Contents. Three. Key Figures. Five. This is Siem Offshore Inc. Seven. Board of Directors Report. Thirteen. Income Statement.

Transcription

1 Annual Report 2008

2 Contents Key Figures This is Siem Offshore Inc. Board of Directors Report Income Statement Balance Sheet Assets Balance Sheet Equity and Liabilities Cash Flow Statement Statement of Changes In Equity Notes to the Accounts Auditor s Report Management Responsibility Statement Board of Directors Corporate Governance Financial Calendar Fleet List March 2009 Three Five Seven Thirteen Fourteen Fifteen Sixteen Seventeen Nineteen Eighty-Four Eighty-Five Eighty-Six Eighty-Seven Ninety Ninety-One

3 Key Figures CONSOLIDATED (Amounts in USD 1,000) INCOME STATEMENT Operating revenue Operating expenses Depreciation and amortization Gain/(loss) on sale of assets Gain on sale of interest rate derivatives Gain/(loss) on currency exchange forward contracts Operating profit Net financial items Profit before taxes Tax expense Net profit Attributable to minorities Attributable to equity shareholders BALANCE SHEET Non-current assets Current assets Total assets Equity Non-current liabilities Current liabilities Total liabilities and shareholders' equity KEY RATIOS Average number of outstanding shares (1,000) Earnings per share (USD) Share price per year end (NOK) Book shareholders' equity per share (USD) Book equity ratio 49 % 51 % Price/earnings per share (P/E) Liquidity ratio Siem Offshore Inc., Annual Report 2008 Three

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5 This is Siem Offshore Inc. Siem Offshore Inc. is an owner and operator of modern support vessels for the global oil and gas service industry. The Company has grown significantly and has currently a fleet of 40 vessels, of which 15 are under construction. The Company s fleet includes large anchor handling tug supply vessels, platform supply vessels, and other support vessels. Siem Offshore Inc., Annual Report 2008 Five

6 The Company has an integrated operation with offices in Norway, Brazil and Cayman Islands, and provides a wide range of services from its vessels, equipment and experienced onshore and offshore personnel with high focus on Health, Safety, Environment and Quality. The Company s vision is to become a preferred supplier of marine services to the oil and gas industry based on quality and reliability, and by providing cost efficient solutions by close cooperation with customers. The Company is listed on the Oslo Stock Exchange. Six

7 Board of Directors Report The Company Siem Offshore Inc. commenced operations effective 1 July 2005 following its spin-off by Subsea 7 Inc. Siem Offshore is registered in the Cayman Islands and is listed on the Oslo Stock Exchange. All references to Siem Offshore, the Group and the Company shall mean Siem Offshore Inc. and its subsidiaries and associates unless the context indicates otherwise. Siem Offshore is an owner and operator of support vessels for the offshore oil and gas service industry with a fleet of 25 vessels in operation and 17 vessels under construction at the end of The Company has offices in the Cayman Islands, Norway (Kristiansand and Rovde) and Brazil (Rio de Janeiro and Macae). Results, Balance Sheet and Financial Risks Results The Company recorded a net loss for 2008 of USD (27.6) million (2007: net profit of USD 87.7 million), or USD (0.11) per share (USD 0.45 per share). The Company s results were heavily influenced by the volatility of the NOK/ USD exchange rates during 2008 and 2007 and the effects on the forward contracts which were entered into for the purpose of hedging its obligations for future yard instalments on its newbuilding programme of NOK 5.9 billion. The Company recorded losses of USD 47.3 million (2007: gains of USD 39.6 million) arising from the revaluation of currency exchange contracts, 1 or maturity of such contracts,due to the stronger USD-currency during the year. Approximately USD 45.9 million of such loss in 2008 is unrealised. Net financial items in 2008 were USD (24.5) million (2007: USD (1.3) million) and included a revaluation of non-usd currency items of USD (18.3) million (2007: USD 8.8 million) due to the stronger USD-currency during the year. Approximately USD 16.3 million of such loss in 2008 is unrealised. The Board proposes that the net loss of USD 27.6 million for 2008 be charged retained earnings and that no dividend be paid for As of 31 December 2008, retained earnings were USD million. Balance Sheet Shareholders equity was USD 408 million and there were 253,891,866 shares issued and outstanding at year-end The cash position at year-end was USD 73.4 million. The balance sheet included gross interest-bearing debt of USD 279 million. The Company had USD 30 million available under a working capital facility at year-end In December 2008, the Company agreed the terms of a guarantee facility in respect of a 12-year USD 112 million loan facility for two MRSVs and one AHTS vessel. The USD 112 million loan and guarantee facility represents 60% of the total project cost for the three vessels. The three vessels are scheduled for delivery in February 2009, May 2009 and July 2009, respectively. The loan will be provided by the Norwegian export credit agency for Export Financing ( Eksportfinans ) and the guarantees will be provided by the Norwegian Guarantee Institute for Export Credits ( GIEK ) and a commercial bank. The loan and guarantee facility agreements were completed in January The Company received confirmation of loan undertaking from Eksportfinans for the Company s remaining AHTS-vessels under construction at Norwegian yards. The loan undertakings are limited to 80% of the project cost per vessel and requires the provisions of guarantees. GIEK will provide such guarantees in favour of Eksportfinans, subject to participation by commercial banks on a pari-passu basis. The Company is in the process of negotiating guarantee facilities for the remaining AHTS-vessels under construction at the Norwegian yards. Future yard instalments for vessels under construction in Norway totalled NOK 5.9 billion at year-end In accordance with the shipbuilding contracts, yard instalments of NOK 3.1 billion fall due in 2009 and NOK 2.8 billion fall due in Following the cancellation of shipbuilding contracts for two AHTS vessels, the future yard instalments for vessels under construction in Norway is reduced by NOK 1.2 billion. The Company provided in 2008 a subordinated interest bearing loan of NOK 160 million to a Norwegian shipyard where the Company has several vessels under construction. The initial term of the loan is 30 June 2009, but the shipyard may extend the term of the loan until 1 Currency exchange contracts have been entered into in order to hedge the future NOK instalments for vessels under construction at Norwegian yards. The Company held USD 354 million in such currency exchange contracts at year-end at an average contract price of NOK 6.23/USD. Siem Offshore Inc., Annual Report 2008 Seven

8 31 December The loan enabled the shipyard to arrange the construction financing in an effective way. The Company has two high speed supply vessels and two crew vessels under construction in Brazil. Fundo de Marinha Mercante, which is the Brazilian Government Fund for Development of Merchant Shipping, has granted financing for up to 90% of the total project cost. Future yard instalments totalled USD 18.8 million at year-end In accordance with the shipbuilding contracts, yard instalments of USD 16 million falls due in 2009, USD 2.6 million in 2010 and USD 0.2 million in The Company has, through its 51% owned subsidiary, Siem Meling Offshore DA, one large-size PSV under construction to be outfitted at a Norwegian yard. Siem Meling Offshore DA has entered into a loan agreement with a commercial bank for the long-term debt financing of the vessel equivalent to 80% of the estimated project cost. IFRS Accounting Standards The consolidated accounts and the accounts of the parent company are prepared in accordance with the International Financial Reporting Standard (IFRS) as adopted by the European Union. Going Concern The financial statements have been prepared under the assumption of going concern. This assumption is based on the level of cash and cash equivalents at year end, cash flow forecasts, available and offered credit facilities and the market value of assets. Financial Risks Interest risk The Company is exposed to changes in interest rates as approximately 80% of the long-term interest bearing debt was subject to floating interest rates per yearend. The remaining part of the debt is subject to fixed interest rates. Currency risk The Company is exposed to currency risk as revenue and costs are denominated in various currencies. The Company is also exposed to currency risk due to future yard instalments in relation to shipbuilding contracts and long-term debt in various currencies. Forward exchange contracts are entered into in order to reduce the currency risk related to future cash flows. Liquidity risk The Company is financed by debt and equity. If the Company fails to repay or refinance its credit facilities, additional equity financing may be required. There can be no assurance that the Company will be able to repay its debts or extend the debt repayment schedule through re-financing of credit facilities. Nor can there be any assurance that the Company will not experience cash flow shortfalls exceeding the Company s available funding sources or to comply with minimum cash requirements. Further, it can be no assurance that the Company will be able to raise new equity, or arrange new credit facilities on favourable terms and in amounts necessary to conduct its ongoing and future operations, should this be required. Yard risk The process for construction of new vessels is associated with numerous risks. Among the most critical risk factors in relations to such construction is the risk of not receiving the vessels on time, at budget and with agreed specifications. In addition, there is the risk of yards experiencing financial or operational difficulties resulting in bankruptcy or otherwise adversely affecting the construction process. The Company has obtained certain guarantees of financial compensation including refund guarantees in case of delays and non-delivery. Further, the Company has the right to cancel contracts if delivery of vessels is significantly delayed. However, no assurance can be given that all risks have been fully covered. Delays and non-delivery of the vessels under construction is likely to result in a loss of income for the Company, and could also possibly lead to breach of contract in respect of contracts entered into between the Company and third parties concerning employment of vessels. Credit risk The Company is exposed to potential losses on receivables from customers. However, the credit risk is diversified as the Company is not significantly exposed to one individual customer or contract. Operations Fleet, Performance and Employment The Company had ownership in 25 vessels in operation at year-end. The fleet in operation include twelve platform supply vessels (PSVs), two multipurpose ROV support vessels (MRSVs), a fleet of nine crew/supply boats operated in Brazil, one well stimulation vessel and one scientific core drilling vessel. The twelve PSVs obtained 94% utilisation. The contract backlog for 2009 was 78% for the PSV fleet. The two MRSVs obtained 100% utilisation (from date of delivery). The contract backlog for 2009 is 100% for the two MRSVs. The nine crew/supply boats operated in Brazil obtained 95% utilisation. Two Eight

9 of these vessels were dry-docked during the fourth quarter. Seven of the Brazilian-fleet vessels are on contracts with Petrobras, one vessel is on a long contract with Transpetro (Petrobras subsidiary) and one vessel is working in the Brazilian spot market. The contract backlog for 2009 was 89%. The conversion of the 50% owned core drilling vessel JOIDES Resolution was completed in January 2009 and the vessel commenced the operation phase of the contract with Texas A&M Research Foundation as a Scientific Ocean Drilling Vessel for the Integrated Ocean Drilling Program s phase II. The operation phase of the contract has an initial term until September 2013, with ten additional years of options. The estimated contract value for the initial term of the operation phase is approximately USD 115 million excluding reimbursable costs. The operation phase of the contract can be terminated by TAMRF at any time with a USD 3 million termination fee. The conversion cost incurred at the yard in Singapore over the last year and paid for by TAMRF would remain as part of the vessel in case of early termination. The 41% owned well stimulation vessel Big Orange XVIII continued on its charter with Schlumberger with operations in the North Sea. The charter has a term until August Newbuilding Program The Company had two MRSVs under construction at a Norwegian yard at year-end The first of these MRSVs, the Siem Marlin, was delivered on 26 February 2009, and commenced a contract with a Nigerian entity. The vessel shall be used by a subsidiary of Chevron as a field, ROV and subsea installation vessel at the Agbami field 70 nautical miles offshore Nigeria. Siem Offshore is the vessel provider and a subsea contractor provides the engineering, ROV and subsea installation services. The term of the Contract is for an initial period of up to 12 months, to be followed by a firm period of two years plus one year of option. The Contract value is approximately USD 15 million for each 12 month period. The second MRSV under construction is scheduled for delivery in May The Company had ten large-size AHTS-vessels under construction at a Norwegian yard at year-end The Company and the yard agreed in March 2009 to cancel shipbuilding contracts for two of the AHTS vessels. Capacity issues with major subcontractors as well as the general market turmoil were instrumental factors for both Siem Offshore and the yard to arrive at this decision. The cancelled contracts had contractual delivery dates in August and September 2009, and represented two of ten shipbuilding contracts for AHTS vessels ordered by Siem Offshore. The yard has confirmed that it expects to deliver the remaining AHTS vessels under construction on or about the contractual delivery dates. The pre-delivery instalments paid on the two cancelled shipbuilding contracts shall be off-set towards remaining pre-delivery instalments on the remaining number of vessels. The first AHTS vessel is scheduled for delivery in July 2009, which represents a delay of approximately two months. The 51% owned subsidiary Siem Meling Offshore DA, has a large-size PSV under construction. The hull grounded during the towing operation from the hull yard in Turkey to the outfitting yard in Norway in September The hull has been refloated and towed to a repair yard in Turkey. The hull is insured and the repair of the hull is coordinated by the insurance underwriters. Siem Meling Offshore DA has in 2009 agreed to swap the hull with a similar hull built for the 49% partner O.H Meling & Co AS. The alternative hull arrived the outfitting yard in Norway in April 2009 and the PSV is expected to be delivered in fourth quarter The construction of the four vessels in Brazil is generally progressing according to plan. All four vessels will be employed on years contracts with Petrobras. QHSE Siem Offshore s vision is to become a preferred supplier of marine services to the oil & gas industry based on quality and reliability. To support our vision, we have designed and operate an integrated Quality, Health, Safety and Environment (QHSE) management system. Our QHSE philosophy is based upon internationally recognised standards and is supported by management commitment, personal accountability, training, and performance measurement. Accordingly, we are committed to preventing injuries, pollution to the environment and damage or loss to property or equipment. To fulfil our commitment, we will: Meet or exceed all applicable QHSE laws, regulations and industry requirements related to our work activities in each and any country of where we operate. Strive for zero harm to people and property by holding health and safety as our first priority. Strive for zero oil spills and minimize the impact of our operations on the environment. Ensure that all our people, whether working directly for us or on our behalf, Siem Offshore Inc., Annual Report 2008 Nine

