2011 Nico Middle East Limited and its Subsidiaries Appendix Key Financial Statements 2011 for the year ended 31 December 2011 The following 2011 financial statements of Nico Middle East Limited are included to ensure compliance with the reporting covenant relevant to Topaz s issue of senior notes in October. The combined financial statements of the Company as at and for the year ended 31 December 2011 comprise the Company and its marine subsidiaries (together referred to as the Group and individually as Group entities ) and the Group s interest in jointly controlled marine entities. Marine subsidiaries and jointly controlled marine entities (collectively referred to as the Marine Division) include those subsidiaries and jointly controlled entities of the Company that are engaged in the provision of offshore supply vessels and other marine vessels on charter primarily to the oil and gas industry. Combined statement of comprehensive income Revenue Direct costs Gross profit Other income Other expenses Administrative expenses Results from operating activities Other non-operating expenses Finance costs Finance income Profit before income tax Income tax expense ,436 (176,952) 116, (218) (27,287) 89,328 (13,579) (32,362) 2,462 45,849 (14,332) Profit for the year 31,517 Other comprehensive income Foreign currency translation differences Effective portion of changes in fair value of cash flow hedges Other comprehensive income for the year Total comprehensive income for the year 27,285 Profit attributable to: Owners of the Company Non-controlling interests (4,232) (4,232) 20,281 11,236 Profit for the year 31,517 Total comprehensive income attributable to: Owners of the Company Non-controlling interests 16,049 11,263 Total comprehensive income for the year 27,285 Annual Report and Accounts / 99

102 4 / Accounts and Notes Nico Middle East Limited and its Subsidiaries Appendix Key Financial Statements 2011 (continued) for the year ended 31 December 2011 Combined statement of financial position Assets Non-current assets Property, plant and equipment Intangible assets and goodwill Long-term receivables and prepayments Investment in Engineering Division entities Long-term receivable from Engineering Division entities Deferred tax assets Current assets Inventories Accounts receivable and prepayments Due from related parties Bank balances and cash ,848 26,648 2,650 6,155 9,537 2, ,637 5,298 84,647 66,869 32, ,752 Total assets 1,152,389 Equity and liabilities Equity Share capital Statutory reserve Hedging reserve Translation reserve Revaluation reserve Reserve at acquisition Retained earnings Equity attributable to owners of the Company Non-controlling interests 241, (4,832) 895 1,871 (67) 146, ,904 65,599 Total equity 451,503 Non-current liabilities Term loans Loans due to Holding Company Employees end of service benefits Accounts payable and accruals Provision for fair value of derivatives Current liabilities Accounts payable and accruals Bank overdraft Term loans Loans due to Holding Company Due to related parties Income tax payable Provision for fair value of derivatives 331, ,760 1,441 3,048 5, ,173 40,784 1,285 93,934 5,424 47,360 9,793 4, ,713 Total liabilities 700,886 Total equity and liabilities 1,152,389 The combined financial statements were approved and authorised for issue in accordance with a resolution of the directors on 16 September. René Kofod-Olsen Chief Executive Officer Yeshwant Desai Director 100 / Annual Report and Accounts

