PREPARING FOR THE RECOVERY

Transcription

1 PREPARING FOR THE RECOVERY FINANCIAL REPORT Q3 2018

2 DOF Subsea AS Thormøhlens gate 53 C 5006 Bergen NORWAY

3 Index Financial Report 3 rd quarter Financial statements 3 rd quarter Consolidated statement of comprehensive income...8 Consolidated statement of financial position...9 Consolidated statement of cash flows...11 Consolidated statement of changes in equity...12 Notes to the financial statements...14 Note 1 Management reporting...14 Note 2 Segment information...16 Note 3 Operating revenue Note 3 Operating revenue (continued) Note 4 Financial income and expenses...18 Note 5 Tangible assets...19 Note 6 Net interest-bearing debt...20 Note 7 Financial instruments and hedging activities...22 Note 8 Transactions with related parties...22 Note 9 Investments in associates and joint ventures...23 Note 10 Events after period end...23 Note 11 Shareholder information...23 Note 12 General...23 Note 13 New standards and interpretations not yet adopted...24 Note 14 Performance measurement definitions...25 Supplemental information...26 Condensed statement of comprehensive income 5 last quarters...26 Condensed statement of financial position 5 last quarters...27 Key figures

4 Financial Report Q DOF SUBSEA Financial Report 3 rd quarter 2018 Headlines For the first nine months of 2018, the DOF Subsea Group had an operating income of NOK million, an operating profit before depreciation of NOK 820 million and an operating profit of NOK 198 million after depreciation and impairment of NOK 623 million. The net financial loss was NOK 380 million giving a loss before tax of NOK 182 million. In the 3rd quarter of 2018, the Group had an operating income of NOK 958 million (NOK 899 million in the 3rd quarter of 2017) with an operating profit before depreciation of NOK 271 million (NOK 285 million). The operating profit was NOK 73 million (loss NOK 41 million) after depreciation and impairment of NOK 197 million (NOK 326 million). The net financial loss was NOK 159 million (income NOK 168 million), and the loss before tax was NOK 86 million (profit NOK 127 million). Australia and New Zealand and IMR and Survey work for Chevron and Conoco Phillips in Australia. In the Atlantic region, the Group has executed engineering, survey, light construction and installation work for Eni Angola, Conoco Phillips, Total, CNR and Saipem. In the North America region, the Group has conducted IMR work for Husky Energy, Chevron, Eni, Enbridge, and survey and positioning work for HMC. In Brazil, the Group has been engaged in ROV inspection work for Petrobras, Shell and Saipem. In addition, the joint venture with TechnipFMC has provided pipelay services for Petrobras. During the quarter, the Group has been awarded short-term contracts in the Subsea/IMR Projects segment and in the renewable industry. Utilisation 3Q Q Q Key figures (NOK million) 3Q Q 2017 YTD 2018 YTD 2017 Operating revenue EBITDA EBIT Net interest-bearing debt EBITDA proportional method In the 3rd quarter the Group has seen an increase in revenue compared to 3rd quarter last year, the increase in revenue is mainly linked to more vessels in operation and higher project activity compared to 3rd quarter last year. In the Subsea/IMR Projects segment the Group has faced problems on two projects reducing the quarterly EBITDA within the segment by NOK 30 million. In the North America region, the project activity was reduced by the dry-docking of the Jones Act vessel Harvey Deep-Sea. In Brazil the Group faced prolonged mobilization and testing and late startup of the contracts on Skandi Achiever and Skandi Salvador. In general, the market conditions within our industry are still challenging, however in line with the rebound in the oil price the tendering activity has increased during the quarter for projects with start-up in Long-term Chartering 75 % 86 % 88 % 85 % Subsea/IMR Projects 76% 72 % 65 % 65 % Fleet 75% 76 % 72 % 71 % Consolidated statement of comprehensive income and consolidated statement of financial position In the 3rd quarter of 2018, the Group achieved an operating income of NOK 958 million compared to an operating income of NOK 899 million in the 3rd quarter of Operating profit before depreciation (EBITDA) was NOK 271 million (NOK 285 million in 2017). The operating profit after depreciation and impairment (EBIT) was NOK 73 million (loss NOK 41 million). Depreciation and impairment amounted to NOK 197 million (NOK 326 million). NOK million 3Q Q 2017 Change % Operating revenue % EBITDA % EBIT % During the quarter, the Group has seen a stable performance and vessel utilisation in the Subsea/IMR Projects segment. In 3rd quarter, Skandi Seven, Skandi Salvador, Skandi Patagonia, Skandi Skansen and Harvey Deep-Sea were in dry dock. Skandi Achiever was under importation and mobilization for a longterm contract with Petrobras and started her contract mid-september. Geoholm and Geograph were idle during the quarter. In the Long-term Charter segment Skandi Vitoria ended her contract with Petrobras in the beginning of the quarter and has since then been idle together with Skandi Niteroi. The average vessel utilisation of the Subsea/IMR Projects segment has been 76 % during the quarter whilst the utilization of the vessels within Long-term Charter segment has been 75%. Net financial loss was NOK 159 million (income NOK 168 million), where NOK 11 million (NOK 262 million) was unrealised net gain on derivative instruments and currency positions. The loss before tax was NOK 86 million (profit NOK 127 million), and the loss for the period was NOK 98 million (profit NOK 138 million). The Group s total assets were NOK million (NOK million), where non-current assets amounted to NOK million (NOK million), including NOK 581 million (NOK 730 million) in intangible assets. Current assets were NOK million (NOK million), of which NOK 748 million (NOK million) was cash and cash equivalents. Operational events 3rd quarter As at 30 September 2018, the number of subsea employees was 1 322, and the Group s fleet comprised 23 owned vessels, 4 chartered-in vessels and 1 newbuilds under construction, plus a fleet of 71 ROVs. During the 3rd quarter, the Asia Pacific region has conducted IMR and construction work for Shell in the Philippines, NOK million Change % Total assets % Tangible assets % Cash and cash equivalents % Net interest-bearing debt % Total equity % 4

