Petrofac Annual Report 2015

Plain-text annual report

FOCUSING ON CORE STRENGTHS Annual report and accounts 2015 We are an international service provider to the oil and gas production and processing industry, with a diverse customer portfolio including many of the world’s leading integrated, independent and national oil and gas companies. We design, build, operate and maintain oil and gas facilities, delivered through a range of innovative commercial models, enabling us to respond to the distinct needs of each client and helping them to transform the value of their assets across the oil and gas life cycle. Our service offering is underpinned by our ability to develop resource holders’ local capability through the provision of skills training with competency development and assurance frameworks. At the heart of everything we do, the six Petrofac values guide our decisions and behaviours: safe, ethical, innovative, responsive, quality and cost conscious, and driven to deliver. Above all, we aim to be the world’s most admired oilfield service company. Strategic report 02 Group performance at a glance 08 04 Year in review 2015 Renewed focus on 06 operational excellence Focused on our core markets Our focus on values drives our success 12 Chairman’s statement 10 14 Market outlook 18 Our business model 20 Group Chief Executive’s Strategic review 24 Key performance indicators 26 Risk management 30 Principal risks and uncertainties 34 Segmental performance 46 Financial review 50 Corporate responsibility Governance 68 Chairman’s introduction 70 Directors’ information 72 Our leadership team 73 Corporate Governance report 82 Nominations Committee report 84 Audit Committee report 90 107 Directors’ statements Directors’ remuneration report Financial statements 108 Group financial statements 168 Company financial statements 109 Independent auditor’s report 117 Consolidated income statement 118 Consolidated statement of other comprehensive income 119 Consolidated statement of financial position 120 Consolidated statement of cash flows 121 Consolidated statement of changes in equity 122 Notes to the consolidated financial statements 169 Company income statement 169 Company statement of other comprehensive income 170 Company statement of financial position 171 Company statement of cash flows 172 Company statement of changes in equity 173 Notes to the Company financial statements 185 Shareholder information 186 Glossary Against the backdrop of a very challenging industry environment, and a disappointing operational performance on one project in particular, 2015 was the year in which Petrofac returned to its traditional areas of focus. During the year we renewed our commitments on operational excellence and cost efficiency across the business, and refocused our priorities on our core areas of expertise. We continue to identify and progress cost saving opportunities which will deliver benefits in 2016 and beyond. The strength of our backlog and position in our core markets means our revenue visibility is better than it has been at any other point in our 35-year history. Ayman Asfari Group Chief Executive To view and download our Annual report online www.petrofac.com/investors/ara2015 Petrofac Annual report and accounts 2015 / 01 Strategic reportGroup performance at a glance Revenue Earnings per share (diluted)1 US$6,844m (2014: US$6,241m) 2.65¢/s (2014: 168.99¢/s) EBITDA1 US$312m (2014: US$935m) Net profit1 US$9m (2014: US$581m) Return on capital employed1 Backlog 3% (2014: 18%) US$20.7bn (2014: US$18.9bn) Performance Highlights 2015 • Achieved order intake in 2015 of US$8.6 billion, securing major new awards and extensions, including in Kuwait, Saudi Arabia, Oman and the United Kingdom • Commercial production has now commenced on Laggan-Tormore following completion of construction activities, transfer of care and custody of the plant to our client and introduction of gas before end 2015 • Substantially completed the Bab Compression project and phase 1 of the Bab Habshan project, both in Abu Dhabi, and completed the second of three trains on the Badra project in Iraq • Good progress on commissioning of the topside systems on the FPF1 floating production facility with marine work expected to be completed to enable sailaway during the second quarter of 2016; first production from the Greater Stella Area development is expected in summer 2016 • Continued to work towards migration of our Production Enhancement Contracts to Production Sharing Contracts in Mexico 1 Before exceptional items and certain re-measurements. Onshore Offshore Oil and gas development and production Oil and gas processing facilities Storage and pipelines Upstream Midstream Refining and petrochemicals Downstream Oil and gas engineering, construction operations and decommissioning Offshore wind 02 / Petrofac Annual report and accounts 2015 A leading global service providerRelated pages Market outlook p14 Our business model p18 Divisions Engineering, Construction, Operations & Maintenance (ECOM) Onshore Engineering & Construction (OEC) Onshore Engineering & Construction delivers onshore engineering, procurement and construction projects. Predominantly focused on markets in the Middle East, Africa and the Caspian region of the CIS. Offshore Projects & Operations (OPO) Offshore Projects & Operations, which includes our Offshore Capital Projects service line, specialises in both offshore engineering and construction services, for greenfield and brownfield projects, and the provision of operations and maintenance support, onshore and offshore. Integrated Energy Services (IES) Integrated Energy Services (IES) Integrated Energy Services provides an integrated service for hydrocarbon resource holders under innovative commercial models that are aligned with their requirements. Projects cover upstream developments, both greenfield and brownfield, and related energy infrastructure projects, and can include investment. Engineering & Consulting Services (ECS) Engineering & Consulting Services is Petrofac’s centre of technical engineering excellence. From offices across the Middle East and North Africa, CIS, Asia-Pacific, Europe and The Americas, we provide engineering services across the life cycle of oil and gas assets. Our teams execute all aspects of engineering, including conceptual studies, front-end engineering and design (FEED) and detailed design work, for onshore and offshore oil and gas fields and facilities. Group revenue contribution Group revenue contribution Group revenue contribution Group revenue contribution 62% 21% 10% 7% Revenue US$4,383m (2014: US$3,241m) Revenue US$1,484m (2014: US$2,009m) Net loss1 US$59m (2014: US$403m net profit) Net profit1 US$68m (2014: US$64m) Revenue US$715m (2014: US$437m) Net profit US$50m (2014: US$33m) Offshore Revenue US$531m (2014: US$782m) Net profit1 US$5m (2014: US$131m) Onshore Oil and gas development and production Oil and gas processing facilities Storage and pipelines Upstream Midstream Refining and petrochemicals Downstream Oil and gas engineering, construction operations and decommissioning Offshore wind Petrofac Annual report and accounts 2015 / 03 Strategic reportYear in review 2015 2015 backlog by geography (%) 4 4 4 22 8 13 17 14 14 Kuwait Oman Saudi Arabia UAE Mexico United Kingdom Algeria Malaysia Other 22% 17% 14% 14% 13% 8% 4% 4% 4% Excellent revenue visibility In a challenging market, Petrofac has enjoyed high levels of new orders and contract extensions. In 2015 we increased our order backlog further to US$20.7 billion, and our pipeline of bidding opportunities remains robust. This sets us apart from our peers and gives us excellent visibility of future revenues. See pages 39–40 UKCS • Five-year contract extension from EnQuest for Duty Holder and brownfield modifications services for the Kittiwake platform • Duty Holder Support Services contract to support Oranje-Nassau Energie (ONE) US$45 million over three years • Renewed six operations and maintenance contracts in the UKCS, including one for five years with Canadian Natural Resources International (CNRI) across its North Sea assets • Petrofac and GE awarded a contract worth over £110 million to connect up to 336 megawatts of clean energy from the Galloper Offshore Wind Farm off the coast of Suffolk, UK, to the British grid 31 December 2015 backlog ageing (US$bn) Backlog by reporting segment (%) 10% Increase in Group backlog 2015 US$20.7bn at 31 December 2015 8.0 0.9 1.0 1.1 6.6 0.6 0.6 0.8 5.0 4.6 6.1 1.6 0.3 1.3 2.9 2016 2017 2018+ OEC OPO ECS IES 9 15 16 60 OEC OPO IES ECS 60% 16% 15% 9% 04 / Petrofac Annual report and accounts 2015 See page 37 Saudi Arabia • Contract to undertake the engineering, procurement and construction of a sulphur recovery plant as part of Saudi Aramco’s Fadhili gas programme Our year-end backlog stood at record levels See page 40 Iraq • US$100 million one-year extension operations and maintenance services contract with South Oil Company • Three-year general construction management services contract by BP Iraq for the Rumaila field. • Multi-million dollar technical training contract with Shell Iraq Related pages Segmental performance p34 See page 35 Kuwait • US$4 billion award for Kuwait Oil Company’s (KOC) Lower Fars heavy oil development programme, Petrofac leading a consortium with Greece-based Consolidated Contractors Company (CCC) as its partner • Award for KOC’s Manifold Group Trunkline system in the north of Kuwait, valued at approximately US$780 million See page 39 Bahrain • Contract win for installation of a new gas dehydration facility for Tatweer Petroleum See page 41 Australia • Award of an Integrity and Maintenance Programme Development contract for the Ichthys LNG Project See page 41 Oman • Circa US$900 million engineering, procurement and construction management contract (EPCm) for Petroleum Development Oman to provide services for its Yibal Khuff project Petrofac Annual report and accounts 2015 / 05 Strategic reportRENEWED FOCUS ON OPERATIONAL EXCELLENCE With a 35-year history, we have built a strong reputation for commitment and delivery across our core markets, backed up by a strong ethos of delivery and execution. 06 / Petrofac Annual report and accounts 2015 Segmental performance p34 US$4bn contract awarded in consortium with Consolidated Contractors Company (CCC) for the Lower Fars heavy oil project, Kuwait 20m LTI-free man-hours and the Best Contractor Safety Initiative award at the Upper Zakum, UZ750 field development in Abu Dhabi Delivering complex and challenging projects Petrofac has been behind some of the world’s most impressive oil and gas installations. In the tough climates of our core Middle Eastern and North African markets, we excel in delivering large, demanding projects. Maintaining an excellent safety record ‘Safe’ is a core Petrofac value. At many of our projects we have delivered tens of millions of man-hours without a safety incident. Across our key safety indicators, we operate substantially better than industry norms. Effective risk management From the moment we choose to bid for a project, the discipline begins. We identify risks from the outset, ensure a clear understanding of project complexity, and maintain our risk management rigour each step of the way. Petrofac Annual report and accounts 2015 / 07 Strategic reportFOCUSED ON OUR CORE MARKETS Across our core markets in the Middle East and North Africa, our National Oil Company clients are continuing to invest in large, strategic projects – and we offer them an unrivalled track record, long-term relationships and a very cost-competitive delivery capability. 88% of ECOM’s 2015 year-end backlog is in core markets in the Middle East and North Africa US$800m contract extensions in the UK North Sea Onshore Engineering & Construction 2016 prospects 10 26 9 10 20 25 Oman UAE CIS Saudi Arabia Algeria Other 26% 25% 20% 10% 9% 10% 08 / Petrofac Annual report and accounts 2015 Market outlook p14 Long-term partnerships Our success rests on building trusted, long-term client relationships, such as in the UK Continental Shelf where our drive to support clients improve their cost effectiveness helped us secure substantial contract renewals in 2015. Relationships with National Oil Companies Petrofac has strong, long-established relationships with many of the world’s leading National Oil Companies, who are less sensitive to market sentiment and more inclined to make long-term strategic investments in their oil and gas assets. A record backlog of projects Despite a sharp slowdown in upstream oil and gas spending, Petrofac has delivered an excellent business development performance, which means that we now have the largest year-end order backlog in our entire 35-year history. Petrofac Annual report and accounts 2015 / 09 Strategic reportOUR FOCUS ON VALUES DRIVES OUR SUCCESS As a people-based business, we have a problem-solving culture, clear values and strong leadership. We respond to the distinct needs of each client to unlock the full value of their energy assets. 19,000 employees 10 / Petrofac Annual report and accounts 2015 Corporate responsibility p50 Engineering expertise Engineering excellence is core to almost everything we do. Our teams provide engineering services across the life cycle of oil and gas assets, including conceptual studies, front-end engineering and design (FEED) and detailed design work for both onshore and offshore facilities. In-country value Local delivery has always been key to the Petrofac model, which means that we make a determined effort to employ local people, build local capabilities, draw on local supply chains, stimulate local economies, and engage with local communities. Can-do culture With every Petrofac project comes an array of complex technical and operational challenges – and our Group is full of committed, driven people who go the extra mile to find solutions and deliver for our clients. Petrofac Annual report and accounts 2015 / 11 Strategic reportChairman’s statement The Board’s priority for 2015 was to continue to guide Petrofac back to its traditional areas of strength in the face of another challenging year.” Last year I spoke of the Board’s determination to restore Petrofac’s reputation for excellence in project delivery, reduce its capital intensity, and position the Company to succeed in a more challenging business environment. This year, I want to update you on progress made so far. Whilst 2015 was undoubtedly challenging and we delivered disappointing financial results, I am encouraged by our progress. We have made significant changes to some of our processes during the year, which should ensure that the business returns to delivering a portfolio of well executed projects with differentiated margins. 12 / Petrofac Annual report and accounts 2015 Restoring our reputation Anyone familiar with the Petrofac story will know about the issues that overshadowed our recent performance. The Laggan-Tormore project on Shetland in the UK unsurprisingly took up a great deal of the Board’s time during the year. Whilst the project was initially approved in 2010, it significantly reduced our earnings in 2014 and 2015. In April we were obliged to update the Market that we expected the cost-to-complete the project would be significantly higher than we had previously anticipated and the costs unfortunately continued to escalate. Nevertheless, I am proud that we stayed the course, notwithstanding the many challenges that we faced in such an extreme environment. Total E&P UK announced first production from the Laggan and Tormore fields on 8 February 2016 and anticipates that the overall development will help meet the UK’s gas needs for decades to come. In addition, the FPF1 conversion for the Greater Stella Area field development has been another project where our delivery has fallen short of our usual high standards. However, we are now making good progress and anticipate that sailaway will be achieved in time for first production in summer 2016. Given the difficulties associated with these two projects, the Board spent time in 2015 looking at how we can protect the Company from making the same mistakes again. Three separate reviews were commissioned: an external independent investigation of the relevant internal controls by KPMG; a review of operational risk management; and an analysis of the risk oversight processes that were in place at the time the projects were initially approved and were applied throughout project execution. Further details are set out on page 86. We have since revised our delegated authorities to ensure that the lessons learned are incorporated into our risk management oversight. Adapting to an ever tougher environment Oil prices continued to decline during 2015 and the consensus is they will remain lower for longer. We believe we are better positioned than most to come out of the downturn stronger. Although our IES business does have exposure to the oil price, the bulk of the Group’s income comes from National Oil Companies in the Middle East and North Africa (MENA) which have historically continued to invest throughout the cycle. We finished 2015 with a record year-end backlog of US$20.7 billion and the pipeline of opportunities for 2016 is robust. Our initiatives to reduce our cost base, maintain good capital discipline and manage our working capital and cash collection, collectively underpin our business. The Board supported management’s decision to cancel the contract for the construction of the JSD6000 vessel at the ZPMC shipyard in China due to performance issues. The rest of the contracts for construction of the vessel including the J-Lay tower, heavy-lift crane and other owner-furnished equipment remain in place and we are currently appraising proposals from alternative shipyards to replace the cancelled contract. Nevertheless the Board has asked management to update its strategic assessment of our offshore strategy in light of the cancellation of the ZPMC contract and it is expected that this assessment will be reviewed in the next few months. Given the current state of the offshore Related pages Corporate Governance report p68 Directors’ information p70 oilfield services market, the Board believes it is right to consider its options carefully and to devote sufficient time and effort to determine the best way forward to maximise shareholder value. Progressing to a more balanced portfolio Our core ECOM business in MENA continued to perform well and we continue to review the IES portfolio. We are exiting the Ticleni field in Romania and are seeking to migrate our Mexican Production Enhancement Contracts to Production Sharing Contracts to help reduce existing and future capital commitments. We are very pleased to have won project awards during the year for the Lower Fars Heavy Oil Development and Manifold Group Trunkline, both in Kuwait, and a further EPCm contract in Oman. Maintaining a strong Board for the future The Board aspires to live the Company’s values: safe, ethical, innovative, responsive, quality and cost conscious, and driven to deliver. This year, two of our Board meetings took place in the Middle East. I also took the time to visit our Malaysian offshore operations, whilst all Non-executive Directors are encouraged to gain first-hand knowledge of the business. Following the incorporation of the Board Risk Committee into the Audit Committee, the Board increased its direct oversight of strategic risk and, with the appointment of a new Group Head of Enterprise Risk, the Company further developed its Key Risk Register (details of which are set out on page 28). This past year we have had more Board change than anticipated. Following his appointment as CEO of one of our main competitors, Stefano Cao stepped down as a Director in April. Then, in the face of a significant increase in her US commitments, Roxanne Decyk retired at the AGM in May. We thank both of them for their contribution to the Board and wish them well for the future. In view of these resignations, we initiated a search for two new Non-executive Directors during 2015. As a result, we are delighted to recommend to shareholders the appointments of Andrea Abt and George Pierson at our forthcoming AGM. Meanwhile, the appointment of Matthias Bichsel in May 2015 was very well received. Alongside his deep industry experience, he brings an all-important client-side perspective. Going forward, I am confident that we will benefit from a strong, multi-disciplinary Board, with a good ratio of Non-executive-to- Executive Directors. Developing the right people within the best organisational structure With the move back to Petrofac’s core areas of strength, it was logical to reorganise the Company. Our strong desire was to see a simple, streamlined organisational model, which improves efficiency through de-layering and centralising back-office functions, yet does nothing to detract from our distinctive, entrepreneurial and delivery focused culture. In recognition of the Group’s refocus on its core services, Marwan Chedid was promoted to Group Chief Operating Officer from 1 January 2016. People are our most critical asset. Hence the Board is focused on managing our present and future talent including succession plans, and this matter continues to have the full attention of the Nominations Committee. This not only includes the identification of potential successors at a senior level but also understanding how the business identifies and develops the next generation of leaders. Reflecting on our 2015 financial performance The Group delivered US$9 million in earnings (before exceptional items and certain re-measurements) attributable to Petrofac shareholders. This clearly falls short of our expectations at the start of the year. Predominantly reflecting the lower oil price environment, future anticipated earnings from the IES contract portfolio and the Group reorganisation, we recognised charges for exceptional items and certain re-measurements of US$358 million (2014: US$461 million). This reduced overall Group earnings attributable to shareholders to a loss of US$349 million. At the end of 2015 our net debt was US$686 million (2014: US$733 million) and our cash generated from operations was US$827 million (2014: US$790 million). This is the second year-on-year improvement in cash generated from operations, which is a notable achievement in light of the substantial losses we incurred on Laggan-Tormore. I