Directors report 2008

Transcription

1 Annual Report 2008

2 Directors report 2008 Nature of business The Songa Offshore Group (the Group ) owns five semi submersible drilling rigs and one drill ship, of which two rigs and the drill ship are being operated by the Group. Songa Offshore SE (the Company ) is the parent company of the Group, and is headquartered in Oslo. The Group was established in April 2005, and listed on the Oslo Stock Exchange on 26 January Throughout 2008, the Group s main focus has been to secure a sound operating performance and good customer satisfaction. In August 2008 the Company purchased the semi submersible rig Deepsea Delta, subsequently renamed Songa Delta, from Odfjell Drilling and signed an operating agreement with Odfjell for the rig. The Group has moved from being an organization focused on refurbishing rigs to delivering outstanding operating performance on its fleet of rigs. For the rigs operating in Australia and the drill ship operating in West/North Africa, our offices in Australia, Singapore and West/North Africa have closely supported their respective operation and the quality delivered to our customers. During 2008 there has been an increasing level of activity in our newly established office in Stavanger which is soon to start operating the Songa Dee. The office is also working closely with Odfjell which is operating the rigs Songa Trym and Songa Delta. Main events in 2008 and so far in 2009 In February the Songa Venus was awarded a Letter of Intent from Australian Drilling Associates (ADA) for a drilling contract utilizing the semi-submersible for development and exploration drilling in Australia. ADA is the main contract manager and coordinates the drilling operations on behalf of the independent Oil Companies operating under an ADA coordinated consortium contract in Australia. On 26 May the Annual General Meeting approved the plan to redomicile the Company to Cyprus and ratify the merger between Songa Offshore ASA and Songa Offshore Cyprus PLC. Upon completion of the merger in December 2008 the Company was transformed into an SE-entity (Societas Europaea) as discussed below. In June Songa Offshore ASA completed the merger with Songa Offshore AS, Songa Dee AS and Songa Trym AS. In June the Group announced a new contract for the rig Songa Trym with StatoilHydro. The contract is for two years firm with an optional period of one year. The value for the firm part of the contract is estimated to be USD 347 million. Odfjell will continue to operate the rig on Songa s behalf for the duration of this contract. In June the Group entered into an agreement with Odfjell Drilling to acquire the semi submersible rig Deepsea Delta. The acquisition price was set at USD million. The rig continues to be operated by Odfjell Offshore for the remainder of its contracted periods. 3

3 In August the purchase of the rig Deepsea Delta was finalized at a price of USD 431 million, the rig has subsequently been renamed Songa Delta. The price was slightly increased due to the rig being delivered after 30 June and Songa paid a compensation of USD 50,000 per day for the 55 days delayed delivery, adding up to the extra USD 2,750,000 paid for the rig. In August the Group refinanced its external debt with a new USD 1,050 million bank loan facility. In late September the Group announced the signing of a contract with CNOOC Africa Ltd for a one well program offshore Equatorial Guinea utilizing Songa Saturn. On 16 October Songa Offshore ASA completed a private placement for a total of 10,600,000 new Shares. The subscription price was set to NOK per share, giving gross proceeds of approximately NOK 265 million. The purpose of the private placement was to finance the Company's short term liquidity requirements, including debt repayment, cash calls from total return swaps and increase in Company's cash holdings. In October the Group entered into an agreement with two of its lead banks, for a credit facility of USD 35 million, which has not been utilised at year end. On 12 December the merger between Songa Offshore ASA and Songa Offshore Cyprus PLC was finalized and Songa Offshore ASA became Songa Offshore SE. On 17 February 2009 an EGM approved the proposal to transfer the Company s registered office to Cyprus including a transfer plan, new articles of association, new memorandum of association, and new auditors to come into effect after relocating. On the same EGM the nominal value of the Company s shares was changed from NOK to EUR. The EGM also elected three new members to the Board of Directors as follows; Nancy Charalambous, Trond Christensen and Erik Østbye. The Board wishes to thank those members resigning for their contribution while serving on the Board of Directors; Jon C. Syvertsen, Gunnar Hvammen and Anette Melbye. Mission Statement As stated in the Articles of Association, the mission statement of the Company is the acquisition and operation of vessels, rigs and offshore installations, as well as other related business. The Company may also acquire and own shares, securities and ownership interests in other companies. The Group s mission is to be the provider of safe and superior offshore drilling performance, to our clients and shareholders, in the midwater floating sector. This will be accomplished with competent and experienced personnel delivering high quality performance to our clients. The main objective of the Group, as a commercial entity, is to increase the economic value of the Group for the owners of the Company, who rely on the Group to provide them with a satisfactory return on capital invested. In achieving this objective, the Group s goal is to provide services in its field of expertise, in accordance with the highest standards of professional excellence and commercial integrity and in compliance with all relevant laws, regulations and guidelines. Consideration must be taken for the rights and interests of others, and the health, safety and job satisfaction of all Songa employees. 4

4 The Group will at all times strive to be a good corporate citizen within each country in which it operates, and to obey the laws, respect the customs, cultures and beliefs, and preserve the environment of each country. The Group seeks to understand the aims and objectives of the clients for which the Group performs services, and endeavours at all times to assist its clients to achieve these aims. Strategy The founders of the Group focused on two primary parameters to optimize shareholder value when investing in the mobile offshore drilling unit (MODU) sector: early cash flow top management The management team is in place and the five semisubmersibles and one drill ship are well positioned to generate cash flows and returns for the shareholders, but given the stressed situation in the financial markets combined with rig rates levelling off, repayments to shareholders are postponed until further notice. In the near future the Company will focus on deleveraging and continue to deliver outstanding operating performance. The Board of Directors summarizes the strategy going forward to the following main points: Increase contract coverage Continue to deliver top class commercial and operational management of the Group s rigs Establish a tailored organization for the Songa Dee, Songa Trym and Songa Delta for the Norwegian and British continental shelves Deleverage the Company Future outlook The demand for the Group s offshore drilling rigs is still comfortable, although we have passed the peak of demand experienced in the previous year s market. The Board now believes we are in a more normal market situation and that the Group is well prepared going forward. With well performing assets, and the rigs rolling into contract extensions or new contracts at higher day rate levels in the beginning of 2009, the Company's leverage position is declining. The management continues to screen the market for new contact opportunities and the Group is experiencing more enquiries for its rigs after a quiet period in the last quarters of Moving to Cyprus With the resolution passed by the shareholder s in the EGM on 17 February 2009 a two months credit notice period has commenced, and will end on 17 April Then, at the Board s discretion, a decision to move the seat of the Company can be made. It is expected that it will take some time on both the Cypriot and Norwegian side before the move is finalized after the decision has been made. The Company is looking forward to take advantage of: A more predictable business climate with the protection of EU to support the international activities of the Group A reputable register for vessels and MODUs The ability to create a corporate headquarters where operations, marketing, engineering and accounting/finance are housed in one location Being closer to support several of the Groups rigs both in terms of distance and time zones 5

5 An opportunity for the Company to pay quarterly dividends instead of annual dividends No withholding tax on dividends; today most non-eu shareholders including North American shareholders would experience withholding tax if the Company paid a dividend from Norway The issue with Exittaxes On 29 November 2007 a new tax provision was adopted in Norway whereby an SE company that transfers its tax residency from Norway to another EEA State will be subject to exit tax. In the Company s view this exit tax is in conflict with the fundamental freedoms in the EEA-Agreement, more precisely the Company s right to freedom of establishment. Accordingly the Company in May 2008 filed a complaint with the EFTA Surveillance Authority (ESA). In the complaint, the Company stated that the Norwegian exit tax implies a restriction on the freedom of establishment which cannot be upheld on the basis of imperative reasons in the public interest. The exit tax does not only affect a company which temporarily transfers its tax residence before selling assets with the sole aim of avoiding payment of the tax on increases in value due in Norway. The provision also affects SE companies with no aim other than the bona fide exercise of their freedom of establishment in another Member State. Reference was made to judgments delivered by the European Court of Justice, Lasteyrie du Saillant (Case C-9/02) and the N-case (C-470/04), and to the Commission's Communication on exit taxation (COM(2006)825 of 19 December 2006) and case 2007/2372, where the European Commission recently formally requested Sweden to change its tax provisions which impose an exit tax on companies ceasing to be taxable in Sweden. ESA issued a letter of acknowledgement in July ESA is now in the information gathering process, and has had correspondence and a meeting with the Norwegian Ministry of Finance to discuss the exit tax legislation. If ESA considers that an infringement of EEA law warranting the opening of infringement proceedings may have occurred, it issues a letter of formal notice. Subsequently, ESA may decide to issue a reasoned opinion, where ESA will set out the reasons why it considers that an infringement of EEA law has occurred and call on Norway to comply with EEA law within a specified time period (normally two months). If Norway fails to comply with a reasoned opinion, ESA may decide to bring the case before the EFTA Court. Songa Offshore may also decide to bring the case before a Norwegian court, and request the Norwegian court to refer the case to the EFTA Court. Risk exposure and risk management Operational risk Project risk It is customary in the business in which the Group operates that all contracts are charter related, e.g. structured as time charters or bareboat charters. The rationale for this is that oil service companies provide a service where the schedule and scope of work is controlled and ultimately directed by its customers. In some instances market participants may accept fixed prices for certain components of the overall contract work scope. Such instances include mobilisation and demobilisation of a unit to/from a 6

6 worksite, and the conversion/upgrade of units to meet specific requirements as may be required for a specific project. The Group s corporate policy is to mitigate project risk at all times by having a strict policy on termination risk, breakdown risk, off-hire situations, force majeure risk etc, and always to find the right balance and aim to use the best practice available to ensure that project risk is reduced to a minimum. However, there can be made no assurance that the Company will be able to sufficiently mitigate these project risks. Insurances Operational risks can cause personal injury, the loss of a unit, operational disruption, off hire and termination of contract. In order to mitigate these risks the Group has instigated an insurance program in line with market practice and additional insurance is always considered when a specific project is considered to be of a high risk nature. Vessel operation The Group s fleet will be exposed to operational risks associated with offshore operations such as breakdown, bad weather, technical problems, force majeure situations (nation wide strikes etc), collisions, grounding etc, which may have a material adverse effect on the earnings and value of the Group. Accidents Offshore drilling rigs may work in harsh environments. There are several factors that can contribute to an accident including, but not limited to, human errors, adverse weather conditions, faulty constructions, etc. An accident can have a material adverse effect of the Group s financial condition and there can be no assurance that the Songa Offshore Group will have sufficient insurance against such losses and/or expenses. Service Life and technical risk The service life of a rig and/or vessel is generally assumed to be more than 40 years, but will ultimately depend on its efficiency. There can be no assurance that the Songa Offshore Group s rigs will be successfully deployed for such period of time. There will always be some exposure to technical risks, with unforeseen operational problems leading to unexpectedly high operating costs and/or lost earnings, which may have a material adverse effect on the financial position of the Songa Offshore Group. Market Risk Oil and gas prices The profitability and cash flow of Songa Offshore s operations will depend upon the market price of oil and gas which in turn are affected by numerous factors beyond Songa Offshore s control, including economic and political conditions, levels of supply and demand, the policies of the Organisation of Petroleum Exporting Countries (OPEC), currency exchange rates and the availability of alternate fuel sources. Oil and gas commodity prices have been high and have therefore increased the cost of oilfield goods and services worldwide and in the countries in which Songa Offshore operates. Currently, the oil prices have decreased substantially from above USD 140 in the second quarter of 2008 to the current USD price per barrel. The impact of this substantial decrease on Songa Offshore s business could be a delay in activity because of oil companies cutting their exploration and development budgets which could lead to a lower utilization of rigs. Regulations governing operations The Group is subject to the laws and regulations governing the oil and gas industry and shipping industry. The Group is required to comply with the various regulations introduced by the authorities where the operations take 7

7 place, various flag states and the guidelines introduced by IMO where applicable. In the event that the Group is unable at any time to comply with the existing regulations or any changes in such regulations, or any new regulations introduced by local or international bodies, the operations may be significantly adversely affected. Any change in or introduction of new regulations, may increase the costs of operations, which could have a significant adverse effect on the Group s profitability. Furthermore, if the production units do not comply with the extensive regulations applicable from time to time, the consequence may be that the units are suspended or not permitted to operate. Risk of war, other armed conflicts and terrorist attacks War, military tension and terrorist attacks have among other things caused instability in the world s financial and commercial markets. This in turn has significantly increased political and economic instability in some of the geographical areas in which the Company operates (or may operate in the future) and has contributed to high levels of volatility in prices for among other things oil and gas. Continuing instability may cause further disruption to financial and commercial markets and contribute to even higher level of volatility in prices. In addition, acts of terrorism and threats of armed conflicts in or around various areas in which the Company operates (or may operate in the future) could limit or disrupt the Company s markets and operations, including disruptions from the evacuation of personnel, cancellation of contracts or the loss of personnel or assets. Armed conflicts, terrorism and their effects on the Company or its markets may have a significant adverse affect on the Company s business and results of operations in the future. Rigs and vessels could be requisitioned by a government in the case of war or other emergencies or become subject to arrest. This could significantly and adversely affect the earnings of the relevant unit and the Company as well as the Company s liquidity forecast. Financial risks Foreign exchange risk USD is the functional currency of Songa Offshore. The Songa Offshore Group will be exposed to risks due to fluctuations in interest and exchange rates. Songa Offshore will attempt to minimise these risks by implementing hedging arrangements as appropriate but will not be able to avoid these risks. Currency exchange rates are determined by forces of supply and demand on the currency exchange markets. These forces are affected by the international balance of payments, economic and financial conditions, government intervention, speculation and other factors. Changes in currency exchange rates relative to the USD will affect the USD value of the Group s assets and thereby impact materially and adversely upon the Group s total return on such assets. Currency fluctuations relative to the USD of an investor s currency of reference may adversely affect the value of an investor s investments. Credit risk Lack of payments from customers/clients will significantly and adversely impair the Group s liquidity. The Group undertakes due consideration to the credit quality of its potential clients during contract negotiations to minimize the risk of payment delinquency, but no assurance can be given that the Group will be able to avoid this risk. Interest rate risk A major part of the Group s interest costs on bank loans are subject to floating interest rate (LIBOR) plus a margin. Consequently, the Group is exposed to fluctuation in interest rates. Some interest rate swaps have been entered into to lower this risk. 8