5 DOF SUBSEA Financial Report Q The total equity was NOK million (NOK million), including non-controlling interests of NOK 199 million (NOK 226 million). Non-current liabilities were NOK million (NOK million). Current liabilities were NOK million (NOK million), of which NOK million (NOK million) was current portion of debt. The Group s total equity and liabilities were NOK million (NOK million). The net interest-bearing debt (NIBD) was NOK million (NOK million). At the end of the 3rd quarter, the book equity ratio was 37.6 %, and the value-adjusted equity ratio was 43 %. The value-adjusted equity ratio is calculated by adjusting the book equity and total assets by excess values on all owned vessels in the Group. Shareholders The shares in DOF Subsea AS are owned by DOF ASA (64.9%), FRC Lux Holding Limited (30.6%) and Dolphin Invest 2 AS (4.5%). The number of outstanding shares is , with a book equity of NOK per share. Employees At the end of 3rd quarter, the number of employees in the Group was The number does not include marine employees that are employed in DOF Management and Norskan and hired in through shipman agreements to operate the vessels. Cash and cash equivalents have changed due to operating, investing and financing activities. Net cash flow from operating activities in the 3rd quarter was NOK -109 million (NOK 111 million). Cash flow from investing activities was NOK -57 million (NOK -70 million), of which NOK -71 million (NOK -49 million) was from investment in assets that increase or will increase capacity for the Group. Cash flow from financing activities was NOK -104 million (NOK -231 million) of which NOK -224 million (NOK -231 million) was instalments and repayments on long-term interest-bearing debt. At the end of the 3rd quarter, the Group s cash and cash equivalents were NOK 748 million (NOK million). NOK million Cash and cash equivalents Cash flow Net cash flow from operating activities -165 Cash flow from investing activities Cash flow from financing activities 748 Exchange rate Cash and cash effects equivalents Debt, financing and liquidity The Group s total interest bearing debt was NOK million, the current portion of interest bearing debt at the end of September was NOK million, including balloons, bond, drawn credit facilities and ordinary instalments. During the quarter the Group has paid ordinary instalments and interest rate on debt. In July the Group established a long-term drawing facility with one of it s main banks. The prolonged weak market conditions have increased the risk for impairment of the Group s non-current assets and put pressure on the Group s liquidity position, however over the last quarter the vessel values have shown sign of recovery. The Fleet At the end of 3rd quarter, the Group s fleet comprised 23 owned vessels, 4 chartered-in vessels and 1 vessel under construction in DOFCON Navegacao Ltda., a 50/50 joint venture with TechnipFMC. The Backlog As at end of 3rd quarter, the firm contract backlog amounts to NOK 15.1 billion, and including options NOK 33.7 billion. However, the Group is exposed to the short-term market conditions in the Subsea/IMR Projects segment. In this segment the management is working to increase the backlog and improve the utilisation of personnel and assets. Contract Backlog* NOK billion 20,0 15,0 10,0 5,0 0, Thereafter Options 0,1 0,6 0,5 0,9 1,1 15,5 Firm 1,0 2,9 2,6 2,2 1,8 4,6 * Contract backlog excludes master service agreements (MSAs) within the subsea/ IRM Projects segment. Under the MSAs only confirmed POs are accounted for. Events after period end Firm Options DOF Subsea AS is contemplating the issuance of new unsecured bonds of NOK 800-1,000 million with maturity in November Financial risk The Group s operating income is in NOK, USD, AUD, GBP, CAD and BRL, while the Group s loans are distributed between NOK, USD and CAD. This exposes the Group to the risk of exchange rate fluctuations. The Group has an active exchange rate policy and uses derivatives to hedge the exchange rate exposure. 5