want to thank all Petrofac shareholders for your loyalty. We maintained a constructive dialogue throughout the year and the Board is committed to rewarding your trust. I am delighted that we are therefore in a position to maintain the same dividend as last year and are proposing a final dividend of 43.80 cents per share, which, if approved, will be paid on 27 May 2016. Staying on course in 2016 and beyond Risk and crisis management will remain an area of focus. HSSEIA is always high on our agenda. Whilst we are not complacent, I am heartened that for the second successive year we have seen an overall improvement in HSSEIA performance. Management and employees should be commended. We remain mindful of the evolving geopolitical situation in some parts of MENA. We are also aware of the likelihood of increased competitive intensity in our core markets and, to that end, are focused on managing our cost base. Finally, I want to thank all our employees for their commitment during another challenging year. In particular, I would like to acknowledge our Group Chief Executive, Ayman Asfari. He has been relentless in his efforts to restore Petrofac to corporate good health. It is reassuring to see how hard he and his executive team are working to deliver our collective commitments and position the Group for sustainable growth over the longer term. The Board will carry on supporting Ayman and his team as they continue to guide Petrofac back to good health in 2016. Rijnhard van Tets Non-executive Chairman 23 February 2016 Petrofac Annual report and accounts 2015 / 13 Strategic reportMarket outlook Long-term market fundamentals are robust Figure A Change in natural gas production in selected countries in the New Policies Scenario 2013-2025 2025-2040 China United States Iran Turkmenistan Australia Canada Iraq Argentina Qatar Brazil Saudi Arabia Mozambique India Azerbaijan Nigeria Algeria Russia Venezuela Libya Angola United Arab Emirates Kazakhstan Tanzania Israel Egypt Kuwait Malaysia Thailand United Kingdom Trinidad and Tobago Norway Netherlands -60 -30 0 30 60 90 120 150 180 210 240 Billion cubic metres © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/ 14 / Petrofac Annual report and accounts 2015 Introduction Irrespective of the low oil price environment in which we currently operate, we are satisfied that the long-term market fundamentals are robust – and Petrofac is well positioned to benefit. Among industry analysts, there is consensus that global energy demand is set to grow strongly over the long term and that hydrocarbons will continue to play a significant role. Large-scale investments in oil and gas infrastructure will therefore be needed to meet this demand and to offset a natural decline in existing production. In terms of the global appetite for energy, the most recent analysis from the International Energy Agency (IEA) estimates that demand is set to grow by 32% by 2040 – by which time the world’s energy supply mix will divide into four almost-equal parts: oil, gas, coal and low-carbon sources1. This presupposes that demand for oil will grow by 10 million barrels per day, or 13%, to exceed 100 million barrels per day by 2040 (see figure B). Meanwhile, demand for gas is estimated to grow by more than 45%. Clearly, in order to meet this demand, continued investment in the exploration and production of hydrocarbons will be required. Indeed, the IEA suggests that its projections to 2040 will entail a cumulative investment in the oil and gas sectors of some US$25 trillion, of which just under 80%, or US$20 trillion, is in the upstream sector. This represents an annual average of US$750 billion for upstream oil and gas2 (see figure C). Of course, the future for the oil price environment is far from clear. In its most recent World Energy Report, the IEA concedes that there is a large element of uncertainty around its analysis, and that much will depend on a combination of economic growth, government policy, and the approach of the main oil producers. The IEA therefore presents an alternative, Low Oil Price Scenario, in which the price of oil remains within a US$50–60 per barrel (bbl) range until well into the 2020s, and only rises towards US$85 by 2040. Under these circumstances, however, the demand for oil would remain higher than would otherwise be the case (meeting 28% of global energy demand by 2040, compared with 26% under the IEA’s central planning scenario)3. Once again, this would necessitate continuing investment in the necessary infrastructure. Whilst many Independent and International Oil Companies (IOCs) will face ongoing financial pressure, particularly in the short-to- medium-term, we expect that many of the National Oil Companies (NOCs) will continue to invest in long-term strategic projects – especially in regions with lower marginal costs of production. Meanwhile, we see an in-built need for reinvestment in existing fields in order to arrest their declining production. Indeed, once production has peaked, a conventional oil field can expect to see 1 International Energy Agency, World Energy Outlook 2015 (which, under its central New Policies Scenario, suggests that by 2040, coal will account for 4,414 million tonnes of oil equivalent (Mtoe) of primary energy demand, whereas oil will account for 4,735 Mtoe, Gas will account for 4,239 Mtoe and low carbon sources for 4,547 Mtoe) © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/ 2 Ibid 3 Ibid Related pages Our business model p18 average declines of around 6% per year4 – and, especially in a period of lower oil prices, reinvesting in these assets can deliver a more immediate return on capital employed than can more speculative exploration and production projects. As the IEA puts it: “An annual US$630 billion in worldwide upstream oil and gas investment – the total amount the industry spent on average each year for the past five years – is required just to compensate for declining production at existing fields and to keep future output flat at today’s levels.”5 The Organization of the Petroleum Exporting Countries (OPEC) provides an alternative yet broadly similar analysis. In its 2015 World Oil Outlook report, it estimates that oil demand will reach 97.4 million barrels by 2020, and will grow to almost 110 million barrels per day by 2040. OPEC believes that this will require oil-related investments of at least US$10 trillion, and asserts that, “OPEC Member Countries maintain their readiness to invest in the development of new upstream capacity, in the maintenance of existing fields and in the building and expansion of the necessary infrastructure. This underscores OPEC’s commitment to security of supply for consumers, which needs to go hand-in-hand with security of demand for producers.”6 Petrofac is well positioned in the most promising market segments Although upstream capital spending is thought to have fallen by 23% in 2015 and is set to drop by at least another 15% in 2016,7 we do expect it to return to long-term growth, if only to offset the underlying production decline. Also, certain segments of the market are poised for higher levels of investment, from which Petrofac is well positioned to benefit. • Good prospects in markets where Petrofac is well established Petrofac’s operations tend to be concentrated in those regions that are expected to make the most significant contribution to long-term energy supplies. Petrofac is particularly strong in the Middle East and North Africa (MENA). In mid-2015, in its annual ranking of EPC contractors servicing the oil and gas industry, the Middle East Economic Digest reported that: “Petrofac tops the ranking for the third year running, confirming its status as the most successful contractor in the MENA region.”8 This is significant because, according to the IEA, meeting long-term demand will depend increasingly on the larger resource-holders in the region (see figures A and D). By 2040, for example, oil production from the OPEC members located in the Middle East is forecast to rise by more than 10 million barrels per day (up from 27.2 million barrels per day in 2014 to 37.5 million barrels per day in 2040)8. In addition, the lower the oil price remains, the greater the proportion of world production the region is likely to account for. In its Low Oil Price Scenario, the IEA suggests that, by the 2030s, the share of OPEC countries in total oil production could rise above 50%, a level not seen since the early 1970s. It goes on to explain that: “This is a logical outcome over the longer term: OPEC countries are those with the largest and lowest-cost resources.”9 • Continued investment from NOCs – where Petrofac can draw on strong relationships NOCs collectively control around 80% of the world’s combined conventional and unconventional reserves. Given that NOCs are typically less sensitive to short-term financial pressures and are relatively immune to market sentiment, they will continue to invest in long-term strategic projects. Figure B World oil supply by type in the New Policies Scenario (mb/d) Conventional production Crude oil Existing fields Yet-to-be developed Yet-to-be found Enhanced oil recovery Natural gas liquids Unconventional production Tight oil Extra-heavy oil and bitumen Total production Processing gains Supply * Compound average annual growth rate. 2000 73.8 65.5 64.0 – – 1.4 8.3 1.2 – 0.8 75.0 1.8 76.9 2014 81.9 68.0 66.6 – – 1.4 13.9 7.6 4.0 2.6 89.5 2.2 91.7 2020 82.6 67.3 53.6 12.4 – 1.4 15.2 10.9 5.8 4.1 93.5 2.4 95.9 2025 84.5 68.4 44.8 17.7 3.7 2.2 16.1 10.8 5.2 4.3 95.3 2.6 97.9 2030 85.1 67.9 36.9 19.3 8.7 3.1 17.2 12.1 5.5 4.9 97.2 2.7 99.9 2035 85.6 67.4 29.7 20.8 13.1 3.8 18.2 13.2 5.4 5.7 98.8 2.9 101.7 2040 85.9 66.8 23.8 22.3 16.3 4.4 19.2 14.5 5.0 6.9 100.4 3.0 103.5 2014–2040 Change CAAGR* 4.0 -1.2 -42.7 22.3 16.3 2.9 5.2 6.9 1.0 4.3 10.9 0.8 11.8 0.2% -0.1% -3.9% n.a. n.a. 4.4% 1.2% 2.5% 0.8% 3.8% 0.4% 1.2% 0.5% 4 International Energy Agency, World Energy Outlook 2013 5 © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/ 6 Organization of the Petroleum Exporting Countries, World Oil Outlook 2015 7 Barclays Upstream Spending Survey 2016 8 Oil price drop reshapes top 10 contractors, Middle East Economic Digest, 11 May 2015 9 © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/ Petrofac Annual report and accounts 2015 / 15 Strategic reportMarket outlook continued By building on strong, well-established relationships with many of the world’s leading NOCs, particularly in MENA, Petrofac is well positioned in this respect. In addition to sustained spending on upstream oil and gas projects, Petrofac is well placed to participate in a market of downstream opportunities in the refining and petrochemicals sectors. Once again, many of the MENA-based NOCs are continuing to invest in large strategic projects, and have signalled their intent to capture more of the downstream market in order to secure more of the value chain. As a recent report from McKinsey & Company states: “Major crude exporters in the Middle East continue to add to refining capacity, motivated by a number of factors. Firstly, ensuring security of domestic supply remains a top political priority… Second, Middle East players are motivated by maintaining their competitiveness in the global crude markets.”10 To complement our ability to deliver large demanding projects in the MENA, and our established relationships across the industry, Petrofac has been building its credentials in the refining sector. For example, in 2014 we were selected as a 50/50 partner in the US$2.1 billion refinery improvement programme in Sohar, Oman, and are progressing apace with our US$1.7 billion share of the Clean Fuels Project in Kuwait. Further afield, we continue to work on the sizeable engineering, procurement, construction and commissioning contract (EPCC) for a refinery package in the new Refinery and Petrochemicals Integrated Development (RAPID) project in Johor, Malaysia. As noted by the Middle East Economic Digest: “Petrofac’s success comes from being able to diversify its business across several sectors within the hydrocarbons industry, as well as operating across a geographic footprint that covers the entire MENA region.”11 Compared with its peers, Petrofac is less exposed to lower oil prices Petrofac is relatively well positioned to succeed in a sustained period of lower oil prices. More specifically, our direct exposure to oil price fluctuations is limited to a small number of equity upstream investments within IES, and our record year-end backlog gives us the best visibility of future revenues in our 35-year history. Indeed, we enter 2016 with an order book of US$20.7 billion. Also, our existing operations tend to be concentrated in those geographies with lower production costs and, again, much of our income comes from NOCs whom we expect to continue to invest in their assets. In our core MENA geographies, which are the source of the majority of our backlog, we continue to see an attractive pipeline of bidding opportunities. Of course, with fewer opportunities available globally, which tend to be concentrated in a more limited geographic area, we face the risk of greater competitive intensity. Figure C Cumulative oil and gas supply investment by region in the New Policies Scenario, 2015–2040 (US$2014 billion) Oil Gas Upstream Transport Refining Total Upstream Transport OECD Americas United States Europe Pacific Japan Non-OECD E. Europe/Eurasia Russia Asia China India Southeast Asia Middle East Africa Latin America Brazil Inter-regional transport World European Union 4,560 3,798 1,998 616 146 2 7,996 1,383 817 1,011 705 62 235 2,271 1,356 1,975 1,193 n.a. 153 129 42 11 13 1 646 69 36 107 40 31 32 280 90 101 64 338 452 241 190 138 73 28 1,259 100 69 690 315 192 159 266 87 116 70 n.a. 5,164 4,167 2,230 765 232 31 9,901 1,552 921 1,808 1,059 285 425 2,816 1,533 2,192 1,327 338 2,617 1,864 1,426 458 295 3 4,290 1,333 710 1,289 555 127 434 554 634 480 128 n.a. 1,314 743 575 333 238 44 1,615 404 265 543 262 84 114 319 233 115 34 97 12,555 1,136 1,711 15,403 243 7 124 374 6,907 226 3,026 302 9,932 528 Total 3,931 2,607 2,001 791 534 47 5,905 1,737 974 1,832 817 212 548 873 868 594 162 97 Average annual oil and gas upstream 276 218 132 41 17 0 473 104 59 88 48 7 26 109 77 94 51 n.a. 749 18 10 Profitability in a world of over capacity, McKinsey & Company, May 2015 11 Oil price drop reshapes top 10 contractors, Middle East Economic Digest, 11 May 2015 16 / Petrofac Annual report and accounts 2015 Improving our cost-effectiveness in the North Sea business There is, of course, greater uncertainty surrounding Petrofac’s operations in the UK Continental Shelf (UKCS). Here, the future of the oil and gas sector rests on structural and fiscal considerations as well as the prospects for the oil price. Also, while we would not want to downplay the challenges faced by our sector, it is clear that a low oil price environment will also offer some new opportunities for a company such as Petrofac, including: It should be noted, however, that our business in this region is more reliant on ongoing operational expenditure than on new capital investment, and we continue to work closely with clients to improve the cost effectiveness of their asset operations. A trend we do see is for well-established operators to divest their assets in this region. Often they are succeeded by new entrants, who are looking for outsourced asset management services, and Petrofac is a natural partner (as we saw when Oranje-Nassau Energie UK Limited took over the Sean gas field in mid-2015). We also believe Petrofac is in prime position to compete for a substantial decommissioning market that, through to 2040, is valued at some £37 billion.12 Turning an industry challenge to our advantage We believe that the dynamic economics within the industry play to Petrofac’s strengths in operational excellence – as well as our flexible approach and our expertise in developing innovative commercial approaches with our clients. With our strong ethos of balancing quality with cost-consciousness, we had begun to adapt to price constraints in the industry well before the reduction in oil prices, and we remain convinced that our approach will stand us in good stead during a period of lower oil prices. As clients consider any new investments, or seek to improve their existing operational efficiency, it is abundantly clear that now, more than ever, they will demand certainty of delivery and budget, and will incentivise gains in efficiency. In particular, we believe they will look for three key things from their suppliers: • A clear capability to deliver the work on the ground • A competitive cost base with a culture of cost control and incremental improvement • A willingness to share in the risk of delivery – whether that be through a lump-sum EPC contract or a performance-related operational contract • Reduced executional risk – in a low-inflation (or perhaps even a deflationary) environment, executional risks such as cost over-runs and shortages of key materials, equipment or components, can be reduced • Increased availability of hitherto scarce skills – in recent years the industry has faced a crippling skills shortage. The new industry economics may alleviate this pressure, making it easier and cheaper to access expertise • Improved access to adjacent market segments – again, any reining-in of production, by definition, opens up access to a potentially lucrative decommissioning market. Meanwhile Petrofac is continuing to build its credentials in the downstream market, which tends to be less sensitive to oil price fluctuations Given our business model and our distinctive, delivery-focused culture, the new environment represents a definite opportunity for Petrofac to increase market share and to continue to deliver differentiated margins. It also means that, when oil prices do eventually recover, Petrofac can emerge in an even stronger position. Figure D Change in oil production in selected countries in the New Policies Scenario, 2014-2040 Crude oil Tight oil Other unconventional oil NGLs Iraq Brazil Canada Iran Saudi Arabia Venezuela United Arab Emirates Qatar Kazakhstan Kuwait Argentina United Kingdom Azerbaijan Norway China United States Russia 12 UK Oil & Gas Survey 2014 -4 -3 -2 -1 0 1 2 3 4 5 Million barrels per day © OECD/IEA 2015 World Energy Outlook, IEA Publishing. Licence: http://www.iea.org/t&c/ Petrofac Annual report and accounts 2015 / 17 Strategic reportOur business model Working across the international oil and gas industry, we help our clients unlock the full value of their energy assets. Value inputs Operational excellence Our people As a people-based business, we have a problem-solving culture, clear values and strong leadership. Risk processes and risk management By thinking through every eventuality, we de-risk our projects and bring certainty to clients. Our supply chain and contractors With deep knowledge of the many businesses in our supply chain, we know when and how to call on their respective strengths. Financial capital Exerting capital discipline, we operate a balanced portfolio, we judiciously co-invest, and sometimes tap into third-party capital. Design From the concept to the detail, we provide design and engineering services across the life cycle of oil and gas assets. Build Onshore or off, greenfield or brown, upstream or down, we provide the full spectrum of engineering, procurement, construction and commissioning services. Manage and maintain We operate and maintain oil and gas assets on behalf of clients under contract to suit their requirements. Train We assess needs, build facilities, design curricula and deliver programmes to develop safe and effective local workforces. Our values Safe Ethical Innovative Responsive Quality and cost conscious Driven to deliver 18 / Petrofac Annual report and accounts 2015 Related pages Segmental performance p34 Financial review p46 Corporate responsibility p50 Commercial models Outcomes Lump-sum turnkey Projects where we are remunerated on a fixed-price (lump-sum) basis. For example, on the Lower Fars heavy oil project in Kuwait (see page 35). Reimbursable services Where the cost of our services is reimbursed by the client plus an agreed margin. Cost plus KPIs Often our reimbursable contracts will include income linked to the successful delivery of key performance indicators. For example, the Yibal Khuff project in Oman (see page 41). Production Enhancement Contracts (PECs) Where we are paid a tariff per barrel for enhancing oil and gas production above an agreed baseline. Risk Service Contracts (RSCs) Where we co-invest, develop, operate and maintain a field, while the resource holder retains ownership and control of the reserves. Equity Upstream Investments Upstream investments made through production sharing contracts or concession agreements, which will typically have production and commodity price exposure. Shareholder value Delivering sustainable, long-term value, through dividend payments to our shareholders and the financial returns from share price growth. In-country value Developing local skills and capabilities, benefiting local development, and stimulating productivity in local economies. Client value Benefiting from certainty of cost and delivery, and taking advantage of commercial models that meet client needs. Petrofac Annual report and accounts 2015 / 19 Our values Safe Ethical Innovative Responsive Quality and cost conscious Driven to deliver Strategic report Group Chief Executive’s Strategic review Our big theme for 2015 was a refocusing on Petrofac’s core strengths.” 