8 Liquidity risk Songa Offshore is dependent upon having access to long term funding. There can be no assurance that the Company may not experience net cash flow shortfalls exceeding the Company s available funding sources 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. Borrowing and leverage risk Borrowings create leverage. To the extent income derived from assets obtained with borrowed funds exceeds the interest and other expenses that the Songa Offshore Group will have to pay; the Songa Offshore Group s net income will be greater than if borrowing were not made. Conversely, if the income from the assets obtained with borrowed funds is insufficient to cover the cost of such borrowings, the net income of the Songa Offshore Group will be less than if borrowing were not made. The Songa Offshore Group will borrow only when it is believed that such borrowings will benefit the Songa Offshore Group after taking into account considerations such as the costs of the borrowing and the likely returns on the assets purchased with the borrowed monies, but no assurances can be given that the Group will be successful in this respect. Fluctuating value of the rigs and market rates The value of the rigs owned by the Songa Offshore Group may fluctuate with market conditions. A downturn in the market could have a material adverse effect on the Group s liquidity and may result in breaches of its financial obligations. In such a case, sales of the Group s rigs and vessels could be forced at prices that represent a potential loss of value. 9

9 Contracts for the rigs Overview of the drilling fleet Songa Venus Songa Venus was at year end fixed on a contract with ENI/INPEX offshore North West Australia that ended early January Due to the extended duration of this contract, the rate originally set at USD 225,500 per day was increased to USD 425,000 per day from 25 October 2008 until the end of the Contract. Songa Venus commenced the contract with Australian Drilling Associates (ADA) in early January The primary term is for 376 days and with a secondary term of another 376 days thereafter. The day rate is set at USD 400,000 per day, for both terms. One of the participants in the ADA consortium, Anzon, has decided to cancel their planned drilling activities and the ADA contract for Venus have been suspended for up to 200 days. For this period a separate contract 10

10 with Shell Australia has been entered into. Shell Australia has taken over the earlier allocated Anzon time under the ADA contract which was 168 days, in addition Shell is given an option of 32 days. The rig will thereafter continue with remaining ADA-consortium work. Revenues under this arrangement remain same as under the ADA contract. Songa Mercur Songa Mercur is fixed on a contract with Santos offshore North West Australia ending July The rig is now drilling at a rate of USD 400,000 per day. This is the first rig to come out of contract and the Company is in discussions with both existing and new clients for operation both in Australian waters and elsewhere. Songa Saturn Songa Saturn was working on a one well contract for Hess in Libya at year end. The contract ended early February The rig then mobilized to Malta for replacement of damaged equipment before mobilizing back to Libya to start the campaign for the consortium led by Nippon. The contract with the consortium is firm for four wells and has five optional wells, all priced at USD 405,000 per day. Optional wells must be declared three wells in advance. In September 2008 Songa Saturn secured a contract with CNOOC for a one well program offshore Equatorial Guinea. The contract will commence after the current drilling campaign in Libya which is expected to be completed in late The contract has a day rate of USD 450,000 and a mobilization rate of USD 350,000 per day plus fuel. Further, the contract has demobilization alternatives for both West Africa and the Mediterranean. Before starting the mobilization to Equatorial Guinea, Songa Saturn will complete the long planned upgrade of the rig from 3300 ft to 3800 ft water depth capacity. This work is likely to be carried out in Malta directly after the ongoing campaign in Libya. Songa Dee Songa Dee is fixed on a bareboat charter to Stena at a rate of USD 1,250,000 per month. Stena has fixed the rig to StatoilHydro for a campaign originally planned to end at year end but which was extended to 17 March Originally the Company had agreed with Stena that the rig would be taken through the Special Periodic Survey (SPS) at Stena s cost and risk before redelivery to Songa Offshore. In order to prepare the rig for the upcoming contract with Marathon/Lundin the Company has agreed with Stena that they pay a lump sum and Songa Offshore will take the rig through the SPS and cover any cost in excess of the lump sum. No rate is paid during the SPS period. Furthermore, Songa Dee is fixed on a contract for 2 years plus 2 six month options with Marathon and Lundin. The operators may use the Songa Dee in the Norwegian and the UK sectors of the North Sea on an equal time basis. The contract will commence when the rig is released by the current operator and after completing the SPS, expected to be in the second quarter of The day rate for the contract is USD 425,000 plus cost escalations. The options must be declared one year in advance. The day rate for the option period is set to be no less than the current day rate. Songa Trym Deepsea Trym has been renamed Songa Trym. Songa Trym was at year end fixed on a bareboat charter to Odfjell, the contract lasted until early February 2009 and paid a rate of USD 50,000 per day. Odfjell had fixed the rig to StatoilHydro for the same period. The contract with StatoilHydro has then been renewed at a rate of USD 475,000 per day 11

11 and is now firm for two years and there is an additional one year option priced at USD 525,000 per day. Odfjell will continue to operate the rig on the Company s behalf. Songa Trym went through a special periodic survey during the summer of 2007 at Odfjell s risk and cost. In February 2008 it was decided to acquire a BOP well control system upgrading the capacity from 10,000 psi to 15,000 psi, the unit is to be delivered in early The system will be put in place when there is a contract requiring such specifications. Songa Delta Songa Delta was at year end fixed on a contract with StatoilHydro paying USD 185,000 per day including escalation clauses. The contract was originally to end in March 2009, but now looks to end in mid May 2009 due to extended services on the last well. Due to this StatoilHydro has accepted an increase in day rate to USD 425,000 from April 15. As soon as the last well for StatoilHydro is completed, Songa Delta will start on its three year contract for Wintershall and Det norske oljeselskap at USD 447,000 per day including cost escalation. Capital commitments and planned surveys Capital investments for the next twelve months where the Group is committed; amounts to USD 31.9 million and is related to contract preparation items on Songa Dee and the new BOP for the Songa Trym. As per year-end 2008 the commitment was: USD ' Songa Dee BOP Songa Trym 1-3 months 3-12 months 1-5 years Total - 10,000-10,000-20,191 1,683 21,874-30,191 1,683 31,874 Planned surveys, for both intermediate and SPS for the next three years can be summarized as follows: USD ' Total Songa Venus - 15,000-7,000 22,000 Songa Mercur ,000-15,000 Songa Saturn - 7,000-15,000 22,000 Songa Dee * 13,000 13,000 Songa Delta - 25,000-25,000 Songa Trym 10, ,000 35,000 Saturn water depth upgrade 10, ,000 33,000 22,000 40,000 47, ,000 Songa's commitment, in excess of lump sum received from Stena SPS are budgeted with USD 15 million taking 15 days to complete and intermediate surveys are budgeted with USD 7 million taking 7 days to complete for rigs outside Norway. For the Norwegian rigs the budget is USD 25 million and USD 10 million respectively. No charter hire is received during surveys. Songa Saturn has planned for a water depth upgrade to take place after the Libyan campaign. The upgrade is expected to commence late 2009/early 2010 and last for 30 days with a remaining investment of 10 USD million. No charter hire is received during this yard stay. 12

12 Financing In the first quarter the Company repurchased USD 27 million of the USD 75 million bond loan. To finance the repurchase the Company entered into a Repurchase Agreement (REPO). In the second quarter the Company bought back additional USD 17.2 million of the USD 75 million bond loan. To finance the repurchase the Company increased the REPO. In addition the Company refinanced its NOK 165 million bond loan with a NOK 200 million bond loan at 10.5% interest rate. In the third quarter the Company refinanced its USD 650 million bank facility, replacing it with a new facility of USD 1,050 million. The increased amount represents the financing of the acquisition of Deepsea Delta, take-out of USD 51 million of the USD 75 million bond and the USD 50 million commercial paper that matured in September. The new facility is a so called senior secured credit facility consisting of a term loan facility of USD 910 million and a revolving credit facility of USD 140 million. The interest rate is USD Libor + a margin of basis points. Further the Company issued an open commercial paper with a limit of NOK 300 million, at 11.5% interest rate and 1 year term, of which NOK 128 million is placed at year end. In the fourth quarter the Company cancelled its total return swap (TRS) with Nordea Bank Norge ASA (Nordea) for 2,395,000 shares. The TRS was settled at NOK 25 per share. Further the TRS with Carnegie Investment Bank AB Norway Branch was reduced by 229,000 shares, settled at NOK 25 per share. The remaining 2,845,965 underlying shares have been transferred to Nordea and renewed or rolled over. The new TRS expires on 19 March The remaining TRS was set at NOK In addition the company has also entered into an agreement with two of its lead banks, for a credit facility of USD 35 million, which has not been utilized at year end. There is also USD 22 million undrawn capacity remaining under the bank facility. The strike price of the USD 125 million convertible bond has been changed due to the issue of new equity in October mentioned below. The strike price has been adjusted from USD to USD At year end the Company s external debt was USD 978 million of the USD 1,050 million bank facility, USD 24 million outstanding under the USD 75 million bond loan which matures in March 2011, and is callable from March 2009, a USD 125 million convertible bond due in June 2010 and two commercial papers in the amount of NOK 200 million (which is swapped to USD 39 million) and NOK 128 million (USD 22 million) which are due in June and September 2009 respectively. Share capital In December 2007 Chairman of the Board Arne Blystad and Board Members Gunnar Hvammen and Robert J. Scott exercised options for a total of 1,500,000 shares, these shares were issued in January. In the first quarter a total of 1,261,998 shares were issued following conversion of freely tradable warrants. In the second quarter a total of 4,678,513 shares were issued following conversion of freely tradable warrants. The warrant program expired on 8 June

13 Further the Company renewed or rolled over its total return swaps (TRS) with Nordea Bank Norge ASA for 2,395,000 shares and with Carnegie Investment Bank AB Norway Branch for 3,074,965 shares. In addition the Board of Directors allocated share options to the executive management of the Company based on the resolution made at the Annual General Meeting held on 26 May The total number of options granted is 900,000 and the strike price is according to the resolution set at NOK per share. No new shares were issued during the third quarter. In the fourth quarter Songa Offshore ASA completed a private placement for a total of 10,600,000 new Shares. The subscription price was set to NOK per share, giving gross proceeds of approximately NOK 265 million. The purpose of the private placement was to finance the Company's short term liquidity requirements, including debt repayment, cash calls from total return swaps and increase in Company's cash holdings. The Company has cancelled the total return swap (TRS) with Nordea Bank Norge ASA (Nordea) for 2,395,000 shares. The TRS was settled at NOK 25 per share. Further the TRS with Carnegie Investment Bank AB Norway Branch has been reduced by 229,000 shares, the settled part was done at NOK 25 per share. The remaining 2,845,965 underlying shares have been transferred to Nordea and renewed or rolled over. The new TRS expires on 19 March The remaining TRS was set at NOK Weighted average number of shares for the year was 94,741,710 shares. The USD 125 million convertible bond loan is convertible into common shares in the Company. The total number of shares, if converted, is 9,578,544, i.e. strike at USD per share. In addition there are share options to executive management of the Company outstanding. The total number of options granted is 900,000 and the strike price is according to the resolution set at NOK per share and after the share issue mentioned above adjusted to NOK per share. For the 900,000 share options to senior management there has been a change in the way of settlement. The share options are now accounted for as cash settled instead of equity settled. Assuming all options and convertibles mentioned above, except options to management that are now cash settled, are converted, the Company would on a fully diluted basis have 114,886,088 shares as at year end. Adjusted weighted average number of shares, as defined in IFRS for the full year was 104,320,254 shares. The EGM mentioned in the main events above resolved to authorize an increase in the share capital of the Company by up to NOK 21,061,509, alternatively by up to EUR 2,316, Further it was resolved to change the nominal value of the shares from NOK 1 to EUR Section 4 of the Articles of Association was changed to read: The share capital is EUR 11, 583,829.84, divided in 105,307,544 shares, each with a nominal value of EUR At year end the total issued share capital in Songa was NOK 105,307,544. The total number of shares was 105,307,

14 Health, safety and the environment Songa Offshore always put people and environment first. Hence major focus has been put on working environment and behaviour based safety. The company focuses continuously on competence management and a systematic approach to work that can include potential hazardous situations. We consider Risk Management to be a core activity in the company and are actively using the Safety Management System to improve the working environment for the crew. A companywide campaign to focus on behaviour based safety contributes to heighten the safety awareness and also bonds crew and management trough teambuilding sessions. Both health and welfare for all employees are important factors and we work to motivate the crew by ongoing campaigns and initiatives. The Board of Directors would like to thank all employees of Songa Offshore for their hard work and good efforts in The Company does not have a research and development group. Sick leave Recorded leave of absence due to illness is detailed in the table below: Recorded Days Sick Leave Total Work Days % Recorded Absence due to Illness , % Throughout 2009 the Group will focus on further reducing absence through a coordinated and consistent approach. Key focus areas being: Proactive absence management and reporting The involvement of occupational health services where appropriate to limit the negative impact of long term sickness absence The involvement of private medical insurance providers to assist with timely rehabilitation The use and analysis of return to work interviews Gender equality The Group is fully committed to providing a workplace with equal opportunities in all aspects of the employment relationship and the promotion of Equal Opportunities and Diversity within the Company. Managing diversity and Equal Opportunities successfully is the key to good people management. People can make the difference between good and poor business performance. The Company will encourage good employment practices through managing equality issues, communication and training, and addressing specific areas. The gender profile of the Group is: Company/ Group % Female % Male Norway onshore 56% 44% Norway offshore 1% 99% Other Group Companies 14% 86% The high percentage of male employees is explained by the proportion of Group Employees working in offshore positions. As these are traditionally male dominated disciplines within the Drilling Industry the pool of labour for female entrants is limited. Where the Company has agreements with 3rd party vendors to supply the junior offshore positions (where the pool of female labour may be greater), the Company requests that these vendors comply with the Company s commitment to Equal Opportunities. Throughout the Group a higher proportion of onshore positions are filled by females when compared to Offshore. For example in Human Resources, females make up 84% of the workforce and hold 2 out of 3 management positions. In Finance the gender balance is neutral. 15