6 Financial Report Q DOF SUBSEA Forward looking statement The Board of Directors is not satisfied with the financial numbers delivered for 3rd quarter which are below expectation. The market has continued to be challenging with variations in the different regions during the quarter and the Board of Directors expects the market to continue to be challenging during the winter season. A continuing weak market with regards to both terms and margins on new contracts, may lead to further impairment for the Groups non-current assets. As such the Group will continue its focus on adjusting the capacity and risk exposure to the challenging market conditions. However, with oil price stabilizing above USD 70 per barrel, oil companies have increased their tendering activity for subsea work, which may indicate that the activity will gradually improve, increasing the demand for the Group s services going forward. The majority of the Group s high-end assets are committed on long term contract and represent the largest portion of the Group s backlog, including the remaining newbuild committed on a 8-year contract. Bergen, 12 November 2018 The Board of Directors of DOF Subsea AS Contact information: Mons S. Aase, CEO Marianne Møgster DOF Subsea AS Thormølens gate 53 C 5006 Bergen 6

7 DOF SUBSEA Financial Report Q

8 Financial Report Q DOF SUBSEA Financial statements 3 rd quarter 2018 Consolidated statement of comprehensive income Note 3Q Q 2017 YTD 2018 YTD Operating revenue 1, 2, Payroll expenses Other operating expenses Share of net income of associates and joint ventures 1, Profit from sale of non-current assets Operating profit before depreciation (EBITDA) 1, Depreciation and impairment Operating profit (EBIT) Financial income Financial expenses Realised net gain / loss on derivative instruments and currency position Unrealised net gain / loss on derivative instruments and currency position Net financial income / loss Profit / loss before tax Income tax expense Profit / loss for the period Other comprehensive income net of tax Items that may be subsequently reclassified to profit / loss Currency translation difference (CTA) Share of other comprehensive income of associates and joint ventures Items that will not be subsequently reclassified to profit / loss Defined benefit plan actuarials gains/losses Other comprehensive income / loss net of tax Total comprehensive income / loss for the period net of tax Total comprehensive income / loss attributable to: Non-controlling interests Owners of the parents

9 DOF SUBSEA Financial Report Q Consolidated statement of financial position Assets Note Tangible assets Goodwill Deferred tax asset Investment in associates and joint ventures 1, Non-current receivables Non-current assets Trade receivables Other current receivables Total current receivables Restricted cash Unrestricted cash and cash equivalents Cash and cash equivalents Current assets Total assets

10 Financial Report Q DOF SUBSEA Consolidated statement of financial position Equity and liabilities Note Paid-in equity Other equity Non-controlling interests Total equity Bond loans Debt to credit institutions Financial non-current derivatives Other non-current liabilities Non-current liabilities Current portion of debt Trade payables Other current liabilities Current liabilities Total liabilities Total equity and liabilities

11 DOF SUBSEA Financial Report Q Consolidated statement of cash flows Note 3Q Q 2017 YTD 2018 YTD Operating profit (EBIT) Depreciation and impairment Profit from sale of non-current assets Share of net income of associates and joint ventures 1, Change in trade receivables Change in trade payables Changes in other working capital Exchange rate effect on operating activities Cash flow from operating activities Interest received Interest paid Tax paid Net cash flow from operating activities Sale of tangible assets Purchase of tangible assets Purchase of shares Net cash flows from other non-current receivables Cash flow from investing activities Proceeds of interest-bearing debt Instalments on interest-bearing debt Share issue Payments from non-controlling interests Cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents from merger and acquisition Exchange rate effect on cash and cash equivalents Cash and cash equivalents at the end of the period

12 Financial Report Q DOF SUBSEA Consolidated statement of changes in equity Share capital Share premium Other paid-in capital Paid-in equity Currency Retained translation earnings differences Other equity Noncontrolling interests Total equity Equity at Profit / loss for the period Other comprehensive income for the period Total comprehensive income for the period IFRS 9 implementation effect Changes in non-controlling interests Equity at Equity at Profit / loss for the period Other comprehensive income for the period Total comprehensive income for the period Merger DOF Subsea Holding AS Equity at