20 / Petrofac Annual report and accounts 2015 As a result, the Company is well positioned to withstand a challenging business environment. Our order backlog stands at record year-end levels, we continue to see a robust pipeline of bidding opportunities, and we enjoy excellent visibility of future revenues. Like every other player in our sector, Petrofac has had to adapt to a market in which oil prices have reached new lows, with an anticipated recovery being slower and longer. This has led to a sharp reduction in capital spending among some of our clients and an increase in competitive intensity in some markets. Going forward, there is bound to be a clear focus on operational excellence and disciplined cost control. In adjusting to this environment, Petrofac is in a good position. Our operations are concentrated in the most resilient sectors of the global market and our model has always been grounded in project excellence. The operational challenges we faced in recent years have taught us to be extremely cautious when stepping outside of our core areas of capability. Meanwhile, as we choose how to proceed with those areas of the business that are more exposed to lower oil prices, we are not under any pressure to make hasty decisions, so can move at a measured pace and in a way that preserves shareholder value. Performance against a challenging backdrop Before talking about our future prospects and priorities, let me first reflect on our 2015 achievements. A more diligent approach to risk management Of course, our 2015 performance continued to be overshadowed by two difficult projects, specifically the Laggan-Tormore gas plant project on Shetland and the Greater Stella Area development. In both cases I am proud to say that we stayed the course. We faced up to our mistakes and remained determined to limit any damage to our reputation among clients. With Laggan-Tormore, we delivered a world-class facility for our client in challenging circumstances. With the Greater Stella Area development, the commissioning of the topside systems on the FPF1 floating production facility is progressing well, and first production is expected in summer 2016. Through these projects, we learnt difficult and expensive lessons. To ensure the mistakes are not repeated, we have introduced and institutionalised a more structured and diligent approach to operational risk management. In doing so, we are paying particular attention to the initial stages of bidding and project planning, giving us the clearest possible understanding of associated risks and project complexities. On 1 January 2016, we restructured our business into three reporting segments: Engineering & Construction (our lump-sum activities onshore and offshore); Engineering & Production Services (which now includes all of our reimbursable engineering and production services activities); and a leaner Integrated Energy Services business, focused on delivering value from our existing IES asset portfolio. Whilst our 2015 results throughout the rest of this Report and Accounts are presented on the basis of the four reporting segments that subsisted during the year, this page looks at performance and priorities through the lens of our new reporting structure. 1. Lump-sum business 2. Reimbursable business 3. Integrated Energy Services Performance in 2015 • Secured major new awards in Kuwait and Saudi Arabia • Achieved major milestones on the Laggan-Tormore project, with completion of all construction activities, transfer of care and custody of the plant to our client and the introduction of gas before the end of the year • Substantially completed the Bab Compression project and phase 1 of the Bab Habshan project, both in Abu Dhabi • Completed the second of three trains on the Badra project in Iraq with completion of the third train expected in early 2016 • Gas introduced into the central processing facility for In Salah southern fields development Priorities in 2016 • High quality execution of the existing project portfolio • Clear focus on operational excellence, and disciplined cost control • Maintain our bidding discipline in a challenging market, targeting projects within our core capabilities and in which the risk/reward balance is right • Embed our reorganised business structure to provide a platform for future growth • Resolution on the future of our deepwater ambitions taking account of the market and need to preserve shareholder value Performance in 2015 • Secured a number of major new contracts and extensions in the UK North Sea, including for CNR International, Eni, Centrica, EnQuest and Oranje- Nassau Energie (ONE) UK Limited • Secured a US$100 million one-year contract extension with South Oil Company to support its Iraq Crude Oil Expansion Project • Announced our first contract in Bahrain, to supply a new gas dehydration facility for Tatweer Petroleum • Awarded a contract worth more than £110 million in consortium with GE, to engineer, construct and install a turnkey power system for the Galloper Offshore Wind Farm, UK • Awarded an engineering, procurement and construction management contract by Petroleum Development Oman, worth around US$900m, to provide services for the Yibal Khuff project Priorities in 2016 • Entrench the new structure of our reimbursable business to provide maximum efficiency in a tough market and build a platform for longer-term sustainable growth • Increase business footprint across new geographies, sectors and client base • Collaborate with new and existing clients on innovative models for sustainable and cost effective oil recovery from UKCS • Position ourselves as a strong competitor in the decommissioning market Performance in 2015 • Progressed well with the commissioning of the topside systems on the FPF1 floating production facility in Poland, with first production from the Greater Stella Area development expected in summer 2016 • Progressed towards contract migration on our Production Enhancement Contracts in Mexico as part of Mexico’s energy reforms • Berantai Risk Service contract continued to operate in line with expectations • Chergui gas concession in Tunisia continued to produce near capacity, other than when interrupted due to infrequent periods of civil unrest • Production levels on Block PM304 in Malaysia improved during the second half of the year as we drilled and tied back further wells on the field • Agreed with OMV Petrom to exit the Ticleni Production Enhancement Contract in Romania Priorities in 2016 • Conclude negotiations on migration of our Mexican service contracts to Production Sharing Contracts • Complete commissioning of FPF1 floating production facility • Manage the asset portfolio to maximise shareholder value Petrofac Annual report and accounts 2015 / 21 Strategic reportGroup Chief Executive’s Strategic review continued A record new business performance In a market that is very challenged, a year in which global upstream capital spending is estimated to have shrunk by more than 20%, and prospects for a further tightening of both capital and operational spending, Petrofac nonetheless enjoyed strong order intake. During 2015, we added US$8.6 billion to an order backlog that, by the start of 2016, had reached US$20.7 billion. This is a considerable achievement, which sets us apart from our peers and gives us excellent visibility of future revenues. We are, of course, helped by the fact that we are strongest in the most resilient segments of the market, with deep experience in the Middle East and North Africa, and long-established relationships with some of the world’s leading National Oil Companies, many of whom have signalled their intention to continue investing in large strategic projects. A relentless focus on operational excellence In past years our industry has not been terribly efficient. All too often, project delivery has been lacking and project uptime has been sub-optimal. Previously, buoyant commodity prices masked these shortcomings but, in a lower price environment, revenue in the system will be reduced and discipline will be paramount, with no further room for inefficiencies in performance. Nonetheless, we believe that there are opportunities to improve efficiency, and the lower oil price makes this an imperative. At Petrofac, we have always benefited from a distinctive, delivery-focused culture, underpinned by our values: safe, ethical, innovative, responsive, quality and cost conscious, and driven to deliver. As we gear the Company up to fulfil our order backlog, and optimise our wider operations, we are recommitting to this heritage. Evidence comes from many areas. Good examples include the reductions to our cost base, improvements in an already strong safety performance, and our ability to increase further the efficiency of our sizeable UKCS operations, which helped us to secure more than US$800 million in contract renewals in 2015. A streamlined Company, structured to meet today’s challenges As part of our adjustment to the new commercial environment, we begin 2016 with a new organisational model, which we will be reporting against in future years. This Group-wide reorganisation aims to improve our efficiency through de-layering and centralising back office services. At the same time, it provides stronger functional support and oversight, thereby enhancing our focus on delivery and our responsiveness, both to market conditions and our clients’ needs. We are clear on our strategic objectives for the realigned business for the coming year (see page 21 for more information). In recognition of the Group’s refocus on its core services, Marwan Chedid has been promoted to Group Chief Operating Officer and under his leadership will be two external reporting segments: Engineering & Construction (E&C), which will include our lump-sum businesses (OEC and Offshore Capital Projects); and Engineering & Production Services (EPS), which will include our reimbursable businesses (OPO, ECS and Petrofac Training Services), plus our global service capabilities in areas such as well engineering and asset management, which will be transferred from other areas of the business. Meanwhile, IES will continue to report as currently, led by IES Chief Operating Officer, Rob Jewkes. It will remain focused on delivering value from its project portfolio. A clear commitment to our people and their career growth The foundation of Petrofac’s continued success is its distinctive culture. Another of the principles of our organisational redevelopment was to reinforce this culture, by empowering our people to live the values, supporting their professional development, and enabling them to benefit from any career progression opportunities that may open up across the Group. Wherever I go in the Petrofac world, I am always struck by the commitment, quality and dedication of our people. Ultimately, it is they who set us apart. So I do want to pay particular tribute to all of our employees and thank them for their efforts during 2015, and look forward to working with them in the next phase of our development. Finally, I would like to thank our Chairman and the Board for their continued support; their collective expertise and wise counsel has been invaluable during this challenging year. 22 / Petrofac Annual report and accounts 2015 A financial performance that reflects the realities of our situation The losses and impairments incurred during 2015 from the Laggan-Tormore and Greater Stella Area projects in particular, prevented us from meeting our initial forecasts. However, as explained in the financial review, there were positives to note. For example, following strong cash collection in the fourth quarter of 2015, our net debt decreased over the calendar year. Revisiting our deepwater ambitions Turning to our offshore ambitions, it is widely acknowledged that the proprietary design of the JSD6000 would create an industry leading multi-purpose vessel capable of accessing top tier deepwater construction and installation opportunities. Whilst the JSD6000 project is still progressing, given the cancellation of the shipyard construction contract, development is continuing at a much slower pace, which is appropriate given the market circumstances. As noted elsewhere in this report, we will review our options carefully over the next few months before determining how to take things forward. Looking forward, capital discipline will remain a key theme, although our relatively strong financial position means that we are able to take a responsible and measured approach. Well positioned for 2016 and beyond Whilst it is important to be cautious and tempered in our ambitions, I certainly do not want to underplay our robust position nor the strength of our core business. Good prospects in our core E&C and EPS businesses We need to focus on executing our backlog of orders to the highest standard. At the same time, we continue to see a robust pipeline of bidding opportunities, and will only pursue those that play to our strengths, where the return is commensurate with the risk inherent in the opportunity. Building on our existing experience, we are also in a good position to pursue opportunities in adjacent sectors, such as petrochemicals, and in new geographies. However, this will be about incremental growth, and does not signal a major strategic shift. Repositioning our IES operations With regards to IES, the immediate focus is to finalise ongoing negotiations in Mexico to migrate our Production Enhancement Contracts to Production Sharing Contracts. This should allow us to reduce our capital intensity as we farm down some of our position, enable us to be remunerated for the value we bring, and provide a model for future contracts. Across the wider portfolio, the focus will remain on delivering value from the project portfolio. Continuing to improve the efficiency of our UKCS business In the North Sea, our core business has always revolved around operational and maintenance support rather than capital spending. The recent round of contract renewals gives us relatively good visibility of future earnings and demonstrates our desire to work with clients to improve cost-effectiveness. As production is reined in, clients will be looking for new models to run mature assets, and we are also well placed to compete for work in the decommissioning market. Strong foundations for long-term growth Although the short-to-medium-term prospects for the sector are far from clear, we do anticipate increased long-term demand for energy, fuelled by a growing appetite for hydrocarbons and ongoing capital spending by resource holders. The achievements of 2015 demonstrate that, thanks to the strength of our backlog, our refocus on execution and our flexibility to adapt to client and market demands, Petrofac is well equipped to grow market share, deliver sector-leading margins in today’s challenging business environment, and is well positioned to resume earnings growth when more favourable conditions return. Petrofac Annual report and accounts 2015 / 23 Strategic report Key performance indicators To help the Group assess its performance, Executive Management sets KPI targets and monitors and assesses performance against these benchmarks on a regular basis. Revenue +10% US$6,329m US$6,241m US$6,844m 2013 2014 2015 Description Measures the level of operating activity and growth of the business. Measurement Revenue for the year as reported in the consolidated income statement. EBITDA1 -67% US$1,031m US$935m US$312m Net proﬁt1 -98% 2013 2014 2015 US$650m US$581m US$9m Return on capital employed (ROCE)1 2013 2014 2015 28% 18% 3% 2013 2014 2015 Description EBITDA means earnings before interest, tax, depreciation and amortisation and provides a measure of the operating profitability of the business. Measurement EBITDA is calculated as profit before tax and net finance costs, but after our share of results of associates (as per the consolidated income statement), adjusted to add back charges for depreciation and amortisation (as per note 3 to the financial statements). Description Provides a measure of the net profitability of the business, i.e. profit for the year attributable to Petrofac Limited shareholders. Measurement Profit for the year attributable to Petrofac Limited shareholders, as reported in the consolidated income statement. Description ROCE is a measure of the efficiency with which the Group is generating operating profits from its capital, per the consolidated balance sheet adjusted for gross up of finance lease creditors. Measurement ROCE is calculated as EBITA (earnings before interest, tax and amortisation, calculated as EBITDA less depreciation per note 3 to the financial statements) divided by average capital employed (being total equity and non-current liabilities per the consolidated balance sheet adjusted for gross up of finance lease creditors). 1 Before exceptional items and certain re-measurements. 24 / Petrofac Annual report and accounts 2015 Earnings per share (diluted) EPS1 Employee numbers -98% 189.10¢/s 168.99¢/s 2.65¢/s -4% 2013 2014 2015 18,300 19,800 19,000 Related pages Our strategic review p20 Group financial statements p108 Cash generated from operations and cash conversion 2013 2014 2015 US$5m US$790m US$827m Description EPS provides a measure of net profitability of the Group taking into account changes in the capital structure, for example, the issuance of additional share capital. Measurement As reported in the consolidated income statement and calculated in accordance with note 8 to the financial statements. Description Provides an indication of the Group’s service capacity. Measurement For the purposes of the Annual Report, employee numbers include contract staff and the Group’s share of joint venture employees. Lost time injury and recordable injury frequency rates per 200,000 man-hours 0.046 0.044 0.019 0.14 0.16 0.16 2013 2014 2015 2013 2014 2015 Description Provides a measure of the safety performance of the Group, including partners and subcontractors. Measurement Lost time injury (LTI) and recordable injury (RI) frequency rates are measured on the basis of reported LTI and RI statistics for all Petrofac companies, subcontractors and partners, expressed as a frequency rate per 200,000 man-hours. We aim continually to improve our safety record, but our target for these measures is zero. Backlog +10% US$15.0bn US$18.9bn US$20.7bn 2013 2014 2015 Description The Group uses this KPI as a measure of the visibility of future revenues. Measurement Backlog consists of the estimated revenue attributable to the uncompleted portion of lump-sum engineering, procurement and construction contracts and variation orders plus, with regard to engineering, operations, maintenance and Integrated Energy Services contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and five years. Backlog will not be booked on Integrated Energy Services contracts where the Group has entitlement to reserves. The Group uses this key performance indicator as a measure of the visibility of future revenue. Backlog is not an audited measure. 2013 2014 2015 2013 2014 2015 0% 84% 265% Description These KPIs measure both the absolute amount of cash generated from operations and the conversion of EBITDA to cash. Measurement Cash generated from operations is as per the consolidated cash flow statement; cash conversion is cash from operations divided by EBITDA. Part of 2015 Executive Directors’ remuneration. See more on pages: p90–106 Petrofac Annual report and accounts 2015 / 25 Strategic report Risk framework Sets risk appetite. Approves Key Risk Register. Approves signiﬁcant projects. Board oversight of framework of internal controls and risk management. Board Audit Committee Provides assurance on framework Key Risk Register review by Audit Committee Oversight of Key Risk Register. Senior management consider risk on signiﬁcant projects and investments for formal consideration by the Board. Group Risk Committee Divisional management oversight and review of projects. Divisional Risk Review Committees Risk management is embedded within each business unit. Assurance to management and the Board. Business Units Group Functions Internal Audit Risk management Petrofac operates in a challenging environment and we recognise that, with careful management, risks can offer opportunities as well as challenges. The successful delivery of Petrofac’s strategy depends on the Group’s identification, assessment, monitoring and management of its principal risks. During 2015 we made a number of improvements to our risk management processes in order to ensure our risk and control framework is firmly embedded throughout the Group. We have ensured that lessons learnt from our reviews of the issues experienced on the Laggan- Tormore project, in particular, have been reflected in these improvements to strengthen our procedures and controls. We believe our risk management framework provides us with the structure to identify the risks and uncertainties which may impact our business, thereby underpinning our ability to achieve future objectives and opportunities as our business evolves. 26 / Petrofac Annual report and accounts 2015 Each of our individual businesses has its own business management system that incorporates risk management policies and procedures and produces its own risk register. Each business service line’s management team meets regularly and monitors these risks as a matter of course, notes risk assessment changes and seeks to take appropriate mitigating action. The risk registers for each business are reviewed formally each month by that business’s leadership team and are then shared with the Group’s senior leadership team. Risk agenda Our annual budget and business plan review process incorporates a review of risks which have previously been identified. The effectiveness of existing controls and mitigating action plans are also considered. When compiled, risk reviews are assessed by the senior leadership team, the GRC and considered by the Audit Committee (where relevant and appropriate), and ultimately form the basis of a detailed Board review. Further detail with regards to the outcome of the Board’s internal control and risk management review for the year is provided on page 79. 