15 However, again due to the limited pool of skilled female labour in technical disciplines of the Drilling Industry, the Group average salaries reflect the fact that the majority of senior positions within the organisation are held by males resulting in a higher average salary for men than for women. The Group is not complacent with regard this issue and the following initiatives will continue throughout 2009: Ensure a fair and consistent recruitment & selection process. Draft and place advertisements to avoid discrimination and stereotyping through language and images. Indicate if any genuine occupational requirements apply. Operate transparent and consistent appraisal and performance management processes. Have clear career paths including promotion and training opportunities for all employees. Revise policies and procedures, if appropriate, to ensure fairness and consistency e.g. flexible working practices. Treat personal information sensitively and confidentially, and reassure how this information will be used. Continually monitor and evaluate policies and practices to ensure that they are working and bias free using cross-sections of the organisation. Complacency can undermine effectiveness. As above, encourage all 3rd party vendors to follow the Company s commitment to Equal Opportunities and Diversity. Accidents and incidents The Group had 19 incidents in 2008 recordable with the International Association of Drilling Contractors (IADC). None of the incidents were fatal or caused long term disability. Of the 19 incidents 13 were Medical Treatment Only (MTO), 5 incidents were Restricted Work Cases (RWC) and there was 1 Lost Time Incident (LTI). There has been no major damage to equipment due to accidents and incidents. Environmental reporting The Group has placed great emphasis so that the rigs meet all statutory requirements for emissions, pollution and environmental impact. The Group strives to comply with all classification society, flag state, national and international regulations, but more importantly the International Maritime Organization (IMO) requirements with regards to Environmental Issues. The Group has also been audited against the International Safety Management Code and received an Interim Document of Compliance by ABS which essentially means the Group s Safety Management System suffices international requirements of all facets of safety, health and the environment. With regards to the Group s compliance of these organizations regulations, the Group fulfils accepted international standards for environmental considerations. For further information about the Group s environmental policy, please see the Company s webpage. Type and quantity of energy and raw materials consumed Drilling with Non-Aqueous Drilling Fluid (NAF): High-speed shale shakers will be used to provide an average of less than 20% wet weight mud on cuttings over the NAF sections of the well, upon completion of drilling with NAF based fluids, the drilling fluid is returned to the supplier for reconditioning and reuse. Drill cuttings: Discharged to sea through a shunt pipe placed below the sea surface. The discharge depth is set and selected to achieve maximum dilution effects and to minimize impacts upon the surface waters. 16

16 Deck Drainage: Spillage of diesel, cleaning solvents or mud chemicals will be cleaned up completely using absorbent pads and low toxicity biodegradable detergents. Deck drainage, wash down water and machinery space drainage will be processed through an oil-water separator as required and in accordance with rules and regulations. Sewage: The drilling units are equipped with sewage treatment units; all sewage is properly treated prior to disposal at sea. Galley wastes: Food waste will be macerated to less than 25 mm and discharged to the sea at a distance of more than 12 nautical miles (22 km) from shore. Type and quantity of pollution that is let out by rig activity ATMOSPHERIC EMISSIONS DUE TO ENERGY USE Offshore Offshore Offshore Sulfur Dioxide Nitroge n Oxide Carbon Monoxide VESSEL Fuel received m3 Oil received m3 Garbage discharged m3 Waste oil Discharge m3 SO2 (t) Nox (t) CO (t) MERCUR VENUS SATURN TOTAL Action taken or planned to be taken to eliminate or reduce environmental damage. Oil Pollution Emergency Procedures are integrated within the Songa Offshore units Emergency Procedures for all incidents and are covered in the Emergency Procedures Manual. Additionally all Songa Offshore Vessels have classification society approved Ship Oil Pollution Emergency Plan (SOPEP). The purpose of these plans is to provide guidance to the Master and Officers on board the Mobile Offshore Drilling Units (MODUs) with respect to the steps to be taken when pollution incidents have occurred or is likely to occur. Effective planning ensures that the necessary actions are taken in a structured, logical, and timely manner. These plans and procedures are written in accordance with the requirements of Regulations 26 of Annex I of the International Convention for the Prevention of Pollution from ships 1973, as modified by the Protocol of 1978 relating thereto. (MARPOL 73/78). The SOPEP Plan contains all information and operational instructions required by the Guidelines. The appendices to the SOPEP Plan contain names, telephone, fax, etc., of all contacts referenced in the Plan, as well as other reference material. These Plans has been approved by the Administration and no alteration or revision shall be made to any part of the plan without prior approval of the Administration. The plan is designed to link into the Corporate Crisis Management Plan for dealing with oil pollution emergencies. The Offshore Installation Manager will be backed 17

17 up on-scene by managementappointed personnel as the circumstances and the position of the rig at the time of the incident require. The plan will be of little value if it is not made familiar to the personnel who will use it. Regular exercises will ensure that the plan functions as expected and that the contacts and communications specified are accurate. Such exercises may be held in conjunction with other shipboard exercises and appropriately logged. Where units carry response equipment, hands-on experience with it by crew members will greatly enhance safety and effectiveness in an emergency situation. Procedures for training and exercise may be defined. Corporate Governance The Group has established a separate Corporate Governance Policy document that is published on the company s webpage. The Group has also established a separate Business Code of Ethics document, also published on the webpage. A more detailed discussion on the Group s compliance of the Norwegian Code of Practice for Corporate Governance guidelines is included in the Appendix. International Financial Reporting Standards The EU Commission has determined that all listed companies within the EU shall prepare their accounts in accordance with the International Financial Reporting Standards (IFRS). Under the EEA Agreement, Norwegian companies are subject to the same accounting presentation requirements as companies within the EU. Songa Offshore Group has prepared its consolidated financial statements in accordance with the IFRS. When preparing the accounts for Songa Offshore SE, the Company has applied simplified application of IFRS in accordance with the Norwegian Accounting Act 3-9. This means that the IFRS valuation rules are applied, whilst remaining in compliance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles for presentation of the notes. Comments related to the financial statements The Songa Offshore Group - Comments related to the financial statements The Songa Offshore Group consolidated result after tax shows a profit for 2008 of USD 10.1 million. Operating income for 2008 was USD million. Operating expenses for 2008 was USD million. Net finance cost for 2008 was USD 60.3 million. In August 2008 the Group purchased the rig Deepsea Delta, subsequently renamed Songa Delta, for an amount of USD million. Net cash generated by operating activities was USD 70.4 million. Net cash used in investing activities was USD million. The cash used in investing activities relates to the acquisition of Deepsea Delta, as well as acquisitions for the other rigs. Net cash generated by financing activities was USD million. The cash generated by financing activities comes from issuance of share capital, refinance of the main bank facility from a USD 650 million facility to a USD 1,050 million facility, and the issuance of commercial papers. Net decrease in 18

18 cash and cash equivalents was USD 5.7 million. Total cash and cash equivalents at year end was USD 58.5 million. The change in Other Equity in the consolidated balance sheet relates mainly to the profit after tax for 2008, adjustments recorded directly in equity and the change in reserves relates to the senior management option program. Please see the consolidated financial statement notes for further information. The Group s total assets at year end were USD 1,556.5 million. As of December , the equity ratio in the Group was 21.6%. Basic earnings per share (EPS) for 2008 were USD Songa Offshore SE - Comments related to the financial statements Songa Offshore SE has during the year merged with several of its subsidiaries, including; Songa Mercur AS, Songa Venus AS, Songa Offshore AS, Songa Trym AS, Songa Dee AS and Songa Offshore Cyprus PLC. The mergers are for accounting purposes recognized under a concept of consistency and considered to have effect from 1 January These principles are included in the figures below from that date. Songa Offshore SE s result after tax shows a loss for 2008 of USD 3.1 million. Operating income for 2008 was USD million. Operating expenses for 2008 was USD million. Net financial cost for 2008 was USD 57.8 million. Net cash generated by operating activities was USD million. Net cash used in investing activities was USD 28.6 million. Net cash generated by financing activities was USD 70.2 million. The cash generated by financing activities comes from issuance of share capital, refinance of the main bank facility from a USD 650 million facility to a USD 1,050 million facility, and the issuance of commercial papers. Net increase in cash and cash equivalents was USD 11.4 million. Total cash and cash equivalents at year end was USD 45.8 million. The change in other equity in the balance sheet for Songa Offshore SE relates mainly to the effect of merging the subsidiaries into the company, the change in reserves relates to the senior management option program and the after tax loss for Please see the notes of the financial statement for further information. Songa Offshore SE s total assets at year end were USD 1,657.8 million. As of December 31, 2008, the equity ratio in Songa Offshore SE was 15.1%. Songa Offshore SE s distributable equity was USD 78.6 million at year end. The net loss of the Company of USD 3.1 million has been attributed to Other Equity. Going concern In accordance with the Accounting Act 3-3a we confirm that the Financial Statements have been prepared under the assumption of going concern. This assumption is based on income forecasts for the year 2009 and the Group and the Company s long-term strategic forecasts. The Group and the Company s economic and financial position is sound. The Board believes that the annual report provides a correct outline of the Group and the Company s assets and debt, financial position and result. 19

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21 Board Composition Arne Blystad, chairman of the Board. Mr. Blystad is an independent investor, who owns and operates shipping and investment activities through a group of companies. Mr. Blystad is a Norwegian citizen and resides in Oslo, Norway. Valborg Lundegaard, board member. Mrs. Lundegaard is Senior Vice President Business Development in Aker Kvaerner Field Development. She has more than 20 years experience from the oil and gas industry and has held a number of key positions in Aker Kvaerner, including corporate and project management. Mrs. Lundegaard holds a degree in Chemical Engineering from the Norwegian University of Science and Technology (NTNU). Erik Østbye, board member. Mr. Østbye has since 1983 been associated with the Arne Blystad Group of companies: From 2003 to 2007 he was Vice President of Finance of Sokana Chartering LLC, from 1988 to 2003 he served as Vice President of Finance of Blystad Shipping (USA) Inc. and from 1983 to 1988 he was Financial Manager of Arne Blystad AS. Following the sale of the Blystad tanker operation to Eitzen Chemical USA in 2006, Mr. Østbye has continued his work for the Blystad Group of companies as a U.S. representative. Mr. Østbye also serves on the Board of Directors of several privately held companies. He holds a Siviløkonom/MBA from the Norwegian School of Management (BI). Mr. Østbye is a Norwegian citizen and resides in the US. Trond Christensen, board member. Mr. Christensen is the COO of Songa Offshore Group. Prior to becoming COO, Mr. Christensen worked 26 years in offshore drilling operations as well as onshore management of drilling rigs and coiled tubing drilling. During his 23 year career with Transocean, Mr. Christensen had the opportunity to work in a wide range of countries and areas in various capacities; such as Rig Manager, District and country Manager, as well as HSE auditor for the corporate HSE Department. He also held other positions such as Drilling Supervisor, Drilling Advisor and Engineer within several oil companies. Mr. Christensen is a Norwegian citizen and resides in Limassol, Cyprus. Nancy Charalambous, board member. Ms. Charalambous is a qualified lawyer in the Republic of Cyprus and an associate at Aristodemou Loizides Yiolitis LLC. She practices in the areas of banking, corporate finance and mergers and acquisitions and advises multinational clients and financial institutions in the relevant fields. Ms. Charalambous holds an LLB from the University of Sheffield and an LLM from University College London (UCL), England. She has completed the Legal Practice Course of the Law Society of England and Wales and has been called to the Cyprus Bar. Ms. Charalambous is a Cypriot citizen and resides in Limassol, Cyprus. 22

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27 Notes to the consolidated financial statements for the year ended 31 December General information Songa Offshore SE ( the Company ) and its subsidiaries (together, the Group ) are engaged in the business of owning and operating offshore drilling rigs and other vessels to be used in the exploration and production of crude oil. The Group owns five semi-submersible rigs and one drill ship. With a highly experienced management team, the Company s vision is to provide a flexible and reliable drilling service to its customers. The Group is headquartered in Oslo, Norway, and the rig operations are run from Singapore, Perth Australia, Limassol Cyprus, Stavanger Norway and Tripoli - Libya. Per 31 December 2008 the Group had operations in the North Sea, offshore West/North Africa and offshore North/West Australia. The Company has been listed on Oslo Stock Exchange since 26 January Ticker: SONG. Songa Offshore SE is a European public limited liability company, incorporated in Norway, the address of the registered headquarters is: Haakon VIIs gate 1, 0161 Oslo, Norway. Enterprise no These group consolidated financial statements were authorised for issue by the Board of Directors on 30 March Adoption of new and revised Standards In the current year, the Group has adopted all of the new and revised Standards and Interpretations issued by the International Accounting Standards Board (the IASB) and the International Financial Reporting Interpretations Committee (the IFRIC) of the IASB that are relevant to its operations and effective for annual reporting periods beginning on 1 January The adoption of these new and revised Standards and Interpretations have not affected the amounts reported for the current or prior years. The Group elected to early adopt IFRS 8 Operating Segments in IFRS 8 replaces IAS 14. The new standard requires a management approach under which segment information is presented on the same basis as that used for internal purposes. No new IFRSs issued are effective for the financial year ended 31 December Certain interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current year. The adoption of these interpretations has not led to changes in the Group s accounting policies. Other than IFRS 8, no new standards and interpretations which are not yet effective have been adopted by the group. The effect of implementation of these standards and interpretations has not yet been fully assessed, but are not expected to have a significant impact on earnings or equity of the group. The revised version of IFRS 3 Business Combinations will become effective for business combinations made on or after 1 July The 28