13 DOF SUBSEA Financial Report Q

14 Financial Report Q DOF SUBSEA Notes to the financial statements Note 1 Management reporting The Group uses the proportionate consolidation method when accounting for joint ventures in management reporting. Porportional consolidation method is used to better reflect the operating performance for vessels in the joint ventures. At the end of the 3rd quarter of 2018 the joint venture has 5 PLSVs in operation and 1 PLSV under construction. The table below shows the effect of proportional consolidation method used in management reporting. 3Q 2018 Consistent with management reporting Reconciliation to equity method 3Q 2018 YTD 2018 Consistent with management reporting Reconciliation to equity method YTD 2018 Operating revenue Payroll expenses Other operating expenses Share of net income of associates and joint ventures Profit from sale of non-current assets Operating profit before depreciation (EBITDA) Depreciation and impairment Operating profit (EBIT) Financial income Financial expenses Realised net gain / loss on derivative instruments and currency position Unrealised net gain / loss on derivative instruments and currency position Net financial income / loss Profit / loss before tax Income tax expense Profit / loss for the period

15 DOF SUBSEA Financial Report Q Note 1 Management reporting (continued from previous page) Consolidated statement of financial position Consistent with management reporting Reconciliation to equity method Intangible assets Tangible assets Financial assets Non-current assets Current assets Total assets Consolidated statement of financial position Consistent with management reporting Reconciliation to equity method Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities Consolidated statement of cash flows Consistent with management reporting Reconciliation to equity method Net cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Net change in cash and cash equivalents Cash and cash equivalent at the beinning of the period Exchange rate effect on cash and cash equivalents Cash and Cash equivalents at the end of the period

16 Financial Report Q DOF SUBSEA Note 2 Segment information The Group applies the equity method to account for joint ventures, as required by IFRS 11. The segment reporting below is presented according to internal management reporting, with principle as described in note 1, and reconciled to the equity method. Presentation of segments includes information that is reported to the chief operating decision-makers on a regular basis. Corporate expenses and similar are allocated to the segments proportionately based on the estimated split of services delivered to each segment. Operating revenue consistent with management reporting 3Q Q 2017 YTD 2018 YTD Long-term Chartering Subsea/IMR Projects Total consistent with management reporting Reconciliation to equity method Total EBITDA consistent with management reporting Long-term Chartering Subsea/IMR Projects Total consistent with management reporting Reconciliation to equity method Total The Group s business is divided into two business segments: Subsea/IMR Projects and Long-term Chartering. The Subsea/IMR Projects segment covers operations in four regions; the Asia Pacific region, the Atlantic region, the North America region and the Brazil region. In the Subsea/IMR Projects segment, the vessels and equipment are utilised on a global basis. The Subsea/IMR Projects segment is the Group s largest segment, accounting for 66% of the Group s total revenues for the 3rd quarter The Group has gradually built up the Subsea/IMR Projects segment, and has become a global provider of subsea services with a core focus on IMR. Within IMR, the Group has been awarded several long-term contracts over the last couple of years, among others, the 7-year contract with Shell Philippines, the 3-year contract with Chevron Australia, the 5-year contract with Shell Australia, the 10-year contract with Husky Energy in Canada and the 3-year diving contract with Petrobras. In addition to the IMR market, the Subsea/IMR Projects segment has focused on mooring and survey work utilising the Group s core competences and assets. The Long-term Chartering segment covers letting of vessels to third-party charterers and is managed through the Group s associated company, DOF Management AS, and sister company Norskan Offshore Ltda. The Long-term Chartering segment is built on DOF Subsea s long standing as an internationally recognised vessel owner and operator of high-end subsea vessels. Typical clients of the Group s Long-term Chartering services are, inter alia, Total, Petrobras, TechnipFMC and Subsea 7. 16