10 works responsibly and will meet our QHSE standards in recognition of being held accountable for individual performance, and the performance of those working under our supervision. Treat QHSE issues with equal value to financial, production and quality issues. Provide the resources, training and development to ensure that work is carried out safely, professionally and with full consideration for environmental protection. Require every employee to take personal responsibility for his/her own and others safety and towards meeting quality, health, safety and environmental objectives. Everyone working for Siem Offshore has a duty to comply with the Company s QHSE Policy. By so doing, we believe we will create a professional QHSE culture and continuously improve our QHSE performance. The Board is pleased with the HSE records for 2008, during which there was no serious injury to personnel, environmental pollution or damage to property. Technology Investments Siem WIS The commercial product CircSub TM (Constant Circulation Device) has been delayed as a function of the implementation surveys been performed on four different platforms operated by StatoilHydro. To introduce the CircSub at the installation covered in the survey, technical changes have been implemented at the CircSub design. The co-operation between Siem WIS and StatoilHydro, which shall lead to an offshore pilot operation during 2009, is ongoing, and a nominated pilot well will be agreed later this year. The development of the other Siem WIS product portfolio is progressing, and initialization of the Riser Pressure Control Device, which is an important development contribution to perform managed pressure drilling from floaters, is expected to be done during Siem Offshore s accumulated investment in Siem WIS totals USD 11.4 million whereof USD 9.2 is recorded as intangible assets in the consolidated accounts. WellCem WellCem continues to pursue commercial applications for utilisation of its leak stop technology represented by the patented product ThermaSet. WellCem completed a new successful plugging of a leaking cement plug in an oil well in the North Sea. WellCem supplied a ThermaSet balanced plug for the tubing and annulus for a leaking cement plug in a well for the operators at the Greater Ekofisk Area. Siem Offshore s accumulated investment for 34% of the shares in WellCem totals USD 2.7 million and is recorded as investments in the consolidated accounts. Shareholders and Corporate Covernance Shareholder Information The Company s authorised share capital is USD 3,800, divided into 380,000,000 ordinary shares of a nominal value of USD 0.01 each. The issued share capital at 18 April 2009 is USD 2,538, divided into 253,891,866 shares. The shares of the Company are listed on the Oslo Stock Exchange with the ticker symbol SIOFF. The largest shareholder of the Company is Siem Industries Inc., which held 34% of the shares at 18 April Over the course of 2008 the share price fell from NOK 19.3 on the first day of trading to NOK 8.2 on the last. Corporate Governance The company has implemented guidelines for corporate governance based on the recommendations and guidelines given by the Oslo Stock Exchange. The purpose of these guidelines is to clarify the division of roles between shareholders, the General Meeting, Board of Directors and day-today management beyond what follows from the legislation. A detailed summary of our corporate governance principles may be found in a separate section of this report. The Working Environment and the Employees The Company, and its subsidiaries, had 158 onshore employees at its offices in Norway, Brazil and the Cayman Islands, of which 53 were women. At year-end, a total of 545 offshore employees were employed on vessels, of which 23 were women. The Company aims to be a workplace with equal opportunities. The Company aims to avoid gender discrimination regarding salary, promotion and recruiting. However, by the nature of the business the Company has clearly a majority of male employees for the offshore positions. The Company will continue to recruit women for both onshore and offshore positions. The sick leave for the onshore and offshore employees was 5.8% and 7.6%, respectively. Ten

11 No incidences or reporting of work related accidents resulting in significant material damage or personal injury occurred during the year. The development of the onshore and offshore organisations continues in order to prepare for the increased future activities. Site management teams consisting of captains, chief engineers and electricians are being employed to conduct the supervision during the outfitting phase. The site management teams will gradually increase during the outfitting phase and form the basis for the future offshore organisations for each vessel. Siem Offshore has entered into a long-term collaboration in Norway with Offshore Simulator Centre AS, Ålesund and the Ålesund University College for training and development of expertise for Siem Offshore crew. Offshore Simulator Centre will expand its simulator environment with the use of Siem Offshore s AHTS-vessel design. This simulator also involves a new bridge concept, Rolls-Royce winch system, Kongsberg DP system and the fitting of a new extensive deck arrangement from Triplex. Siem Offshore s crew will have the opportunity to train in a simulator environment equivalent to what they will meet on board. Siem Offshore has also been selected to participate in the Offshore Simulator Centre s development of a new training concept for winch operation together with two other vessel owners and Rolls-Royce Marine AS, as well as engage in relevant research projects in collaboration with other participants within the industry. The knowledge of the crew is vital for a safe and secure operation of any vessel. Such knowledge includes good seamanship in general, an overall understanding of the demanding assignments to be executed, knowledge of capabilities and limitations of the vessel and equipment, extensive experience, and understanding and respect of circumstances that may affect safe execution of tasks. Siem Offshore contributes to the reinforcement of good training in the industry and support the development of suitable training concepts. The long-term collaboration with Offshore Simulator Centre and Ålesund University College is an initiative to safeguard both. External Environment The Company is in compliance with environmental regulations imposed by relevant national authorities and international conventions. There is always a risk that bunkers and oils onboard vessels may cause pollution to the environment and that collision and serious breakdowns of the vessels may occur. However, the Company has devised systems with the aim to prevent such incidents and to mitigate the damages should they occur. The Company did not experience material spills of fuel during the year and caused no environmental harm. Outlook The Company plans are based on the assumption that the oil price will remain at an average of USD 50 per barrel or above, for the years 2009 and Industry consensus is that the long term demand for global energy will increase despite any potential short term lulls. The need to drill for new oil and develop production is set to increase. The world finance crisis and the fall in the oil price may however have an impact on the demand for support vessels. Some operators will delay smaller projects. However, most of the large projects world wide is expected to proceed as planned. This was evident during 2008 where despite a significant increase in fleet size, owing to new vessels entering the market, fleet utilization remained at a steady high level. A large number of new vessels remain on order books and this may lead to an over-supply situation. Some vessel attrition can be expected, however, and we believe that more stringent requirements for technical competency and age of vessel will place Siem Offshore with its modern fleet of sophisticated vessels in a favourable position for tendering. New long and short term requirements for AHTS vessels and PSVs will favour new tonnage with high specifications. In addition to an active year in the North Sea, we are seeing increased activity in areas such as South America and West Africa. Some of these areas present new challenges for the Company, but it is our opinion that these must be areas of focus as exploration and production activity has a large growth potential there. In terms of operational activity, we expect to see a shift towards production projects as oil companies attempt to capitalize on existing assets and proven reserves. The North Sea spot market in 2008 yielded exceptionally high day rates during the third quarter preceding a steep reduction in the fourth. Seasonal variations are always expected in this market. We are confident that the market will provide a profitable return for Siem Offshore in Siem Offshore Inc., Annual Report 2008 Eleven

12 18 April 2009 Kristian Siem Michael Delouche Richard England Chairman Board member Board member (Sign.) (Sign.) (Sign.) Bjørn Johansen David Mullen Ulf Sørdal Board member Board member Board member (Sign.) (Sign.) (Sign.) Terje Sørensen Chief Executive Officer (Sign.) Twelve

13 Income Statement PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Note Operating revenue 4, Operating expenses 8,18,19, Depreciation and amortization Gain/(loss) on sale of assets Gain on sale of interest rate derivatives (CIRR) Gain/(loss) on currency exchange forward contracts Operating profit FINANCIAL INCOME AND EXPENSES Financial income Financial expenses Result from associated companies 7, Net currency gain/(loss) Net financial items Profit/(loss) before taxes Tax expense Net profit/(loss) Attributable to minorities Attributable to equity shareholders Average number of outstanding shares (1,000) Earnings per share Diluted earnings per share Siem Offshore Inc., Annual Report 2008 Thirteen

14 Balance Sheet Assets PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Note NON-CURRENT INTANGIBLES 0 0 Deferred tax asset Intangible assets Total non-current intangibles NON-CURRENT TANGIBLES Vessels under construction 5, Vessels and equipment Capitalised project costs Total non-current tangibles FINANCIAL NON-CURRENT ASSETS Investment in subsidiaries Investment in associated companies CIRR Loan deposit Long-term receivables Total financial non-current assets Total non-current assets CURRENT ASSETS Accounts receivable Other short-term receivables Inventories Non-current asset held for sale Derivative financial instruments 15, Cash Total current assets TOTAL ASSETS Fourteen

15 Balance Sheet Equity & Liabilities PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Note EQUITY Paid-in capital Other reserves Retained earnings Shareholders' equity Minorities Total equity LIABILITIES Non-current liabilities Borrowings falling due after 1 year CIRR Loan Tax liabilities Deferred CIRR Pension liabilities Other non-current liabilities Total non-current liabilities Current liabilities Accounts payable Borrowings falling due within 1 year Forward currency contracts 15, Payable taxes Other current liabilities 13, Total current liabilities Total liabilities TOTAL EQUITY AND LIABILITIES Secured debt Guarantees Siem Offshore Inc., Annual Report 2008 Fifteen

16 Cash Flow Statement PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Note CASH FLOW FROM OPERATIONS Profit before taxes, excluding interest Interest paid Paid taxes in the period Result from associated companies Gain/(loss) on sale of assets Depreciation and amortization Effect of unreal. currency exchange forward contracts Changes in short-term receivables and payables Other changes Net cash flow from operations CASH FLOW FROM INVESTMENT ACTIVITIES Interest received Investment in fixed assets Loan to shipyard Investment in shares Received from sale of fixed assets Dividend from associated companies Investments in associated companies Investments in subsidiaries Net cash flow from investment activities CASH FLOW FROM FINANCING ACTIVITIES Settlement for sale of interest rate derivatives Received from raising of new equity Received from raising of new long-term borrowing Repayment of long-term borrowing Net cash flow from financing activities Effect of exchange rate differences Net change in cash Cash at bank as of Cash at bank as of Sixteen

17 Statement of Changes In Equity (Amounts in USD 1,000) Total Number Of Shares Share Capital Share Prem. Reserves Issue Cost CONSOLIDATED Equity as of Share issue July Share issue December Share issue to certain key employee Share issues in partially owned subsidiaries Other items The year's net profit Effect of exchange rate differences Equity as of Share issues in partially owned subsidiaries Other items -9 The year's net profit Effect of exchange rate differences Equity as of Share issues in partially owned subsidiaries New equity Siem Offshore Meling DA New equity Siem WIS AS New equity Næringsbygg Idrettsveien 13 DA Total PARENT COMPANY Equity as of Share issue July Share issue December Share issue to certain key employee The year's net profit Equity as of Other items -9 The year's net profit Effect of exchange rate differences Equity as of Siem Offshore Inc., Annual Report 2008 Seventeen

18 Exchange Rate Differences Other Reserves Retained Earnings Shareholders' Equity Minority Interest Total Equity Eighteen

19 Notes to the Accounts Note 1 - Accounting Principles 1.1 General Siem Offshore Inc. is registered in the Cayman Islands and is listed on the Oslo Stock Exchange. All references to Siem Offshore Inc., the Group and the Company shall mean Siem Offshore Inc. and its subsidiaries and associates unless the context indicates otherwise. All references to Parent Company shall mean Siem Offshore Inc. as a stand-alone company unless the context indicates otherwise.siem Offshore Inc was established on 1 July 2005 through a restructuring (spin-off) from the company Subsea 7 Inc. Siem Offshore Inc., Annual Report 2008 Nineteen

20 1.2 Basis of preparation The consolidated financial statements and stand alone financial statement for the parent company are prepared in accordance with International Financial Reporting Standards( IFRS ), and International Financial Reporting Interpretations Committee ( IFRIC ) interpretations, endorsed by the European Union and the regulations of the Oslo Stock Exchange. As of 31 December 2008, there were no differences between these standards and International Financial Reporting Standards ( IFRS ), as issued by the International Accounting Standards Board, and the policies adopted by the Company. The consolidated financial statements have been prepared under the historical cost convention, as modified by fair value of non-current assets held for sale, and financial assets, including derivative instruments at fair value through profit or loss. The financial statements have been prepared under the assumption that the Company is a going concern. A summary of the principal accounting policies applied in the preparation of these consolidated financial statements is set out below. The Financial statements are presented at and for the years ended December 31. All figures are in USD thousands unless otherwise clearly stated. USD is the functional and reporting currency for the Company. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company s accounting policies. The areas involving a higher degree of judgement or complexity or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed under Critical accounting estimates and judgements presented below. 1.3 Accounting policies (a) Interpretations effective in 2008 IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction, provides guidance on assessing the limit in IAS 19 on the amount of the surplus that can be recognised as an asset. It also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. This interpretation does not have any impact on the Company s financial statements, as the Company has a pension deficit and is not subject to any minimum funding requirements. IFRIC 11, IFRS 2 Group and treasury share transactions, provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent s shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. This interpretation does not have an impact on the Company s financial statements. (b) Standards and amendments early adopted by the group No standards have been early adopted by the company as per 31 December (c) Interpretations effective in 2008 but not relevant The following interpretation to publi-shed standards is mandatory for accounting periods beginning on or after 1 January 2008 but is not relevant to the Company s operations: IFRIC 12, Service concession arrangements ; and IFRIC 13, Customer loyalty programs. (d) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company The following standards and amendments to existing standards have been published and are mandatory for the Company s accounting periods beginning on or after 1 January 2009 or later periods, but the Company has not earlier adopted them: IAS 23 (Amendment), Borrowing costs (effective from 1 January 2009). The amendment requires an entity to capitalise borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (one that takes a substantial period of time to get ready for Twenty