28 effect of implementing the revised standard will be dependent on the circumstances that apply to individual business combinations after the adoption date, and cannot be estimated reliably in connection with the presentation of the financial statements for The implementation of IFRS 3 (2008) will not result in any changes in relation to business combinations that have been completed in prior periods. 3. Significant accounting policies Basis of preparation The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The consolidated financial statements of the Songa Offshore Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU. The consolidated financial statements have been prepared under the historical cost convention, except for: Derivative financial instruments stated at fair value. (Note 5) Liabilities for cash-settled sharebased payment arrangements measured at fair value. (Note 27) Loans stated at amortized cost. (Note 23) The financial statements have been prepared on a going concern basis. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Business combinations Acquisitions of subsidiaries and businesses are accounted for using the purchase method. The cost of the business combination is measured as the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree, plus any costs directly attributable to the business combination. The acquiree s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business combinations are recognised at their fair values at the acquisition date. Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the Group s activities. Revenue is shown net of value-added tax, returns, rebates and discounts and after eliminating sales within the Group. 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. In connection with drilling contracts, the Company may receive lump sum 29

29 fees for the mobilization of equipment and personnel. Mobilization fees received and costs incurred to mobilize a drilling unit are recognized over the fixed contract term of the related drilling contract. Certain contracts include a contribution or fee from the client payable at the start of the contract. In cases where the contribution 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 firm 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 fee is recognised as revenue over the firm contract period. The related investment is depreciated over the firm contract period. In cases where the fee covers specific operating expenses at the start up of the contract the fees are recognised in the same period as the expenses. Foreign currency Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Foreign currency differences arising on retranslation are recognised in profit or loss. For the purpose of the consolidated financial statements, the results and financial position of all entities in the Group are expressed in United States Dollar (USD), which is the functional currency of the Company and the presentation currency for the consolidated financial statements. Retirement benefit plan The subsidiaries operate various pension schemes. The schemes are generally funded through payments to insurance companies or investment houses. A defined contribution plan is a pension plan under which the Group pays contributions into an insurance company, investment house or state organized fund. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a plan which typically defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, year of service and compensation. The liability recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10% of the value of plan assets or 10% of the defined benefit obligation are charged or credited to income over the employees expected average remaining working lives. Past service costs are recognized immediately in profit and loss, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortised on a straight-line basis over the vesting period. 30

30 Share-based compensation At year end the Group operates a cash-settled, share-based compensation plan for executive management. Each share option converts into one ordinary share of Songa Offshore SE on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. The fair value of the amount payable to executive management in respect of the share-based compensation plan which is settled in cash is recognised as an expense with a corresponding increase in liabilities over the period that the executives become unconditionally entitled to payment. The liability is re-measured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as personnel expense in profit or loss. At grant date the plan was considered equity settled but this was changed during the year. On reclassification from equity-settled to cash-settled the entity measured the liability initially using the reclassification date fair value of the equity award based on the elapsed portion of the vesting period. This amount was recognised as a credit to the liability and a debit to equity. The Company then re-measured the liability at year end and will do so at each subsequent reporting date and recognise any additional expense from increases in the liability. Further details on how the fair value of the share-based transactions have been determined can be found in note 27. A share option plan covering employees and board members that expired 31 December 2007 was cash settled in January Taxation Income tax expense comprises current and deferred tax. Income tax expense is recognised in profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. The measurement of deferred tax liabilities and assets reflects the tax 31

31 consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Rig, machinery and equipment Rig, machinery and equipment are stated at cost less accumulated depreciation and impairment losses. The cost of self-constructed assets and modifications includes the cost of material, direct labour and other direct attributable cost to bring the asset to a working condition for its intended use. Where components of an item of property, plant and equipment have different useful lives, they are accounted for separately. Subsequent expenditures are capitalised when it is probable that they will give rise to future economic benefits. Other costs are recognised in the income statement as incurred. Depreciation is charged to the income statement on a straight-line basis over the estimated useful life of each component of property, plant and equipment. The estimated useful lives, residual values and decommissioning costs are reviewed at each financial year end. No decommissioning costs have been recorded to date, and the presence of any obligations is reviewed at each financial year end. There is no decommissioning liability on the drill ship or the drilling rigs as there is no legal or constructive obligation to dismantle or restore the assets. In practice, assets of this nature are rebuilt, when no longer useful; laid up in dry dock or scrapped. For a standard vessel, specialised demobilising yards pay for a vessel to be scrapped per light displacement tonne (ldt) of the vessel. Any changes are accounted for prospectively as a change in accounting estimate. The estimated useful lives are as follows: Rigs and drill ship; 4 to 25 years Fixtures and equipment; 3 to 10 years The useful lives of the assets are reviewed at each year end. Management has reviewed each of the rigs by expected usage and considered the scheduled 5 years special periodic surveys (SPS) going forward. Costs for SPS and intermediate surveys on offshore units required by regulatory bodies are capitalised and depreciated over the anticipated period between surveys, generally five years. Other maintenance and repair costs are expensed as incurred. The Group categorizes spare parts into two groups, spare parts and spare assets. A spare part is a consumable that is not depreciated, but expensed when acquired against repair and maintenance cost. A spare asset is a larger spare item that is recorded as a rig component and depreciated. Consumables are recorded at cost. The residual value is reviewed at each year end, with any change in estimate accounted for as a change in estimate and therefore prospectively. The most common method to estimate residual values for ships is to use the scrap price which is publicly noted by brokers in USD per ldt of a complete vessel with all normal machinery and equipment on board. This method is used to determine the residual value for the drill ship Songa Saturn. Drilling rigs 32

32 are much more complicated to scrap than ships and have much less metal and scrapable/recoverable material due to their construction, design and nature. The price that could be recovered from scrapping of drilling rigs is estimated to approximate the cost of extracting this scrap metal. Therefore, no residual value is recorded given the assumption that if the assets were disposed at the end of their useful life given their expected age and condition no material amount would be recovered. Impairment of tangible assets The carrying amounts of the Group s rigs, machinery and equipment are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. When considering impairment indicators, the Group considers both internal (e.g. adverse changes in performance) and external sources (e.g. adverse changes in the business environment). These are analyzed by reviewing day rates and broker valuations. The recoverable amount of an asset is the higher of its fair value less costs to sell and value in use. The value in use is calculated as the present value of the expected future cash flows for the individual units. An impairment loss is recognised if the carrying amount of an asset exceeds the recoverable amount. Trade receivables Trade receivables are presented net of any allowance for bad debt. Estimates for allowance for bad debt are calculated individually for each customer. When a trade receivable is uncollectible, it is written off against the provision account. Subsequent recoveries of amounts previously written off are credited against the provision account. Changes in the carrying amount of the provision account are recognised in profit or loss. See also note 17. Financial liabilities and equity instruments Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs. Financial liabilities are classified as either financial liabilities at Fair Value Through Profit and Loss (FVTPL) or other financial liabilities. Financial liabilities at FVTPL are stated at fair value, with any resultant gain or loss recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability. Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately. The Group does not hold derivatives that meets the criteria for hedge accounting. 33

33 Further details of derivative financial instruments are disclosed in note 5 to the financial statements. Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value with changes in fair value recognised in profit or loss. Cash and cash equivalents Cash and cash equivalents include cash, bank deposits, collaterals, escrow accounts, bank accounts held by managers on our behalf for and other short-term highly liquid assets that are readily convertible to known amounts of cash and which are subject to insignificant changes in value. See note 16 for further details. Events after the balance sheet date New information on the Group s positions at the balance sheet date is taken into account in the annual financial statements. Events after the balance sheet date that do not affect the Group s position at the balance sheet date but which will affect the Group s position in the future are stated if significant. 4. Critical accounting judgements and key sources of estimation uncertainty In the application of the Group s accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, rarely equal the related actual results. The following are the critical judgements and estimations, that management has made in the process of applying the entity s accounting policies and that have the most significant effect on the amounts recognised in financial statements: Impairment of rigs and drill ships At each balance sheet date judgement is used to determine whether there is any indication of impairment of the Group s fleet of rigs and drill ship. If any such indication exists, the asset s recoverable amount is estimated. When considering impairment indicators, the Group considers both internal (e.g. adverse changes in performance) and external sources (e.g. adverse changes in the business environment). These are analysed by reviewing day rates and broker valuations. If an indicator of impairment is noted, further management estimate is required to determine the amount, if any, of impairment. In order to measure for potential impairment, the carrying amount of the rigs and drill ship would be compared to the recoverable amount, which is the higher of value in use or fair value less the cost to sell. The value in use is calculated as the present value of the expected future cash flows for the individual units, requiring significant management estimates of the proper discount rates as well as the length and amounts of cash 34

34 flows. Fair value is calculated as the mean of three independent brokers estimates on the rig values. An impairment loss would then be recognised to the extent the carrying amount exceeds the recoverable amount. Useful lives for depreciation of fixed assets Depreciation of rigs and drilling equipment is computed using the straight line method over estimated useful lives. The depreciable amount is determined after deducting the residual value of the asset. To support management s estimate for residual value, considerations provided by an independent third party have been used. The cost of rigs has been categorised separately by its main components, and useful lives have been determined for each component. The primary portion of the rigs is depreciated over 25 years, while other components are depreciated over their useful lives, ranging from 4 to 25 years. Cost which relate to special periodic surveys categorized as full or intermediate are amortized over a five and a two and a half year period respectively. Estimates of useful lives, residual values and methods of depreciation are reviewed at each financial year end, and adjusted if appropriate. Any changes are accounted for prospectively as a change in accounting estimate. The estimated useful life of the rigs could change, resulting in different depreciation amounts in the future. Valuation of share based-options The company uses share-based incentive programs. Share-based options are valued at fair value at the grant date using the Black & Scholes option pricing model. The company carefully reviews the assumptions used in the Black & Scholes option pricing model, and uses an external third party to perform the calculations of the fair value for each period. However changes in the assumptions, and especially the expected volatility used for the calculation of fair value at grant date, could change the fair value of the options significantly. Income taxes deferred tax assets The group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain. The group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. Deferred tax assets are recognised for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. 35

35 5. Financial instruments Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of debt, which includes borrowings (note 23), cash and cash equivalents (note 16) and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. The Group has been in compliance with externally imposed capital requirements related to borrowings (note 23). The Group will balance its overall capital structure through the payment of dividends, new share issues and share buy-backs as well as the issue of new debt or the redemption of existing debt. The Group s overall financing strategy moves with the changes in the financial markets. The increased risk premiums and lack of liquidity in the financial markets is closely monitored by the Company. In addition to regular quarterly repayments under the bank facility, the Company has to plan for retiring the two commercial papers, of NOK 200 million and NOK 128 million due in June and September 2009 respectively, instead of rolling them over for new periods. The gearing ratios at 31 December 2008 and 2007 were as follows: USD Total borrowings (1) 1,162, ,266 Less: cash and cash (58,501) (64,207) equivalents Net debt 1,103, ,059 Total equity (2) 335, ,238 Total capital 1,438,929 1,015,297 Gearing ratio 77% 73% (1) Debt is defined as long- and short-term borrowings stated at amortized costs, see note 23. (2) Equity includes all capital and reserves for the Group. The Company s future capital requirements and level of expenses will depend on numerous factors, including but not limited to the timing and terms on which drilling contracts and other contracts can be negotiated, the amount of cash generated from operations, the level of demand for its services and general industry conditions. Songa Offshore will further be exposed to credit risk, interest rate risk, foreign currency risk and liquidity risk risks in its operations. Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements. 36

36 Categories of financial instruments USD ' Financial assets Financial assets as at fair value through profit or loss (FVTPL) Loans and receivables including cash and cash equivalents excluding prepayments 1,462 6, , ,259 Financial liabilities Financial liabilities as at FVTPL 26,584 3,327 Amortised cost 1,172, ,610 The Group monitors and manages the financial risks related to the operations of the Group through internal reports and analysis. The group is exposed to various risks such as market risk (including currency risk, fair value interest rate risk, and price risk), credit risk, liquidity risk and cash flow interest rate risk. The Group seeks to manage these risks by using derivative financial instruments when appropriate. The use of financial derivatives is monitored and approved by the board of directors. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. interest rate swaps to mitigate the risk of rising interest rates forward exchange contract to hedge the exchange rate risk arising on collateral in NOK set as security for a TRS (Total Return Swap) agreement. There has been a change to the Group s exposure to market risks as the main floating loan was refinanced in August 2008 and now exposes the Group to a larger amount in the floating interest rate market. Further the expansion in Norway has increased the Group s exposure to costs in NOK. Foreign currency risk management The Group is exposed to foreign currency (FC) risks related to its operations. The Group s expenses are primarily in USD, AUD and NOK. As such, the Group s earnings are exposed to fluctuations in the foreign currency market. The Group uses the foreign currency spot market to buy foreign currencies. FC '000 Assets Liabilities AUD 6,605 2,789 22,109 17,629 EUR ,404 NOK 40, ,925 5, ,389 LYD 1, SGD ,954 Market risk management The Group s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates (see below). The Group enters into derivative financial instruments to manage its exposure to interest rate and foreign currency risk, including: forward exchange contracts to hedge the exchange rate risk arising on debt in foreign currency 37