17 DOF SUBSEA Financial Report Q Note 3 Operating revenue The Group s operating revenue streams are a result of the Group s Time Charter contracts and Project contracts. Time Charter revenue is based on contracts where the Group delivers a vessel including crew, to a client. The charterer determines, within the contractual limits, how the vessel is to be utilised. A Time Charter contract consists of a bareboat component and a service component. The bareboat period starts from the time the vessel is made available to the customer and expires on the agreed return date. The bareboat component will normally be within the range 30-80% of the total contract value. The service component is covering crew and other operational costs. The service component is within the scope of IFRS 15, while the bareboat component is within the scope of IAS 17/IFRS 16. Both the service and the bareboat are recognised as revenue over the lease period on a straight-line basis. There is no Time Charter revenue when the vessels are off hire. Project revenue is based on contracts where the Group utilises its vessels, equipment, crew and the onshore project organisation to perform tailor made services on the client s installations and/or assets. The project revenue is recognised over time. Both Time Charter contracts and Project contracts are contracts with customers where the Group is compensated based on a fixed day rate for vessel, equipment and personnel. Some of the project contracts will from time to time be lump sum contracts based on a fixed fee for the total service and/or construction delivered. Operating revenue 3Q Q 2017 YTD 2018 YTD Lump sum contracts Day rate contracts Total operating revenue Accounting policies Revenue is measured based on the consideration specified in a contract with a customer. The Group recognises revenue when it transfers control over a service to a customer. If those services are distinct, the promises are performance obligations and are accounted for separately. A service is distinct if the customer can benefit from the service on its own or together with other resources that are readily available to the customer and the entity s promise to transfer the service to the customer is separately identifiable from other promises in the contract. For Time Charter revenue, the performance obligations are to operate the vessels that are made available for the client. This performance obligation is satisfied over time. For Project revenue, the performance obligations are tailor made services or constructions on the client s installations and/ or assets. Normally, the customer will benefit and control the service/construction in line with the progress of the project. Thus, performance obligations are satisfied over time. Operating revenue is shown net of discounts and value-added tax. For lump sum projects, contract revenue and expenses are recognised over time in accordance with the stage of completion of a contract. The stage of completion is calculated by dividing contract costs incurred to date by total estimated contract costs (input method). Contract revenue comprises the set amount of revenue agreed by the client in the contract plus variation orders where applicable. Variation orders will only be included in contract revenue to the extent they are considered as one performance obligation in combination with the original contract. If the variation order or a group of variation orders are considered as distinct, thus the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer, the performance obligation is accounted for separately. Cost forecasts are reviewed on a continuous basis and the project accounts are updated in a monthly project manager s report as a result of these reviews. Costs incurred relating to future performance obligations are deferred and recognised as assets in the consolidated statement of financial position. The costs incurred will be expensed in line with the satisfaction of the performance obligation. Conversely, where revenue is received in advance of costs being incurred, a deferred liability is recognised in the consolidated statement of financial position. 17

18 Financial Report Q DOF SUBSEA Note 3 Operating revenue (continued) In the event that it is probable that total contract costs will exceed contract revenue (onerous contracts), the anticipated loss is immediately recognised as an operating expense in the consolidated statement of comprehensive income. Expected losses are determined by reference to the latest estimate of project results at completion. The calculation of onerous contracts are in line with the principles in IAS 37 Provisions, Contingent Liabilities and Contingent Assets. New standards and changes The Group has applied IFRS 15 Revenue from contracts with customers from 1 January The transition method is applied retrospectively on contracts that were not completed by 1 January Implementation of IFRS 15 has not changed the timing of revenue recognition for the Group s revenue streams. There was no adjustment to the equity as of 1 January For further information about the implementation of IFRS 15 Revenue from contracts with customers please refer to the Annual Report for Note 4 Financial income and expenses 3Q Q 2017 YTD 2018 YTD Interest income Other financial income Financial income Interest expenses Capitalisation of interest Other financial expenses Financial expenses Net gain / loss on non-current debt Net gain / loss on operational capital Net gain / loss on financial derivatives Net realised gain / loss on financial instruments Net unrealised gain / loss on non-current debt Net unrealised gain / loss on operational capital Net unrealised gain / loss on financial derivatives Unrealised gain / loss on financial instruments Net financial income / loss

19 DOF SUBSEA Financial Report Q Note 5 Tangible assets Vessels & periodic maintenance ROVs Machinery & other equipment Newbuilds Total Net booked value Additions Reclassification Depreciation Impairment Currency translation differences Net booked value Vessels & periodic maintenance ROVs Machinery & other equipment Newbuilds Total Net booked value Additions Disposals Reclassification Depreciation Impairment Currency translation differences Net booked value The challenging market conditions for offshore service vessels have continued. In the 3rd quarter 2018, the Group faced lower market values for some of the Group`s vessels. Impairment indicators are observed, and an impairment test for vessels in the Group has been performed. Impairment tests are performed in line with accounting principles presented in the annual report for Impairments of NOK 65 million have been recognised on the oldest part of the fleet in the 3rd quarter of YTD 2018, the Group has recognised impairments of NOK 217 million. 19