21 use or sale) as part of the cost of that asset. The option of immediately expensing those borrowing costs will be removed. The Company will apply IAS 23 (Amendment) prospectively from 1 January The amendment will have a significant impact on the Company s result IAS 1 (Revised), Presentation of financial statements (effective from 1 January 2009). The revised stadard will prohibit the presentation of items of income and expenses (that is, non-owner changes in equity ) in the statement of changes in equity, requiring non-owner changes in equity to be presented separately from owner changes in equity. All non-owner changes in equity will be required to be shown in a performance statement, but entities can choose whether to present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of comprehensive income). Where entities restate or reclassify comparative information, they will be required to present a restated balance sheet as at the beginning comparative period in addition to the current requirement to present balance sheets at the end of the current period and comparative period. The Company will apply IAS 1 (Revised) from 1 January It is likely that both the income statement and statement of comprehensive income will be presented as performance statements. IFRS 2 (Amendment), Share-based payment (effective from 1 January 2009). The amended standard deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. As such these features would need to be included in the grant date fair value for transactions with employees and others providing similar services, that is, these features would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. All cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Company will apply IFRS 2 (Amendment) from 1 January 2009, but is not expected to have a material impact on the group s financial statements. IAS 32 (Amendment), Financial instruments: Presentation, and IAS 1 (Amendment), Presentation of financial statements Puttable financial instruments and obligations arising on liquidation (effective from 1 January 2009). The amended standards require entities to classify puttable financial instruments and instruments, or components of instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation as equity, provided the financial instruments have particular features and meet specific conditions. The Company will apply the IAS 32 and IAS 1 (Amendment) from 1 January 2009, but is not expected to have any impact on the group s financial statements. IAS 27 (Revised), Consolidated and separate financial statements (effective from 1 July 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profit or loss. The Company will apply IAS 27 (Revised) prospectively to transactions with non-controlling interests from 1 January IFRS 3 (Revised), Business combinations (effective from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquire either at fair vale or at the non-controlling interest s proportionate share of the acquirer s net assets. All acquisition-related costs should be expensed. The Company will apply IFRS 3 (Revised) prospectively to all business combinations from 1 January IFRS 5 (Amendment), Non-current assets held for sale and discontinued operations (and consequential amendment to IFRS 1, First-time adoption ) (effective from 1 July 2009). The amendment is part of the IASB s annual improvements project published in May The amendment clarifies that all of a subsidiary s assets and liabilities are classified as held for sale if a partial disposal sale plan results in loss of control, and relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. A consequential amendment to IFRS 1 states that these amendments are applied prospectively from the date of transition to IFRSs. The Company will apply the IFRS 5 (Amendment) prospectively to all partial disposals of subsidiaries from 1 January IAS 23 (Amendment), Borrowing costs (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 Financial instruments: Recognition and measurement. This eliminates the Siem Offshore Inc., Annual Report 2008 Twenty-One

22 inconsistency of terms between IAS 39 and IAS 23. The Company will apply the IAS 23 (Amendment) prospectively to the capitalisation of borrowing costs on qualifying assets from 1 January IAS 28 (Amendment), Investments in associates (and consequential amendments to IAS 32, Financial Instruments: Presentation and IFRS 7, Financial instruments: Disclosures ) (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May An investment in associate is treated as a single asset for the purposes of impairment testing and any impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. The Company will apply the IAS 28 (Amendment) to impairment tests related to investment in subsidiaries and any related impairment losses from 1 January IAS 36 (Amendment), Impairment of assets (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January IAS 38 (Amendment), Intangible assets (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May A prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Company will apply the IAS 38 (Amendment) from 1 January 2009 with no expected write-off of prepayments of C500 to retained earnings. IAS 19 (Amendment), Employee benefits (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. IAS 37, Provisions, contingent liabilities and contingent assets, requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent. The Company will apply the IAS 19 (Amendment) from 1 January IAS 39 (Amendment), Financial instruments: Recognition and measurement (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May This amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge. The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading is also amended. This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profittaking is included in such a portfolio on initial recognition. The current guidance on designating and documenting hedges states that a hedging instrument needs to involve a party external to the reporting entity and cites a segment as an example of a reporting entity. This means that in order for hedge accounting to be applied at segment level, the requirements for hedge accounting are currently required to be met by the applicable segment. The amendment removes this requirement so that IAS 39 is consistent with IFRS 8, Operating segments which requires disclosure for segments to be based on information reported to the chief operating decision maker. Currently for segment reporting purposes, each subsidiary designates and documents (including effectiveness testing) contracts with group treasury as fair value or cash flow hedges so that the hedges are reflected in the segment to which the hedged items relate. This is consistent with the information viewed by the chief operating decision maker. See Note 3.1 for further details. After the amendment is effective, the hedge will continue to be reflected in the segment to which the hedged items relate (and information provided to the chief operating decisions maker) but the group will not formally document and test this hedging relationship. Twenty-Two

23 When remeasuring the carrying amount of a debt instrument on cessation of fair value hedge accounting, the amendment clarifies that a revised effective interest rate (calculated at the date fair value hedge accounting ceases) are used. The Company will apply the IAS 39 (Amendment) from 1 January 2009, which is not expected to have an impact on the the Company s income statement. IAS 1 (Amendment), Presentation of financial statements (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May The amendment clarifies that some rather than all financial assets and liabilities classified as held for trading in accordance with IAS 39, Financial instruments: Recognition and measurement are examples of current assets and liabilities respectively. The Company will apply the IAS 39 (Amendment) from 1 January It is not expected to have an impact on the Company s financial statements. There are a number of minor amendments to IFRS 7, Financial instruments: Disclosures, IAS 8, Accounting policies, changes in accounting estimates and errors, IAS 10, Events after the reporting period, IAS 18, Revenue and IAS 34, Interim financial reporting, which are part of the IASB s annual improvements project published in May 2008 (not addressed above). These amendments are unlikely to have an impact on the group s accounts and have therefore not been analysed in detail. IFRIC 16, Hedges of a net investment in a foreign operation (effective from 1 October 2008). IFRIC 16 clarifies the accounting treatment in respect of net investment hedging. This includes the fact that net investment hedging relates to differences in functional currency not presentation currency, and hedging instruments may be held anywhere in the Company. The requirements of IAS 21, The effects of changes in foreign exchange rates, do apply to the hedged item. The Company will apply IFRIC 16 from 1 January 2009, which is not expected to have a material impact on the Company s financial statements. (e) Interpretations and amendments to existing standards that are not yet effective and not relevant for the group s operations The following interpretations and amendments to existing standards have been published and are mandatory for the Company s accounting periods beginning on or after 1 January 2009 or later periods but are not relevant for the Company s operations: IFRIC 13, Customer loyalty programmes (effective from 1 July 2008). IFRIC 13 clarifies that where goods or services are sold together with a customer loyalty incentive (for example, loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. IFRIC 13 is not relevant to the Company s operations because none of the Company s companies operate any loyalty programmes. IAS 16 (Amendment), Property, plant and equipment (and consequential amendment to IAS 7, Statement of cash flows ) (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Entities whose ordinary activities comprise renting and subsequently selling assets present proceeds from the sale of those assets as revenue and should transfer the carrying amount of the asset to inventories when the asset becomes held for- sale. A consequential amendment to IAS 7 states that cash flows arising from purchase, rental and sale of those assets are classified as cash flows from operating activities. The amendment will not have an impact on the Company s operations because none of the group s companies ordinary activities comprise renting and subsequently selling assets. IAS 27 (Amendment), Consolidated and separate financial statements (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Where an investment in a subsidiary that is accounted for under IAS 39, Financial instruments: recognition and measurement is classified as held for saleheld for sale under IFRS 5, Non-current assets held for saleheld for sale and discontinued operations, IAS 39 would continue to be applied. The amendment will not have an impact on the Company s operations because it is the Company s policy for an investment in subsidiary to be recorded at cost in the standalone accounts of each entity. IAS 28 (Amendment), Investments in associates (and consequential amendments to IAS 32, Financial Instruments: Presentation and IFRS 7, Financial instruments: Disclosures ) (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Where an investment in associate is accounted for in accordance with IAS 39 Financial instruments: recognition and measurement only certain, rather than all disclosure requirements in IAS 28 need to be made in addition to disclosures required by IAS 32, Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures. The amendment will not have an impact on the Company s operations because it is the Company s policy for an invest- Siem Offshore Inc., Annual Report 2008 Twenty-Three

24 ment in an associate to be equity accounted in the Company s consolidated accounts. IAS 29 (Amendment), Financial reporting in hyperinflationary economies (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company s operations, as none of the Company s subsidiaries or associates operate in hyperinflationary economies. IAS 31 (Amendment), Interests in joint ventures (and consequential amendments to IAS 32 and IFRS 7) (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Where an investment in a joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, Financial instruments: Presentation and IFRS 7 Financial instruments: Disclosures. The amendment will not have an impact on the Company s operations as there are no interests held in joint ventures. IAS 38 (Amendment), Intangible assets, (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May The amendment deletes the wording that states that there is rarely, if ever support for use of a method that results in a lower rate of amortisation than the straight line method. The amendment will currently not have an impact on the Company s operations as all intangible assets are amortised using the straight line method. IAS 40 (Amendment), Investment property (and consequential amendments to IAS 16) (effective from 1 January 2009). The amendment is part of the IASB s annual improvements project published in May Property that is under construction or development for future use as investment property is within the scope of IAS 40. Where the fair value model is applied, such property is, therefore, measured at fair value. However, where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable. The amendment will not have an impact on the Company s operations, as there are no investment properties are held by the Company. IAS 20 (Amendment), Accounting for government grants and disclosure of government assistance (effective from 1 January 2009). The benefit of a below-market rate government loan is measured as the difference between the carrying amount in accordance with IAS 39, Financial instruments: Recognition and measurement, and the proceeds received with the benefit accounted for in accordance with IAS 20. The amendment will not have an impact on the Company s operations as there are no loans received or other grants from the government. The minor amendments to IAS 20 Accounting for government grants and disclosure of government assistance and IAS 29, Financial reporting in hyperinflationary economies IAS 40, Investment property and IAS 41, Agriculture, which are part of the IASB s which are part of the IASB s annual improvements project published in May 2008 (not addressed above). These amendments will not have an impact on the Company s operations as described above. IFRIC 15, Agreements for construction of real estates (effective from 1 January 2009). The interpretation clarifies whether IAS 18, Revenue, or IAS 11, Construction contracts should be applied to particular transactions. It is likely to result in IAS 18 being applied to a wider range of transactions. IFRIC 15 is not relevant to the Company s operations as all revenue transactions are accounted for under IAS 18 and not IAS Consolidation (a) Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Company s share of the identifiable net assets acquired is recorded as Twenty-Four

25 goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement. Identifiable assets consist of tangible assets and intangible assets other than goodwill. Inter-company transactions, intercompany balances and unrealized profit between group companies have been eliminated. Unrealized loss is eliminated, but considered an impairment indicator of the asset transferred. The minority interests in equity and in net results are reported separately in the consolidated financial statements. (b) Associated companies Associates are all entities over which the Company has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Company s investment in associates includes goodwill (net of any accumulated impairment loss) identified on acquisition. The share of earnings recorded in the consolidated financial statements are based on the after tax earnings of the associates. In the income statement, the share of earnings from associates is shown as a financial item. The Company s share of its associates post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Company s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognise further losses unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Company and its associates are eliminated to the extent of the Company s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been reconciled where necessary to ensure consistency with the policies adopted by the Company. 1.5 Classification of items in the financial statements Assets designated for long-term ownership or use and receivables falling due later than one year after drawdown have been recorded as long-term assets. Other assets are classified as current assets. Receivables are stated at par value less provision for doubtful accounts. Liabilities which fall due later than one year after the end of the accounting year are posted as long-term liabilities. Other liabilities are classified as current liabilities. 1.6 Segment reporting A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments. The Company is organized into five different divisions, named Supply/Crew fleet, MRSV, AHTS, Combat Management Systems, and Other, in which the Company operates. 1.7 Foreign currency translation (a) Functional and presentation currency Items included in the financial statements of each of the Company s entities are measured using the currency of the primary economic environment in which the entity operates ( the functional currency ). The consolidated financial statements are presented in USD, which is the Company s functional and presentation currency. All amounts in these financial statements are in USD 1,000 unless otherwise stated. (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Siem Offshore Inc., Annual Report 2008 Twenty-Five

26 The following exchange rates are used in 2008: (c) Group companies The results and financial position of all the group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: (i) assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; (ii) income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and (iii) all resulting exchange differences are recognised as a separate component of equity. In consolidation, exchange differences arising from the translation of the net investment in foreign operations and from borrowings and other currency instruments designated as hedges of such investments are taken to shareholders equity. When a foreign operation is sold, exchange differences that were recorded in equity are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign Average NOK (Norwegian krones): EUR (Euros): GBP (Pound Sterling): REAS (Brazilian Reals): entity are treated as assets and liabilities of the foreign entity and translated at the closing rate. 1.8 Fixed assets and maintenance costs Vessels are measured in the consolidated balance sheet at cost less accumulated depreciation and impairment loss. Depreciation is on a straight-line basis and determined by an estimate of the remaining useful economic life of the asset. Estimated scrap value is taken into account and reassessed at 31 December each year. The vessels presently owned by Siem Offshore are considered to have an economic life of 30 years. Other fixed assets are depreciated on a straight-line basis over the anticipated useful life. Each part of a fixed asset that is significant to the total cost of the asset is separately identified and depreciated over that component s useful lifetime. Components with similar useful lives will be included in one component. The Company has identified 5 significant components relating to their different types of vessels.in accordance with IAS 16 and the cost model, dry-dock costs are considered a separate component of the ships cost at purchase with a different pattern of benefits and, therefore, need to be amortised separately. Day-to-day maintenance costs are charged to the income statement during the financial period in which they are incurred. The cost of major renovations and periodic maintenance of vessels is capitalised and depreciated over the useful lifetime of the parts replaced. The useful life of the regular vessels docking expenses will normally be the period until next docking. The residual value and expected useful lifetime assumptions of fixed-assets are reviewed at each balance sheet date and, where they differ significantly from previous estimates, depreciation charges are changed accordingly. Vessels in the same business segments, as defined in IAS 14 Segment Reporting, are treated as one cashgenerating unit when determining the recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in operating profit. Dry-docking costs are capitalised and amortised over the period until the next scheduled dry-dock ranging from 2 to 3 years. The unamortised value of the previous dry-docking is decomposed from the purchase price when ships are acquired and amortized as described above. 1.9 Newbuild contracts Instalments on newbuild contracts are entered in the balance sheet as non-current assets. Costs related to the on-site supervision and other pre-delivery construction costs are capitalized per vessel Impairment of fixed assets Each year non-current assets are reviewed for impairment whenever events Twenty-Six