103 Independent Auditor s Report of Comprehensive Income of Financial Position of Cash Flows of Changes in Equity Notes to the Consolidated Financial Statements Appendix Key Financial Statements 2011 Nico Middle East Limited and its Subsidiaries Appendix Key Financial Statements 2011 (continued) for the year ended 31 December 2011 Combined statement of cash flows Cash flows from operating activities Profit before income tax Adjustments for: Depreciation Amortisation of intangible assets Gain on disposal of property, plant and equipment Provision for employees end of service benefits Finance cost Finance income Impairment loss on trade accounts and receivables Changes in: Inventories Accounts receivables and prepayments Accounts payable and accruals Due from related parties Due to related parties Cash generated from operating activities Employees end of service benefits Income tax paid ,849 45, (7) ,362 (2,462) , ,549 (793) (50,220) 3,465 Net cash from operating activities 68,451 Cash flows from investing activities Acquisition of property, plant and equipment Cash acquisition of a subsidiary Acquisition of intangible assets Proceeds from disposal of property, plant and equipment Advance / deposit paid for vessels Changes in deposits under lien Interest received Change in long-term receivable and prepayments 76,137 (386) (7,300) (121,847) 54 (128) 7 (3,200) (9,000) (6) Net cash used in investing activities (134,120) Cash flows from financing activities Proceeds from issue of share capital Funds introduced by non-controlling shareholders Dividend paid to owners of the Company Dividend paid to non-controlling shareholders External borrowings obtained net Loan obtained from the Holding Company net Interest paid (36,399) 45,302 91,819 (29,011) Net cash from financing activities 71,711 Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Effect of exchange rate changes on cash held 6,042 16,611 Cash and cash equivalents at 31 December 22,653 Annual Report and Accounts / 101

104 5 / Corporate Information Glossary AHTSVs Anchor Handling Tug Supply Vessels are vessels designed for anchor handling and towing offshore platforms, barges, production modules and/or other vessels Backlog/contract backlog a key performance indicator that consists of the total revenue attributable to the uncompleted portion of all Topaz vessel charter contracts Bareboat/bareboat charter the lease or hire of a vessel under which the responsibility for the crew, maintenance, equipment and insurance passes to the lessee Cable layer a vessel with the ability to lay cable, including fibre-optic cables for telecoms, or power lines for energy supplies CAGR Compound Annual Growth Rate CAPEX Capital Expenditure Core assets in the Topaz fleet, refers only to AHTSVs, PSVs, MPSVs, ERRVs Crewboat a vessel designed to transfer personnel and limited amounts of cargo from shore to offshore installations and between offshore installations Day rate the daily revenue generated by a particular vessel, excluding mobilisation and demobilisation costs Daughter craft a small craft that berths on board a mother ship, often being a high-powered fast recovery craft designated for safety standby duties Deadweight measure of maximum permissible weight that may safely be carried by a vessel, such that it s Plimsoll line is at the point of submersion Deep-water water at a depth of more than 1,000 feet up to 5,000 feet Drilling bulk powder materials used in the exploration of oil and gas, such as dry powders of barites, cement and bentonite Dry-docking removal of a vessel from the water for the performance of maintenance or other work on the exterior of the vessel below the waterline Dynamic positioning or DP the ability of a vessel to remain in a fixed geographical position by use of external propulsion synchronised by computer programming, within which the terms DP1, DP2 and DP3 denote increasing degrees of system reliability EBITDA represents profit before income tax plus any depreciation and amortisation ERM Enterprise Risk Management ERRVs Emergency Recovery and Response Vessels are vessels designed to provide safety support to offshore installations and are typically equipped with fast rescue, firefighting and oil recovery facilities Ice-breaking vessel a special purpose vessel designed to move and navigate through ice-covered waters IOC International Oil Company ISO International Organization for Standardization KPI Key Performance Indicator LTI Lost Time Injuries comprising all accidental injuries including Fatalities and Lost Work Day cases but excluding Restricted Work Day cases. A Lost Work Day case is any work-related accidental injury other than a fatal injury that results in a person being unfit for work on the next shift/day while a Restricted Work Day case is any work-related injury other than a Fatality or Lost Work Day case that results in a person being unfit for full performance of a regular job on the shift/day after the injury. LTIf Lost Time Injuries frequency, the number of LTIs occurring per one million man hours worked Man hours actual hours worked based on a 12-hour day in Topaz s offshore operations or actual hours worked including overtime hours in Topaz s onshore operations Mmbpd million barrels of oil per day Mono-hull vessel a vessel having only one hull MOA Manual of Authority Mobilisation in Topaz, the process of moving a vessel from one location, either a yard or port, to its working location MPSVs Multi-Purpose Support Vessels are multifunctional vessels designed to support a range of offshore activities Oilfield/field a geographical area defined by the boundary of an underlying oil and gas accumulation, usually used in the context of a producing oil field NOC National Oil Company Offshore platform a large structure situated some distance from the shore with facilities to drill, extract and process oil and gas and, in many cases, may also have accommodation facilities for offshore workers OSVs Offshore Support Vessels, and when referring to the Topaz fleet, includes AHTSVs, PSVs, MPSVs, ERRVs, specialised barges, crew boats and other vessels PSVs Platform Supply Vessels are vessels designed for transporting supplies and equipment to and from offshore installations RONA Return on Net Assets Shallow-water water at a depth of less than 1,000 feet Sister vessels two or more vessels with the same class and specifications Tugs a small powerful boat designed for towing or pushing larger vessels Upstream a sector in the oil and gas industry involving exploration and production activities Utilisation rate the measure of the extent to which Topaz vessels are actively employed by or for our clients 102 / Annual Report and Accounts