2015 review We continually seek to improve our process for managing risk and during 2015 we made the following enhancements to our processes and controls to improve the transparency of our approach: • We strive for operational excellence and have recognised that improvements were necessary to strengthen our project controls and management of large projects. We have enhanced these with the introduction of a formal assurance team across the Engineering & Construction and Engineering & Production Services businesses that will provide independent peer reviews of project progress, execution plans and costs. Risk governance Petrofac’s overall system of risk governance relies on a number of committees and management processes which bring together reports on the management of risk at various levels. The risk governance process relies upon regular risk assessments and reviews of existing and new opportunities, by considering the risk exposure and appetite of each business unit, service line and function. The diagram on page 26 sets out the risk governance structure in operation, showing the interaction between the various risk review and management committees. Terms of reference are in place for each of the key committees. The Group Risk Committee (GRC) is a management committee constituted as the principal executive forum for the review of enterprise, project and investment risks, in accordance with the Delegated Authorities approved by the Board. The GRC reviews all material new business opportunities and projects (including bid submissions, country entry, joint ventures, investments, acquisitions and disposals) and is responsible for making recommendations as to the management and mitigation of risk exposure; and also recommends proposals for approval by the Board or the relevant executive. The GRC is responsible for the assurance of the Enterprise Risk Management framework agreed by the Board including the approval of Group standards and the application of the Group’s Delegated Authorities. In addition, the GRC reviews the Key Risk Register (KRR) prior to its submission to the Audit Committee. Each division has a Risk Review Committee (DRRC) chaired by the responsible Managing Director/Chief Operating Officer which provides peer review of proposed projects and investments in accordance with the Delegated Authorities. Where required by the Delegated Authorities, the DRRC then prepares appropriate materials for the GRC and ensures that no proposal is presented without first being reviewed and supported by the DRRC. Related pages Corporate Governance p68 Audit Committee Report p84 • We have strengthened and further empowered our functional groups through the recent reorganisation with greater interaction of specialist areas in the risk review process. We have further increased the level of functional review in our Delegated Authorities. • We have enhanced our review of major projects with many of these having been brought to the GRC a number of times whilst we are still in the early stages of the bidding process. The increased number of reviews has enabled us to analyse fully the key risks and identify appropriate mitigation before any contractual commitment and provides assurance to the GRC that the contract at pre-signature stage remains within our agreed risk appetite. • We have introduced additional controls to provide assurance to the GRC that actions identified during previous risk reviews have been fully closed out. • We, like all companies, continue to be exposed to external cyber-security threats. During 2015 we have expanded our intrusion detection monitoring and have made significant changes to tighten controls. We have also initiated an information security/cyber awareness campaign to ensure our people are informed of the risks. Over the course of 2015 we have made a number of improvements in how we run our business and have learnt from risk management weaknesses identified over recent years. Petrofac Annual report and accounts 2015 / 27 Strategic reportRisk management continued Risk management framework The Group’s risk management framework encompasses the policies, culture, organisation, behaviours, processes, systems (and other aspects of the Group) that, taken together, facilitate its effective and efficient operation. The framework is designed to underpin the Group’s longer-term sustainability. The framework supports the Board in exercising its overall responsibilities and to: • Regulate the entry of appropriate opportunities and risks into the Group • Develop our understanding of the most significant threats and opportunities • Promote active management of risk exposures down to acceptable levels • Assist the Group in delivering business plan objectives and operational performance During 2015, the framework has continued to mature and a more robust process was defined. The principal aspects are explained in the following sections. Risk Management System Petrofac’s Enterprise Risk Management System (PERMS) was deployed during 2014 and was embedded across the Group in 2015. Its purpose is to systematise our risk management process (which itself is based upon the principles and guidelines of BS ISO 31000:2009), with the aim of providing an integrated approach to risk and control and to standardise the means of assessing, reviewing and reporting on risk and to enhance visibility and accountability. The system aggregates and records risks (by type and exposure) under the same framework. Key Risk Register (KRR) The KRR identifies those risks that, given the Group’s current position, could materially threaten its business model, future performance, prospects, solvency, liquidity, reputation, or prevent us from delivering our strategic objectives. The Board treats such risks as principal risks. The KRR is the means by which the Group’s principal risks are reported to the Audit Committee and the Board for their review. It includes business, financial, hazard and operational risks, together with external factors over which the Group may have little or no direct control. On certain projects our clients have access to the PERMS system and are monitoring project risks jointly with the appropriate project team. During 2015 we identified a number of enhancements that will further improve our use of the system and these are currently being developed. The KRR is updated on a quarterly basis and looks forward over a three year time horizon to identify the: • Nature and extent of the risks facing the Group • Likelihood of the risks materialising and their potential impact on the achievement of business plan objectives • Means of mitigation to reduce or control the incidence or impact on the business of risks that do crystallise • Aggregate enterprise risk profile (and associated key risk indicators) Group’s risk management framework Risk integration Strategic planning Medium term planning Prospect phase Go/No-go process Proposal phase Design Procurement Execution Operation Hand over Management support processes Infrastructure Company vision and strategy Company values Group policies and standards Risk appetite and delegated authorities Asset integrity framework Code of Conduct Risk management process Risk Review Committees Global insurance programme Emergency preparedness Risk management process Communicate and consult Risk identification Risk assessment Risk treatment Risk monitoring Risk reporting Assurance Company values and culture Enterprise Risk Management system (and other tools) Leadership, communications and engagement 28 / Petrofac Annual report and accounts 2015 and therefore the extent to which different categories of risk are regarded as acceptable for the Group to bear. Some of the parameters used to exercise control over risk appetite include: The KRR is designed to provide the Board and Audit Committee with clarity around ownership, accountability and mitigation strategies, to promote active engagement, informed debate and constructive challenge, and to keep under review the effectiveness of decision making processes. Risk appetite The Group’s risk appetite has developed organically over a number of years (based on historical risk taking characteristics) and this has continued to develop during 2015. Our appetite for risk is largely governed through the Delegated Authorities and Risk Review Committees which are embedded across the Group. The Board recently reviewed and updated its Delegated Authorities to clarify expectations and incorporate lessons learnt. Financial thresholds for determining acceptable levels of risk have also been reviewed. As part of the review of our risk framework, the Board continues to believe that it should not apply a single aggregate risk appetite for the Group as a whole, preferring to see risk appetite managed through limits and parameters, which are continuously monitored in each business service line and aggregated for review at Group level. Risk appetite is articulated in a variety of ways appropriate to the category of risk being considered. For example, at the highest level are our policy statements which describe our risk-based approach to each category; and our policy standards, which describe acceptable controls and limits, examples of which, can be found in the Sovereign and Financial Market Risk Policy, or our Asset Integrity Policy. Related pages Our strategic review p20 Group financial statements p108 Risk culture As with all aspects of good governance, the effectiveness of risk management and internal control also depends on the individuals responsible for operating the systems that are put in place. A risk management maturity assessment was carried out in 2014 to assess the culture within the Group. In 2015 a number of improvements were made to existing processes to encourage and incentivise desired behaviours and to increase capabilities further. An example of this is the improvement in effectiveness of the DRRC and GRC processes. The recent reorganisation provides the Group with a strong platform to standardise certain processes. Plans for 2016 will continue to develop the desired values, behaviours and capabilities so that they become embedded at all levels. • Health and Safety – monthly reviews of KPIs for Lost Time Injuries and High Potential incidents • Asset Integrity – monthly reviews of control KPIs associated with all key assets across the Group • Concentration risk – tolerable exposure by: territory; client; contract type; revenue • Market growth risk – agreed bi-annually in strategy setting meetings, with trends reviewed monthly • Investment limits – for capital expenditure, minimum rates of IRR and annual cash-flow targets • Liquidity headroom – agreed by the Board and specified in the Sovereign and Financial Market Risk Policy • Financial strength – maintain an EBITDA Debt Ratio agreed with the Board • People risks – non-conformances with Code of Conduct, incident reporting and attrition rates • Off-strategy risks – where the Group has a zero tolerance, for example, sanctioned territories Viability statement In accordance with the provisions of Section C.2.2 of the UK Corporate Governance Code 2014, the Directors have assessed the viability of the Group over a three year period to 31 December 2018 having taking into account the potential impact of the principal risks and their mitigating strategies identified on pages 30 to 33. The Board believes that a viability assessment period of three years is an appropriate time horizon as this aligns with the average duration of our long-term contracts. This period also represents the first three years of the Group’s longer-term five year financial planning period and therefore provides a more robust view of financial outcomes than a five year period. The three year cash flow forecasts reflect assumptions relating to the underlying operating performance of the Group’s contracts, movements in working capital, capital expenditures and divestments, and the repayment of loans due within the forecast period. The cash flow forecasts have been stress tested against a number of what the Directors believe are severe but plausible risks to the business that could potentially impact the Group’s ability to fund its future activities and meets its banking covenants. The key stress test scenarios applied were as follows: • A substantial reduction in the level of new order intake in the Onshore Engineering & Construction lump sum contract business • A major lump-sum project delivery failure in the Engineering & Construction business which results in material financial losses being incurred • A reduction of between US$15 and US$30 per barrel in the market price of oil compared with our base case business plan assumptions for Integrated Energy Services’ oil and gas assets • A significant adverse variance in the anticipated cash flows in respect of the rationalisation of the IES portfolio and JSD6000 vessel construction project Based on the results of this analysis, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years. Petrofac Annual report and accounts 2015 / 29 Strategic report Principal risks and uncertainties Principal risks are a risk or a combination of risks that, given the Group’s current position, could seriously affect the performance, future prospects or reputation of the Group. They include those risks that could materially threaten our business model, performance, solvency or liquidity, or prevent us from delivering our strategic objectives. In terms of managing these risks, our systems of risk management and internal control are founded upon deployment of our Enterprise Risk Management Framework (based upon ISO 31000:2009); and our Internal Control Framework. Details of which are included in the Audit Committee report on pages 84 to 89. Market conditions Description and impact Volatility in oil and gas prices could influence the level of investment within the industry and the demand for our services. The financial performance of IES is directly impacted by oil and gas price volatility (due to Equity Upstream Investments). Significant movements in exchange rates could also impact our financial performance. Mitigation and management Group backlog stood at US$20.7 billion at 31 December 2015; largely insulating the Company from the immediate effects of the fall in hydrocarbon prices. However, low prices and uncertainty in the forward oil price are having an impact on the level of investment, exploration, development and production activity among International Oil Companies (IOCs) and National Oil Companies (NOCs) who are increasing their capital discipline. This, in turn, could influence the level of demand for our services in this sector and the longer-term prospects for our E&C and EPS businesses. In mitigation of this risk, we are maintaining strong client relationships with NOCs; carefully diversifying operations by client and by geography; increasing our activity in the oil and gas sub-sectors of maintenance, modifications and operations (MMO); and extending our offshore portfolio. Under our Sovereign and Financial Market Risk Policy we aim to hedge, on a rolling annual basis, the net profit exposure to hydrocarbon prices from IES’s Equity Upstream Investments as appropriate. However, we do not begin hedging until a development has achieved steady-state production. The majority of Group revenues are denominated in US dollars or currencies pegged to the US dollar. In instances where we are procuring equipment or incurring costs in other currencies, we use forward currency contracts to hedge any related exposures. Links For more information see: pages 8–9; 12–17 and 162 Change We have continued our own business model evolution with a focus on our cost base and the indentification of innovative solutions to client problems. Assessment The risk has increased in 2015 Worsening political risks in key geographies Description and impact The risk of exposure to civil or political unrest, civil war, regime change or sanctions that could adversely affect our operations. The risk of over-concentration in a particular market or geography. Mitigation and management We face a range of political risks in a variety of territories, including the possibility of unforeseen regime change as well as legal or regulatory changes. The Board regularly monitors the changing political landscape, particularly in those countries regarded as unpredictable and core to our business. All current and new projects or operations in all high risk territories are assessed and executed in compliance with our Security Policy and Security Standards. Security risk assessments are carried out in all high risk territories before entering into new contracts. Careful consideration is also given to project, investment and income exposures, and to the associated contract terms and conditions. We take all reasonable measures to reduce and limit our commercial exposure in each territory. This includes regular security risk assessments, careful selection of contracting parties, out-of-country arbitration, advance payments, and disciplined approach to cash management. When considering the entry into new territories, or extending our activities in existing territories, our plans are reviewed by the GRC. The Audit Committee regularly reviews the Group’s overall concentration risk. Links For more information see: pages 8–9; 16 and 55 Change All significant oil producing countries are facing varying degrees of challenge from factors related to oil price, sectarian conflict and the wider global economic situation. Assessment The risk has increased in 2015 Failure to meet future order targets Description and impact The risk of a significant change to the marketplace dynamics and the ways in which this could threaten our market position or our geographic footprint. Mitigation and management The capital discipline of our clients continues to increase and we therefore expect the demand for our services in this sector to be challenging. Bid-to-win ratios and segmental competition are regularly analysed to monitor this risk; improved competitiveness through streamlined bidding and estimating processes is reflected in the high bidding success rate to support targeted business acquisition. Links For more information see: pages 14–17 Change Competitors are planning to expand their presence in the Middle East, despite the increased political risks. Assessment The risk has increased in 2015 30 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Operational and project performance Description and impact The portfolio typically includes a relatively small number of very large contracts. The risk is the impact on our financial performance if any of these contracts were to be disrupted or if we fail to execute in line with our expectations. The risk of experiencing a serious environmental, asset integrity or safety incident – and the commercial and reputational damage that could be caused. If we are unable to transfer certain risks to the insurance market (due to the availability or cost of cover, for example), we could be exposed to material uninsured losses. Mitigation and management Notwithstanding some recent exceptions, we have a long history of successful project execution (from bid submission through to project completion), which has demonstrated our rigorous approach to risk identification and mitigation. We have continued to reinforce our delivery framework across our E&C and EPS businesses to include: operational excellence; margin capture; cost reduction; design optimisation; change to execution and subcontracting models; and reinforced our system of governance to maintain delivery focus and ensure tighter commercial and contractual decision making. Within IES we have continued to strengthen the engineering design Technical Authority; subsurface and operational Technical Authorities; enhanced our governance and assurance processes; and provided greater interdependence between technical, asset management and sub-surface teams. We always seek to enter into legally strong contracts with clear deliverables and avoid liabilities that are unquantifiable or for which we could not reasonably be held responsible. We also monitor the level of insurance provision and the extent to which we could bear the financial consequences of a major disruption. Our culture of health, safety and environmental awareness is central to our operational and business activities. This culture is continually re-emphasised and is supported by our operating framework and its associated management processes and systems – including our Group-wide Asset Integrity Framework. Health, safety and environmental awareness continues to be a key driver for the Group and the Board receive regular briefings throughout the year. We also have a wide variety of controls embedded within the business including: health, safety, security, environment and integrity assurance (HSSEIA) processes, safety case management processes, major accident hazard risk assessments and audits, and regular monitoring of integrity management and maintenance schedules. We continue to reinforce Group level crisis response capabilities and procedures to respond in the event of a significant direct threat to any aspect of our workforce or assets. We maintain a Group-wide insurance programme to mitigate against significant losses. The programme is consistent with general industry practice, and it also incorporates a captive insurance vehicle for the management of low level additional losses. Insurance premium costs are subject to changes based on various facts including a particular company’s loss experience; the overall loss experience of the insurance markets accessed; and capacity constraints. To mitigate these risks, we have worked with our insurance brokers, Aon, to optimise the insurance policies that we purchase in terms of their limits; deductibles; and specific policy terms and conditions. Links For more information see: pages 6–7; 20–22; and 52–55 Change We have restructured the organisation and introduced separate assurance teams. We have revised our Delegated Authorities to strengthen our controls around commercial and contractual decisions. Assessment No change Application of the commercial strategy Mitigation and management The Board assesses the level of project management discipline and executive capability necessary to support the business, to satisfy itself that the right mix of risk, capability and reward is established. We have been clear and transparent in our communications around the execution challenges we have faced and have made a number of improvements as a result of lessons learnt. We remain focused on consistent delivery; strategically, operationally and financially. We aim to minimise our cash flow exposure on contracts, especially where we deploy capital alongside our services (as in certain IES contracts). We will only do so where we are comfortable with the level of counterparty risk and with the contractual terms and conditions. Description and impact The risk that poor strategic or investment decisions could negatively impact our business model. As the Group’s strategy for growth moves into new geographies and Petrofac competes for larger, more integrated projects, the Board is required to sanction more complex bids and investments, such as the JSD6000 vessel. This includes investments in the business itself and co-investment in our customers’ assets (as is often the