27 or changes in circumstances indicate that the carrying amount may not be recoverable. The asset s cash generating ability either through use or sale is reviewed and compared to the asset s carrying amount in the balance sheet. If the carrying amount is higher, the difference must be written off as an impairment loss. Fair value reduced by estimated sales costs is the amount achievable on sale to an independent third party. The recoverable amount is established individually for all assets. 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 the time and the risk specific to the asset that is considered impaired. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. Reversal of previously recognised impairment is limited to the amount the carrying value of the asset would have been had the initial impairment charge not taken place Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is charged against profits in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial yearend. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Intangible assets within indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis Financial assets The Company classifies its financial assets in the following categories: Financial assets at fair value, 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 and re-evaluates this designation at every reporting date. (a) Financial assets at fair value This category has two sub-categories: financial assets held for trading and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within 12 months of the balance sheet date. (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 balance sheet date. These are classified as non-current assets. Loans and receivables are classified as trade and other receivables in the balance sheet. (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 management intends to dispose of the investment within 12 months of the balance sheet date. Purchases and sales of financial assets are recognized on the trade-date, the date on which the Company 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 income statement. Financial assets are de-recognised when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Available-for-sale financial Siem Offshore Inc., Annual Report 2008 Twenty-Seven

28 assets and financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are 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 income statement within net gains (losses) in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Company s right to receive payment is established. The Company assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired Inventories Lubricating oil and bunkers inventories are valued at the lower of historical cost and market value applying the FIFO (first-in, first-out) principle. The Company makes inventory provisions based on an assessment of excess and obsolete inventories Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities on the balance sheet Accounts receivable Accounts receivable are reported at amortized cost. The interest factor is ignored if insignificant. In the case of objective evidence of a fall in value, the difference between reported value and the present value of the future cash flow is discounted with the original effective interest rate for the receivable and reported as a loss. Provisions for losses are recognised when there are objective indicators that the Company will not receive settlement in accordance with the original terms. Significant financial problems facing the customer, probability that the customer will go bankrupt or undergo financial restructuring, postponements and nonpayment are regarded as indicators that the receivables from customers must be written down Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. When the Company purchases its own shares, the consideration paid, including any directly attributable incremental costs (net of income taxes), is deducted from equity attributable to the Company s equity holders until the shares are cancelled Borrowings Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date Taxation Tax expense/benefit includes current taxes and the change in deferred taxes. Deferred income tax is provided for all temporary differences between the book value and the tax basis of assets and liabilities and for tax losses carried forward. Deferred tax assets made probable through prospective earnings that can be utilized against the tax reducing temporary differences are recognized as intangible assets. Deferred tax asset and deferred tax liability are recognised independently of when the differences will be reversed and, as a rule, at nominal value. Deferred tax asset and tax liability are measured on the basis of estimated future tax rate. Parts of the Company s activities within the Norwegian subsidiaries are structured within the regulations for the Norwegian Tonnage Tax System for shipping companies. The tax cost and deferred tax liability for its organized under this tax regime depend on the subsidiaries dividend policy and future estimated profits Pension costs and obligations The Company has a defined benefit plan for its employees in Norway. The pension scheme is financed through contributions to insurance companies or pension funds. A defined benefit plan defines the 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. Twenty-Eight

29 The liability recognised on the balance sheet relating to defined benefit plans is the net present value for the defined benefits on the balance sheet date less the fair value of the pension fund assets adjusted for unrecognised estimate deviations and costs relating to pension benefits earned from prior periods. The pension obligations are calculated annually by an independent actuary on the basis of a linear model. The net present value of the defined benefits is determined by discounting the estimated future payments based on the interest rate for Norwegian government bonds. Since Norwegian government bonds are not issued for terms exceeding 10 years, a supplement to this bond rate is calculated by means of estimation techniques to establish a discount rate that is approximately the same as the term of the pension obligation. Estimate deviations due to new information or changes in the actuarial assumptions in excess of 10% of the value of the pension fund assets or 10% of the pension obligations will be recognised in the profit and loss account over a period that corresponds to the employees expected remaining service lifetime. Changes in the pension plan s benefits are entered as an expense or income on a current basis in the profit and loss account, unless the rights in accordance with the new pension plan are contingent on the employee remaining in service for a period of time (accrual period). In this case the cost related to the change in benefits is amortised linearly over the accrual period Contingent liabilities and provisions The Company recognises provisions for any environmental improvements and legal requirements when: there is a legal or self-imposed obligation to do so as a result of earlier events, there is a preponderance of evidence that the obligation will be settled by a transfer of economic resources, and the size of the obligation can be estimated with an adequate degree of reliability. In cases where there are additional obligations of the same nature, the probability that the litigation will be settled will be assessed for the Company as a whole. Provisions for the Company are recognised even if the probability for settlement related to the Company s individual elements may be low. Provisions are measured as the net present value of the expected payments to redeem the obligation. A pre-tax discount rate is used that reflects the current market situation and risk specific to the obligation. An increase in the obligation as the result of a change in the time value is recognised as an interest cost Financial derivatives Siem Offshore enters into derivative instruments, primarily foreign currency contracts, to hedge the foreign currency rates. The criteria for qualifying as a hedge under IFRS are strict. The Company s foreign currency contracts do not qualify as hedging. The fair market value of these contracts is recorded as a receivable or liability and any change in the valuation is recognized in the profit and loss under Operating profit Revenue recognition The Company s activity is to employ different kind of offshore support vessels, such as PSVs, MRSVs, AHTSs, standby vessels, and crew boats.. In addition, the Company holds interests in two limited liability partnerships, owning one scientific core-drilling vessel and one well-stimulation vessel, respectively. In one of the subsidiaries of the Company, revenues are mainly generated from income from construction contracts. Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Company s activities. Revenue is shown net of value-added tax, withholding tax, returns, rebates and discounts and after elimination of sales within the Company. Revenue is recognised as follows: Charter rate contracts Revenue derived from charter hire contracts or other service contracts is recognised in the period that services are rendered at rates established in the relevant contracts. Certain contracts include mobilisation fees payable at the start of the contract. In cases where the fee covers a general upgrade of a rig or equipment which increases the value of the rig or equipment beyond the contract period, the fee is recognised as revenue over the contract period whereas the investment is depreciated over the remaining lifetime of the asset. In cases where the fee covers specific upgrades or equipment specific to the contract, the mobilisation fees are recognised as revenue over the estimated contract period. The related investment is depreciated over the estimated contract period. In cases where the fee covers specific operating expenses at the start of the contract, the fees are recognised in the same period as the expenses. Vessels without signed contracts in place at discharge have no revenue before a new contract is signed. Charter-related expenses incurred for vessels in the idle time are expensed. Revenues from time charters and bareboat charters accounted for as operating leases are recognised Siem Offshore Inc., Annual Report 2008 Twenty-Nine

30 rateably over the rental periods of such charters as service is performed. Construction contracts The Company follows the generally accepted practice of accounting for long-term construction, engineering and project management contracts on the percentage-of-completion basis as costs are incurred. Under this method, revenue and income is recognised as work progresses on the contract. For all contracts, no profit is recognised before the outcome of the contract can be measured reliably and, generally, this will mean no profit is recognised until progress has reached at least 20% of completion. The estimated cost used to determine profit at completion reflects all facts or occurrences expected to affect the final cost of the contract; therefore, the entire amount of any estimated contract loss is recognised when it first becomes evident. For projects that are assumed to result in a loss, the total estimated loss is recognized immediately. Interest income Interest income is recognised on a time-proportion basis using the effective interest method. When a receivable is impaired, the Company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. Dividend income Dividend income is recognised when the right to receive payment is established. Rendering of services Service revenue is generally recognised when a signed contract or other persuasive evidence of an arrangement exists, the service has been provided, the fee is fixed or determinable and collection of resulting receivables is reasonably assured. Other services are recognised on percentage-of-completion basis Use of estimates Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and are accounted for when estimates are changed. Actual results could differ from such estimates Earnings per share Earnings per share are calculated by dividing the net profit/loss for the Company by the weighted average number of outstanding shares over the period in question. Diluted earnings per share include the effect of the assumed conversion of potentially dilutive instruments such as stock options. The impact of share equivalents is computed using the treasury stock method for share options Cash flow statement The statement of cash flow is prepared in accordance with the indirect model Related party transactions All transactions, agreements and business activities with related parties are set on arm s length basis in a manner similar to transactions with third parties Events after balance sheet New information regarding the Company s financial position on balance sheet date is included in the accounts. Events occurring after balance sheet date which do not impact the Company s standing on the balance sheet date but which have a significant impact on future period are presented in the notes to the accounts Government grants Grants relating to net wages arrangement in Norway are recognised as a reduction of wage cost Exchange gain/loss account receivables and account payable All foreign exchange gains and losses related to account receivables and account payable are recognised in the income statement under net currency items Changes in Comparatives In the audited annual accounts for 2007 tax expense for 2007 was recorded at USD 1.9 million. The comparative accounts for 2007 have been revised to include a provision of net USD 12.6 million, which comprise a provision of USD 14 million for the years 2006 (immaterial amount) and 2007 and a deferred tax asset of USD 3.3 million which also is recognized in the balance sheet because it is made probable through prospective earnings that it can be utilized against tax reducing temporary differences. Net effect on the tax expenses for 2007 is an increase of USD 10.7 million, from USD 1.9 million to USD 12.6 million. These changes have been reported in the Third quarter 2008 Interim report of Siem Offshore inc. Basic and diluted earnings per share (EPS) has been reduced from 0.50 per share to 0.45 per share in 2007 due to the provision for payable taxes. Thirty

31 Note 2 - Financial Risk Management 2.1 Financial risk factors The Company is exposed to a variety of financial risks through its ordinary operations and debt financing. Such risks include foreign exchange risk, interest rate risk, credit risk and liquidity risk. To reduce and manage these risks, management reviews and assesses its primary financial and market risks. Once risks are identified, appropriate action is taken to mitigate the identified risk. The Company s risk management is exercised in line with guidelines approved by the Board. 2.2 Foreign exchange risks: USD is the functional and reporting currency for the Company. The Company operates internationally and is exposed to foreign exchange risks arising from various currency exposures primary with respect to NOK, GBP and EUR. Foreign exchange risks arise from future commercial transactions and recognized assets and liabilities. The Company had in 2008 and 2007 mainly USD, NOK, GBP and EUR revenues, and mainly USD and NOK expenses. Forward currency contracts are used to manage the imbalances between revenues and costs. The Company is exposed to foreign exchange risk of its subsidiaries, including the development of the Brazilian Real. The following table demonstrates the sensitivity to a reasonably possible change in exchange rates, with all other variables held constant, of the Company s profit and equity before tax. PARENT COMPANY Foreign exchange risk rate (10) (Amounts in USD 1,000) 10 % -10 % 2008 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset Cash and cash equivalent (3 499) - Accounts receivable (950) - Impact on finacial asset before tax (4 449) - Financial Liablities Accounts payable 921 (77) Derivates (29 022) Borrowings (1 471) Impact on finacial liabilities before tax (27 473) - Income statement Operating revenue (6 509) Operating expensen (1 292) Impact on operating result before tax (5 217) Total increase/decrease before tax (37 139) - Allocation per currency NOK (33 550) EUR (3 454) GBP 135 (135) Total increase/ decrease before tax (37 139) Siem Offshore Inc., Annual Report 2008 Thirty-One

32 CONSOLIDATED Foreign exchange risk rate (10) (Amounts in USD 1,000) 10 % -10 % 2008 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset Cash and cash equivalent (3 561) (2 457) Accounts receivable (1 571) (358) Impact on finacial asset before tax (5 132) (2 815) Financial Liablities Accounts payable (89) (241) Derivates (29 022) Borrowings (1 471) (5 277) Impact on finacial liabilities before tax (5 518) (27 462) Income statement Operating revenue (9 698) Operating expensen (5 990) Impact on operating result before tax (3 708) Total increase/decrease before tax (2 704) (36 302) Allocation per currency NOK (31 072) EUR (3 628) GBP (1 603) Total increase/ decrease before tax (36 302) Thirty-Two

33 PARENT COMPANY Foreign exchange risk rate (10) (Amounts in USD 1,000) 10 % -10 % 2007 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset Cash and cash equivalent (14 741) - Derivates (19 023) Accounts receivable (2 669) - Impact on finacial asset before tax (36 433) - Financial Liablities Accounts payable (619) Borrowings (2 232) Impact on finacial liabilities before tax (2 851) Income statement Operating revenue (7 680) Operating expensen (762) 762 Impact on operating result before tax (6 918) Total increase/decrease before tax (40 500) - Allocation per currency NOK (35 907) EUR (2 705) GBP (1 888) Total increase/ decrease before tax (40 500) Siem Offshore Inc., Annual Report 2008 Thirty-Three