37 Foreign currency sensitivity analysis The Group is mainly exposed to the currency of Australia (AUD), Singapore (SGD), Norway (NOK), Libya (LYD) and the European Union currency (EUR). The table below details the Group's sensitivity to a 10 % change in the USD against the relevant foreign currencies with all other variables held constant. The analysis only includes monetary items stated in other currencies than USD. A negative number below indicates a decrease in profit and loss after tax and a positive number below indicates an increase in profit and loss after tax where the currency changes 10% against the USD. Impact on profit and loss in USD ¹ USD ' Currency Australian Dollar (AUD) ² -/+838 -/+851 European Currency (EUR) ² -/+1 -/+150 Norwegian Krone (NOK) ² +/-395 +/ Libyan Dinar (LYD) ² +/ Singapore Dollar (SGD) ² +/-11 -/+61 ¹ The net of assets and liabilities for each currency ² Working capital exposure The Group holds two commercial papers in NOK that have been swapped to USD and is secured with forward contracts. They are not part of the sensitivity analysis above. In management s opinion, the sensitivity analysis is unrepresentative of the inherent foreign exchange risk for the year as a whole as the year end exposure does not reflect exposure during the year. The USD has been fluctuating substantially towards the above currencies during the year. The Group has no specific policy of entering into forward foreign exchange contracts to cover foreign currency payments. Contracts are entered into when treasury finds it in line with the overall currency risk strategy. The following table details the forward foreign currency (FC) contracts outstanding as at reporting date: Outstanding contracts Trade date Value date Exchange rate Foreign currency Contract value Fair value FC '000 USD '000 USD '000 Buy NOK 06/12/08 06/15/ , ,000 9,897 Buy NOK 09/23/08 09/22/ , ,000 3,267 Sell NOK 11/03/08 06/15/ ,655-11, Sell NOK 12/18/08 06/15/ , Sell NOK 10/01/08 01/05/ ,700-9,906-1, The Group has issued two commercial papers in NOK;NOK 200 million and NOK 128 million respectively. The entire NOK 200 million commercial paper is swapped to USD and NOK 100 million of the NOK 128 million commercial paper is swapped to USD. The Group has entered into foreign exchange contracts to buy NOK in order to 38

38 hedge the exchange rate risk. Further the Group has on two occasions bought back parts of the first commercial paper (NOK 11 and NOK 1 million) and reduced its exposure by selling NOK accordingly. In addition the Group at year end had a contract to sell NOK that was linked to a cash collateral on TRS agreements, the contacted expired on 5 January 2009 and was then settled. Interest rate risk management The Group is exposed to fluctuations in interest rates for USD. The risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings and by the use of interest rate swap contracts. Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to floating interest rates at the balance sheet date. A 50 basis point increase or decrease is used and is considered as reasonably possible change in interest rates. If interest rates had been 50 basis points higher/lower and all other variables were held constant the Group s profit and loss after tax for the year ended 31 December 2008 would decrease/increase by USD 2.1 million (2007: decrease/increase by USD 1.8 million). This is attributable to the Group s exposure to floating interest rates on its bank facilities held during the year. Interest rate swap contracts Under the interest swap contracts the Group agrees to exchange the difference between fixed and floating interest rate amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the fair value of issued fixed rate debt and the cash flow exposure on the issued variable rate debt. The Group is financed through a combination of equity, bonds and bank loan. The interest rate on the major bank loan is LIBOR (floating) plus a margin. In September 2007 the Group entered into a 5 year interest rate swap contract, swapping from floating to fixed interest. Meaning that we will receive floating interest rate and pay fixed interest rate. Three notionals of USD 50 million each have been swapped from LIBOR to a fixed interest rate. The term of the swaps is 5 years with an option for the bank to flip the swap back to LIBOR after 1 year, and on every quarter there after. If the swaps are flipped we will pay LIBOR minus 0.10%. The swaps: USD 50 million, 5 September 2007, fixed rate 4.25% USD 50 million, 7 September 2007, fixed rate 4.20% USD 50 million, 11 September 2007, fixed rate 4.16% The market value of the swap was at year end 2008 is minus USD 13.1 million. The instrument is recognized at fair value through profit and loss. The option the bank has to flip is not treated as an embedded derivative since the swap itself is a derivative. Credit risk management Due to the nature of the Group s operations, revenues and related receivables are typically concentrated amongst a relatively small customer base of international oil and gas companies. The Group continually evaluates the credit risk associated with customers and, when considered necessary, requires certain guarantees, either in the form of parent company guarantees, bank guarantees or escrow accounts. The Group s three largest customers accounted for 37%, 15% and 13% of gross revenues respectively in The maximum credit risk is equal to the capitalised value of trade receivables and incurred revenue not 39

39 billed. The trade receivables are pledged as security for the Group s long term borrowing (note 20). There is no history of material loss on trade receivables. The Group s short term investments are limited to reputable money market funds and cash deposits in the Group s relationship banks. Derivative financial instruments are normally entered into with the Group s main relationship banks. Liquidity risk management Prudent liquidity risk management includes maintaining sufficient cash and cash equivalents, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, Group Treasury is seeking flexibility in funding by maintaining availability under committed credit lines. The following tables detail the Group s remaining contractual maturity for its nonderivative financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. USD ' months 3-12 months 1-5 years Total 2008 Non interest bearing 10,394 10,394 Variable interest rate instruments 57, , ,083 1,090,842 Fixed interest rate instruments 2,321 71, , ,996 Contractual obligations - 30,191 1,683 31,874 70, , ,238 1,362,106 USD ' months 3-12 months 1-5 years Total 2007 Non interest bearing 10,631 10,631 Variable interest rate instruments 38, , , ,597 Fixed interest rate instruments 7,325 35, , ,357 Contractual obligations 16,832 10,095 26,927 56, , , ,511 At year end 2008 there are unused financing facilities in the amount of USD 57 million. The Group expects to meet its obligations from operating cash flows. The Group plan to reduce its gearing ratio for the next year with aggressively redeeming the outstanding debt in correlation with increased revenues. The increased risk premiums and lack of liquidity in the finance markets is closely monitored by the Group. In addition to regular quarterly repayments under the bank facility, the Group has to plan for retiring the two commercial papers due in June (NOK 200 million) and September 2009 (NOK 128 million) respectively instead of rolling them over for new periods. The following table details the Group s liquidity analysis for its derivative financial instruments. The flippable swap is assumed not to be converted given the existing level for floating 3M USD LIBOR. The table has been drawn up based on the 40

40 undiscounted net cash (inflows)/outflows on the derivative instruments that settle on a net basis. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves existing at the reporting date and the probability that options included in the instruments would be exercised. USD ' Flippable interest rate swap USD ' Flippable interest rate swap 1-3 months 3-12 months 1-5 years Total ,813-10,313-14, months 3-12 months 1-5 years Total ,150-1,455 In addition the Group holds a Total Return Swap (TRS) with its own share as underlying security. The Group is exposed to fluctuations in the share price and a decrease in the share price when the instruments are settled or rolled forward could result in cash payments. Between settlement dates the bank can call for funds to set a side as cash collateral. There was no cash collateral at year end. The maximum downside on the TRS is USD 5.4 million converted with the NOK/USD exchange rate at year end. Gross settled forward contracts can be found in this note in the section Foreign currency risk management. Fair value of financial instruments The fair values of financial assets and financial liabilities are determined as follows: the fair value of other financial assets and financial liabilities (excluding derivative instruments) is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable current market transactions and dealer quotes for similar instruments the fair value of derivative instruments is calculated using quoted prices. Where such prices are not available, use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments for nonoptional derivatives, and option pricing models for optional derivatives. The fair value of the derivative financial instruments are calculated by reputable financial institutions on behalf of the Group the carrying amounts of financial liabilities recorded at amortised cost in the financial statements are assumed to approximate the fair value. Note 6 Changes in the Group s structure In April 2008 Bjørgvin Offshore AS was renamed to Songa Services AS. In May 2008 Songa Mercur AS and Songa Venus AS merged with their parent company Songa Offshore AS. In June 2008 Songa Offshore AS, Songa Dee AS and Songa Trym AS merged with their parent company Songa Offshore ASA. On 12 December Songa Offshore ASA was transformed from a Norwegian Public Limited Liability Company (ASA) to a European Public Limited Liability Company; Societas Europaea (SE). The new official name of the company is Songa Offshore SE. The transformation was a result of a merger between Songa Offshore Cyprus PLC and Songa 41

41 Offshore ASA which entered into force the same day. In December 2008 Bjørgvin Offshore KS was liquidated. Four new companies were established during the year; Songa Management Ltd (Cyprus), Songa Delta AS (Norway), Songa Delta Ltd (Cyprus) and Pegasus Invest Pte Ltd (Singapore). Note 7 Segment information No segment information is presented. The Group's business activities are not organised on the basis of differences in related products and services or differences in geographical areas of operations. The Group operates five rigs and one drill ship all in the mid water segment. Operating results are regularly reviewed by the entity s chief operating decision maker in order to make decisions about resources to be allocated to them and to assess the performance. The rigs are reported together since the drilling services provided are the same, the drilling operations are the same and the customers approached are the same. The rigs and drillship all operate world wide, and therefore providing financial information split according to geographical location is not considered to add any value. USD million Revenue Customer A 141 Customer B 58 Customer C 49 Other customers 134 Total 382 Note 8 List of subsidiaries Company Country of registration Ownership share 2007 Ownership share 2008 Songa Norway 100% 100% Management AS Songa Saturn Norway 100% 100% AS BOP 15 Invest Norway 100% 100% AS Songa Norway 100% 100% Services AS ¹ Songa Singapore 100% 100% Offshore Pte Ltd Songa Saturn Singapore 100% 100% Chartering Pte Ltd Songa Pty Ltd Australia 100% 100% Songa Management Inc Songa Delta AS Songa Management Ltd Songa Saturn Ltd Songa Delta Ltd Pegasus Invest Pte Ltd USA 100% 100% Norway 100% 100% Cyprus 100% 100% Cyprus 100% 100% Cyprus 100% 100% Singapore 100% 100% ¹ Renamed from Bjørgvin Offshore AS. The Group's business activities are concentrated around a relatively small number of customers. The Group s three largest customers account for 37%, 15% and 13% of gross revenues respectively: 42

42 Note 9 Exchange rates Currency/USD Exchange rates year end 2008 Exchange rates year end 2007 Norwegian Krone (NOK) Singapore Dollar (SGD) Australian Dollar (AUD) Libyan Dinar (LYD) European Currency (EUR) Note 11 Other gain and loss USD ' Allowances for bad debt ¹ 1,506 1,381 Net foreign exchange (gain)/loss Changes in fair value financial items ² (4,567) ,276 (784) Other (gain)/ loss 63,215 1,285 Note 10 Revenue, operating expenses USD ' Mobilisation 13,780 28,877 Time Charter Revenue 322, ,042 Bare Boat Charter 33,300 30,775 Revenue Management fee Other income 15,524 11,913 Total revenue 381, ,860 ¹ See note 17. ² For the financial year 2008 changes in fair value consist of the following items: Total Return Swap (loss USD 49.3 million), Flipable swap (loss USD 11.1 million), early redemption of bond (loss USD 4.5 million) and loss of disposal of assets (USD 1.4 million). Income, expenses, gains and losses for other categories of financial instruments can be found in note 13 as interest expenses, they are mainly related to loans stated at amortized cost. Operating expenses (USD ,702) is in its entirety related to operation of the rigs 43

43 Note 12 General and administrative expense USD ' Total administrative expenses 9,247 13,153 Total employee benefit expenses 21,436 19,451 Total general and administrative expenses 34,589 28,698 USD ' Total administrative expenses as follows: Legal and consulting fees ¹ 6,438 4,746 Other office costs 3,831 2,890 Travel expenses 1,230 1,861 Other expenses 1, Total administrative expenses 13,153 9,247 Including remuneration to auditors USD ' Total employee benefit expenses are split as follows: Salary Social security Bonus and stock based compensation Pension cost defined benefit plans (Note 28) Director's fee ¹ Total employee benefit expense ¹ Including payments to some members of the BoD in See also note ,920 11, ,091 6, ,436 19,451 Employees, full time equivalents Employees, full time equivalents Fees paid to the auditors Deloitte and cooperating companies are split as follows (VAT is not included in the auditor's fee): USD ' Statutory audit Other assurance services Other non-assurance services Tax consultant services Total

44 Note 13 Finance income and finance costs USD ' Interest income Total finance income 1,784 2,220 1,784 2, Interest expense 61,618 67,249 Other financial expenses Less: amounts included in the cost of qualifying assets - (6,335) Total finance costs 62,046 61,020 Income, expenses, gains and losses for other categories of financial instruments can be found in note 11. Note 14 Tax income and deferred taxes USD ' Current taxes paid Changes in deferred tax Tax income/(expense) (13,071) (14,137) 9, (3,825) (13,730) A reconciliation of the effective rate of tax and the nominal tax rate in Songa Offshore ASA s country of registration, Norway: 28% 28% Pre-tax profit 13,925 61,940 Tax assessed at the nominal tax rates in Songa Offshore Group s countries of registration, 28% (3,899) (17,343) Tax rates outside Norway which differ from 28% Non-taxable income 4,784 Non-deductible expenses 7 (1,824) Issue expenses recorded to equity (277) - Tax income/(expense) recognised in consolidated income statement (3,825) (13,730) Effective tax rate 27.5 % 22.2 % 45