case with IES contracts). Links For more information see: pages 12–13; 17 and 23 Change We have strengthened our review of major projects at the early stage of the bidding process. Assessment No change Petrofac Annual report and accounts 2015 / 31 Strategic reportPrincipal risks and uncertainties continued IT resilience Description and impact There is a risk that IT security or integrity failings could result in the loss of commercially sensitive data and create substantial business disruption. Mitigation and management During the year we have migrated our critical applications to new data centres; we have expanded our intrusion detection monitoring and an information security and cyber awareness campaign has been initiated. Across Petrofac we are alert to the related risks, and conscious of the need to be able to respond effectively to any far-reaching systems failure. Links For more information see: pages 74 and 86 Change We continue to develop our capability and have recently further tightened our controls. Assessment No change Counterparty risk Description and impact The risk of over-exposure to any one customer – and the impact this could have if the relationship were to be jeopardised. Mitigation and management The Board regularly monitors the total value of contracts by customer to ensure that we are not overly dependent on any one relationship. We have a formal programme of regular, senior level dialogue with our major customers to understand and pre-empt any concerns they may have. The risk of financial or commercial exposure if counterparties (such as key financial institutions, customers, partners, subcontractors or vendors) default on their commitments. Links For more information see: pages 87; 163 and 182 We regularly monitor our exposure and ensure that our financial assets are spread across a number of creditworthy financial institutions and that limits are not breached. We also maintain close working relationships with clients and exercise close cash flow monitoring. Our Sovereign and Financial Market Risk Policy requires that material financial counterparty risk is only held with counterparties that are rated by Standard and Poor’s as ‘A’ or better (or the equivalent Moody’s rating). Financial Counterparty Risk is managed by Group Treasury and the Audit Committee has established specific limits for financial counterparties. Change We have increased our focus within the business units on cash collection. We continually review and seek robust contractual protections as we enter contracts with new clients. Assessment No change Loss of financial capacity Description and impact The risk arising if we were not able to meet our financial commitments. Mitigation and management Given the need to finance our ongoing operations and invest in future growth, we are exposed to certain liquidity risks. We manage these risks by ensuring that we always maintain an adequate level of liquidity in the form of readily available cash, short-term investments or committed credit facilities. The Audit Committee has defined a minimum level of liquidity that must be maintained. Additionally, the Board has set a target for the maximum level of leverage. Cash flow forecasting is carried out across all service lines on a regular basis to identify any funding requirements well in advance. Links For more information see: pages 13; 48; 87; 164; 171 and 181–183 Change We have improved our net debt position following settlement of a number of commercial positions. A global cash management initiative is underway which will minimise the number of bank accounts and reduce surplus cash through consolidated cash pooling. Assessment No change 32 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Corporate responsibility p50 Dilution of Company culture and/or capability Description and impact A lack of availability of sufficiently skilled, experienced and capable personnel (particularly at senior levels) could impact on our ability to deliver our business plans. Mitigation and management Given our long-term growth expectations, it is necessary for Petrofac to attract and retain significant numbers of appropriately qualified employees. We have therefore developed a systematic, Group-wide approach to talent management. We regularly review our resourcing needs, and aim to identify and nurture the best people through talent and performance management programmes, linked to effective succession planning and recruitment. Individual performance scorecards are implemented for employees, with end of year reviews being actively promoted across each business group. We remain confident that our policies to attract, retain, train, promote and reward our people are appropriate for the Group – and will enable us to meet our strategic goals. Links For more information see: pages 10–11; 13; 17; and 56–58 Change In 2015 we reviewed our e-learning resources and we embedded our Leadership and Management Competency Framework. The current volatility in the sector has increased the pool of talented oil and gas professionals, providing a better market for recruitment. Assessment No change Effectiveness of the internal control framework Description and impact The risk that employees or suppliers may fail to live up to our high ethical standards – and the consequent impact on our reputation. The potential financial and reputational risk that would arise if any of our employees (or third parties) were to breach local or international laws. The potential of material financial losses if there are weaknesses in our financial internal control framework. Links For more information see: pages 26–29; 66–67; 69; 74–81; and 86–89 Mitigation and management Our Code of Conduct sets out the behaviours we expect of our employees and the third parties we work with (including suppliers, contractors, agents and partners). We are disciplined in monitoring and managing the social impacts of our operations, as set out in our Social Performance Standard. This includes supporting and investing in local communities affected by our operations. We seek assurances that the third parties we employ comply with our Code of Conduct and the principles set out in our Ethical, Social and Regulatory Risk Policy, and our Social Performance Standard. Our business is conducted in a growing range of territories, and is therefore subject to a broad range of regulations including sanctions compliance. The Group has an anti-corruption compliance programme that seeks to manage related risks across all of our business activities. This programme recognises the requirements of the UK Bribery Act 2010, and focuses on training, monitoring, risk management and due diligence. Our management takes a risk-based approach to due diligence activities. In recent years, we have increased the level of due diligence for new contracts in higher-risk countries; and, where appropriate, this includes the commissioning of independent investigations. We have strengthened and further empowered our functional groups through the recent reorganisation. An annual self assessment questionnaire is completed by each business unit where management review and confirm the adequacy of financial and other controls and compliance with Company policies. The Audit Committee has oversight of the Group’s financial controls, approves the annual internal audit plan and reviews the results of internal and external audits together with ad hoc control or compliance reviews. There are specific delegations of authority for all financial transactions. Change We have further increased the level of functional review in our Delegated Authorities. Three separate reviews were commissioned: an external independent investigation of the relevant internal controls by KPMG; a review of operational risk management; and an analysis of the risk oversight processes that were in place at the time the projects were initially approved and were applied throughout project execution. Assessment No change Petrofac Annual report and accounts 2015 / 33 Strategic reportSegmental performance A review of our segmental performance throughout 2015 Segmental analysis The Group reported the financial results of its seven service lines under four segments: Divisions Engineering, Construction, Operations & Maintenance (ECOM) Integrated Energy Services (IES) Reporting segments Onshore Engineering & Construction (OEC) Offshore Projects & Operations (OPO) Engineering & Consulting Services (ECS) Integrated Energy Services Service lines Onshore Engineering & Construction Offshore Projects & Operations Offshore Capital Projects Engineering & Consulting Services Training Services Production Solutions Developments We present below an update on each of the Group’s reporting segments*: US$ millions Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Corporate, consolidation & elimination Group Growth/margin analysis % Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Group Revenue Operating profit1,2 Net profit3 EBITDA2 2015 4,383 1,484 715 531 (269) 6,844 2014 3,241 2,009 437 782 (228) 6,241 2015 (55) 67 69 43 (12) 112 2014 395 89 39 172 (4) 691 2015 (59) 68 50 5 (55) 9 2014 403 64 33 131 (50) 581 2015 (9) 74 78 171 (2) 312 Revenue growth Operating margin Net margin EBITDA margin 2015 35.2 (26.1) 63.6 (32.1) 9.7 2014 (8.3) 20.2 20.7 (16.3) (1.4) 2015 (1.3) 4.5 9.7 8.1 1.6 2014 12.2 4.4 8.9 22.0 11.1 2015 (1.3) 4.6 7.0 0.9 0.1 2014 12.4 3.2 7.6 16.8 9.3 2015 (0.2) 5.0 10.9 32.2 4.6 2014 438 107 45 345 – 935 2014 13.5 5.3 10.3 44.1 15.0 1 Profit from operations before tax and finance costs. 2 Operating profit and EBITDA includes the Group’s share of results of associates. 3 Profit for the year attributable to Petrofac Limited shareholders. * Before exceptional items and certain re-measurements. 34 / Petrofac Annual report and accounts 2015 Engineering, Construction, Operations & Maintenance (ECOM) Onshore Engineering & Construction Onshore Engineering & Construction delivers onshore engineering, procurement and construction projects. We are predominantly focused on markets in the Middle East, Africa and the Caspian region of the Commonwealth of Independent States (CIS). Group revenue contribution Revenue 62% +35% US$3,534m US$3,241m US$4,383m Net (loss)/profit Net profit margin -115% US$433m US$403m US$(59)m Employees 6,900 (2014: 5,900) 2013 2014 2015 12.3% 12.4% (1.3)% We achieved major milestones on the Laggan-Tormore project with the completion of all main construction activities at the Shetland Gas Plant for our client Total E&P UK and transfer of the care and custody of the plant and the introduction of gas before the end of the year. We have also substantially completed the Bab Compression project and phase 1 of the Bab Habshan project, both in Abu Dhabi. In Iraq, we have completed the second of three trains on the Badra project and the third train is expected to be completed shortly. We continue to make good progress across the rest of our portfolio of engineering, procurement and construction (EPC) projects. 2013 2014 2015 2013 2014 2015 New awards Order intake for the year totalled US$6.1 billion (2014: US$6.3 billion), including the following major awards: Lower Fars heavy oil project, Kuwait In January 2015, we announced that we are leading a consortium with Consolidated Contractors Company (CCC) to deliver the first phase of Kuwait Oil Company’s (KOC) Lower Fars heavy oil development programme, which is located in the north of the country. The contract, which is worth in excess of US$4 billion, with Petrofac’s share being approximately US$3 billion, will be completed in approximately 52 months. The scope of work covers greenfield and brownfield facilities and includes engineering, procurement, construction, pre-commissioning, commissioning (EPC), start-up and operations and maintenance work for the main central processing facility (CPF) and associated infrastructure as well as the production support complex. This also includes a pipeline of almost 162 kilometres which will transport the heavy crude from the CPF to the South Tank Farm located in Ahmadi, from where KOC has the option to send it to the proposed Al-Zour refinery in the south of Kuwait. Manifold Group Trunkline (MGT) system, Kuwait In July 2015, we received an award notification for KOC’s Manifold Group Trunkline (MGT) system in the north of Kuwait. Valued at approximately US$780 million, it is integral to KOC’s plans to increase and maintain crude production over the next five years. Three new gathering centres, which form part of the broader project, are already under construction with Petrofac executing the EPC contract for GC29. Due for completion towards the end of 2017, the MGT system will provide the feedstock to each of the gathering centres via three independent networks of intermediate manifolds and pipelines. Each of the three gathering centres will be capable of producing around 100,000 barrels of oil per day together with associated water and gas. Petrofac Annual report and accounts 2015 / 35 Strategic report97% of original project scope completed by the end of 2015 Operational excellence Design Build Related pages Business model p18 DELIVERING LOCALLY IN SAUDI ARABIA Back in 2012, Petrofac was awarded two engineering, procurement and construction (EPC) contracts for the prestigious PetroRabigh Phase II petrochemical project in Saudi Arabia. This expansion of the existing 3,000-acre facility will enable PetroRabigh (a joint venture between Saudi Aramco and Sumitomo Chemical) to start producing a new range of high value petrochemical products within Saudi Arabia. As with so many Petrofac projects, the ability to deliver locally was an important factor, and all of the work has been led from the Company’s Al-Khobar offices. The contracts cover a full range of common utilities along with two sizeable tank farms, comprising 47 tanks and five spheres. By the end of 2015, 97% of the original project scope had been accomplished, with completion scheduled for later in 2016. Building on the quality of our work, we were recently awarded a significant increase to the scope of the original contracts, including the EPC requirements for two additional tanks, two additional LPG spheres, and all the associated utilities. This phase of the work is also underway, and due to be completed in 2017. 36 / Petrofac Annual report and accounts 2015 Segmental performance continued Fadhili gas programme, Saudi Arabia In November 2015, we were awarded a contract by Saudi Aramco to undertake the engineering, procurement and construction of a sulphur recovery plant as part of their Fadhili gas programme. Fadhili is a greenfield development located 30 km west of the city of Jubail in the eastern province of Saudi Arabia. When completed, the gas plant will have a capacity for around 2,500 million standard cubic feet per day (MMSCFD) and will process sour gas from the Khursaniyah oil field and the Hasbah non-associated gas field. Petrofac’s scope of work includes: the construction of six sulphur recovery trains with associated facilities for the sulphur and heavy duty oil handling, loading, unloading and storage; sour water stripper; flare system; and waste water treatment plant. Financial performance1 Revenue for the year increased 35% to US$4,383 million (2014: US$3,241 million), reflecting an increase in activity levels as we moved into the execution phase on a number of projects, particularly in Oman, Abu Dhabi, Algeria, Kuwait and Saudi Arabia. The net loss for the year was US$59 million (2014: US$403 million net profit), reflecting the recognition of a post-tax loss of US$431 million on the Laggan-Tormore project. The net margin for the year was minus 1.3% (2014: 12.4%), while the underlying net margin before the Laggan-Tormore loss was 8.5%, reflecting the geographic mix of the portfolio and the contribution from projects in their late stages in the prior year. Onshore Engineering & Construction headcount stood at 6,900 at 31 December 2015 (2014: 5,900), reflecting the increase in activity levels. At 31 December 2015, Onshore Engineering & Construction backlog increased to a record year-end level of US$12.5 billion (2014: US$10.8 billion), reflecting the high level of order intake secured during 2015. Timeline for ECOM key projects NOC/NOC led company/consortium Joint NOC/IOC company/consortium IOC/IOC led company/consortium Laggan-Tormore gas processing plant, UKCS In Salah southern fields development, Algeria Badra field, Iraq PetroRabigh, Saudi Arabia Jazan oil refinery, Saudi Arabia SARB3, Abu Dhabi Upper Zakum field development, Abu Dhabi Bab Compression, Abu Dhabi Alrar, Algeria Sohar refinery improvement project, Oman Clean Fuels Project, Kuwait Khazzan central processing facility, Oman Rabab Harweel Integrated Project, Oman BorWin3, German North Sea Reggane North Development Project, Algeria Gathering Centre 29, Kuwait RAPID project, Malaysia Lower Fars heavy oil development, Kuwait Yibal Khuff project, Oman Manifold Group Trunkline, Kuwait Fadhili sulphur recovery plant, Saudi Arabia 2013 2014 2015 2016 2017 Original contract value to Petrofac >US$800m US$1,200m US$330m Undisclosed US$1,400m US$500m US$2,900m US$500m US$450m US$1,050m US$1,700m US$1,200m > US$1,000m Undisclosed US$970m US$700m >US$500m >US$3,000m US$900m US$780m Undisclosed 1 Financial performance is reported before exceptional items and certain re-measurements unless stated otherwise. An explanation of exceptional items and certain re-measurements is included in note 5 to the financial statements. Petrofac Annual report and accounts 2015 / 37 Strategic report270 active oil and gas installations across the region Operational excellence Manage & maintain Related pages Business model p18 INCREASING EFFICIENCY IN THE UK CONTINENTAL SHELF In response to the sustained low oil price the industry is turning to collaboration through the supply chain to drive efficiencies and reduce costs. By thinking differently about delivery Petrofac has leveraged its position as a UKCS Duty Holder to join up the activities of two of its key customers to increase efficiency and reduce costs across their respective operations. Faroe Petroleum and Eni Hewett both have assets in the Southern North Sea (SNS). As a result of a review undertaken by Petrofac to identify synergies across their respective operations a new tripartite agreement was formed. Faroe Petroleum increased the capacity of and opened up its aviation arrangements to Eni Hewett. In return, Faroe’s offshore personnel who service nearby unmanned assets now stay overnight at Eni Hewett’s facility. This approach results in increased productive time across both operations as it reduces the number of offshore mobilisations required, maximises helicopter capacity and enables Petrofac resources to be shared. It has been a great example of how the industry can work together to create efficiency and flexibility within operations. This initiative has saved around £1.2 million and has increased productivity by an average of 50 planned activity days. The industry regulator Oil & Gas UK, has described the initiative as a great example of “co-operation in action”. 38 / Petrofac Annual report and accounts 2015 Segmental performance continued Offshore Projects & Operations Offshore Projects & Operations (OPO), which includes our Offshore Capital Projects (OCP) service line, specialises in both offshore engineering and construction services for greenfield and brownfield projects, and the provision of operations and maintenance support, onshore and offshore. Group revenue contribution Revenue 21% Net profit +6% US$71m US$64m US$68m Employees 3,600 (2014: 5,500) -26% US$1,671m US$2,009m US$1,484m Net profit margin 2013 2014 2015 4.2% 3.2% 4.6% 2013 2014 2015 2013 2014 2015 Overall activity levels in 2015 were lower than during 2014. This was primarily due to lower levels of activity on capital projects, such as the Laggan-Tormore gas plant on Shetland in the UK and the upgrade and modification of the FPF1 floating production facility (which will subsequently be deployed on the Greater Stella Area development), and lower levels of brownfield engineering activity. Activity has remained robust and we continue to make good progress across our portfolio of operations support contracts and offshore capital projects, such as the SARB3 project in Abu Dhabi, which is now over 80% complete, and the BorWin3 project in the German North Sea, where we have completed over 50% of the engineering. New awards and extensions We secured the following major new contracts and extensions during the year: Oranje-Nassau Energie (ONE) UK Limited support contract, Southern North Sea In June 2015, we secured a contract to support ONE UK Limited, a subsidiary of Amsterdam based oil and gas producer Oranje-Nassau Energie B.V., as the company became the operator of the Sean gas field in the Southern North Sea on 1 June 2015. The contract is for Duty Holder support services and is worth US$45 million over three years, with the option of two one-year extensions. Gas dehydration facility, Kingdom of Bahrain In September 2015, we announced our first contract in Bahrain, to supply a new gas dehydration facility. The scope of the contract includes the installation of a new 500 MMSCFD gas dehydration facility, which is the first of a series of planned gas capacity projects scheduled for the next three to five years. The project is a significant part of Tatweer Petroleum’s commitment to secure the delivery of natural gas needed to meet the growing demands of the Kingdom of Bahrain. Petrofac Annual report and accounts 2015 / 39 Strategic reportSegmental performance continued Galloper wind farm, UK In November 2015, we were awarded a contract worth more than £100 million in consortium with GE, split approximately 50/50 between the consortium parties. The scope of work covers provision of an offshore substation as well as a receiving onshore substation, which will transmit high voltage alternating current from the offshore wind farm. Petrofac and GE have also undertaken the front end engineering and design and accompanying pre-construction works. Contract extensions We were successful in securing contract extensions with a range of clients in the UK North Sea during the year, including CNR International, Eni, Centrica and EnQuest, totalling approximately US$800 million. The extension with CNR International includes the provision of operations and maintenance teams across its North Sea assets – the three platforms in the Ninian complex; Murchison; and Tiffany – for the next five years. For Eni, our services cover operations and maintenance services in the East Irish Sea for the Douglas fixed platforms, Offshore Storage Installation and Point of Ayr terminal and Duty Holder responsibility for the Irish Sea Pioneer operations support vessel. During the second half of 2015, we secured a US$100 million one-year extension with SOC to support its Iraq Crude Oil Expansion Project. McDermott marketing alliance In February 2015, we entered into an agreement with offshore engineering, procurement, construction and installation (EPCI) company, McDermott, to form a strategic marketing alliance. Under the terms of the five year alliance, we will jointly pursue opportunities in the deepwater subsea, umbilicals, risers and flowlines (SURF) sector. JSD6000 In October 2015, we announced that we had terminated the contract with the shipyard for the construction of the proprietary design Petrofac JSD6000 deepwater multi-purpose offshore vessel due to issues with the shipyard’s performance and the Board is reviewing its options. Financial performance2 Revenue for the year was substantially lower at US$1,484 million (2014: US$2,009 million), predominantly reflecting lower levels of activity on capital projects, such as the Laggan-Tormore gas plant on Shetland in the UK and the upgrade and modification of the FPF1 floating production facility, and lower levels of brownfield engineering activity. In addition, cost savings achieved in the supply chain, particularly in the UK, enabled the delivery of services to clients at a lower cost. Net profit for the year increased to US$68 million (2014: US$64 million), representing a net margin of 4.6% (2014: 3.2%). The lower net margin in 2014 was due to the recognition of a loss of US$27 million in relation to Offshore Projects & Operations’ scope of work on the Laggan-Tormore project. Adjusting for the Laggan-Tormore loss in 2014, net margins were broadly unchanged. The Group recognised exceptional items and certain re-measurements in the OPO reporting segment primarily reflecting reorganisation and redundancy costs together with provisions for leases on vacant offices in the Aberdeen area. Headcount stood at 3,600 at 31 December 2015 (2014: 5,500), reflecting the decrease in activity, particularly on the Laggan-Tormore project where we substantially de-manned our direct construction workforce as we handed over care and custody of the plant to our client before the end of the year. OPO’s backlog was marginally lower at US$3.2 billion at 31 December 2015 (2014: US$3.4 billion), with new awards and contract extensions more than offset by progress delivered on existing contracts. 