34 CONSOLIDATED Foreign exchange risk rate (10) (Amounts in USD 1,000) 10 % -10 % 2007 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset Cash and cash equivalent (15 081) (1 764) Derivates (19 023) (502) Accounts receivable (2 672) (317) Impact on finacial asset before tax (36 776) (2 583) Financial Liablities Accounts payable (636) (146) Borrowings (2 232) (6 039) Impact on finacial liabilities before tax (2 868) (6 185) Income statement Operating revenue (10 219) Operating expensen (4 503) Impact on operating result before tax (5 716) Total increase/decrease before tax (3 583) (39 624) Allocation per currency NOK (34 761) EUR (2 921) GBP (1 943) Total increase/ decrease before tax (39 624) Thirty-Four

35 2.3 Credit risks Concentration risks: The Company trades with recognized, creditworthy third parties. Receivable balances are monitored on an ongoing basis with the result that the Company s exposure to bad debt is limited. Below, we present a table showing the concentration risks for 2007 and PARENT COMPANY CONSOLIDATED USD % of total (Amounts in USD 1,000) USD % of total Receivables at % 1 to 5 largest % % 6 to 10 largest % % Others % ,0 % Total accounts receivables % USD % of total (Amounts in USD 1,000) USD % of total Receivables at % 1 to 5 largest % % 6 to 10 largest % % Others % % Total accounts receivables % Siem Offshore Inc., Annual Report 2008 Thirty-Five

36 Trade and receivables: Below we show an aging analysis of the outstanding receivables by year end 2007 and 2008: PARENT COMPANY CONSOLIDATED USD % of total (Amounts in USD 1,000) USD % of total Aging at % Up to 1 month % % 1-4 months % % More than 4 months % % Total accounts receivables % USD % of total (Amounts in USD 1,000) USD % of total Aging at % Up to 1 month % % 1-4 months % % More than 4 months % % Total accounts receivables % The carrying amounts of the Company s accounts receivables are denominated in the following currencies: PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Currency USD NOK EUR GBP Other The maximum exposure to credit risk at the reporting date is the carrying value of each class of accounts receivables mentioned above. Thirty-Six

37 2.4 Cash flow, fair value interest risk: The Company is financed by debt and equity. If the Company fails to repay or refinance its loan facilities, additional equity financing may be required. There can be no assurance that the Company will be able to repay its debts or extend their re-payment schedule through refinancing of the loan agreements or not experience net cash flow shortfalls exceeding the Company s available funding sources or to comply with a minimum cash requirements, nor can there be any assurance that the Company will be able to raise new equity, or arrange new borrowing facilities, on favourable terms and in amounts necessary to conduct its ongoing and future operations, should this be required. In the event of insolvency, liquidation or similar event relating to a subsidiary of the Company, all creditors of such subsidiary would be entitled to payment in full out of the assets of such subsidiary before the Company, as a shareholder, would be entitled to any payments. Defaults by, or the insolvency of, a subsidiary of the Company could result in the obligation of the Company to make payments under parent company guarantees issued in favour of such subsidiary. The Company is moreover exposed to changes in interest rates, which may affect the Company s financial results. These risks are mainly related to the Company long term borrowings with floating interest rates. Further details of the Company s borrowings are set out in Note 12. The Company has not significant interest bearing assets other cash and cash equivalents therefore the Company s income and operating cash flows are substantially independent of changes in market interest rates. Cash and cash equivalents are invested for short maturity periods, generally less than one week, which mitigates the potential interest rate risk. The following tables demonstrate the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Company s profit before tax and equity. PARENT COMPANY (Amounts in USD 1,000) Interest rate risk (IR) -1 % 1 % 2008 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset CIRR Loan deposit* Cash and cash equivalent (363) 363 Impact on finacial asset before tax (363) 363 Financial Liablities Borrowings (2 228) CIRR loan * Impact on finacial liabilities before tax (2 228) - Total increase/decrease before tax (1 865) - The table shows the impact in Profit and Equity when interest rate are assumed. *= Change in interest rate has no impact on the CIRR Loan deposit and CIRR Loan because of same amount asset and liabilities and the interest is fixed. Siem Offshore Inc., Annual Report 2008 Thirty-Seven

38 CONSOLIDATED (Amounts in USD 1,000) Interest rate risk (IR) -1 % 1 % 2008 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset CIRR Loan deposit* Cash and cash equivalent (734) 734 Impact on finacial asset before tax (734) 734 Financial Liablities Borrowings (2 787) CIRR loan * Impact on finacial liabilities before tax (2 787) - Total increase/decrease before tax (2 053) - The table shows the impact in Profit and Equity when interest rate are assumed. *= Change in interest rate has no impact on the CIRR Loan deposit and CIRR Loan because of same amount asset and liabilities and the interest is fixed. Thirty-Eight

39 PARENT COMPANY (Amounts in USD 1,000) Interest rate risk (IR) -1 % 1 % 2007 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset CIRR Loan deposit* Cash and cash equivalent (1 518) Impact on finacial asset before tax (1 518) Financial Liablities Borrowings (2 042) CIRR loan * Impact on finacial liabilities before tax (2 042) - Total increase/decrease before tax (524) - The table shows the impact in Profit and Equity when interest rate are assumed. *= Change in interest rate has no impact on the CIRR Loan deposit and CIRR Loan because of same amount asset and liabilities and the interest is fixed. Siem Offshore Inc., Annual Report 2008 Thirty-Nine

40 CONSOLIDATED (Amounts in USD 1,000) Interest rate risk (IR) -1 % 1 % 2008 Carrying amount Profit Movements in Equity Profit Movements in Equity Financial Asset CIRR Loan deposit* Cash and cash equivalent (1 883) Impact on finacial asset before tax (1 883) Financial Liablities Borrowings (2 695) CIRR loan * Impact on finacial liabilities before tax (2 695) - Total increase/decrease before tax (812) - The table shows the impact in Profit and Equity when interest rate are assumed. *= Change in interest rate has no impact on the CIRR Loan deposit and CIRR Loan because of same amount asset and liabilities and the interest is fixed. Forty

41 Siem Offshore Inc., Annual Report 2008 Forty-One

42 2.5 Liquidity risk: The Company has substantial commitments in the newbuilding program in the years ahead. The executive management and Board are focused on managing the liquidity risk, and monitor its risk to a shortage of funds by closely monitoring the projected cash flow from operations, financial expenses, and its capital expenditure program in particular related to above mentioned newbuilding program. The Company may require additional capital in the future due to unforeseen liabilities or in order for it to take advantage of business opportunities. There can be no assurance that Company will be able to obtain necessary financing in a timely manner on acceptable terms. Future share issues may result in the existing shareholders of Siem Offshore sustaining dilution to their relative proportion of the equity in the Company. The table below summarizes the maturity profile of the Company s financial liabilities. CONSOLIDATED 2008 Less than 3 months 3 to 12 months 1 to 4 years 5 years and thereafter Interest bearing loans and borrowings Trade and other payables Total Total 2007 Interest bearing loans and and borrowings Trade and other payables Impact on finacial liabilities before tax Yard instalments falling due over the next 5 years 2008 Yard instalments falling due Yard instalments falling due Forty-Two

43 PARENT COMPANY 2008 Less than 3 months 3 to 12 months 1 to 4 years 5 years and thereafter Interest bearing loans and and borrowings Trade and other payables Total Total 2007 Interest bearing loans and and borrowings Trade and other payables Impact on finacial liabilities before tax Yard instalments falling due over the next 5 years 2008 Yard instalments falling due Yard instalments falling due Capital risk management The Company aims to obtain long-term financing supported by long-term contracts and thereby reduce the frequency and risk associated with refinancing of loans. Long-term charter parties will also enable higher degree of debt financing. Based on the current capital structure, the Company will pursue a high level of debt financing for its new buildings. The Company was granted debt financing from Eksportfinans ( Norwegian export credit institution for Export Financing) prior to ordering of vessels at Norwegian yards. The debt financing from Eksportfinans is for a maximum of 80% of the project cost for each vessel and subject to satisfactory guarantees. The Norwegian Guarantee Institute for Export Credits (GIEK) has confirmed that it is positive to issue guarantees in favour of Eksportfinans for the relevant vessels, subject to participation by commercial banks on a pari-passu basis. The Company applied in 2008 for guarantees for three vessels scheduled for delivery during 1st half of 2009, and a 12 years loan and guarantee facility of USD 112 million was entered into in January 2009 for such vessels. The loan and guarantee facility is for 60% of the project cost for each vessel. The Company will in 2009 proceed with the debt financing for the remaining vessels under construction at Norwegian yards. 2.7 Risks related to loan agreements, restrictions on dividends and distribution The Company s current and future loan agreements may include terms, conditions and covenants which impose restrictions on the operations of the Company. These restrictions may negatively affect the Company s operations, hereunder, but not limited to, the Company s ability to meet the fierce competition in the market in which it operates. 2.8 Risks related to possible tax liabilities The Company will seek to optimise its tax structure to minimise withholding taxes when operating vessels abroad, avoiding double taxation, and minimising corporate tax paid by optimally making use of the shipping taxation rules that applies. It is, however, a challenging task to optimise taxation, and there is always a risk that the Company may end up paying more taxes than the theoretical minimum, which may in turn affect the financial results negatively. Siem Offshore Inc., Annual Report 2008 Forty-Three

44 Note 3 - Critical Accounting Estimates And Judgements The preparation of financial statements in conformity with generally accepted accounting principles under IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as information on contingent assets and latent obligations on the reporting date, including income and expenses for the reported period. The final outcomes may deviate from the estimates. Certain amounts included in or that have an effect on the accounts and the associated notes require estimation, which in turn entails that the Company must make assessments related to values and circumstances that are not known at the point in time when the accounts are prepared. A significant accounting estimate can be defined as an estimate that is important to provide a correct picture of the Company financial position, which is at the same time the result of difficult, subjective and complex assessments performed by the management. Such estimates are often uncertain by nature. The management evaluates such estimates continuously based on historical data and experience, and by consultation with experts, trend analyses and other methods that are considered relevant for the individual estimate. Estimates and assessments that can have a significant impact on the accounts are listed below. a) Vessels - Economic life The level of depreciation is dependant upon the estimated economic life of the vessels. The estimate is based on historical data and experience related to the vessels that are included in the Company. The estimate is reassessed annually. A change in the estimates will affect depreciation in future periods. - Residual value at the end of the economic life The level of depreciation is dependant on the estimated residual value on the balance sheet date. The anticipated residual value is based on knowledge of the scrap value of vessels. The scrap value is dependent on the price of steel. The scrap value estimates is subject to an annual reassessment. - Write-downs On the balance sheet date the Company has assessed whether there are any indications that it may be necessary to write down a vessel. When such indications exist, the recoverable value of the vessel is estimated, and the vessel s value is written down to the recoverable amount. The recoverable amount for vessels is estimated by means of broker estimates or, if a vessel is fixed on a long contract, by calculating the discounted value of the vessels cash flows based on an estimated discount rate. b) Market value of derivatives and financial assets available for sale. All derivatives, including financial assets available for sale, are recognised on the balance sheet at market value. The market value of derivatives is typically based on an expected future performance and is calculated by means of complicated valuation models. The estimates are based on the information available on the balance sheet date and will be influenced by changes in the interest rates, foreign currency exchange rates and other input for the calculations. c) Pension obligations TThe accounting of defined benefit plans is a complex area since it requires the preparation of estimates for both actuarial and economic assumptions. In addition, the liabilities are measured based on the present value since the benefits are paid out many years after the employees have made their contributions and earned their pension rights. The Company uses the guidelines published in a discussion memo from the Norwegian Accounting Standards Board, November The calculation of pension obligations is mainly influenced by the discount rate assumed. The discount rate is based on a ten-year government bond in Norway and is adjusted for the length of the pension obligation. d) Recognition of purchase cost for newbuildings on the balance sheet Only purchase cost that are directly related to the asset under construction may be recognised on the balance sheet. The term directly related to requires the use of judgement for several costs that are relevant to construction to determine whether costs shall be recognised on the balance sheet or as an expense. e) Consolidated accounts All significant investments in shares and units must be classified as a subsidiary, joint venture or associated company in order to prepare the consolidated accounts. This classification is linked to the degree of control that the Company has over the individual company. An evaluation of the degree of control requires the use of judgment for a number of parameters. Forty-Four

45 Note 4 - Segment Reporting PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Revenue by business area PSV/crew vessels MRSV Combat Management Systems Other Total Depreciation by business area PSV/crew vessels MRSV Other Total EBIT by business area PSV/crew vessels MRSV Combat Management Systems Other Total Assets PARENT COMPANY Liabilities Assets / liabilities by business area / capital expenditures Capital expenditure Assets Liabilities CONSOLIDATED Capital expenditure PSV/crew vessels MRSV AHTS vessels Combat Management Systems Other Total All AHTS vessels are scheduled for delivery during 2009 and The Company operates in the North Sea, North/South America and in the Far East. The Company do not report its activities into geographical regions in the management reporting. Other assets include current assets, financial non-current assets and non-current intangibles. Other liabilities include all liabilities except of liabilities secured in vessel. Siem Offshore Inc., Annual Report 2008 Forty-Five

46 Note 5 - Property, Plant & Equipment PARENT COMPANY CONSOLIDATED Vessel under construction Vessels and equipment (Amounts in USD 1,000) Vessel under construction Vessels and equipment Purchase cost per Capital expenditure (62 226) Vessels delivered in 2007 ( ) The year's disposal at cost 0 (19 046) 0 0 Effect of exchange rate differences Purchase cost per (3 763) Accumulated depreciation per (8 326) 0 (12 724) The year's depreciation 0 (17 097) 0 0 The year's disposal of acc. depreciation (16 487) Acc. depreciation per (15 165) Net book value per Purchase cost per Capital expenditure (66 303) Vessels delivered in 2008 (66 303) (13 018) (1 792) The year's disposal at cost (13 018) (1 996) 0 0 Effect of exchange rate differences 0 (17 349) Purchase cost per (16 487) Accumulated depreciation per (15 165) 0 (24 926) The year's depreciation 0 (30 785) 0 0 The year's disposal of acc. depreciation (41 413) Acc. depreciation per (45 927) Net book value per Forty-Six