20 Financial Report Q DOF SUBSEA Note 6 Net interest-bearing debt Non-current interest-bearing debt Bond loans Debt to credit institutions Total non-current interest bearing debt Current interest-bearing debt Bond loans Debt to credit institutions Total current interest-bearing debt Total non-current and current interest-bearing debt Net interest-bearing debt Cash and cash equivalent Other interest-bearing assets - non-current Total net interest-bearing debt The Group has applied IFRS 9 Financial instruments from 1 January IFRS 9 Financial instruments addresses the classification, measurement and de-recognition of financial assets and financial liabilities and introduces new rules for hedge accounting. The implementation had a negative effect on the equity of NOK 25 million as of 1 January 2018, due to the modification of the remaining part of the DOFSUB07 bond loan in December The increased liability related to the DOFSUB07 bond loan will be amortised as reduced interest cost over the remaining time to maturity. Reconciliation of changes in debt Non-current interest bearing debt Cash changes Balance Cash flows IFRS 9 effect Non-cash changes Amortised loan expense Reclassification Currency adjustment Balance Bond loans Debt to credit institutions Total non-current interest bearing debt Current interest bearing debt Debt to credit institutions Total current interest bearing debt Total interest bearing debt Debt repayment profile Q Q Q Q Total current debt Q Thereafter Total Bond loan Debt to credit institutions Total repayment A non-current loan has been provided by Eksportfinans and is invested as a restricted deposit. The repayment terms on the loan from Eksportfinans are equivalent with the reduction on the deposit. The loan is fully repaid in The cash deposit is included in restricted deposits. 20

21 DOF SUBSEA Financial Report Q Note 6 Interest-bearing debt (continued from previous page) Share of debt secured by fixed interest rate Fixed rate Floating rate Total NOK Debt to credit institutions 85 % 15 % 100 % Bond loan 0 % 100 % 100 % Total NOK 75 % 25 % 100 % USD Debt to credit institutions 72 % 28 % 100 % Bond loan 100 % 0 % 100 % Total USD 80 % 20 % 100 % CAD Debt to credit institutions 100 % 0 % 100 % Total CAD 100 % 0 % 100 % Total debt 79 % 21 % 100 % Financial covenants The Group s long-term financing agreements include the following covenants: The Group shall have available cash of at least NOK 500 million at all times (based on the proportionate consolidation method of accounting for joint ventures) The Group shall have value-adjusted equity to value-adjusted assets of at least 30% The Group shall have book equity of at least NOK million at all times The Group shall have positive working capital at all times, excl. current portion of debt to credit institutions The fair value of the Group s vessels shall always be at least % of the outstanding loan amount In addition to the above mentioned financial covenants, the loan agreements are also subject to the following covenants: The Group s assets shall be fully insured There shall not be any change to classification, management or ownership of the ships without the prior written approval of the lenders DOF ASA shall be the principal shareholder in DOF Subsea AS, and own a minimum of 50.1 % of the shares DOF Subsea AS shall not merge or demerge activities without the prior written approval of the lenders DOF Subsea AS shall report financial information to the lenders and Oslo Stock Exchange on a regular basis The Group s vessels shall be operated in accordance with applicable laws and regulations The Group is in compliance with all covenants. 21

22 Financial Report Q DOF SUBSEA Note 7 Financial instruments and hedging activities Assets Liabilities Assets Liabilities Non-current and current portion Interest rate swaps Foreign exchange contracts Total non-current and current Non-current portion Interest rate swaps Foreign exchange contracts Total non-current portion Total current portion Committed Received Amount Committed Received Amount Instrument Foreign exchange contracts, buy NOK NOK NOK Note 8 Transactions with related parties Description of transactions with related parties is given in the Annual Report for There are no major changes in type of transactions between related parties during the second quarter During the quarter the Group has had Skandi Chieftain, owned by DOF ASA, on bareboat charter. In addition, the Group has receivables and liabilities towards DOF ASA, Norskan, DOF Management and Marin IT related to operations. 22

23 DOF SUBSEA Financial Report Q Note 9 Investments in associates and joint ventures Entity Proportion of ownership Joint ventures DOFCON Brasil AS 50 % Associated companies Marin IT AS 35 % DOF Management AS 33.8 % Master & Commander IS 20 % Booked value of investments in associates and joint ventures Share of net income of associates and joint ventures 300 Share of other comprehensive income related to associates and joint ventures 19 Booked value of investments in associates and joint ventures See also note 1 and note 2. Note 10 Events after period end DOF Subsea AS is contemplating the issuance of new unsecured bonds of NOK 800-1,000 million with maturity in November Note 11 Shareholder information Name No. shares Shareholding Voting shares DOF ASA % 64.9 % FRC Lux Holding Limited % 30.6 % Dolphin Invest 2 AS % 4.5 % Total % 100 % Note 12 General This Financial Report has been prepared in accordance with the standard for interim reporting (IAS 34). The Financial Report does not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual consolidated financial statements as at 31 December The Financial Report is unaudited. 23