2 Financial performance is reported before exceptional items and certain re-measurements unless stated otherwise. An explanation of exceptional items and certain re-measurements is included in note 5 to the financial statements. 40 / Petrofac Annual report and accounts 2015 Engineering & Consulting Services Engineering & Consulting Services Engineering & Consulting Services (ECS) operates as our centre of technical engineering excellence. From offices across the Middle East and North Africa, CIS, Asia-Pacific, Europe and the Americas, we provide engineering services across the life cycle of oil and gas assets. Our teams execute all aspects of engineering, including conceptual studies, front-end engineering and design (FEED) and detailed design work, for onshore and offshore oil and gas fields and facilities. Group revenue contribution Revenue 10% Net profit +52% US$32m US$33m US$50m Employees 5,500 (2014: 4,900) +64% US$362m US$437m US$715m Net profit margin 2013 2014 2015 8.8% 7.6% 7.0% 2013 2014 2015 2013 2014 2015 We are making good progress on our engineering, procurement and construction management (EPCm) contracts for Petroleum Development Oman (PDO) (the Rabab Harweel Integrated Project (RHIP) and Yibal Khuff, see below) and the Al Taweelah Alumina refinery in Abu Dhabi. Utilisation remains high across our engineering offices, particularly in our engineering centres in India, which predominantly support Onshore Engineering & Construction’s activities. As well as supporting the rest of the Group, we have secured and undertaken a wide range of projects during 2015 for a number of our external customers. Engineering & Consulting Services’ larger awards won over the course of the year included: Yibal Khuff Project, Oman In June 2015, we were awarded an engineering and procurement contract by PDO to provide services for its Yibal Khuff project, a field located approximately 350 km south west of Muscat. Under the terms of the four and a half year contract, we will provide reimbursable engineering, and construction and commissioning management support services and procurement on an incentivised pass- through basis. This will extend throughout construction and during start-up of the integrated oil and sour gas facility. The total contract value is expected to be around US$900 million with around one-quarter of the revenues relating to professional services (engineering, construction and commissioning management). Development of the field will add to PDO’s future oil production, whilst the associated gas will be utilised for power generation and enhanced oil recovery developments. Plant Asset Management (PAM), various Throughout the year, we were awarded a number of contracts in our PAM business, our asset performance management consultancy. The awards included an Integrity and Maintenance Programme Development contract by INPEX for the Ichthys LNG Project in Australia. This is one of the largest global projects awarded to PAM, involving an integrated gas chain covering both upstream and midstream assets. In addition, PAM has won a number of awards in the UK North Sea during the year. Financial performance Revenue for the year increased 64% to US$715 million (2014: US$437 million), reflecting the ramp up of activity on the Rabab Harweel project awarded in March 2014, and high utilisation across our Indian engineering offices. Net profit for the year increased 52% to US$50 million (2014: US$33 million), representing a net margin of 7.0% (2014: 7.6%). Headcount increased to 5,500 at 31 December 2015 (2014: 4,900), reflecting the increase in activity levels. ECS’ backlog increased to US$1.9 billion at 31 December 2015 (2014: US$1.4 billion), following the award of the Yibal Khuff contract in June 2015. Petrofac Annual report and accounts 2015 / 41 Strategic report2018 expected completion date Operational excellence Design Build Related pages Business model p18 BREAKING NEW GROUND IN ABU DHABI The Al Taweelah Alumina project in Abu Dhabi involves the engineering, procurement and construction management (EPCm) of a greenfield alumina refinery with an initial capacity of 2.0 million tonnes per annum. Awarded by Emirates Global Aluminium to a joint venture of Petrofac Emirates and Bechtel Mining and Metals (BPJV), the project brings together the skills of the respective organisations. Whereas Bechtel is a global leader in mining and metals projects, Petrofac has deep experience of working in the UAE – we know the region, we know the local supply chains, and we know how to deliver large, demanding projects in the sweltering desert climate. As an integrated joint venture, the two organisations are working hand-in-hand across every dimension. More than 145 Petrofac employees are based at the BPJV project office in Abu Dhabi and also the New Delhi-based engineering team. 42 / Petrofac Annual report and accounts 2015 Segmental performance continued Integrated Energy Services Integrated Energy Services (IES) provides an integrated service for hydrocarbon resource holders under flexible commercial models that are aligned with their requirements. Projects cover upstream developments, both greenfield and brownfield, and related energy infrastructure projects, and can include investment. Group revenue contribution Revenue 7% Net profit -96% US$125m US$131m US$5m Employees 2,900 (2014: 3,300) -32% US$934m US$782m US$531m Net profit margin 2013 13.4% 2014 16.8% 2015 0.9% 2013 2014 2015 2013 2014 2015 IES deploys the Group’s capabilities to meet the individual needs of customers using a range of commercial frameworks, including: • Production Enhancement Contracts (PECs) • Risk Service Contracts (RSCs) • Traditional Equity Upstream Investment models, including Production Sharing Contracts (PSCs) and concession agreements Production Enhancement Contracts As part of the ongoing energy reforms in Mexico, we continue to work towards migration of our PECs to PSCs. We have agreed with OMV Petrom to exit the Ticleni PEC in Romania in the second quarter of 2016. We earn a tariff per barrel on PECs for an agreed level of baseline production and an enhanced tariff per barrel on incremental production. During the year we earned tariff income on a total of 7.5 million barrels of oil equivalent (mboe) (2014: 9.2mboe), reflecting lower investment as we exit the Ticleni field and prepare for migration of the Mexican PECs into PSCs. Risk Service Contracts The Berantai RSC continues to operate in line with expectations and has experienced high uptime during the year. Equity Upstream Investments Through OPO, we are making good progress with the topside systems on the FPF1 floating production facility and onshore topsides commissioning is expected to be completed before the end of the first quarter of 2016. The marine work on the FPF1 floating production facility is expected to be completed to enable sailaway during the second quarter of 2016, with first production from the Greater Stella Area development expected in summer 2016. On Block PM304 in Malaysia, production levels improved during the second half of the year as we drilled and tied back further wells on the field. Following periods of civil unrest during March and April, production from the Chergui gas concession in Tunisia has been steady through the second half of the year. Our net entitlement from production for 2015 from Block PM304 and the Chergui gas concession was 2.4 mboe (2014: 2.1 mboe). Petrofac Annual report and accounts 2015 / 43 Strategic report 12% of Tunisia’s total gas consumption produced by the Chergui field Operational excellence Design Build Manage & maintain Related pages Business model p18 OPTIMISING PERFORMANCE AND INCREASING EFFICIENCY Located on the Kerkennah archipelago, some 30 Km off the Tunisian coast, the Chergui field delivers up to 30 million standard cubic feet (SCF) of gas per day, and makes up around 12% of Tunisia’s total gas consumption. As well as being the operator, Petrofac holds a 45% interest in the field, which we operate on behalf of the Tunisian state oil company, Enterprise Tunisienne D’Activitiés Pétrolières (ETAP). In the face of declining reservoir pressure, the emphasis for 2015 was to find new ways to optimise performance – by maintaining historic production levels, keeping both operational and capital spending in check, and extending Chergui’s strong safety record. So, for example, the Petrofac teams worked with ETAP to conduct and assess a series of plant optimisation trials. The asset management team has identified several ways to bring increased efficiencies to Chergui; meanwhile, an extensive subsurface remapping project has identified new drilling targets that would allow us to extend the production plateau considerably. As the islands’ largest employer, Petrofac also plays an important role in the local economy, and our range of community investment programmes is designed to improve local livelihoods and education. 44 / Petrofac Annual report and accounts 2015 Segmental performance continued Summary of IES* key projects Production Enhancement Contracts* Magallanes and Santuario, Mexico Pánuco, Mexico** Arenque, Mexico Risk Service Contracts*** Berantai development, Malaysia Equity Upstream Investments Block PM304, Malaysia Chergui gas plant, Tunisia Greater Stella Area, UK 2014 2015 2016 2017 2018 End date 2037 2043 2043 2020 2026 2031 Life of ﬁeld * Ticleni PEC in Romania excluded following decision to exit. ** In joint venture with Schlumberger. *** OML119 not included, as Field Development Plan not yet deﬁned. commodity price expectations, the Group reviewed the carrying value of its PM304 oil and gas asset. This resulted in a post-tax impairment of US$33 million (2014: nil). The Group has reviewed the carrying value of goodwill allocated to the IES portfolio in light of revised commodity price expectations and underlying asset performance during the year. As a result of this review, a further post-tax impairment charge of US$33 million has been recognised in respect of IES goodwill (2014: US$18 million). See note 5 to the financial statements for further details. Headcount decreased to 2,900 at 31 December 2015 (2014: 3,300), with the largest reductions in our projects in Malaysia and in Petrofac Training. Backlog decreased marginally to US$3.1 billion at 31 December 2015 (31 December 2014: US$3.3 billion). Of this balance, US$2.8 billion relates to our Mexican PEC portfolio, which we will cease to recognise as backlog in the event we are successful in migrating the contracts to PSCs. Financial Performance1 IES’ revenue decreased 32% to US$531 million (2014: US$782 million), predominantly reflecting the lower oil price environment and lower investment in our PECs in Mexico as we work through the contract migration process. IES made a net profit of US$5 million (2014: US$131 million), reflecting the lower oil price environment, lower investment in our PECs in Mexico and a gain in the prior year of US$56 million from the sale of floating production facilities to PetroFirst Infrastructure Limited (‘PetroFirst’). The Group recognised exceptional items and re-measurements in respect of the IES reporting segment of US$330 million post-tax (2014: US$461 million), predominantly in relation to impairment of assets and fair value re-measurements. The Group revalued its loan receivable from Ithaca Energy in respect of the Greater Stella Area development in the UK, primarily as a result of a re-assessment of oil and gas forward prices. This resulted in a post-tax reduction in fair value of the Greater Stella Area receivable of US$214 million (2014: US$207 million). As a result of significantly lower 1 Financial performance is reported before exceptional items and certain re-measurements unless stated otherwise. An explanation of exceptional items and certain re-measurements is included in note 5 to the financial statements. Petrofac Annual report and accounts 2015 / 45 Strategic report Financial review We delivered net profit for the year of US$9 million1, EBITDA of US$3121 million and backlog increased 10% to a record year-end level at US$20.7 billion.” At a glance • Revenue up 10% to US$6.8 billion • Net profit1 of US$9 million, after Laggan-Tormore post-tax loss of US$431 million • Group backlog up 10% to record year-end levels of US$20.7 billion at 31 December 2015, giving excellent revenue visibility for 2016 and beyond, with embedded margins consistent with guidance • Net debt decreased over the second half of 2015 to stand at US$0.7 billion at 31 December 2015, reflecting strong cash collection during the fourth quarter of 2015 • Full year dividend maintained at 65.80 cents per share, reflecting confidence in the Group’s future prospects Revenue Group revenue increased 9.7% to US$6,844 million (2014: US$6,241 million). We delivered strong revenue growth in Onshore Engineering & Construction, reflecting an increase in activity levels as we moved into the execution phase on a number of projects, and in Engineering & Consulting Services, following several engineering, procurement and construction management (EPCm) contract wins over the past two years. Strong growth in these areas more than offset substantial declines in revenue in Offshore Projects & Operations, due to a lower level of activity on capital projects and brownfield engineering and cost deflation in the supply chain, and in Integrated Energy Services (IES), predominantly reflecting the lower oil price environment and lower investment in our Production Enhancement Contracts (PECs) in Mexico. Net profit The net profit for the year attributable to Petrofac Limited shareholders before exceptional items and certain re-measurements was US$9 million (2014: US$581 million), predominantly due to the recognition of a post-tax loss on the Laggan-Tormore project of US$431 million (see page 37 in the Segmental Review). The net loss for the year attributable to Petrofac Limited shareholders after exceptional items and certain re-measurements of US$358 million (2014: US$461 million; see note 5 to the financial statements) was US$349 million (2014: US$120 million net profit). The largest component of exceptional items and certain re-measurements relates to IES. As part of our normal year-end process, we review the carrying value of the IES portfolio for potential impairment. The Group revalued its loan receivable from Ithaca Energy in respect of the Greater Stella Area development in the UK, primarily as a result of a reassessment of oil and gas forward prices. This resulted in a post-tax reduction in fair value of the Greater Stella Area receivable of US$214 million (2014: US$207 million). As a result of significantly lower commodity price expectations, the Group reviewed the carrying value of its PM304 oil and gas asset. This resulted in a post-tax impairment of US$33 million (2014: nil). The Group has reviewed the carrying value of goodwill allocated to the IES portfolio in light of revised commodity price expectations and underlying asset performance during the year. As a result of this review, a further post-tax impairment charge of US$33 million has been recognised in respect of IES goodwill (2014: US$18 million). 46 / Petrofac Annual report and accounts 2015 1 Before exceptional items and certain re-measurements. Excluding exceptional items and certain re-measurements (“business performance”), reported profit for the year attributable to Petrofac Limited shareholders was lower at US$9 million (2014: US$581 million) predominantly due to: • A post-tax loss of US$431 million incurred on the Laggan-Tormore project (2014: US$227 million, but mitigated by the net release of tax provisions, accounting for previously unrecognised tax losses, and other financial outperformance on late-life contracts) • Lower net profit from IES, predominantly reflecting the lower oil price environment, lower investment in our PECs in Mexico and a gain in the prior year of US$56 million from the sale of floating production facilities to PetroFirst The net margin1 for the Group decreased to 0.1% (2014: 9.3%), predominantly due to the lower profitability of Onshore Engineering & Construction and IES as noted above. Net margins improved in Offshore Projects & Operations, as a US$27 million loss was recognised in this reporting segment in 2014 on the Laggan- Tormore project. Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA)2, 3 EBITDA was lower at US$312 million (2014: US$935 million), representing an EBITDA margin of 4.6% (2014: 15.0%). EBITDA margins were substantially lower in Onshore Engineering & Construction, due to the recognition of a pre-tax loss on the Laggan-Tormore project of US$480 million, and in IES, predominantly reflecting the lower oil price environment, lower investment in our PECs in Mexico and a gain in the prior year of US$56 million from the sale of floating production facilities to PetroFirst. Backlog The Group’s backlog increased 10% to a record year-end level of US$20.7 billion at 31 December 2015 (2014: US$18.9 billion). ECOM backlog increased 13% to a record year-end level of US$17.6 billion, reflecting a strong intake of new orders in Onshore Engineering & Construction, Offshore Projects & Operations and Engineering & Consulting Services. It should be noted that US$2.8 billion of the IES backlog relates to our Mexican PEC portfolio, which we will cease to recognise as backlog in the event we are successful in migrating the contracts to PSCs. Related pages Group financial statements p108 Company financial statements p168 31 December 2015 US$ billion 31 December 2014 US$ billion Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services ECOM Integrated Energy Services Group 12.5 3.2 1.9 17.6 3.1 20.7 10.8 3.4 1.4 15.6 3.3 18.9 Exchange rates The Group’s reporting currency is US dollars. A significant proportion of Offshore Projects & Operations’ revenue is generated in the UK (around 60%) and those revenues and associated costs are generally denominated in sterling, as are the reported results in respect of the Laggan-Tormore project The table below sets out the average and year-end exchange rates for the US dollar and sterling as used by the Group for financial reporting purposes. US$/sterling Average rate for year Year-end rate 31 December 2015 31 December 2014 1.53 1.47 1.65 1.55 Finance costs Finance costs for the year increased to US$101 million (2014: US$79 million), principally due to the interest cost of finance leases in relation to floating production facilities in Malaysia for Block PM304 and the Berantai Risk Service Contract (RSC) which, prior to the 80% disposal of these vessels to PetroFirst Infrastructure Holdings Limited in August 2014, eliminated on consolidation. Finance income was US$9 million (2014: US$22 million) with the majority of the finance income relating to the unwinding of the long-term receivable in relation to the Berantai RSC. Taxation Our policy in respect of tax is to: • Operate in accordance with the terms of the Petrofac Code of Conduct • Act with integrity in all tax matters • Work together with the tax authorities in jurisdictions that we operate in to build positive long-term relationships • Where disputes occur, to address them promptly • Manage tax in a pro-active manner to maximise value for our customers and shareholders Management responsibility and oversight for our tax strategy and responsibility and governance over our tax policy, which is approved by the Board and Audit Committee, rests with the Chief Financial Officer and the Global Head of Tax who monitor our tax activities and report regularly to the Board and the Audit Committee. The Group’s tax affairs and the management of tax risk are delegated to a global team of tax professionals. 