47 The vessels presently owned by Siem Offshore are considered to have an economic life of 30 years. The vessels are divided into the following components and lifetime: Component: Percentage of total Economic life: Hull % 30 years Cargo equipment % 30 years Marine equipment % 15 years Crew equipment 9.00 % 15 years Engine % 30 years Engine system 6.00 % 30 years Combined sewerage system % 30 years Docking 2.5 years Equipment 3 years At the Company has assessed whether there are any indications that it may be necessary to write down a vessel. The financial crises has obviously had an impact on the valuations of vessels and newbuildings. For that reason management has made some analysis to estimate the recoverable values. This estimate is calculated by means of broker estimates. Estimated recoverable values are compared against carrying amounts in the balance sheet, and support that there is no requirement for write off as an impairment loss. The intangible assets recorded at USD 9,232 per 31 December 2008 are related to Siem WIS AS patented technology for the drilling industry. Siem WIS is developing a new Drillability technology for complex low/high pressure reservoirs. By combining Siem WIS technologies, the future potential for extended drilling and methods is enabled. At the same time, the solutions enable a safer, and more efficient, drilling and well maintenance service. Asset under developing are not depreciated. Analysis made by management based on future earnings ability indicates no impairment of the activated asset under developing. The balance of capitalised project costs was USD 1,206 per 31 December Such expenditures relates to specific contracts for the Brazilian crew/supply fleet. The costs are amortised over the term of the specific charter contracts. Total charter amortisation in 2008 was USD 1,295, and was included in deprecation and amortization expense. Siem Offshore Inc., Annual Report 2008 Forty-Seven

48 Forty-Eight

49 Note 6 - Investment in Subsidiaries (Amounts in USD 1,000) Company name Siem Offshore AS Siem Offshore Invest AS Siem Offshore Rederi AS Profit and loss account Operating revenues Operating expenses EBITDA Depreciation and Amortisation Gain on sale Impairment Operating profit (EBIT) Net financial items Taxes The year's net profit Financial assets Current assets Total assets Equity Provisions Non-current liabilities Current liabilities Total liabilities Total equity and liabilities Siem Offshore Inc., Annual Report 2008 Forty-Nine

50 Siem Wis AS Siem Consub SA Siem Offshore US Inc Other Total Fifty

51 Company Registered office Revenue Share Siem Offshore AS Kristiansand, Norway % Siem Offshore Invest AS Kristiansand, Norway % Siem Offshore Rederi AS Kristiansand, Norway % Siem WIS AS Bergen, Norway % Siem Consub SA Rio de Janeiro, Brazil % Siem Offshore US Inc Delaware, USA % Siem Supply Inc Cayman Islands % Siem AHTS Pool Inc Cayman Islands % DSND Subsea Ltd London, England % Arcade Offshore BV Amsterdam, The Netherlands % Total value recorded in the balance sheet of the parent company In addition to companies directly owned by the parent company, the following subsidiaries from part of the Company: Company Registered office Share and voting rights Norsul Offshore Inc Panama City, Panama 100 % Consub Delaware LLC Delaware, USA 100 % Aracaju Serviços Auxiliares Ltda Aracaju, Brazil 100 % Rovde Supply AS Vanylven, Norway 100 % Ocean Commander AS Vanylven, Norway 100 % Siem Offshore Crewing AS Vanylven, Norway 100 % Siem Shipping AS Kristiansand, Norway 100 % Siem Meling Offshore DA Stavanger, Norway 51 % Næringsbygg Industriveien 13 DA Fjell, Norway 95 % Due to a reduction of capital of GBP 11.5 million in DSND Subsea Ltd with pay back to the share holder, the carrying value in the balance sheet is reduced correspondingly. Siem Offshore Inc., Annual Report 2008 Fifty-One

52 Net income Voting rights Cost price Book value Book equity % % % % % % % % % % Fifty-Two

53 Note 7 - Investment in Associated Companies Figures for associated companies included in the consolidated accounts based on the equity accounting (Amounts in USD 1,000) Company name Overseas Drilling Ltd. Wellcem AS PR Tracer Offshore ANS Profit and loss account Operating revenues Operating expenses EBITDA Depreciation and Amortisation Operating profit (EBIT) Net financial items The year's net profit after tax Siem Offshore s share of net profit Adjustments consolidated accounts This year`s share of net profit after tax Balance sheet Intangible assets Tangible assets Financial assets Current assets Total assets Equity Provisions Non-current liabilities Current liabilities Total liabilities Total equity and liabilities Siem Offshore's share of booked equity Siem Offshore Inc., Annual Report 2008 Fifty-Three

54 KS Big Orange XVIII Ocean Commander KS Rovde Ind.park AS Luster Mek. Ind. AS Total Fifty-Four

55 2008 (Amounts in USD 1,000) Company name Overseas Drilling Ltd. Wellcem AS PR Tracer Offshore ANS Added/reduced in the period Adjustments IFRS and fair value in excess of book value for vessel and goodwill as of Net book value in Siem Offshore as of Ownership interest % % % Specification of changes net book value in Siem Offshore's accounts Net book value as of Investment in associated companies This year's share of net profit Adjustments consolidated accounts Dividends Effect of exchange rate differences Net book value as of Of which: Adjustments IFRS and fair value in excess of book value for vessel and goodwill as of Excess value Adjustment for depreciation IFRS -168 Amortisation of fair value in excess of book value for vessels and goodwill Effect of exchange rate differences -171 Fair value in excess of book value for vessels and goodwill as of Parent company is the owner of Overseas Drilling Ltd and Wellcem AS. Net result for 2008 is USD -1,035. Booked value in the parent company of USD 9,065 include an intercompany gain on USD 1,500. Company name Registered office Consolidated as Overseas Drilling Ltd. Monrovia, Liberia Equity accounting PR Tracer Offshore ANS Lysaker, Norway Equity accounting KS Big Orange XVIII Lysaker, Norway Equity accounting Ocean Commander KS Oslo, Norway Equity accounting Rovde Industripark AS Vanylven, Norway Equity accounting Wellcem AS Trondheim, Norway Equity accounting Luster Mekaniske Industri AS Gaupne, Norway Equity accounting Kenny Seateam Ltd. London, England Cost accounting Total Siem Offshore Inc., Annual Report 2008 Fifty-Five

56 KS Big Orange XVIII Ocean Commander KS Rovde Ind.park AS Luster Mek. Ind. AS Total % % % % Owner interest Voting rights Paid in capital Issued, not paid in capital % % % % % % % % % % % % % % % % Fifty-Six

57 2007 (Amounts in USD 1,000) Company name Overseas Drilling Ltd. Ocean Carrier KS PR Tracer Offshore ANS Profit and loss account Operating revenues Operating expenses EBITDA Depreciation and Amortisation Gain on sale Impairment 0 0 Operating profit (EBIT) Net financial items Taxes 0 0 The year's net profit after tax Siem Offshore s share of net profit Share of net result not included Adjustments consolidated accounts This year`s share of net profit after tax Balance sheet Intangible assets Tangible assets Financial assets Current assets Total assets Equity Provisions Non-current liabilities Current liabilities Total liabilities Total equity and liabilities Siem Offshore's share of booked equity Siem Offshore Inc., Annual Report 2008 Fifty-Seven

58 KS Big Orange XVIII Ocean Commander KS Rovde Ind.park AS Luster Mek. Ind. AS Total Fifty-Eight

59 2007 (Amounts in USD 1,000) Company name Overseas Drilling Ltd. Wellcem AS PR Tracer Offshore ANS Added/reduced in the period Adjustments IFRS and fair value in excess of book value for vessel and goodwill as of Net book value in Siem Offshore as of Ownership interest % % % Specification of changes net book value in Siem Offshore's accounts Net book value as of Investment in associated companies This year's share of net profit Adjustments consolidated accounts Dividends Repayment of paid in capital ass. Comp Effect of exchange rate differences Net book value as of Of which: Adjustments IFRS and fair value in excess of book value for vessel and goodwill as of Excess value 0 Adjustment for depreciation IFRS 401 Amortisation of fair value in excess of book value for vessels and goodwill Effect of exchange rate differences 92 Fair value in excess of book value for vessels and goodwill as of Parent company is the owner of Overseas Drilling Ltd. Net result for 2007 USD is -1,564. Booked value in the parent company of USD 7,335 include an intercompany gain on USD 1,500. Company name Registered office Consolidated as Overseas Drilling Ltd. Monrovia, Liberia Equity accounting PR Tracer Offshore ANS Lysaker, Norway Equity accounting KS Big Orange XVIII Lysaker, Norway Equity accounting Ocean Commander KS Oslo, Norway Equity accounting Rovde Industripark AS Vanylven, Norway Equity accounting Luster Mekaniske Industri AS Gaupne, Norway Equity accounting Kenny Seateam Ltd. London, England Cost accounting Total Siem Offshore Inc., Annual Report 2008 Fifty-Nine

60 KS Big Orange XVIII Ocean Commander KS Rovde Ind.park AS Luster Mek. Ind. AS Total % % % % Owner interest Voting rights Paid in capital Issued, not paid in capital % % % % % % % % % % % % % % Sixty

61 Note 8 - Pension Costs and Obligations CONSOLIDATED (Amounts in USD 1,000) The amount recognised in the income statement is as follows; Service cost Interest cost Expected return on plan assets Amortisation of net actuarial loss/(gain) 10 3 Net periodic pension cost (See Note 19) The movement in the defined benefit obligation over the year is as follows; Beginning of year Current service cost Interest cost Actuarial loss/(gain) Payroll tax of employer contribution, assets Benefits paid Exchange differences End of year The movement in the fair value of plan assets of the year is as follows; Beginning of year Expected return on plan assets Actuarial loss/(gain) Employer contribution Benefits paid Exchange differences End of year Siem Offshore Inc., Annual Report 2008 Sixty-One

62 CONSOLIDATED (Amounts in USD 1,000) Present value of funded obligations Fair value of plan assets Unrecognised net actuarial loss/(gain) Present value of funded obligations Present value of unfunded obligations Liability in the balance sheet Financial assumptions: Discount rate 4.30 % 4.70 % Expected wage adjustment 4.50 % 4.50 % Expected pension increase 2.00 % 2.00 % Adjustm. of the basic National Insur. amount 4.25 % 4.25 % Expected return on funds 5.80 % 5.75 % Sixty-Two

63 Note 9 - Receivables PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) LONG-TERM RECEIVABLES 0 0 Seller credit Deposits Loan employees Other long term receivables Total long-term receivables OTHER SHORT-TERM RECEIVABLES Prepaid expenses Unbilled revenue Outstanding insurance claims Loan to shipyard * Prepaid income taxes and other taxes Accrued government grant - seamen Intercompany receivables Other short-term receivables Total other short-term receivables * The Company has provided a short term, subordinated loan, to a shipyard of NOK 160 million. The loan is at market rates for such loan and matures 30 June 2009, with borrower s options for extension until 31 December Note 10 - Restricted funds USD 16,228 of the Company cash balance was restricted funds of which USD 1,723 was for tax withholdings and USD 14,505 was security for bank guarantees and loans. USD 11,982 of the parent company cash balance was restricted funds for bank guarantees and loans. No funds were restricted for tax withholdings. Siem Offshore Inc., Annual Report 2008 Sixty-Three

64 Note 11 - Taxes (Amounts in USD 1,000) CONSOLIDATED Temporary differences Deferred tax Time frame Participation in limited liability companies Long Operating assets Long Special tax account Long Pension funds/obligations Long Other short-term differences Short Other long-term differences Long Net temporary differences as of Tax loss carried forward Basis for deferred tax (tax asset) Deferred tax (tax asset) (28%) Norway Deferred tax (tax asset) (34%) Brazil Deferred tax (tax asset) Deferred tax asset recognised in balance sheet as of There is no deferred tax (tax asset) in the parent company. Deferred tax assets in Norway are recognised as intangible assets because it is made probable through prospective earnings that it can be utilized against the tax reducing temporary differences. Ship-owning companies that adopted the new Norwegian tonnage tax regime in 2007, as an alternative to ordinary corporate taxation, must pay any deferred tax in annual instalments during a period of 10 years. The remaining one third of the untaxed profits will be waived by the tax authorities, unless distributed, if an amount equal to the related tax is spent on qualifying environmental investments within 15 years. The Norwegian Government had stated its intention that this arrangement should not create a tax liability, but the legislation and the secondary regulations issued by the Finance Ministry were not clear and the Company recognised a liability of NOK 17,6 million at 31 December The Norwegian Storting and Government further clarified the interpretation of the legislation during 2008, and based on this the Ministry of Finance acknowledged that there was a conflict between the transition rules enacted by the Storting, and secondary regulations issued by the Ministry of Finance. As a consequence of this the Ministry of Finance announced on 20 January 2009 that the 15 year time limit would be withdrawn so that no tax liability exists at This clarification means that the remaining one third of untaxed equity will not be taxed unless it is distributed. The liability of NOK 17.6 million (USD 3.1 million) has been derecognised at 31 December 2008 to equity. The tax liability that would arise on distribution according to the adjustment tax provisions due to distribution of untaxed profits can be avoided if an equal amount is spent on qualifying environmental investments before the profits are distributed. If an amount equal to the tax liability is invested in qualifying environmental measures the distribution will not provoke adjustment tax, unless the company is due to other distributions of untaxed profits in a position that provokes adjustment tax Sixty-Four

65 Tonnage tax regime in subsidiaries, as of Tax charge Environmental investments Paid Effect of exchange rate differences Total tonnage tax in subsidiaries, as of Total tax consolidated 2008 (Amounts in USD 1,000) Tonnage tax regime Other tax regime Total tax liabilities Long term tax liabilities falling due after 1 year Payable taxes falling due within 1 year Tax liabilities Tax expense 2008 Taxes payable Change in deferred tax/deferred tax asset Tax effect of environmental investments Over/under provisions in previous year Total Siem Offshore Inc., Annual Report 2008 Sixty-Five