24 Financial Report Q DOF SUBSEA Note 13 New standards and interpretations not yet adopted IFRS 16 Leases replaces the current standard IAS 17 Leases and related interpretations. IFRS 16 Leases removes the current distinction between operating and financing leases for lessees, and requires recognition of an asset (the right to use the leased item) and a financial liability representing its obligation to make lease payments. Lease payments are to be reflected as interest expense and a reduction of lease liabilities. The standard is effective for accounting periods beginning on or after January 1, The Group will adopt the standard at its mandatory date. The Group has completed an initial assessment of the potential impact on its consolidated financial statements by reviewing the Group s leasing arrangements over the last year in light of the new lease accounting rules in IFRS 16 Leases. The actual impact of applying IFRS 16 Leases on the financial statements in the period of initial application will depend on future economic conditions, including the Group s borrowing rate at 1 January 2019, currency, accuracy in calculation, the composition of the Group s lease portfolio at that date, the Group s latest assessment of whether it will exercise any lease renewal options and the extent to which the Group chooses to use practical expedients and recognition exemptions. The following arrangements are likely to be effected; Bareboat charters will typically meet the new definition of a lease since under these agreements the charterer controls the use of the vessel for a period of time. Time charters are likely to contain both a lease (i.e. right to use the vessel) and service components (i.e. operation and maintenance of the vessel by the vessel owner). Rent of offices. Other equipment. IFRS 16 Leases redefines financial key figures such as debt ratio and EBITDA. The standard will affect primarily the accounting for the Group s operating leases. The Group does not expect any significant impact on the financial statements for leases in which the Group is a lessor, expect for sub-leases. By the end of the third quarter the Group estimates the following impact from IFRS 16 Leases based on the estimated lease portfolio as per the transitional date 1 January 2019 and compared to as if the standard was not implemented; Lease liabilities of approximately 410 MNOK, Right-of-use assets of approximately 240 MNOK, Finance lease receivable of approximately 170 MNOK, Net profit before tax will decrease by approximately 6 MNOK, EBITDA is expected to increase by approximately 40 MNOK. The above estimates do not include additions to the lease portfolio during By the end of the 3rd quarter 2018, the following main policy choices have been made and form the basis for the Groups IFRS 16 implementation and application work: IFRS 16 transition choices The Group intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption. Contracts already classified either as leases under IAS 17 or as non-lease service arrangements will maintain their respective classifications upon the implementation of IFRS 16 ( grandfathering of contracts ). Lease liabilities are measured at the present value of the remaining lease payments, discounted using the lessee s incremental borrowing rate as of 1 January The weighted average lessee s incremental borrowing rate applied to the lease liabilities presented are 5%. Right-of-use assets will be measured on transition as at the amount of the lease liability on adoption (adjusted for any prepaid or accrued lease expenses). The cumulative effect of initially applying the standard to be recognised as an adjustment to the opening balance of retained earnings is hence expected to be zero. When applying a modified retrospective approach to leases previously classified as operating leases under IAS 17, the lessee can elect, on a lease-by-lease basis, whether to apply a number of practical expedients on transition. The Group has used the following practical expedients permitted by the standard: applying IAS 37 for assessment of whether leases are onerous, the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases, the exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application. IFRS 16 application policy choices The Group has decided not to apply IFRS 16 for intangible assets. The Group has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. Non-lease components within lease contracts will be accounted for separately for all underlying classes of assets, and reflected in the relevant expense category as incurred. 24