45 Deferred tax assets and deferred tax liabilities: Loss carried forward Deferred tax assets - gross at 0%-35% 134, , , ,535 Property, plant and equipment Profit and loss account Option plans Allowance for doubtful debt Financial instruments Interest bearing debt Deferred tax liabilities - gross at 0%-35% 93,617 77,756 31,630 39,538 (176) - (373) - (6,458) - 2,076 1, , ,740 Net recognised deferred tax assets 14,385 12,795 The deferred tax asset and deferred tax liability are explained as follows: Non taxable income and non tax deductible expenses: Change in fair value of BOP option Gain on sale of limited partnership Other non-deductible Employee options Issue expenses Interest expenses Allowance for doubtful debt Change in fair value of derivative financial instruments Total (3,045) ,872 (990) - (10,000) 3,511 (3,323) (966) (6,985) Temporary differences: Property plant and equipment Profit and loss account Option plans Allowance for doubtful debt Financial instruments Interest bearing debt Total 386, , , ,208 (629) - (1,333) - (23,066) - 7,415 5, , ,995 46

46 Losses carried forward: Loss carried forward Total (481,947) (470,299) (481,947) (470,299) Net temporary differences: Positive temporary differences Negative temporary differences Net temporary differences Tax in the range of 0%-35%, deferred tax asset Tax in the range of 0%-35%, deferred tax liability Tax losses carried forward have no expiry date. At year end the deferred tax asset can be recognised. This is based on the fact that all the rigs are on contract and generating income. The Group expects to generate net income that can be offset against the 506, ,995 (503,708) (470,299) 3,012 9,696 (14,385) (13,900) - 1,105 deferred tax assets in the near future. The Group operates in different tax jurisdictions with different tax rates so the deferred tax liability and deferred tax asset can not be calculated as a fixed percentage of the temporary differences. Note 15 Earnings per share USD Basic earnings per share Diluted earnings per share Basic earnings per share: The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: USD ' Profit for the year 10,096 48,210 Profit impact assumed conversions 2,925 2,304 Adjusted profit 13,021 50,514 Weighted average number of ordinary shares for the purposes of basic earnings per share (share '000) 94,742 85,800 47

47 The earnings and weighted average number of ordinary shares used in the calculation of diluted earnings per share are as follows: Note 16 Cash and cash equivalents USD ' USD ' Profit for the year 10,096 48,210 Profit impact assumed conversions 2,925 2,304 Adjusted profit 13,021 50,514 Weighted average number of ordinary shares for the purposes of basic earnings per share (share '000) 94,742 85,800 Warrants - 5,234 Convertible bond 9,578 5,522 Dilutive potential ordinary shares 9,578 10,756 Adjusted weighted average number of ordinary shares for the purpose of diluted earnings per share (share '000) 104,320 96,556 Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year. Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has one category of dilutive potential ordinary shares included in the calculation above, a convertible bond. The USD 125 million convertible bond loan is convertible into ordinary shares in the Company. Cash at the bank and in hand 51,787 19,989 Cash held by rig managers 6,300 - Time deposit - 20,000 Paid in not registered share - 14,754 capital Cash collateral on Total Return Swap - 9,270 Escrow account regarding employee's tax Total cash and cash equivalents 58,501 64,207 Note 17 Trade and other receivables There are made provisions for loss on trade receivables at year end 2008 in the amount of USD 2.7 million (2007 USD 1.4 million). A loss on trade receivables has been recorded during the year with USD 1.9 million (In 2007:0). The normal credit period, when issuing invoices for sale of drilling services, is days. Interest is charged on the receivables in accordance with the contract with the customer. Total trade and receivables at year end is USD 44.5 million including provision for loss USD 2.7 million. (USD '000) Not due 0-30 days days days over 91 days Total overdue 37, ,175 3,821 48

48 Note 18 Rig, machinery and equipment USD '000 Rigs and drill ship Fixtures and equipment Total Year ended 31 December 2007 Opening net book amount 711, ,332 Additions 323, ,228 Book value before depreciations 1,035,359 1,201 1,036,560 Total depreciation charge (54,425) (241) (54,666) Closing net book amount 980, ,894 At 31 December 2007 Cost Accumulated depreciation Net carrying amount 1,049,022 1,356 1,050,378 (68,088) (396) (68,484) 980, ,894 Year ended 31 December 2008 Opening net book amount 980, ,894 Additions 481, ,142 Book value before depreciations 1,462,083 1,953 1,464,036 Total depreciation charge (60,468) (370) (60,838) Closing net book amount 1,401,615 1,583 1,403,197 At 31 December 2008 Cost Accumulated depreciation Net carrying amount 1,530,171 2,349 1,532,520 (128,556) (766) (129,322) 1,401,615 1,583 1,403,197 Estimated lifetime 4-25 years 3-10 year Depreciation rates 4%-25% 10%-30% Depreciation method Straight line Straight line Rigs and drill ship includes the rigs Songa Venus, Songa Mercur, Songa Dee, Songa Trym, Songa Saturn and Songa Delta. Deepsea Delta was acquired in August 2008 and subsequently renamed Songa Delta. Estimated residual value for Songa Saturn as at 31 December 2008 is USD 3.1 million. There has been recognized no impairment loss for any of the Group's units. 49

49 Borrowing costs capitalised on qualifying assets equals USD 0.0 million in 2008, (USD 6.3 million in 2007). The Group has capital commitments related to Songa Trym (new Blow Out Preventor) and Songa Dee ( the Special Periodic Survey in March/April 2009). See note 5 liquidity risk management. Note 19 Incurred revenue Incurred revenue relates to work performed in the amount of USD 11.1 million that has not yet been invoiced to the customers per 31 December 2008 (2007: USD 29.2 million). Note 20 Assets pledged as security Assets have been pledged to secure borrowings of the Group (see note 23). The rigs and the drillship are pledged as security with a maximum amount of USD 1,050 million each. Note 21 Other assets USD ' Other current assets 1,871 6,107 Prepayments Warehouse inventory Financial instruments ¹ 1,462 - Miscellaneous Other assets 3,660 7,018 ¹ FX swap Note 22 Issued capital, reserves and other equity USD '000 Number of shares ('000) Share capital Share premium Paid in not registered Total issued capital As at 01/01/ ,910 12,791 27,469-40,260 Exercised options 5, ,189 34,996 Conversion of warrants ,211-1,279 Exercised 1,500 options Q ,754 14,754 As at 31/12/ ,267 13,666 62,869 14,754 91,289 As at 01/01/ ,267 13,666 62,869 14,754 91,289 Issue of share options 1, ,478 (14,754) - Issue of share capital 10,600 1,517 35,424 36,941 Conversion of warrants 5,941 1,171 7,725 8,896 As at 31/12/ ,308 16, , ,126 50

50 USD '000 Employee benefits reserves Other equity As at 01/01/ , ,500 Translation adjustments (3,259) Profit for the period 48,210 Recognition of convertible bond loan 20,815 Recognition of share-based payments (1,155) As at 31/12/ , ,266 As at 01/01/ , ,266 Adjustments recognized directly to 216 equity Recognition of share-based 1,902 payments Profit for the period 10,096 As at 31/12/ , ,578 Total authorized number of shares is 123,191,887 (2007: 134,805,542) including options to the management, with a par value of NOK 1 per share (2007: NOK 1 per share). All issued shares are fully paid. All issued shares in the Company are vested with equal shareholder rights in all respects. There is only one class of shares and all shares are freely transferable. At the General Meeting 26 May 2008 the General Assembly granted the Board of Directors authorization to buy back own shares up to 10% of the share capital. At year end 2008 no shares had been bought back. USD ' Equity-settled employee benefits reserve Balance at beginning of year 13,683 14,838 Option cost 2,250 4,841 Cash settled ¹ (348) (5,996) Net changes during the financial year 1,902 (1,155) Balance at end of year 15,585 13,683 ¹ Transferred to other short term liabilities. Further information about sharebased payments to executive management and Board of Directors is set out in note 27, 28 and

51 20 largest shareholders Owner Number of shares in '000: Ownership interest in %: SPENCER ENERGY AS 24, % GOLDMAN SACHS INT. - EQUITY 6, % GOLDMAN SACHS & CO - EQUITY 5, % UBS AG, LONDON BRANCH 4, % PICTET & CIE BANQUIERS 3, % NORDEA BANK NORGE ASA 2, % GOLDMAN SACHS & CO - EQUITY 2, % SVENSKA HANDELSBANKEN STOCKHOLM 1, % CITIBANK N.A. (LONDON BRANCH) 1, % BANK OF NEW YORK, BRUSSELS BRANCH 1, % MORGAN STANLEY & CO. INC. 1, % DNB NOR NORGE SELEKTV (III) 1, % SKANDINAVISKA ENSKILDA BANKEN 1, % KLP LK AKSJER % STATE STREET BANK AND TRUST CO % ALFRED BERG NORGE % J.P. MORGAN BANK LUXEMBOURG S.A % JPMORGAN CHASE BANK % ABN AMRO BANK N.V. LONDON BRANCH % SIX SIS AG % Total 20 largest 63, % Others 41, % Total 105, % Shares and options owned by the executive managers, members of the board and senior management in thousands: Name Shares Options Arne Blystad - Chairman 24,361 Jon C. Syvertsen - Board member 121 Gunnar Hvammen - Board member 400 Anette Mellbye - Board member 1 Asbjørn Vavik - CEO Tom E. Jebsen - CFO Trond Christensen - COO Arne Blystad holds his shares through Spencer Energy AS. Jon C. Syvertsen holds his shares through Syneco AS, Adrian Finans AS and Adrian Shipping AS. Gunnar Hvammen holds his shares through Solan Capital AS. Asbjørn Vavik holds his shares through Netza AS. 52

52 Note 23 Borrowings Current (USD '000) Secured: Bank loan (i) 210, ,000 Current secured debt 210, ,000 Non current (USD '000) Secured: Bond loan (ii) 25,373 79,428 Bond loan (iii) 114, ,024 Bank loan (iv) 765, ,565 Non current secured debt 905, ,017 Current (USD '000) Unsecured: Commercial paper (v) - 30,248 Commercial paper (vi) 28,319 - Commercial paper (vii) 18,673 - Current unsecured debt 46,992 30,248 (i) Current portion of non current bank loan. See section (iv). (ii) USD 75 million bond loan reduced to a nominal value of USD 23.4 million, issued 24 March Main terms: 5 years, 9.75% fixed rate, no warrants, not convertible. Option: The Company may redeem, partly or wholly, the remaining loan as follows: (a) On 24 March 2009 at 106% of par value plus accrued interest (b) on 24 March 2010 at 105% of par value plus accrued interest. The loan is a second priority mortgage with priority and right of advancement after a USD 150 million first priority mortgage granted as security for the senior bank loan. Secured with second priority mortgage in the rig Songa Dee. The Company shall not make or distribute dividend payments to the Company s shareholders that constitutes more than, on a consolidated basis 50% of the Company s net profit after taxes for the previous financial year. The outstanding amount under the senior bank loan is redeemed with at least USD 15 million in both 2009 and (iii) USD 125 million convertible bond loan due 2010 with an annual coupon of 3.25% and a conversion price of USD per share. The bond is a combined instrument with one liability component and on equity component. The liability component is measured first, and the difference between the proceeds of the bond issue and the fair value of the liability is assigned to the equity component. The present value of the liability component is calculated using a discount rate equal to the market interest rate for similar bonds having no conversion rights. At intitial recognition the equity component amounted to USD 20.8 million. (iv) USD 1,050 million bank loan facility drawn down in August The facility consists of a term loan in the principal amount of USD 910 million and a revolving facility in the principal amount of USD 140 million. At year end USD 1,028 million has been drawn down and USD 50 million repayed. Main terms: USD Libor + a margin in the range of 1.75% % depending on the leverage ratio and the revolving facility has a fixed margin of 2.25%. Instalments in the amount of USD 50.0 million are due in February and May 2009, thereafter follows eight quarterly instalments of USD 60.0 million each. From Q the quarterly instalments are USD 45 million for six quarters, then two quarters of USD 35 million each and finally USD 80 million on the final maturity date in August Main financial covenants: Cash and cash equivalents to be minimum USD 50 53

53 million, working capital to be zero or positive, leverage ratio no more than 5.00:1.00 from December , equity ratio no less than 3.00:10.00 until December and thereafter no less than 3.50:10.00, value adjusted equity to be no less than USD 750 million and the minimum aggregate market value of the rigs must be at any time at least 175% of the loan outstanding. Not to make any distribution or to pay any dividends without the prior written consent of the Banks. The borrower is entitled to repay the loan in full or in part. The loan is recognized at amortized cost. For current part see section (i). (v) On 17 December 2007 the Company issued a six months commercial paper in the amount of NOK 165 million. The Company simultaneously sold NOK 165 million and received USD and entered into a forward agreement buying NOK to settle the commercial paper at maturity. The forward agreement matured at the same date as the commercial paper. Through this, the Company locked in a USD interest rate of 8.3% on the commercial paper. The commercial paper carried a coupon of 9 5/8%. (vi) On 16 June 2008 the Company issued a twelve months commercial paper in the amount of NOK 200 million. The Company simultaneously sold NOK 200 million and received USD and entered into a forward agreement buying NOK to settle the commercial paper at maturity. The forward agreement matures at the same date as the commercial paper. Through this, the Company locked in a USD interest rate of 7.5% on the commercial paper. The commercial paper carries a coupon of 10.50%. entered into a forward agreement buying NOK to settle the NOK 100 million of the commercial paper at maturity. The forward agreement matures at the same date as the commercial paper. Through this, the Company locked in a USD interest rate of 8.5% on NOK 100 million of the commercial paper. The commercial paper carries a coupon of 11.50%. Note 24 Trade and other payables USD ' Payable vendors 10,420 10,631 Accrued expenses ¹ - 15,938 Accrued employee benefits ¹ - 7,568 Other (26) 206 Total trade and other payables 10,394 34,343 ¹ See note 26 "Other liabilities" for 2008 figures. Note 25 Deferred cost USD ' Prepaid revenues (1,250) (8,727) Deferred drydocking Mobilization costs 2, Total deferred cost 2,515 (7,815) (vii) On 22 September 2008 the Company issued a twelve months commercial paper in the amount of NOK 300 million of which NOK 128 million was placed at year end. The Company simultaneously sold NOK 100 million and received USD and 54