105 Glossary Awards and Accolades Corporate Directory Awards and Accolades Winner Offshore and Energy Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards 2012 Winner Ship Operator Award, Lloyd s List Middle East and Indian Subcontinent Awards Highly Commended Safety Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards 2011 Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards Winner Safety and Quality Award, Seatrade Middle East and Indian Subcontinent Awards Silver Award, The Royal Society for the Prevention of Accidents (RoSPA) Best Safety Video, MarineBiz TV International Maritime Awards Shortlisted Management / Operations Category, Safety at Sea International Awards Dostlug / Friendship Order, awarded to Roy Donaldson in his capacity as Chief Operating Officer of Topaz Marine, for services rendered to the development of the Azerbaijan oil and gas industry 2010 Winner Energy Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Shipowner / Operator Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Marine and Offshore Award, Seatrade Middle East and Indian Subcontinent Awards Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards Winner Shipping Company of the Year, Seatrade Middle East and Indian Subcontinent Awards Silver Award, The Royal Society for the Prevention of Accidents (RoSPA) Awardee Qatar Today Green Awards 2009 Winner Safety at Sea Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards 2008 Winner Innovation and Safety Award, Lloyd s List Middle East and Indian Subcontinent Awards Winner Workboats Award, Seatrade Middle East and Indian Subcontinent Awards BP President s Award, received by the crew of the ERRV Baki for the safe recovery and transport to shore of all CA platform personnel in Azerbaijan Annual Report and Accounts / 103

106 5 / Corporate Information Glossary Awards and Accolades Corporate Directory Corporate Directory Topaz Energy and Marine Corporate Office Level 58, Almas Tower, Jumeirah Lakes Towers P.O. Box , Dubai, United Arab Emirates Tel: Fax: topaz.world@topazworld.com Topaz Marine Caspian BUE Caspian Ltd. 3rd Floor, Gurban Khalilov Street 3 Yasamat District, Baku AZ1006 Azerbaijan Tel Fax topazmarine.azn@topaz-marine.com BUE Kazakhstan Limited 2nd Floor, Building 80, Micro Region 14 P.O. Box , Republic of Kazakhstan Tel Fax tmkzh.aktauoffice@topaz-marine.com Topaz Astrakhan LLC 7, Turgeneva str, 2nd floor Astrakhan, Russia Tel Fax topaz.astr@topaz-marine.com Topaz Marine Global Nico Middle East Limited Building 33, Oilfields Supply Centre, Jebel Ali Free Zone PO Box , Dubai, United Arab Emirates Tel: Fax: marketing.global@topaz-marine.com Topaz Marine Mena Doha Marine Services WWL 4th Floor, Faisaliyah Building, Suhaim Bin Hamad Street, P.O. Box 37102, Al Sadd Area, Doha, State of Qatar Tel s Fax marketing.mena@topaz-marine.com Topaz Marine Saudi Arabia Co Ltd. Office 902, 9th Floor, Al Jarbou Tower, Dhahran Street P.O. Box 4905, Al Khobar 31952, Kingdom of Saudi Arabia Tel Fax saudi.arabia@topaz-marine.com 104 / Annual Report and Accounts

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