66 Total tax consolidated 2007 (Amounts in USD 1,000) Tonnage tax regime Other tax regime Total tax liabilities Long term tax liabilities falling due after 1 year Payable taxes falling due within 1 year Tax liabilities Tax expense 2007 Taxes payable Change in deferred tax/deferred tax asset Tax effect of environmental investments Over/under provisions in previous year Total In the audited annual accounts for 2007 tax expense for 2007 was recorded at USD 1.9 million. The comparative accounts for 2007 have been revised to include a provision of net USD 12.6 million, which comprise a provision of USD 14 million for the years 2006 (immaterial amount) and 2007 and a deferred tax asset of USD 3.3 million which also is recognized in the balance sheet because it is made probable through prospective earnings that it can be utilized against tax reducing temporary differences. Net effect on the tax expenses for 2007 is an increase of USD 10.7 million, from USD 1.9 million to USD 12.6 million. These changes have been reported in the Third quarter 2008 Interim report of Siem Offshore inc. Basic and diluted earnings per share (EPS) has been reduced from 0.50 per share to 0.45 per share in 2007 due to the provision for payable taxes. Total tax parent company (Amounts in USD 1,000) Other tax regime Other tax regime Long term tax liabilities falling due after 1 year 0 0 Payable taxes falling due within 1 year Tax liabilities Tax expense Taxes payable Total Sixty-Six

67 Note 12 - Borrowings PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) (USD) Creditor / Guarantor Currency Facility Amount Drawn Amount Currency Drawn Amount USD HSH Nordbank AG USD HSH Nordbank AG - Working Capital Facility USD DvB Bank N.V. Nordic Branch GBP SpareBank1 SR-Bank NOK Total secured debt Banco Nacional Development Social USD Eksportfinans (CIRR loan) NOK Total USD Fees and expenses Total long-term debt including fees and expenses USD PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) (USD) Creditor / Guarantor Currency Facility Amount Drawn Amount Currency Drawn Amount USD HSH Nordbank AG USD HSH Nordbank AG - Working Capital Facility USD DvB Bank N.V. Nordic Branch GBP SpareBank1 SR-Bank NOK Total secured debt Banco Nacional Development Social USD Eksportfinans (CIRR loan) NOK Total USD Fees and expenses Total long-term debt including fees and expenses USD Siem Offshore Inc., Annual Report 2008 Sixty-Seven

68 2008 Fair value Interest rate Duration Instalments (Libor %, effective 4.62%) Quarterly instalments of USD 5, Quarterly instalments of USD 4,062 0 (Libor %, effective 4.62%) (Libor %, effective 6.80%) Semi annual instalments of GBP (Nibor %, effective 7.28%) Semi annual instalments of NOK 11, % (fixed) 2012 Semi annual instalments of USD % (fixed) 2019 Semi annually, 12 years Fair value Interest rate Duration Instalments (Libor %, effective 7.12%) Quarterly instalments of USD Quarterly instalments of USD (Libor %, effective 7.12%) (Libor %, effective 6.97%) Semi annual instalments of GBP (Nibor %, effective 5.49%) Semi annual instalments of NOK % (fixed) 2012 Semi annual instalments of USD % (fixed) 2019 Semi annually, 12 years Sixty-Eight

69 Siem Offshore Inc., Annual Report 2008 Sixty-Nine

70 PARENT COMPANY Instalments falling due over the next 5 years CONSOLIDATED Mortgage Other interest debt bearing debt Total and thereafter Total The Company had a further USD 30 million un-drawn under a USD 30 million Working Capital Facility and a NOK 226 million un-drawn under the NOK 595 million Term Loan Facility. The balance sheet value of assets mortgaged for own debt is USD 412 million. There is various covenants related to the Company and parent company s debt. The main covenants are equity ratio to total assets in excess of 25%, positive working capital and a certain amount of freely available cash and bank deposit balance. The Company and parent company are in compliance with the covenants as per CIRR loan (Both consolidated and parent company) Total CIRR loan commitment CIRR loan drawn at Commitment as of Prior to ordering vessels from Norwegian yards, the Company applied for fixed 12-year interest rate options related to the long-term financing of such vessels. The Company was granted such options for each of the relevant vessel by the Norwegian Export Credit Agency. During 2007, the Company sold the right to exercise such options to a first class international bank (the Bank ) in consideration for an up-front payment of USD 23.5 million. If the options for the fixed interest rates are exercised by the Bank, the Company will draw up to the equivalent of USD 733 million from the Norwegian Export Credit Agency. Any long-term loans drawn from the Norwegian Export Credit Agency will be placed as corresponding deposits in the Bank as financial security for any loans drawn. Recognition of the gain, related to each option, shall be recorded over the term of any drawn loans, or in whole if the relevant option is not exercised. Per 31 December 2008, the Bank has exercised options for loans of an equivalent USD 66 million, and USD 54 and USD 342 of the total up-front payment is recorded in the income statement for 2007 and 2008, respectively. During first quarter 2009, the Company has bought back options for loans of an equivalent USD 546 million. The remaining options held by the Bank represent loans of an equivalent USD 120 million and the remaining capitalised up-front payment is USD 7.7 million. Seventy

71 Remaining CIRR loan commitment Total Total The gains from the sale of the CIRR options will be recognized over the periods of the commitments and unamortised gain amount related to specific commitments will be recognized when, and if, the buyer elects not to exercise its draw rights related to such commitments. Unearned CIRR Beginning of year Gain on sale of CIRR Recognized in the profit and loss account Paid-back CIRR End of year Note 13 - Other Current Liabilities PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Non-interest-bearing short-term liabilities Social security etc Prepayment from customer Accrued interest Other accrued cost, mainly regarding operating expenses, vessels Intercompany liabilities Other current liabilities Total other current liabilities Other accrued cost include costs as accrued commission, salary, profit-split, project cost etc. Siem Offshore Inc., Annual Report 2008 Seventy-One

72 Note 14 - Related Party Transaction On 31 December 2008, the Company held USD 1,034 as a short-term loan to Rovde Industripark AS. Siem Offshore Invest AS, 100% subsidiary of the Company, owns 50% of Rovde Industripark AS. The purpose of the loan is to provide liquidity until Rovde Industripark AS has refinanced the amount through its bank. In 2008 the services of NOK 75 (2007: NOK 496) were purchased from an entity where one of the non-executive directors of the Company is holding an ownership interest. Services delivered are based on normal commercial terms and conditions. Siem Meling Offshore DA, 51% owned by the Company, held USD 2,195 as a short term liability and USD 284 as a long term liability from its partner in Siem Offshore Meling DA at 31 December A total of USD 148 was booked as interest cost during Siem Meling Offshore DA is also supported by administrative and operational corporate services supplied by the partner in Siem Offshore Meling DA. Booked administration fee amount to USD 636 and crew related cost amount to USD 5,596. Note 15 - Derivative Financial Instruments Assets (Liabilities) PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Liabilities Assets Liabilities Assets 0 0 Forward currency contracts - income (30 801) Forward currency contracts - cash flow (30 801) (30 801) Total derivative financial instruments (30 801) For further information see Note 28. Note Guarantees PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Contractual guarantees to Brazilian Navy (1) Contractual guarantees other Total guarantees (1) Guarantees issued by Siem Consub SA Seventy-Two

73 Note Commitments Capital expenditure contracted for at the balance sheet date, but not yet paid is as follows: PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Shipbuilding contracts with variations orders Instalments paid Unpaid instalments PARENT COMPANY Instalments falling due over the next 3 years CONSOLIDATED (Amounts in USD 1,000) Total The Company has entered into contracts with Norwegian yard for the construction of ten large Anchor Handling Tug Supply vessels and two multipurpose ROV support vessels. The Company has also, through the 51% owned partnership Siem Meling Offshore DA, entered into a contract with Eidsvik Skipsbyggeri AS for the outfitting of a large-size platform supply vessel. The Company s subsidiary, Siem Consub SA, has entered into contracts for the building of two fast supply vessels and two fast crew boats. The company and the yard agreed in March 2009 to cancel shipbuilding contracts for two large Anchor Handling Tug Supply vessels. Following the cancellation the future yard instalments is reduced by NOK 1.2 billion. Note 18 - Operating Expenses PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Vessels crew expenses Other vessels operating expenses General and administration Total operating expenses Siem Offshore Inc., Annual Report 2008 Seventy-Three

74 Note 19 - Salaries and Wages, Number of Employees, etc. CONSOLIDATED (Amounts in USD 1,000) Personnel expenses Salaries and wages Government grants - net wages arrangement in Norway (9 191) (8 502) Payroll tax Pension costs, see Note Other benefit (4 461) Total personnel expenses Government grants is a special Norwegian seaman payroll and tax refund given to Norwegian shipping companies. The grant changed in second half 2008 to a more reduced grant. The average number of employees in 2008 was 642 in the Company which includes land based and offshore workers. There have been no employees in the parent company for The total payroll registered to the CEO in 2008 was USD 459, to the CFO USD 224, to the COO USD 272 and to the CCO USD 86. The CEO held 1,474,000 shares in the Company at Loans advanced to 7 employees of the Company in 2008 equal USD 2,101 (2007: USD 997). No interest is charged on the loans to the employees. The loans are repayable by the employee when the employee s shares in the company are realized or if the employee leaves the Company. No provision has been required in 2008 for loans made to the employees. The Remuneration to the Directors in 2008 was USD 230 (2007: USD 183). Auditor s remuneration The Company is charged with auditor s remuneration of USD 434. This includes USD 272 in audit fees and USD 162 in fees for other services. The Parent company is charged with auditor s remuneration of USD 200. This includes USD 103 in audit fees and USD 97 in fees for other services. Seventy-Four

75 Note - 20 Operating Leases As Lessee CONSOLIDATED (Amounts in USD 1,000) Annual lease payment on operational leases As of 31 December 2008 the Company had some commitments relating to lease agreements. Operating lease and thereafter Total Net present value of future commitments relating to lease agreements are calculated to be USD 4,506. The discount rate in the calculation of net present value is 5%. There are no operating leases in the parent company. Note 21 - Financial Items PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Financial income Interest income Other financial income Total financial income Financial expenses Interest expenses Other financial expenses Total financial expenses Results from associated companies Net currency gain/(loss) Net financial items Siem Offshore Inc., Annual Report 2008 Seventy-Five

76 Note 22 - Earnings Per Share (Amounts in USD 1,000) Earnings per share Average number of shares outstanding Result attributable to shareholders Earnings per share to the parent company's shareholders The average number of shares outstanding is calculated as a weighted average of outstanding shares during the year. There are no options or other instruments outstanding that are dilutive. Note 23 - Contracts in Progress CONSOLIDATED (Amounts in USD 1,000) Actual 2008 Existing at Total project Revenue Cost Total Assets / liabilities 2008 Accrued project cost Unbilled revenue Due from customer Revenue Cost Total (Amounts in USD 1,000) Actual 2007 Existing at Total project Revenue Cost Total Assets / liabilities 2007 Accrued project cost Unbilled revenue Due from customer Revenue Cost Total Contracts in progress refers to the Combat Management Systems. See Note 4. There are no contracts in progress in the parent company. Seventy-Six

77 Note 24 - Asset Held for Sale CONSOLIDATED (Amounts in USD 1,000) Purchase cost per Capital expenditure 0 0 The year's disposal at cost 0 0 Effect of exchange rate differences 0 0 Purchase cost per The non-current asset held for sale comprise equipment related to a past cable project in Brazil. IIt is probable that the asset held for sale will be sold within 12 months. There is no asset held for sale in the parent company. Note 25 - Other Gain/(Loss) PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) (8 028) 0 Gain/(loss) on sale of assets (8 011) Received amounts on previous losses on accounts receivable Provisions for loss on accounts receivable (2 611) (8 028) 0 Total (8 010) (251) Siem Offshore acquired in May 2007 a shipbuilding contract from a third party for a mid-size PSV to be built at a Norwegian yard. The Company paid a premium of NOK 40 million in excess of the price in the shipbuilding contract with the yard. The yard filed for bankruptcy in October Following the bankruptcy at the yard, the Company cancelled the shipbuilding contract in order to recover the pre-delivery instalments made to the yard. The pre-delivery instalments were secured by a refund guarantee and the Company received the funds from the guarantor. The Company did not have financial security for the paid premium of NOK 40 million and the premium, together with accrued supervision, was recorded as a loss in 2008 at an equivalent amount of USD 7,219. Siem Offshore Inc., Annual Report 2008 Seventy-Seven

78 Seventy-Eight

79 Note 26 - Listing of the 20 Largest Shareholders as of 31 December 2008 SHAREHOLDER NUMBER OF SHARES OWNER INTEREST SIEM INDUSTRIES INC % ACE CROWN INTERNATIONAL LIMITED % ROVDEFRAKT AS % MP PENSJON % ROVDE INVEST AS % OJADA AS % KNARDAL INVEST AS % NORDEA BANK NORGE ASA % STAVANGER OFFSHORE AS % PUMPØS A/S % WELLIS AS % IVAR OPSAHL % SIDDIS MARINER KS % SKANDINAVISKA ENSKIL A/C % WATERMAN HOLDING INC % VERDIPAPIRFONDET HAN NORGE % FONDSAVANSE AS % IVAR S LØGE AS % TERJE SØRENSEN % NORDEA BANK DENMARK % Total 20 largest shareholders % Other shareholders % Total number of outstanding shares % Siem Industries Inc and subsidiaries held 85,504,538 shares in the Company at 31 December Siem Industries Inc is the main shareholder of Siem Offshore Inc and is controlled by trusts where certain members of Kristian Siem s family are potential beneficiaries. Kristian Siem, who is Chairman of the Company, is also the chairman of Siem Industries Inc. Terje Sørensen is CEO of the Company and held shares at Siem Offshore Inc., Annual Report 2008 Seventy-Nine