54 Note 26 Other liabilities USD ' Accrued employee 11,411 benefits ¹ - Employee share option cash settlement ² - 5,996 Withholding tax 2,378 1,326 VAT liabilities (750) 592 Accrued expenses ¹ 5,918 - Other Total other liabilities 19,184 7,927 ¹ See note 24 "Trade and other payables" for 2007 figures. ² Employee liability related to the option plan is USD and is recognised in the balance sheet under "Other long term liabilities". Note 27 Share based payments The Group has a share-based compensation plan for executive management. At the annual general meeting (AGM) on 26 May 2008, the Board of Directors was authorized to issue options to subscribe for 900,000 shares in the Company to executive management. The shares are vested over a period of 36 months with 300,000 options vested after 12 months, another 300,000 vested after 24 months and the last 300,000 vested after 36 months. Shares can be exercised for a period of 24 months after vesting. The strike price for the options has, in accordance with the authorization given by the AGM, been set to NOK per share. In accordance with generally agreed principles the strike price was adjusted due to the private placement that took place in October 2008 and is at year end NOK per share. The share-based compensation plan issued in 2006 that expired at year end 2007 was settled in January During 2008 the following was granted: Option series Number of Options Grant date Expiry date Exercise price Average fair value at grant date 1 Executive mgmt 300,000 26/05/ /05/2011 NOK NOK Executive mgmt 300,000 26/05/ /05/2012 NOK NOK Executive mgmt 300,000 26/05/ /05/2013 NOK NOK At grant date the plan was considered equity settled but this was changed during the year. On reclassification from equity-settled to cash-settled the entity measured the liability initially using the reclassification date fair value of the equity award based on the elapsed portion of the vesting period. This amount was recognised as a credit to the liability and a debit to equity. The Company then re-measured the liability at year end and will do so at each subsequent reporting date and recognise any additional expense from increases in the liability. Options were priced using Black & Scholes option pricing model. Where relevant, the expected life used in the model has been adjusted based on management s best estimate for the effects of non-transferability, exercise restrictions, and behavioural considerations. 55

55 Inputs into the model Series 1 Series 2 Series 3 Grant date share price (close) NOK NOK NOK Average expected life 3 years 4 years 5 years Volatility 40.00% 40.00% 40.00% Exercise price NOK NOK NOK Dividends Risk free rate ¹ 5.11% 4.98% 4.84% The historic volatility of the Songa Share from January was 40 %, and is used in this calculation. ¹ Rates from Norges Bank on grant date that are used in the calculations (Interpolation is used to achieve a comparable term.) Option activity: Options Weighted average exercise price Options Weighted average exercise price Balance at the beginning of the financial year 1,718,166 NOK ,669,167 NOK Granted 900,000 NOK ,194,000 NOK Exercised 1,718,166 NOK (4,954,167) NOK Terminated - - (190,834) NOK Forfeited Expired Balance at the end of the financial year 900,000 NOK ,718,166 NOK Vested options - - 1,718,166 NOK Outstanding options Vested options Outstanding options 31/12/2008 Weighted average remaining contractual life Weighted average exercise price (NOK) Vested options 31/12/2008 Weighted average exercise price (NOK) 900, ,718, Note 28 Retirement benefit plans Defined benefit plan I The Group operates a funded defined benefit plan for qualifying employees of Songa Management AS. The plan was established in Under the plan, the employees are entitled to retirement benefits of 70% of final salary on attainment of a retirement age of 67 but limited to 12 times the National Insurance's base amount (Folketrygdens grunnbeløp (G)). One of the senior managers has an additional retirement benefit plan with Songa Management AS valid from No other post-retirement benefits are provided to these employees. The most recent actuarial valuations of plan assets and the present value of the defined benefit obligation were carried out at 31 December 2008 by Vital Pekon AS. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method. The plan covers full-time employees in Songa Management AS being Norwegian citizens and members of 56

56 the National Insurance (Folketrygden). At year end there were 20 people in the plan. Defined benefit plan II The Group also operates a funded defined benefit plan for qualifying employees of Songa Services AS. The plan was established in June 2008 in accordance with the Norwegian Shipowners' Association insurance plan. Under the plan, the employees are entitled to retirement benefits at a retirement age of 60 untill the age of 67. No other postretirement benefits are provided to these employees. Actuarial valuations of the plan assets and the present value of the defined benefit obligation were carried out at 31 December 2008 by Vital Pekon AS. The present value of the defined benefit obligation, and the related current service cost and past service cost, were measured using the projected unit credit method. The plan covers employees in Songa Services AS with a contract on three months or more, working more than 20 % and being Norwegian citizens and members of the National Insurance (Folketrygden). At year end there were 16 people in the plan. In addition the Group is contributing to The Norwegian Pension Insurance for Seamen which is a public, mandatory service pension scheme established by the Act of 3 December The primary purpose of the pension scheme is to pay seaman s pension to sailors between 60 and 67 years of age who have acquired a sufficient number of pensionable months on Norwegian registered ships/rigs (NOR and NIS). The Pension Insurance's expenses are covered by pension contributions from employees and shipping/rig companies and by grants from the State. The Pension Insurance is guaranteed by the State. Contribution (SGC) which is a public, mandatory service pension scheme established in Australia. As an employer you have an obligation to pay super contributions on behalf of all your eligible employees. These contributions are in addition to your employees salaries and wages. The minimum super amount you have to pay is 9% of each eligible employee s earnings base. The Group is obligated to follow the Norwegian Act on Mandatory company pensions ("obligatorisk tjenestepensjon"). All the Group's pension schemes follows the requirement as set out in the above mentioned Act. For the defined benefit plans the principal assumptions used for the purpose of the actuarial valuations were as follows: Economic assumptions Discount rate 3.80% 4.70% Expected return on plan 5.80% 5.75% assets Expected rate of salary 4.00% 4.50% increase Adjustment of base amount in 3.75% 4.25% national insurance (G) Pension adjustment 1.50% 2.00% Actuarial assumptions Expected voluntary retirement before age of retirement Before 40 years 0-8% 2% After 40 years 0% 0% Disability rate IR02- IR02- level level Death rate K2005 K2005 Probability of marriage K2005 K2005 In addition the Group is contributing to the Superannuation Guarantee 57

57 Amounts recognized in profit or loss in respect of the defined benefit plans are: USD ' Current service cost Interest on 13 3 obligation Expected return on plan assets (12) (5) Amortization of loss/(gain) (1) 1 Administration cost 3 4 Payroll tax Total pension cost The charge for the year is included in the salary costs in the income statement. Estimated pension cost for 2009 is USD 0.9 million. The amount included in the balance sheet arising from the entity's obligation in respect of its defined benefit plans are as follows: USD ' Closing defined benefit obligation - estimated Closing defined benefit obligation - used (fair value) Movements in the present value of the plan assets in the current period were as follows: USD ' Opening balance of plan assets converted from NOK to USD with exchange rate at YE Employer contribution Expected interest 1 Expected return on plan assets 12 4 Actuarial gain / (loss) (61) - Administration costs (3) (4) Closing balance of plan assets - estimated Closing balance of plan assets - used (fair value) Major categories of plan assets were as follows: Projected benefit obligation Plan assets at market value (259) (151) Funded status Unrecognized net experience loss/(gain) (178) (4) Payroll tax Net liability for defined benefit obligations USD ' Shares 3.8 % 24.8 % Bonds and other 29.9 % 21.5 % security Cash / Money market 14.0 % 7.5 % Bonds held to maturity 28.8 % 27.7 % Properties and real 16.8 % 15.6 % estate Other short term 6.7 % 2.9 % financial assets Total % % Movements in the present value of the defined benefit obligations in the current period were as follows: USD ' USD ' Experience adjustments on plan liabilities Opening defined benefit obligation converted from NOK to USD with exchange rate at YE Current service cost Interest cost 13 3 Expected return on plan assets - (5) Amortization of loss/(gain) - 1 Administration cost - 4 Actuarial loss (gain) 91 Payroll tax 43 - Experience adjustments on plan assets (62) (25) 58

58 Note 29 Transactions with related parties The major shareholder of Songa Offshore SE is Spencer Energy AS, controlled by the Chairman Arne Blystad with % of the shares outstanding at year end. Office space in Oslo is rented from Arne Blystad AS, a company controlled by Arne Blystad, Chairman of the Group. The rent for 2008 was USD 0.1 million (2007: USD 0.2 million). All related party transactions were made on terms equivalent to those that prevail in arm's length transactions. Note 30 Remuneration to the Board of Directors and executive management USD '000 Executive management: Director's fee Salary Bonus Pension Benefits in kind Paid out of options exercised Total Asbjørn Vavik CEO ,135 1,639 Tom E. Jebsen CFO ,135 1,553 Trond Christensen COO ,135 1,694 Board of Directors: Arne Blystad Chairman Jon C. Syvertsen Board member Valborg Lundegaard Board member Anette Mellbye Board member Gunnar Hvammen Board member Total 81 1, ,405 4,967 Executive Management consists of Group executive management being:chief Executive Officer - CEO, Chief Financial Officer - CFO and Chief Operating Officer - COO, who is disclosed separately above. The CEO and CFO are attending the defined benefit plan for qualifying employees of Songa Management AS. The plan was established in Under the plan, the employees are entitled to retirement benefits of 70% of final salary, limited to twelve times the national insurance base amount (Folketrygdens grunnbeløp (G)), on attainment of a retirement age of 67. No other post-retirement benefits are provided to the executive management. (See note 28) 59

59 The Group has one share option scheme per 31 December 2008 (see note 27). At the annual general meeting (AGM) on 26 May 2008, the Board of Directors was authorized to issue options to subscribe for 900,000 shares in the Company to executive management. The shares are vested over a period of 36 months with 300,000 options vested after 12 months, another 300,000 vested after 24 months and the last 300,000 vested after 36 months. Shares can be exercised for a period of 24 months after vesting. The strike price for the options has, in accordance with the authorization given by the AGM, been set to NOK per share. In accordance with generally agreed principles the strike price was adjusted due to the private placement that took place in October 2008 and is at year end NOK per share. Options to Executive management is as follows: Number of shares in thousands, exercise price in NOK Executive management: Outstanding at the beginning of period Granted Exercised Out-standing at the end of period Weighted average exercise price Asbjørn Vavik - CEO Tom E. Jebsen - CFO Trond Christensen - COO Total The remuneration of the members of the Board is determined on an annual basis. The directors will be reimbursed for, inter alia, travelling and other expenses incurred by them in attending meetings of the Board. A director who has been given a special assignment beside the normal duties of a member of the Board, may be paid such extra remuneration as the Board may determine. The total remuneration to the Board is, at present, not expected to exceed NOK 1.2 million per annum, excluding reimbursement for expenses. No loans or guarantees are granted to the Chairman, member of the Board, CEO, employees, management, shareholders or other related parties to any of these groups. The executive management has not received any other remuneration from any Group companies other that what is disclosed above. There has been no additional remuneration for any special services exceeding the normal work scope of executive management. Information on the guidelines regarding remuneration to the members of the executive managements is included in accordance with the Public Liability Companies Act 6-16 a: Songa Offshore SE's remuneration policy states that executive management shall be offered a competitive remuneration package when all aspects such as salary, benefits in kind, bonus and pension plans are seen as a whole. The Company shall offer a level of remuneration that reflects the level of comparable companies listed on Oslo Stock Exchange and the industry in general. executive management shall be able to obtain a bonus in addition to base salary, 60

60 but only limited to a percentage of base salary and linked to specific goals. The guidelines for such bonus schemes, including bonus to the CEO shall be determined by the Board of Directors or a remuneration committee at the Board's discretion. executive management in Songa Offshore SE and it's subsidiaries, shall be able to receive options to buy shares in the Company. Such options shall be based on the share price at grant date and the program shall have a determined life expectancy. The total number of options in the share option programs shall not exceed 5% of the share capital. Executive management will normally receive pension benefits that are proportionate with the salary they have obtained during their active years. Members of the executive management may have car, phone and house costs covered by the Company but no other substantial benefits in kind. Remuneration to executive management for the year ended 31 December 2008 has been carried out in accordance with the above mentioned principles and remuneration for 2009 will also be carried out in accordance with the above mentioned principles. No changes have been made to the existing remuneration policy nor have any new contracts on remuneration been entered into that will affect the Company or its shareholders materially. undisclosed amount of damages. Based on a legal review of this claim, Songa Management AS has found no basis for such claim and believes that the courts will reject such claim during future litigation. Note 32 Events after the balance sheet date An Extraordinary General Meeting was held 17 February It was decided to move the registered office of Songa Offshore SE from Oslo to Limassol (Cyprus). A two month period of notice to creditors will start running from the same date. In the Meeting a new Board of Directors was elected as well. The members of the new Board of Directors are Arne Blystad (Chairman), Valborg Lundegaard, Erik Østbye, Trond Christensen and Nancy Charalambous. (All elected for a two year period.) At the Extraordnarie General Meeting (EGM) that took place in February the Board of Directors were, authorised to increase the share capital of the company by up to NOK 21,061,509, alternatively by up to EUR 2,316, "Further it was resolved to change the nominal value of the shares from NOK 1 to EUR Section 4 of the Articles of Association was changed to read: The share capital is EUR 11,583,829.84, divided in 105,307, 544 shares, each with a nominal value of EUR 0,11. Note 31 Contingent liabilities KCA Deutag Offshore has filed a breach of contract claim against Songa Management AS, a subsidiary of Songa Offshore SE that relates to the provision of management services during the refurbishment of the rig Tellus in 2006, and seeks an 61