2 Before exceptional items and certain re-measurements. 3 Including our share of results of associates. Petrofac Annual report and accounts 2015 / 47 Strategic report Financial review continued The Group’s effective tax rate for the year ended 31 December 2015 is negative 2.7% (2014: 18.4%). The Group’s effective tax rate, excluding the impact of exceptional items and certain re-measurements, for the year ended 31 December 2015 is 30.0% (2014: 5.2% tax charge). A number of factors have impacted the effective tax rate, excluding the impact of exceptional items and certain re-measurements, this year, principally being the net release of tax provisions held in respect of income taxes which is partially offset by the impact of tax losses created in the year for which the realisation against future taxable profits is not probable. Gearing ratio Interest-bearing loans and borrowings (A) Cash and short-term deposits (B) Net (debt) (C = B – A) Equity attributable to Petrofac Limited shareholders (D) Gross gearing ratio (A/D) Net gearing ratio (C/D) Net debt/EBITDA 31 December 2015 31 December 2014 US$ millions (unless otherwise stated) 1,790 1,104 (686) 1,230 146% 56% 220% 1,719 986 (733) 1,861 92% 39% 78% As with prior years, the effective tax rate is also driven by the mix of profits in the jurisdictions in which profits are earned. Earnings per share Fully diluted earnings per share before exceptional items and certain re-measurements was 2.65 cents per share (2014: 168.99 cents), in line with the Group’s decrease in profit for the year attributable to Petrofac Limited shareholders predominantly due to the loss recognised on the Laggan-Tormore project. Fully diluted earnings per share after exceptional items and certain re-measurements was a loss of 102.65 cents per share (2014: profit of 34.81 cents). The Group’s total gross borrowings less associated debt acquisition costs and the discount on senior notes issuance at the end of 2015 were marginally higher at US$1,790 million (2014: US$1,719 million) due to higher drawings on the Group’s revolving credit facility (see note 25 to the financial statements). As noted in note 25 to the financial statements, both the Group’s term loan and revolving credit facility are subject to a leverage covenant. Prior to 31 December 2015, the term loan and revolving credit facility lenders granted a waiver of the leverage covenant for the year ending 31 December 2015, as a result of which the Group was in compliance with its financial covenant obligations for that period. Operating cash flow and liquidity The Group’s net debt stood at US$0.7 billion at 31 December 2015 (2014: US$0.7 billion) as the net result of: None of the Company’s subsidiaries are subject to any material restrictions on their ability to transfer funds in the form of cash dividends, loans or advances to the Company. • Operating profits before working capital and other non-current changes of US$313 million • Net working capital inflows of US$602 million, including: – a decrease in trade and other receivables of US$605 million following strong cash collection in the second half of the year – an increase in accrued contract expenses of US$367 million offset by an increase in work in progress of US$192 million as a number of Onshore Engineering & Construction projects moved into the execution phase – a reduction in trade and other payables of US$168 million • Investing activities of US$361 million, including loans advanced and capital expenditure of US$228 million on IES projects and US$74 million on the Petrofac JSD6000 installation vessel • Capital proceeds of US$43 million, including further consideration of US$41 million from the PetroFirst transaction (see note 4f to the financial statements) • Financing activities, in particular, payment of the 2014 final dividend and 2015 interim dividend totalling US$223 million and financing the purchase of shares for US$39 million for the purpose of making awards under the Group’s share schemes • Net taxes paid of US$49 million and interest paid of US$96 million Excluding bank overdrafts and Export Credit Agency facilities, the Group’s total available borrowing facilities were US$2,450 million at 31 December 2015 (2014: US$2,450 million; see note 25 to the financial statements for further details). Of these facilities, US$660 million was undrawn as at 31 December (2014: US$725 million). Combined with the Group’s cash balances of US$1,104 million (2014: US$986 million), the Group has substantial sources of liquidity available. Capital expenditure Capital expenditure on property, plant and equipment totalled US$260 million in the year ended 31 December 2015 (see note 10 to the financial statements; 2014: US$668 million), including: • US$121 million on the Petrofac JSD6000 installation vessel • US$95 million on oil and gas assets in IES, predominantly in relation to investment in the Group’s four production enhancement contracts in Mexico Capital expenditure on intangible oil and gas assets during the year was US$10 million (2014: US$97 million), predominantly in respect of pre-development activities on Block PM304, offshore Malaysia. 48 / Petrofac Annual report and accounts 2015 The carrying value of Integrated Energy Services’ portfolio (excluding working capital balances) is: Expenditure on Integrated Energy Services projects Cost At 1 January 2015 Additions/(adjustments) Transfers At 31 December 2015 Depreciation and impairment/ revaluation At 1 January 2015 Charge for the year Impairment/revaluation At 31 December 2015 Net carrying amount: At 31 December 2015 At 31 December 2014 Oil and gas assets per note 10 (Block PM304, Chergui and PECs) US$m Oil and gas facilities per note 10 (floating production facilities) US$m Intangible oil and gas assets per note 13 (Block PM304, and other pre- development costs) US$m Greater Stella Area development loan per note 16 US$m 1,256 97 73 1,426 (415) (78) (32) (525) 901 841 625 (4) – 621 (197) (42) (15) (254) 367 428 161 10 (73) 98 (5) – (7) (12) 86 156 399 182 – 581 (207) – (214) (421) 160 192 Less floating production facilities held under finance leases within ‘oil and gas facilities’ Add Berantai long-term receivable (see note 16 to the financial statements) Add investment in Seven Energy International Limited (see note 15 to the financial statements) Total IES investment before working capital at 31 December 2015 Total US$m 2,441 285 – 2,726 (824) (120) (268) (1,212) 1,514 1,617 (346) 357 169 1,694 Total equity Total equity at 31 December 2015 was US$1,232 million (2014: US$1,871 million). The main elements of the net movement during the year were: loss for the year of US$344 million, less dividends paid in the year of US$228 million and other comprehensive loss of US$74 million. Return on capital employed The Group’s return on capital employed for the year ended 31 December 2015 was lower at 3% (2014: 18%), reflecting lower EBITA (earnings before interest, tax, amortisation and impairment) predominantly due to the loss on the Laggan-Tormore project. Dividends The Company proposes a final dividend of 43.80 cents per share for the year ended 31 December 2015 (2014: 43.80 cents), which, if approved, will be paid to shareholders on 27 May 2016 provided they are on the register on 22 April 2016 (the ‘record date’). Shareholders who have not elected to receive dividends in US dollars will receive a sterling equivalent, based on the exchange rate on 27 April 2016. Shareholders have the opportunity to elect by close of business on the record date to change their dividend currency election. Together with the interim dividend of 22.00 cents per share (2014: 22.00 cents), this gives a total dividend for the year of 65.80 cents per share (2014: 65.80 cents), in line with the prior year. Tim Weller Chief Financial Officer Petrofac Annual report and accounts 2015 / 49 Strategic report Corporate responsibility A safe, ethical, responsive business that is driven to deliver Good engineers have consummate technical ability, but great engineers are also aware of the political, social and economic environment in which they work. A disciplined approach to corporate responsibility is therefore an important competitive strength for Petrofac.” Ayman Asfari Group Chief Executive What matters most to our stakeholders Petrofac materiality matrix and issues for 2015 Over the past few years we have engaged with a range of internal and external stakeholders to identify the corporate responsibility (CR) issues that are most relevant to our business. In 2015, we repositioned some of these issues based on further stakeholder feedback during the year. How we report: Information on the issues listed can be found in the sections shown below. l s r e d o h e k a t s l a n r e t x e o t e c n a t r o p m I D. Occupational health A. Environmental management B. Political risk C. Human rights H. Trade sanctions H. Revenue and tax transparency C. Worker welfare B. Joint venture management A. Water management A. Waste management A. Materials A. Biodiversity/habitat protection D. Well-being and stress management D. Disease prevention A. Energy and climate change A. Legacy soil contamination C. Indigenous populations C. Land acquisition and resettlement C. Social investment (community investment) h g H i i m u d e M w o L A. Environmental incidents B. In-country value B. Supplier and contractor mgmt E. Major accidents/process safety E. Worker safety/ fatalities E. Contractor safety and management F. Emergency preparedness G. Diversity and equality H. Bribery and corruption H. Ethical conduct H. Governance C. Social licence to operate C. Industrial relations disputes F. Security risks G. Learning and development G. Succession and career planning H. Whistleblowing C. Employee volunteering G. Employee retention G. Employee recruitment Low Medium High Key Changed position Same position as 2014 Emerging issue Importance to Petrofac 50 / Petrofac Annual report and accounts 2015 H Ethics P66 A Environmental protection P64 G People and resourcing P56 B Economic performance P62 E F Safety, asset integrity and security P52 C Social performance P59 Key: Issues by group A Environmental protection B Economic performance C Social performance D Health E Safety F Security G People and resourcing H Ethics In 2016, we will also increase the quality and volume of CR reporting at www.petrofac.com At Petrofac, we believe that sustained commercial success and a commitment to corporate responsibility (CR) go hand-in-hand. More specifically, we see that our CR capability helps us to: • Maintain strong employee engagement • Build productive relationships • Bid for challenging projects • Optimise the performance of our assets • Manage our risks During 2015, we continued to formalise our approach to CR, with more rigour and improved reporting standards. Progressively raising our reporting standards To bring more discipline to our CR programmes, we continue to work towards the Global Reporting Initiative (GRI) G4 guidelines. As a commonly used framework for reporting on social, environmental and governance matters, the GRI guidelines help us to: • Identify and address the material issues that matter the most to our stakeholders – including investors, clients, staff and NGOs • Prioritise areas for improvement and track our progress over time • Benchmark our performance against our peers In 2016, we will also increase the quality and volume of CR reporting at www.petrofac.com. Understanding what matters most to our stakeholders For the past few years, we have worked to develop our reporting in line with stakeholder and investor expectations. The process dates back to 2012 when, working with representatives from across our business, we identified those CR topics we believed to be most relevant. In subsequent years, we conducted a series of in-depth interviews with several of our most important stakeholders (including clients, suppliers, investors, NGOs, government representatives and industry associations). These enabled us to validate our initial assumptions and understand changing expectations. In 2015, we continued the process. For example, we engaged with several external stakeholders in the Middle East, enabling us to understand those issues that are most relevant in our key geographies. We also engaged with a number of large institutional investors to understand more fully the views of large shareholders. At Hassi Messaoud training facility, more than 850 Algerians have been trained since 2010. See page 63 for more information. Based on this work, we have developed an authoritative ‘materiality matrix’. To give us a balanced view and take account of changing stakeholder attitudes, this is updated on an annual basis. It is used by the Leadership Team and the Board to inform our management approach to CR. It is also used by the wider business to help improve the quality of our CR programmes and feed through to our reporting. Improving our performance and providing a fuller picture We also conducted a benchmarking and good practice review of our 2014 Annual Report and Accounts. In this, we compared our CR reporting with the reporting from several of our peers, and identified several opportunities for improvement. Drawing on this analysis, we will continue to raise our standards. For example, we have refined our reporting around social performance, ethics and environmental performance. Petrofac Annual report and accounts 2015 / 51 Strategic reportCorporate responsibility continued Safety, asset integrity and security Safety, asset integrity and security are fundamental disciplines for Petrofac – enabling us to protect our people, our clients and the communities we work in, as well as the assets we design, build, operate and maintain. As we shift the emphasis of our business, and undertake the construction phase of many large new projects, we are taking steps to maintain our safety performance. We continue to enhance our well-established programme of health, safety, security, environment and integrity assurance (HSSEIA) measures. ‘Safe’ – a core Petrofac value Reflecting on our safety performance Across Petrofac, our aspiration is for zero safety incidents, as reflected in the name of our Horizon Zero global safety campaign. We are proud to say that, much of the time, we do live up to this goal – and, in 2015, we were able to recognise several encouraging developments. Despite a busier year for Petrofac (when the number of man-hours worked increased by almost 60% to 183 million), we nonetheless achieved a reduction in High Potential (HiPos) and Lost Time Incidents (LTI). And, across many of our operations, we have now gone a considerable length of time without a single LTI reported. Total man-hours worked (million) Million man-hours completed by employees and subcontractors 160 115 183 Lost time frequency rate per 200,000 man-hours 0.046 0.044 0.019 Recordable incident frequency rate per 200,000 man-hours 0.14 0.16 0.16 Driving incident frequency rate incidents per million kilometres driven 0.02 0.58 0.34 52 / Petrofac Annual report and accounts 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 2013 2014 2015 Highlights include: • 20 million LTI-free man-hours and the Best Contractor Safety Initiative award at the Upper Zakum, UZ750 field development in Abu Dhabi • 28 million LTI-free man-hours across all of our Offshore Projects & Operations (OPO) projects across Middle East, North Africa and the Commonwealth of Independent States • 15.5 million LTI-free man-hours and an HSSE award for the second consecutive year at the Kuwait Oil Company (KOC) Pipelines project • 8 million LTI-free man-hours at the Satah Al Razboot package (SARB3) project off the coast of Abu Dhabi • 5 million LTI-free man-hours at the Sohar refinery project in Oman • 9 years without a single LTI at the Point of Ayr Gas Terminal in the UK • 5 million LTI-free man-hours at the Gdansk shipyards in Poland • 1 million LTI-free man-hours on the Berantai operations in Malaysia • 4 years without a single LTI for Petrofac Training Services In terms of our actual performance, an important measure is what we term HiPos, or incidents that could have resulted in a fatality or serious injury had the situation been slightly different. Compared with 2014, the number of HiPos recorded reduced from 77 to 58. We measure our wider safety performance according to the US Occupational Safety and Health Administration (OSHA) rules. In every category, the results were encouraging: • Our recordable incident frequency rate remained level at 0.16 per 200,000 man-hours. This is well below the industry norm of 0.31 (as extrapolated from the figures published by the International Association of Oil and Gas Producers). • Our LTI frequency rate was 0.019 per 200,000 man-hours, compared with a rate of 0.044 in 2014. Again, this compares well with the industry norm of 0.072 (as extrapolated from the International Association of Oil and Gas Producers figures). • The driving incident frequency rate was 0.34 per million kilometres driven. This is down from a rate of 0.58* in 2014. In January 2016 the International Association of Oil and Gas Producers published a report of vehicle accident rates in the oil and gas industry. Petrofac is currently reviewing this data to establish if this can be used as an appropriate external performance benchmark. We are pleased to report that, for the second consecutive year, no fatalities were recorded at any of our operations. * A calculation error in the 2014 Annual Report and Accounts resulted in the vehicle accident rate being quoted per 200,000 kms rather than the correct and stated per 1,000,000 kms. The figure of 0.58 is correct on the per million kilometres basis. During the year we established and began to implement a new Control of Work Standard, which covers construction, maintenance, demolition, remediation and other such aspects of safety control. Strengthening our safety culture When a company enjoys a good safety record, complacency can sometimes set in. Throughout 2015, we therefore sought to maintain a strong safety culture and to prepare the Company for a progressive increase in the number of man-hours due to be worked in 2016 and beyond. Making our Golden Rules of Safety accessible and understandable Our analysis reveals that, in more than 75% of our reported HiPos in 2015, the root cause is a failure to observe our Golden Rules of Safety. As in previous years, we therefore worked hard to raise awareness of these Rules and their importance. For example: For example, the executive leadership team and the Board shifted the focus of our internal safety reporting from LTIs to HiPos. The intention was to emphasise those ‘near misses’ that could have had the most serious consequences. In each case, we provide details on the circumstances, the mitigating actions and the lessons learned. • We continued to roll-out our Golden Rules of Safety e-learning package. Using clear illustrations and graphics, this clearly articulates the Rules and our expectation that they should always be followed. By the end of 2015, this had been completed by 880 employees. • We sought to make the Rules more accessible and understandable In a similar spirit, we added three new leading indicators to our safety reporting, namely: • The number of leadership visits to site • The extent of active monitoring of safety on site • The effectiveness of closing-out actions intended to improve safety at site Experience suggests that these measures can have a direct impact on our safety performance. So, by routinely monitoring and reporting on them, we can become more proactive in our approach. Meanwhile, in gearing up for a progressive increase in construction projects, our OEC business ran a Safety Seven campaign, comprising seven key initiatives intended to contribute to its safety performance – namely contractor management initiatives such as: our Contractor Safety Forum; our HSE Boot Camp training programme; Supervisor Competency Assessments; our Stop, Think, Evaluate, Perform (STEP) programme; our Short Service Employee (SSE) programme; the roll-out of HSE Management software; and the implementation of the Petrofac Assurance Index (PAI) system. The Petrofac delegation, including Andy Nickerson (HSSE Director of our OEC service line) and Mohamed Shanan (Project Director of KOC Pipelines), receives the award from the KOC CEO, Hashem S. Hashem. to all onsite personnel, irrespective of their native language or level of literacy. Using vivid pictograms, we created a suite of materials, including posters, reference cards and pictorial learning guides. Confined space entry Management of change Ground disturbance Lifting operations Energy isolation Permit to work Driving safely Working at heights Keeping our entire policy framework relevant and consistent During 2015, we conducted a root and branch review and refresh of our entire Health, Safety, Security and the Environment (HSSE) Framework, covering each of its constituent policy documents, namely: • Health and Safety Policy • Environmental Policy • Security Policy • Asset Integrity Policy For each of these, we ensured the content was up to date, compliant with current regulatory requirements, and consistent. The new Framework is due for roll-out in 2016. We also established and began to implement a new Control of Work Standard, which covers construction, maintenance, demolition, remediation and other such aspects of safety control. Petrofac Annual report and accounts 2015 / 53 Strategic reportCorporate responsibility continued Empowering our most senior people to lead by example When it comes to safety, we expect all of our senior executives to lead by example. For example, during 2015: Across the Group, we are responsible for managing and assuring the integrity of 21 operating assets, and we seek to apply the underlying principles across all of our operations. • We continued to emphasise the importance of site visits by senior managers, and the opportunity for them to reinforce the importance of safety to onsite personnel. Again, the frequency of such visits has become a safety performance indicator for all of our sites. • We once again held our annual safety conference attended by 130 of our most senior leaders, including our Group Chief Executive and all Service Line Managing Directors. The theme was