80 Note 27 Subsequent Events On 22 January 2009, the subsidiary Siem Consub SA (Brazil) received a Letter of Intent from StatoilHydro Brasil Ltda. for a 2 years contract, with 2 x 1 year options, for a large PSV of VS 485 design. The scheduled commencement is within 4Q 2009 or 1Q On 28 January 2009, the 50% owned vessel JOIDES Resolution completed the conversion phase and commenced the operation phase of the contract with Texas A&M Research Foundation for the use of the JOIDES Resolution as a Scientific Ocean Drilling Vessel for the Integrated Ocean Drilling Program s phase II. The operation phase of the contract has an initial term until September 2013, with ten additional years of options. The estimated contract value for the initial term of the operation phase is approximately USD 115 million excluding reimbursable costs. The operation phase of the contract can be determined by TAMRF at any time with a USD 3 million termination fee. On 3 March 2009, Siem Offshore Inc entered into a charter contract for the Multi-purpose ROV Support Vessel Siem Marlin that was delivered from the Kleven yard on 27 February The contract commenced the first week of March The term of the contract is for an initial period of up to 12 months, to be superseded with a firm period of two years plus one year of option. The contract value is approximately USD 15 million for each 12 month period. On 23 March 2009, Siem Offshore and Kleven yard informed that they had agreed to cancel two shipbuilding contracts for AHTS vessels. Capacity issues with major subcontractors as well as the general market turmoil were instrumental factors for both Siem Offshore and Kleven yard to arrive at this decision. The cancelled contracts had contractual delivery dates in August and September 2009, and represented two of ten shipbuilding contracts for AHTS vessels ordered by Siem Offshore. The yard has confirmed that it expects to deliver the remaining AHTS vessels under construction on or about the contractual delivery dates. The pre-delivery instalments paid on the two cancelled shipbuilding contracts shall be off-set towards remaining pre-delivery instalments on the remaining number of vessels. The vessel shall be used by a subsidiary of Chevron as a field, ROV and subsea installation vessel at the Agbami field 70 nm offshore Nigeria. The contract is entered into with a local Nigerian entity. Siem Offshore shall be the vessel provider and a subsea contractor shall provide the engineering, ROV and subsea installation services. Eighty

81 Note 28 - Gain/(Loss) on Currency Exchange Forward Contracts PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) (45 891) Unrealised gain/(loss) (45 891) Realised gain/(loss) (1 417) (45 600) Total (47 308) Currency exchange contracts have been entered into in order to fix the NOK commitment in relation to the vessels under construction at Norwegian yards. As of 31 December 2008, the Company has sold forward approximately USD 329 million, equivalent to NOK 2.1 billion, of the total future yard instalments of NOK 5.9 billion. Note 29 - Financial Instrument By Category Below is a comparison by category for carrying amounts and fair values of all of the Company s financial instruments that are included in the financial statements. CONSOLIDATED (Amounts in USD 1,000) 2008 Loans and receiables Assets at fair value through the profit and loss Available for sale Total Assets as per balance sheet Financial assets held for sale Derivative financial instruments 0 Trade and other instruments Cash and cash equivalents Total Liabilities at fair value through the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings Derivative financial instruments Total Siem Offshore Inc., Annual Report 2008 Eighty-One

82 CONSOLIDATED (Amounts in USD 1,000) 2007 Loans and receiables Assets at fair value through the profit and loss Available for sale Total Assets as per balance sheet Financial assets held for sale Derivative financial instruments Trade and other instruments Cash and cash equivalents Total Liabilities at fair value through the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings Derivative financial instruments 0 Total PARENT COMPANY (Amounts in USD 1,000) 2008 Loans and receiables Assets at fair value through the profit and loss Available for sale Total Assets as per balance sheet Derivative financial instruments 0 Trade and other instruments Cash and cash equivalents Total Liabilities at fair value through the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings Derivative financial instruments Total Eighty-Two

83 PARENT COMPANY (Amounts in USD 1,000) 2007 Loans and receiables Assets at fair value through the profit and loss Available for sale Total Assets as per balance sheet Derivative financial instruments Trade and other instruments Cash and cash equivalents Total Liabilities at fair value through the profit and loss Other financial liabilities Total Liabilities as per balance sheet Borrowings Derivative financial instruments 0 Total Note 30 Profit Before Taxes, Excluding Interests Reconciliation of net profit for the financial year to cash flow from operations PARENT COMPANY CONSOLIDATED (Amounts in USD 1,000) Net profit for the Financial year Interest expenses Interest income Tax expense Profit before taxes, excluding interest Eighty-Three

84 Eighty-Four

85 Management Responsibility Statement We confirm, to the best of our knowledge, that the financial statements for the period 1 January to 31 December 2008 have been prepared in accordance with current applicable accounting standards, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the entity and the group taken as a whole. We also confirm that the Board of Directors Report includes a true and fair review of the development and performance of the business and the position of the entity and the group, together with a description of the principal risks and uncertainties facing the entity and the group. 18 April 2009 Kristian Siem Michael Delouche Richard England Chairman Board member Board member (Sign.) (Sign.) (Sign.) Bjørn Johansen David Mullen Ulf Sørdal Board member Board member Board member (Sign.) (Sign.) (Sign.) Terje Sørensen Chief Executive Officer (Sign.) Siem Offshore Inc., Annual Report 2008 Eighty-Five

86 Board of Directors Pursuant to the Company s Articles of Association, the Board of Directors of Siem Offshore shall have from three to seven shareholder-elected members. Kristian Siem (born 1949), Chairman of the Board Mr. Siem is the Chairman of Siem Offshore Inc. and is also chairman of Siem Industries Inc., Subsea 7 Inc., and Siem Industrikapital AB and a director of Star Reefers Inc. and North Atlantic Smaller Companies Investment Trust plc. He is an educated business economist from Bedriftsøkonomisk Institutt (BI), Norway. Mr. Siem is a Norwegian citizen. Michael Delouche (born 1957), Board member Mr. Delouche is the President and the Secretary of Siem Industries Inc and is responsible for the financial and corporate management function. He is in charge of the Company s operations at the head office in George Town, Cayman Islands. Mr. Delouche received degrees in civil engineering (structural) and business and was previously an audit manager with KPMG Peat Marwick LLP. Mr. Delouche is a US citizen. Richard England (born 1931), Board member Mr. England was a professional officer in the Royal Navy, specialising in submarines including command. Subsequently he has had wide experience in the offshore industry, including Managing Director designate of Overseas Towage Salvage Co, CEO of both International Offshore Services Ltd and OSA Ltd; followed by, as Managing Director of Vickers Offshore Engineering Group, a member of Vickers Ltd Executive Committee. Mr. England is a UK citizen. Bjørn Johansen (born 1932), Board member Mr. Johansen is an educated business economist and has been employed at Fred. Olsen & Co., Oslo, for about 50 years. He has had central positions in Fred. Olsen s tanker engagement and in the offshore sector from the start in 1971 up to his retirement. Mr. Johansen has served as chairman and board member of several Olsen companies and also as a board member of ASO/Norwegian Ship-owners association for about 12 years. From 1998 to 2003 he was appointed expert judge by Stavanger City Court in the Balder case between Norsk Esso and Smedvig. Mr. Johansen is a Norwegian citizen. David Mullen (born 1958), Board member Mr. Mullen currently serves as the Chief Executive Officer for Ocean rig ASA. Prior to working at Ocean Rig, he was the Senior Vice President of Transocean Inc. where he was responsible for the worldwide marketing, corporate strategy and mergers and acquisitions activities. Between 2001 and 2004, Mr. Mullen was the president of Schlumberger Oilfield Services, North and South America. Prior to this, Mr. Mullen served as vice president of Human Resources for Transocean Sedco Forex, Inc. He has also been the director of personnel for Geco-Prakla, managing director of Schlumberger (Nigeria) Ltd., and the district manager for Eastern Venezuela, Wireline & Testing. Mr. Mullen began his career with Schlumberger in Mr. Mullen holds a degree in geology from Trinity College, Dublin, and a master degree in geophysics from the University College Galway, Ireland. Mr. Mullen is an Irish citizen. Ulf Sørdal (born 1960), Board member Mr Sørdal is a business lawyer with main focus area on corporate tax issues. He works both with national and international tax matters, corporate law, company transactions, transfer pricing, restructurings and general contract law. He has specialized industry knowledge, particular about the fishing, fish farming and shipping/offshore industries. He has extensive experience in creation, classification and use, including tax treatment, of intangible property rights. He is educated both from the Norwegian School of Economics and Administration, and Candidate of Jurisprudence from the University of Bergen. He has been Head of Department at the local tax administration in Bergen and served as lawyer over the past 10 years. He is currently a partner in the Norwegian based law firm Steenstrup Stordrange. Mr. Sørdal is a Norwegian citizen. The remuneration of the Board for 2008 is proposed as USD 30,000 per year per Director. Remuneration for the services of the chairman and Mr. Delouche is included to the fixed fee of USD 300,000 p.a. to Siem Industries. This fee also covers office and administrative costs. The remuneration is subject to approval by the shareholders at the annual general meeting of the Company to be held on May Eighty-Six

87 Corporate Governance Corporate Governance Policy of Siem Offshore The principles for corporate governance adopted by the Company is based on the Norwegian Recommendation for Corporate Governance issued on the 4 th December 2007, which is a revised version of the recommendation issued on the 28 th November 2006, and good common sense. As a company incorporated in the Cayman Islands, Siem Offshore Inc. is subject to Cayman Island Laws and regulations with respect to corporate governance. Cayman Islands corporate law is to a great extent based on English Law. In addition, due to the Company s listing on the Oslo Stock Exchange, certain aspects of Norwegian Securities law apply to the Company and there is a requirement to adhere to the Norwegian Code of Practice for Corporate Governance. The Company endeavours to maintain high standards of corporate governance and is committed to ensure that all shareholders of the Company are treated equally and the same information is communicated to all shareholders at the same time. It is the opinion of the Board of Directors that the Company complies with the Norwegian Code of Practice for Corporate Governance, but would like to comment on the following: Business As stated, Siem Offshore Inc. is subject to Cayman Islands laws and regulations which do not require the objects clause of the Companies Memorandum and Articles of Association to be clearly defined. The Company has however adopted clear objectives and strategies for its business. Siem Offshore aims to grow the company within offshore support vessels, both organically and through combination with other operators, in order to achieve economies of scale and stronger presence in the market. Siem Offshore aims to become a preferred supplier of marine services to the oil & gas industries based on quality and reliability and provide cost efficient solutions for its customers by understanding their operation and applying technology and experience. The Company builds its business around a motivated workforce with the appropriate technical solutions and creating sustainable value to all shareholders. Equity and Dividends The priorities of the use of Company funds are firstly the investment opportunities in the business, secondly the repayment of debt and thirdly the return of capital to the shareholders in form of dividends or share buy-back. The Board s mandate to increase the Company s share capital is limited only to the extent of the authorised share capital of the Company but with preemption rights for shareholders and in accordance with the Company s Memorandum and Articles of Association which comply with Cayman Island law. Under the Articles of Association, the Board can issue new shares, convertible bonds or warrants at any time within the limits of the authorised capital without the consent of the general meeting but with pre-emption rights for shareholders. A General Meeting has further authorised the Board to issue new shares without pre-emption rights to all shareholders up to a limit of 50% of Siem Offshore shares at the time the authorisation was given. The Board holds authorisation from General Meeting 8 July 2008 to issue 126,108,134 New shares. The authority gives the Board flexibility to finance investments, acquisitions and other business com- Siem Offshore Inc., Annual Report 2008 Eighty-Seven

88 binations on short notice through the issue of shares or certain other equity instruments in the Company. Furthermore the Board considers the granting of a new standing authority at the time of holding an Annual General Meeting rather than convening an Extraordinary General Meeting at some future time to be in the best interests of the Company, as this will result in cost savings and more effective time management for both the Company s senior management and its Shareholders. Equal Treatment of Shareholders, Freely Tradable Shares and Transactions with Related Parties The Company is committed to ensuring that all shareholders of the Company are treated equally and all the issued shares in Siem Offshore are freely tradable and carry the same rights with no restrictions on voting. Siem Industries which owns 34% of Siem Offshore is represented by its Chairman Kristian Siem and President Michael Delouche on the Board of Siem Offshore. The Company pays an annual fee to Siem Industries as compensation for directorships, provision of an office and presence in the Cayman Islands, and other services. The fee is adopted by the annual general meeting based on a recommendation from the independent Board Members. Related part transactions are disclosed in the notes to the accounts. General Meetings The annual general meeting of the Company is held at the George Town office of the Company on May :00 am local time and Shareholders can be represented by proxy. Board of Directors The appointment of a nomination committee is not a requirement under Cayman Islands Law. In the appointment of board of directors, the Board consults with the Company s major shareholders and ensures that the board is constituted by directors with the necessary expertise and capacity. In addition, there is no requirement under Cayman Islands Law for the Company to establish a corporate assembly. Siem Industries is represented on the board through its chairman, Kristian Siem, and its president, Michael Delouche. The Board of Directors as a group have extensive experience in areas which are important to Siem Offshore, including offshore services, international shipping, ship broking, financing and corporate governance and restructuring. Work of the Board of Directors The Board monitors the performance of management through regular meetings and reporting. The Company has a Compensation Committee and an Audit Committee. Remuneration of Board of Directors The remuneration of the Board members reflect their experience and is adopted by the annual general meeting based on the recommendation from the Board. Eighty-Eight

89 Siem Offshore Inc., Annual Report 2008 Eighty-Nine