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66 Notes to the financial statements for the year ended 31 December General information For general information about the Company please see note 1 in Songa Offshore Group consolidated financial statements. The company has merged with some of its rig owning subsidiaries during Comparable figures for 2007 is not presented, also see note Significant accounting policies Basis of preparation The principal accounting policies applied in the preparation of these financial statements are set out in note 3 to the Songa Offshore Group consolidated financial statements. These policies have been consistently applied to the current and previous years presented, unless otherwise stated. Financial risk management of the Company is included in note 5 of the Songa Offshore Group consolidated financial statement. When preparing the accounts for Songa Offshore SE, the Company has applied simplified application of IFRS in accordance with the Norwegian Accounting Act 3-9. This means that the IFRS valuation rules are applied, whilst remaining in compliance with the Norwegian Accounting Act and Norwegian generally accepted accounting principles (NGAAP) for presentation of the notes. During 2008 the Company merged with several of its subsidiaries, see note 3 for further information. The figures presented in the 2007 columns only include the Company s figures of last year and are not revised to include the subsidiaries merged in In accordance with Norwegian legislation ( Forskrift om forenklet anvendelse av internasjonale regnskapsstandarder issued 21 January 2008), the company has applied the following alternatives to the IFRS recognition and measurement criteria: IAS and IAS have been deviated so that dividend and group contributions are recognized in accordance with the Norwegian Accounting Act. In accordance with the Norwegian Accounting Act the resolution on the distribution of dividend by the Board of Directors can be recognized in the accounts in the fiscal year even though it is not formally decided until adopted by the General Meeting next year. The Company as a lessee, finance leases The Company presents finance leases in the financial statements as assets and liabilities, equal to the cost price of the asset or, if lower, the present value of the cash flow to the lease. When calculating the present value of the lease the implicit interest rate in the lease is used when it can be determined. Direct costs relating to the lease are included in the asset s cost price. Monthly rent is separated into an interest element and a repayment element. Assets that form part of a finance lease are depreciated. The depreciation period is consistent for equivalent assets that are owned by the Group. 67

67 Investment in subsidiaries Shares in subsidiaries are recorded in accordance with the cost method in the parent company accounts. The investments are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Dividends and contributions from subsidiaries are recognised as finance income. Note 3 List of subsidiaries The following subsidiaries are recognised in the financial statements using the cost method: Company Registered office Acquired Ownership share Voting share Songa Oslo, Norway June % 100% Management AS Songa Saturn AS Oslo, Norway November 100% 100% 2005 Songa Services AS Stavanger, October 100% 100% ¹ Norway 2005 BOP 15 Invest AS Norway July % 100% Songa Offshore Pte Ltd Singapore August % 100% Songa Saturn Singapore August 100% 100% Chartering Pte Ltd 2006 Songa Pty Ltd Perth, March 100% 100% Australia 2006 Songa Houston, November 100% 100% Management Inc USA 2005 Songa Delta AS Oslo, Norway June % 100% Songa Management Ltd Songa Saturn Ltd Songa Delta Ltd Pegasus Invest Pte Ltd Limassol, Cyprus Limassol, Cyprus Limassol, Cyprus Singapore December 2008 December 2007 August 2008 August % 100% 100% 100% 100% 100% 100% 100% Equity as of 31 December 2008 Profit/(loss) for 2008 (1,041) , ,912 2, , ,709 (9,722) (15,587) 3, , (294) (608) (9) (12) (1,898) (1,933) ¹ Renamed from Bjørgvin Offshore AS. During 2008 Songa Offshore SE has merged with the following of its subsidiaries: Songa Venus AS Songa Mercur AS Songa Offshore AS Songa Dee AS Songa Trym AS Songa Offshore Cyprus PLC These mergers are done with continuity for both accounting and tax purposes, meaning that all rights and commitments are carried on in Songa Offshore SE. For accounting and tax purposes the merges are recognized with effect from 1 January prepare it for the planned move to Cyprus. Corresponding figures for 2007 are not included. Note 4 Segment information No segment information is presented. For further discussion on segment reporting please refer to note 7 in the Group financial statements. The purpose of the mergers is to reorganize the company in order to 68

68 Note 5 General and administrative expenses USD ' Employee benefit expenses (1,740) 2,122 Inter company expenses 27,834 - Other expenses 3, Total general and administrative expenses 29,413 3,104 Fees paid to the auditors Deloitte AS (Norway) and cooperating companies are split as follows (VAT not included): USD ' Statutory audit Other assurance services Other non-assurance services - 25 Tax consultant services - 9 Total Note 6 Finance income and finance costs USD ' Interest income 1,510 1,859 Other financial income 17 Interest income group company 3,106 99,184 Total finance income 4, , Interest expense 61,519 60,029 Other financial expenses Interest expense group company Total finance costs 62,378 60,653 Note 7 Income tax and deferred taxes USD ' Tax payable Tax reduction due to group contribution Changes in deferred tax Tax (income)/expense 3,325 7,182 - (7,182) (9,145) (1,791) (5,820) (1,791) A reconciliation of the effective rate of tax and the nominal tax rate in Songa Offshore SE s country of registration, Norway: 28% 28% Pre-tax profit/(loss) (8,959) 36,626 Tax assessed at the nominal tax rate in Songa Offshore SE s country of registration, Norway: 28% (2,509) 10,255 Non-taxable income - (1,783) Gain on limited partnership (6,650) - Non-deductible expenses Issue expenses recorded to equity (277) - Other 3,313 - Tax expense (income) recognised in the income statement (5,820) 8,973 Effective tax rate % 24.5 % 69

69 Deferred tax assets and deferred tax liabilities: Loss carried forward 111,393 - Deferred tax assets - gross 111,393 - Property, plant and equipment (93,330) (1,390) Interest bearing debt and financial instruments 918 (1,446) Other 427 Deferred tax liabilities - gross (91,985) (2,836) Net recognised (deferred tax) / tax assets 19,408 (2,836) Deferred tax and deferred tax assets are explained as follows: Permanent differences: Change in fair value of BOP option (3,045) Gain on limited partnership (23,750) - Employee options 1,789 Issue expenses (990) - Change in fair value on financial instruments (3,323) Non deductible expense 1,080 Other 11,832 Total (11,828) (4,579) Temporary differences: Property plant and equipment 333,321 4,966 Interest bearing debt and financial instruments (3,279) 5,163 Other (1,526) Total 328,516 10,129 Losses carried forward: Loss carried forward (397,832) - Total (397,832) - Net temporary differences: Positive differences 328,516 10,129 Negative differences (397,832) - Net temporary differences (69,316) 10,129 28% Tax on net temporary differences (19,408) 2,836 Tax losses carried forward have no expiry date. At year end the deferred tax asset can be recognised. This is based on the fact that all the rigs are on contract and generating income. The Group expects to generate net income that can be offset against the deferred tax assets in the near future. 70

70 Note 8 Cash and cash equivalents USD ' Cash at the bank and in hand 45,788 12,063 Time deposit - 20,000 Cash collateral on Total Return Swap - 2,361 Total cash and cash equivalents 45,788 34,424 Note 9 Other assets USD ' Deposits ¹ ,516 Other current assets ² 1,853 6,107 Prepayments 2, Other assets 4,925 18,737 ¹ Deposits was regarding collateral for the Total Return Swap (TRS) (2007) ²TRS (2007) Note 10 Rigs, machinery and equipment USD '000 Fixtures and equipment Rigs and machinery Total Year ended 31 December 2007 Opening net book amount - 15,025 15,025 Additions 9-9 Book value before depreciations 9 15,025 15,035 Depreciation charge (1) (502) (503) Closing net book amount 9 14,523 14,532 At 31 December 2007 Cost Accumulated depreciation Net book amount 9 15,025 15,034 (1) (502) (503) 9 14,523 14,532 Year ended 31 December 2008 Opening net book amount 9 14,523 14,532 Additions , ,237 Book value before depreciations , ,770 Depreciation charge (69) (43,583) (43,652) Closing net book amount , ,118 At 31 December 2008 Cost Accumulated depreciation Net book amount , ,272 (70) (44,085) (44,155) , ,118 Estimated lifetime 3-10 year 4-25 years Depreciation rates 10%-30% 4%-25% Depreciation method Straight Line Straight Line 71

71 The additions of assets in 2008 are mainly due to the merger of Songa Offshore SE with Songa Mercur AS, Songa Venus AS, Songa Dee AS and Songa Trym AS. The rigs owned by these companies; Songa Mercur, Songa Venus, Songa Dee and Deepsea Trym respectively are now included in the fixed assets. Note 11 Other gain and loss USD ' Allowances for bad debt 1,333 - Net foreign exchange (gain)/loss (3,838) 243 Liquidation of limited partnership (23,750) - Changes in fair value financial items ¹ 64,856 (784) Other (123) Other (gain)/ loss 38,478 (541) Note 12 Borrowings Information related to short term and long term borrowings are provided in note 23 of the Group financial statements. The shares in subsidiaries are pledged as security. ¹ For the financial year 2008 changes in fair value consist of the following items: Total Return Swap (loss USD 49.3 million), Flipable swap (loss USD 11.1 million), early redemption of bond (loss USD 4.5 million). Note 13 Issued capital, reserves and other equity USD '000 Number of shares ('000) Share capital Share premium Paid in not registered Total issued capital As at 01/01/ ,910 12,791 27,469-40,260 Exercised options 5, ,189 34,996 Conversion of warrants ,211-1,279 Exercised 1,500 options Q ,754 14,754 As at 31/12/ ,267 13,666 62,869 14,754 91,289 As at 01/01/ ,267 13,666 62,869 14,754 91,289 Issue of share options 1, ,478 (14,754) - Issue of share capital 10,600 1,517 35,424 36,941 Conversion of warrants 5,941 1,171 7,725 8,896 As at 31/12/ ,308 16, , ,126 USD '000 Reserves Other equity As at 01/01/ , ,011 Write down of shares (273) Profit for the period 27,653 Recognition of convertible bond loan 20,815 Recognition of share-based payments (1,155) As at 31/12/ , ,206 72

72 Reserves Other equity As at 01/01/ , ,206 Adjustments recognized directly to equity (84,015) Recognition of share-based payments 1,902 Loss for the period (3,139) As at 31/12/ ,585 98,051 Total authorized number of shares at year end is 123,191,887 (2007: 134,805,542). All issued shares are fully paid. All issued shares in the Company are vested with equal shareholder rights in all respects. There is only one class of shares and all shares are freely transferable. At the General Meeting 26 May 2008 the General Assembly granted the Board of Directors authorization to buy back own shares up to 10% of the share capital. At year end 2008 no shares had been bought back. Please see Note 22 in the Group financial statements for information about the 20 largest shareholders as well as shares owned by the Company s board members and senior management. Note 14 Financial instruments Information regarding financial instruments is provided in note 5 of the Group financial statements. Note 15 Share based payments Further information regarding share based payments is provided in note 27 of the Group financial statements. Note 16 Transactions with related parties Information regarding transactions with related parties is provided in note 29 of the Group financial statements. See also note 17 regarding intercompany transactions which mainly relates to the funding of subsidiaries. Songa Offshore SE has management agreements with Songa Management AS for administration and rig operations in Norway, Songa Saturn Chartering Pte Ltd for rig operations in Africa, Songa Pty Ltd for the rig administration and operations in Australia and Songa Management Ltd for general administration, technical and QHSE (Quality Health Security and Environment) services. All related party transactions were made on terms equivalent to those that prevail in arm's length transactions. 73

73 Note 17 Intercompany USD ' Receivables falling due later than one year: Long term receivables group companies 529, ,205 Debts in Songa Offshore SE, are secured through mortgages in the rigs, insurance policies and receivables. These assets are spread across several units in the Group. See Note 20 and 23 in the Group financial statements. Intercompany balances 2008: Long term receivables Short term receivables Long term liability Songa Offshore SE 529,653 13,195 (197,449) Songa Saturn AS ,517 Songa Services AS - - 3,706 Songa Management AS - (9,399) - Songa Management Inc - - 3,989 Songa Pty Ltd (130) 3,708 (66,286) Songa Offshore Pte Ltd (67) - Songa Saturn Chartering Pte. Ltd - 165,310 BOP 15 Invest AS Songa Saturn Ltd - (14) - Songa Delta AS (13,002) - - Songa Delta Ltd (450,365) - - Pegasus Invest Ltd - (2) - Songa Saturn EG Branch - (4) - Songa Saturn Chartering Libya Branch - (3,579) - Total

74 Intercompany balances 2007: Long term receivables Short term receivables Long term liability Songa Offshore ASA 907,205 13,662 (163,161) Songa Offshore AS - (9,674) - Songa Mercur AS (139,053) - - Songa Venus AS (58,455) - - Songa Saturn AS ,448 KS Bjørgvin Offshore ,340 Bjørgvin Offshore AS - (571) - Songa Management AS - (3,417) - Songa Management Inc - - 3,215 Songa Dee AS (310,439) - - Songa Trym AS (252,101) Songa Pty Ltd (85,716) - - Songa Offshore Pte Ltd (61,441) - - Songa Saturn Chartering Pte Ltd ,036 BOP 15 Invest AS 122 Total Note 18 Retirement benefit plans Information regarding retirement benefit plans has been provided in note 28 of the Group financial statements. Note 19 Remuneration to the Board of Directors and senior management Information about salary, pension and other benefits to the Board of Directors, CEO and executive management has been provided in note 30 of the Group financial statements. Note 20 Events after the balance sheet date At the Extra ordinary General Meeting (EGM) that took place on 17 February 2009 the Board of Directors were authorised to increase the share capital of the Company by up to NOK 21,061,509, alternatively by up to EUR 2,316, "Further it was resolved to change the nominal value of the shares from NOK 1 to EUR Section 4 of the Articles of Association was changed to read: The share capital is EUR 11, 583,829.84, divided in 105,307,544 shares, each with a nominal value of EUR 0,11. Further information related to events occurring after the balance sheet date is provided in note 32 of the Group financial statements. 75

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