25 DOF SUBSEA Financial Report Q Note 14 Performance measurement definitions Operating profit before depreciation (EBITDA) Operating profit before depreciation (EBITDA) is defined as operating profit, including profit from sale of non-current assets, before impairment of tangible and intangible assets, depreciation of tangible assets and amortisation of contract assets. EBITDA represents earnings before interest, tax, depreciation and amortisation, and is a key financial parameter for the Group. This measure is useful in evaluating operating profitability on a more variable cost basis as it excludes depreciation, impairment and amortised expenses related primarily to capital expenditures and acquisitions that occurred in the past. The EBITDA margin presented is defined as EBITDA divided by operating revenue. Operating profit (EBIT) Operating profit (EBIT) represents earnings before interest and tax, and is a common non-ifrs measure to assess profitability before financial income and loss items and tax expenses. Net interest-bearing debt Net interest-bearing debt consists of both current and non-current interest-bearing liabilities less interest bearing financial assets and cash and cash equivalents. Non-current receivables from joint ventures are not included in net interest-bearing debt. Cash and cash equivalents will include restricted cash. Current interest-bearing debt includes interest-bearing debt related to asset held for sale. Net interest-bearing debt is a measure of the Group s net indebtedness that provides an indicator of the overall statement. Equity ratio Equity ratio is defined as total equity divided by total assets at the reporting date. Market value Calculated average vessel value between two independent brokers estimates based on the principle of willing buyer and willing seller. Vessel utilisation Vessel utilisation is a measure of the Group`s ability to keep vessels in operation and on contracts with clients, expressed as a percentage. The vessel utilisation numbers are based on actual available days, including yard-stay days for dry docking, repair and upgrade/conversion, transits and idle time between Subsea/IMR project contracts and Chartering contracts. Contract backlog Sum of undiscounted revenue related to secured contracts in the future and optional contract extensions as determined by the client in the future. Contract backlog excludes master service agreements (MSAs) within the Subsea/IRM Projects segment. Under the MSAs only confirmed POs are included. Firm contract backlog Sum of undiscounted revenue related to secured contracts in the future. Secured contracts are contracts signed with clients in the past, covering future delivery of services. Backlog options Sum of undiscounted revenue related to optional contract extensions as determined by the client in the future. Working capital The working capital position of the Group is equal to current assets less current liabilities. It is a measure of the Group s liquidity and efficiency, and demonstrates the Group s ability to pay its current liabilities. 25

26 Financial Report Q DOF SUBSEA Supplemental information The supplemental information below is presented according to internal management reporting, based on the proportionate consolidation method. Proportionate consolidation method implies full consolidation for subsidiaries, and consolidation of 50% of the comprehensive income and financial position for the joint ventures. Condensed statement of comprehensive income 5 last quarters 3Q Q Q Q Q 2017 Operating revenue Payroll expenses Other operating expenses Share of net income of associates and joint ventures Profit from sale of non-current assets Total operating expenses Operating profit before depreciation (EBITDA) Depreciation and impairment Operating profit (EBIT) Financial income Financial expenses Realised gain / loss on financial instruments Unrealised gain / loss on financial instruments Net financial income / loss Profit / loss before tax Tax expenses Profit / loss for the period

27 DOF SUBSEA Financial Report Q Condensed statement of financial position 5 last quarters Assets 3Q Q Q Q Q 2017 Intangible assets Tangible assets Financial assets Non-current assets Total receivables Cash and cash equivalents Current assets Total assets Equity and liabilities 3Q Q Q Q Q 2017 Paid in equity Other equity Non-controlling interests Total equity Non-current provisions for commitment Other non-current liabilities Non-current liabilities Current portion of debt to credit institutions Other current liabilities Current liabilities Total liabilities Total equity and liabilities From 1 January 2018 the Group has changed the way it presents debt and receivables against the Joint Ventures. The debt and receivables are now presented on a net basis. For presentation purpose, the previous years are restated accordingly. Key figures 3Q Q Q Q Q 2017 Profit per share (NOK) EBITDA margin 32 % 31 % 30 % 32 % 30 % EBIT margin 12 % 13 % 5 % 13 % -2 % Return on net capital -2 % -5 % 3 % -6 % 2 % Book value equity per share (NOK) Value-adjusted equity per share (NOK) Net interest-bearing debt (NOK million)

28 Financial Report Q DOF SUBSEA DOF Subsea vessels Owned vessels DOF Subsea currently owns one of the largest fleet of high-end construction vessels (including newbuilds) in the world. These assets offer a versatile, new generation of high-powered and purpose-built vessels with broad offshore capabilities. Geograph Geoholm Geosea Geosund Skandi Acergy Skandi Achiever Skandi Açu Skandi Africa Skandi Buzios Skandi Carla Skandi Constructor Skandi Hawk 28

29 DOF SUBSEA Financial Report Q Skandi Hercules Skandi Neptune Skandi Niteroi Skandi Patagonia Skandi Recife Skandi Salvador Skandi Seven Skandi Singapore Skandi Skansen Skandi Vinland Skandi Vitoria 29

30 Financial Report Q DOF SUBSEA DOF Subsea vessels (continued) Newbuilds in joint ventures and associated companies DOF Subsea invests in the next generations of vessels. An ambitious Newbuild program utilises new technology and smart engineering to ensure efficient and environmentally-friendly operations in the future. Skandi Olinda Chartered-in vessels DOF Subsea charters in vessels on short and long-term contracts based on operational needs, building greater flexibility and a complementary fleet mix to meet our clients subsea challenges. Harvey Deep-Sea Harvey Sub-Sea Skandi Chieftain Skandi Darwin 30