emergency response and the event included a live crisis management exercise. In 2015 we continued to tighten up our everyday processes. A particular focus for 2016 will be on the changes we anticipate in the coming years, when several assets may be divested, and several others may come under our control, while key personnel and roles and responsibility changes are likely. Experience suggests that, during times of change, attention to asset integrity can suffer. So, we are working proactively to protect our performance by taking action that keeps a focus on asset integrity, and ensures that the valuable activities developed over recent years are maintained and further enhanced. Extending our commitment to our suppliers and partners All Petrofac safety policies and procedures apply equally to our suppliers and partners as well as our own employees. To underline this principle, we held our second annual Contractor Safety Forum in Sharjah in 2015. A rigorous, consistent process Every month, each of our 21 operating assets is obliged to report against 20 key performance indicators, which are derived from the UK Health and Safety Executive’s guidance on Developing Process Safety Indicators. These comprise: Following the success of the inaugural event, we scaled up the Forum. It was open to contractors from across our business, and we also invited several of our clients, bringing the total delegate numbers to almost 200. The key aim of the event was to develop a statement with three clear safety actions for all the companies present to take away and implement. The statement was then signed by each company to demonstrate their commitment. Sharing best practice across the industry We continue to share expertise across the industry by collaborating with our peers. For example, we remain an active member of the UK Oil Response Forum, and the Step Change in Safety initiative, including its Asset Integrity Steering Group, the Helicopter Safety Steering Group, and the Behavioural Safety Workgroup. Asset integrity – fundamental to our business At Petrofac, we design, build and operate assets that are safe, reliable and meet or exceed their specified purpose. Key to this is our Asset Integrity Framework, which enables us to take a structured and consistent approach to integrity across all Petrofac operations. This Framework comprises: • Lagging indicators – relating to the physical condition of our assets and the status of their respective maintenance programmes • Leading indicators – relating to the quality of our management processes and the degree of compliance with our Asset Integrity Management Policy Drawing on this data, an asset integrity dashboard is published monthly and distributed to more than 100 people across the Group. Additionally, our Asset Integrity Review Board, consisting of senior representatives from each operating asset, holds monthly teleconferences to review performance, discuss integrity issues and receive challenge and support from their counterparts. Working quickly to address integrity issues During 2015 we received an Improvement Notice from the UK Health and Safety Executive regarding the Kittiwake Platform in the UK North Sea. This related to the failure of small-bore gas tubing due to a combination of vibration and fatigue. Following completion of an action plan, we had complied fully with the requirements by early November, and actively shared the learnings among our design teams as well as our operating teams across the Petrofac Group. • Our Asset Integrity Management Policy • Our Asset Integrity Standard, comprising the 12 Elements of Asset Integrity • Related guidance documents and a toolkit of supporting processes • Audit programmes to assure compliance and continuous improvement Seeking continuous improvement We seek continuously to improve our approach to asset management. Enhancements in 2015 included: • Updating our Asset Integrity Management Policy – as part of a wider review of our HSSE Framework • Implementing a Tank Survey Programme – performing a systematic review of the 180 storage tanks that Petrofac operates across the world and establishing improvement programmes 54 / Petrofac Annual report and accounts 2015 • Conducting a series of audits across our portfolio of assets – including – Milestone audits, to assure the integrity of projects through engineering and construction – Operations phase integrity reviews, to assure control of hazards and safe operating performance – Hull integrity audits of all our marine assets • Establishing an improved understanding of well integrity – across all our high consequence wells • Implementing our new Group-wide Asset Integrity e-learning package – which, by the end of 2015, had been completed by more than 2,000 technical employees • Improving consistency across the Group via new standards and guidance documents – including issue of Technical Due Diligence Guidance, Operations in Projects Guidance, Pressure Systems Repair Guidance, Technical Authority Standard, and development of new Management of Change and Control of Work Standards • Conducting monthly project asset integrity status reporting – together with successes and lessons learned shared across all major projects Plans for 2016 include: • Implementing a Pipeline Survey Programme – to follow-up on the success of 2015’s Tank Survey Programme • Revisiting learning from previous incidents – and refreshing awareness and vigilance in attention to asset integrity hazards in all areas of our work Security – protecting our people and assets Petrofac’s security team works closely with the business to protect our people and assets and ensure that our operations proceed smoothly. In 2015 we continued to enhance our already robust security management systems, reflecting the volatile social and political environments in which we work. Implementing a stronger security focus in the Middle East and North Africa During 2015, dedicated security specialists were assigned to our North African projects, and our security teams became more closely involved with our operations across the Middle East. With a stronger regional focus, our security teams have become better informed and more responsive in our core markets. They are also able to engage more closely with our project teams – from the very early stages of business development through to bidding and delivery. Appointing more local security managers In IES, we implemented a security localisation programme, including the appointment of local country security managers in Malaysia, Mexico and Tunisia. As well as providing effective security support, the provision of employment opportunities helps us to maintain productive relationships with the communities in which we operate. Making technical improvements to our security systems A focus for 2015 was to improve the quality of our threat assessments, taking better account of the diversity in the size and duration of our respective projects. As part of this process, we introduced new access control systems at many of our offices and sites. As well as improving physical security, this has enhanced our related management information. The process will continue in 2016, as we seek to bring more global consistency and integration to our access control systems. Improving maritime security During 2015, we conducted a full review of the security of our maritime assets. This has given us a better understanding of the related security implications and helps us to monitor our assets in compliance with the International Ship and Port Facility Security (ISPS) Code. Respecting human rights Where necessary (for example, where we have a contractual requirement to engage with armed public or private security providers), we conduct security and human rights risk assessments. In 2015, we did this in Algeria, Mexico and Tunisia. Such audits enable us to demonstrate to our clients and other stakeholders that we follow good practice in reducing the risk of inadvertent human rights violations. ‘Safe’ is a core Petrofac value. At many of our projects we have delivered tens of millions of man-hours without a safety incident. Petrofac Annual report and accounts 2015 / 55 Strategic reportCorporate responsibility continued People and resourcing Petrofac is a people-based business. Our people, their attitude and their skills are key to our distinctive, delivery focused culture. By living our values, they set us apart from our competitors, allow us to attract and retain clients, and enable us to earn differentiated margins. For the next phase of our development, we aim to bring more efficiency, consistency and effectiveness to the way we recruit, develop and manage our people – while also enabling and encouraging employees from around the world to progress in their careers. In a company with such a strong culture, we need everyone to understand and live up to our values. Our HR teams are therefore working closely with their colleagues from across the business to reflect these values in our recruitment processes, our performance management systems, and our continuous learning programmes. Our values underpin all that we do and, during the current challenging period, are helping the Company to maintain its focus on disciplined cost containment. The North Kuwait New Distribution Network Project was one of our 2015 EVE Award winners. Pursuing a business-focused HR strategy Throughout the Group, we employ HR professionals with expertise in a number of disciplines. They are based in each of our key locations and, together, they deliver a business-focused HR strategy. The guiding principles include: In light of the challenges faced across the oil and gas sector, jobs have become scarce and voluntary turnover levels within the industry are thought to have reduced commensurately. Here at Petrofac, voluntary staff attrition (measured in terms of those leaving the Company by choice) reduced to around 6% compared with 8.5% in 2014. • Developing all of our people – viewing current employees as the natural candidates for tomorrow’s roles and equipping them to progress in their careers • Identifying and developing those with leadership potential – with effective talent management and succession planning identifying the next generation of senior leaders and providing the support they need • Strengthening our leadership capabilities – developing the skills of those responsible for others • Driving high performance – cascading consistent and aligned performance measures to enable us to achieve our business plans • Attracting and developing the right graduates – evolving our graduate programmes to create a global cohort who are closely networked and highly collaborative • Encouraging people to ‘join our journey’ – portraying a consistent employee value proposition that helps us to compete for and retain talent Adapting to an uncertain business environment As covered elsewhere in this Annual Report, the Group is adapting to an uncertain business environment, in which oil prices may remain low for a sustained period of time. There is a renewed focus on operational excellence and disciplined cost control. Fortunately for Petrofac and our employees, much of the Group is well positioned in the most robust segments of the oil and gas industry and we enter 2016 with our largest ever year-end backlog. However, some parts of the business are not so well insulated from lower oil prices, such as our IES operations and also our operations in the UK Continental Shelf (UKCS). So, in effect, we are now managing two types of businesses: • The operations concentrated in the Middle East and North Africa and our centres of excellence in India, which are continuing to see growth but are nonetheless facing increased competitive intensity • Getting the HR fundamentals right – seeking greater • The more cost-constrained operations located elsewhere efficiency, integration, consistency and effectiveness across all our HR activities In 2015, the total number of employees and long-term contractors decreased by around 4% to reach 19,000. To reflect these circumstances, the Group has been preparing for a reorganisation, which took effect from early-2016, where the HR team has taken a central role. As a result, we have had to manage our cost base tightly and implement reductions in our headcount in a number of locations. 56 / Petrofac Annual report and accounts 2015 During 2015, we climbed more than 100 places (to 174) in the ‘Guardian UK 300’ listing, which ranks the country’s most popular graduate employers. In our UK-based operations, which have been hit particularly hard by falling oil prices, we took the opportunity to establish a UK-wide consultation forum, to act as a conduit for two-way communications with our UK-based employees. With the decision to reduce our UK headcount, this forum played an important role in employee engagement, under very challenging circumstances. In our other locations, such as Mexico and Malaysia, the business has also been restructured and reductions in workforce have been implemented. A clear focus on growing our own talent In the past, Petrofac typically relied on external recruitment to fill key roles. Now, as part of our HR strategy and our talent management programmes, we want our existing employees to benefit from career progression opportunities that may open up across the Group. With this emphasis on identifying, developing and progressing our own talent, we aim to be seen as an attractive employer, offering tangible opportunities for career progression and personal development. Achievements include: • We are now regarded as one of the world’s most in demand employers Back in 2014, we developed an ‘employee value proposition’, encouraging potential job applicants to ‘Join our Journey’. We also introduced a new online recruitment and application-tracking system, designed to improve the experience of potential employees, streamline our recruitment processes, and bring more rigour to the planning and evaluation of our recruitment advertising. We recognise LinkedIn as a key channel to position ourselves as an employer of choice. Our presence and strength of brand continues to grow and we experience high levels of engagement with content on our page. This contributed to our appearance on LinkedIn’s 2015 list of 100 Most InDemand employers for Europe, the Middle East, and Africa (EMEA). In 2015 we were also named, for the second successive year, as one of LinkedIn’s top 20 most influential UK brands. • We are a popular career choice among today’s graduates Attracting and developing the right graduates is one of the principles of our HR strategy. Regrettably, conditions in 2015 forced us to pause our UK graduate recruitment programmes. But, elsewhere in the world, the graduate programme continued unabated. In Sharjah for example, our graduate intake for the year was around 140 people (a slight increase from 2014) and, in India, we recruited around 90 new graduates. To reflect our emphasis on graduate recruitment and development, we brought greater Group-wide alignment to our induction and development programmes. The Petrofac Academy, which is located in Sharjah, for example, is becoming responsible for continuous learning initiatives across the Group. In addition, Group Chief Executive Ayman Asfari took the opportunity whilst visiting the Sharjah office to welcome 2015’s graduate intake to the Group by attending an interactive event, which linked via video, graduates based in Sharjah with those based in Mumbai, Chennai and Malaysia. This joined-up approach helps our graduate cohort become closely networked and highly collaborative, accelerates the acquisition of skills, and allows our young professionals to achieve autonomy more quickly. We are proud that our graduates reflect the level of diversity we enjoy across the wider Group. They represent almost 50 nationalities and females continue to make up around 20% of the total. We also benefit from high levels of retention – among the 1,000 graduates recruited since 2004, the retention rate remains around 70%. During 2015, we climbed more than 100 places (to 174) in the ‘Guardian UK 300’ listing, which ranks the country’s most popular graduate employers. A commitment to continuous learning and development Again, the central ethos of our HR strategy is to develop our own people. We want to enable all employees to progress professionally. We also want to help those employees who are responsible for others to improve their management and leadership skills. Irrespective of their role or seniority, we want to help our employees to live the Petrofac values. • Individual development We offer a growing range of programmes and resources to help individual employees develop their respective competencies. During 2015, we conducted a review of our e-learning resources, in order to provide more flexibility for employees and ensure that programmes developed in one part of the Group can be accessed by colleagues elsewhere. Going forward, we intend to implement an integrated, Group-wide learning management system, which makes better in-house use of the technologies and tools developed by Petrofac Training Services. This will give us more consistent means of identifying training needs, delivering learning, assessing competence and tracking individual progress. • Management and leadership development As in previous years, we continued to develop the skills of those responsible for others. As well as improving their capabilities, this helps us to cascade the right behaviours through the organisation. An important component is our Leadership Excellence Programme, which around 200 of our most senior leaders have participated in. The programme comprises a leadership event, skills modules and alumni workshops. Another focus for 2015 was to implement and embed our newly developed Leadership and Management Competency Framework. Petrofac Annual report and accounts 2015 / 57 Strategic reportCorporate responsibility continued We set out clearly what we expect of all our managers, from first line supervisors right through to our most senior leaders. The framework covers four dimensions: A disciplined approach to succession and career planning A focus of our HR strategy is to develop the Group’s leadership capabilities. – Driving performance – Developing people – Delivering for clients – Being a role model for our values To live up to these expectations, we operate an all-embracing management and leadership development programme, which we call the Petrofac Pathway. During 2015, 420 managers went through the programme. A priority for 2016 is to continue to embed the Petrofac Pathway across the Group, and to support local offices with its implementation. Forever emphasising the importance of our values It is important that all employees understand the importance of the Petrofac values and the role they play in our distinctive, delivery-focused culture. Our values are therefore integrated into everything we do and we explain their importance to employees at each stage of their Petrofac career. This enables everyone to understand what is expected of them, the behaviours we value, and the contribution they make to the success of their teams. In addition, our values are linked to our Group-wide performance management process and therefore play a part in setting employee objectives and conducting mid-year reviews and year-end appraisals. This helps us drive a high performance culture across the Group, whilst also maintaining a focus on how our people should work in partnership with the wider Petrofac team. Each year, we also celebrate employees and teams who embody our values through the EVE (Excellence, Values, Energy) Awards. As in 2014, we received around 320 entries from across the Group, demonstrating a significant level of interest and enthusiasm. For 2016 we will ensure that our values are even more visible to employees, at every stage in their career journey, including the initial recruitment and induction, and also the learning and development programmes. Back in 2014, we conducted a thorough talent review of our most senior managers, and we continue to review and update succession plans for all our critical roles. In 2015, we extended our talent reviews further into the organisation, with a focus on emerging talent, focusing on around 1,600 young professionals. In doing so, we assessed their progression to date, and how best to support their future development. Going forward, we will continue to look at ways to gain more value from the combined knowledge and experience of our most talented people, such as more internal secondments and appointments. The aim is to ensure that we can always place our most effective people into our most important roles. Global mobility where it makes business sense Wherever possible, Petrofac delivers locally, by employing local people, working with local partners and developing local capabilities. However, in some instances, it makes good business sense for us to facilitate international moves. By mobilising some of our key people, we can supplement local skills. We can also strengthen our global culture and add to the experience of our managers and leaders. By drawing on our in-house HR expertise, we are able to advise local business leaders, support assignees and follow consistent processes. At the end of 2015, around 50 of our employees were covered by our global mobility programmes. Given our order backlog, we anticipate an increase in the number of short-term and rotational assignments and expect assignees to be drawn from a wider range of countries. An engaged workforce with a sense of ownership Our aim is to monitor formally employee engagement levels across Petrofac. In the past, we have conducted a biennial employee survey, PetroVoices. However, given the impending restructure of the Group, we chose not to do so in 2015 but will endeavour to reintroduce the survey once the restructuring has been embedded. Meanwhile, we actively encourage employee share ownership, believing that it builds commitment to the Company’s goals and rewards our people for their contribution. In 2015, 32% of our employees participated in at least one of the Petrofac employee share schemes. The 2015 EVE (Excellence, Values, Energy) Award winners. 58 / Petrofac Annual report and accounts 2015 In 2015 our spending on social investments amounted to US$3.5 million, contributing to tangible benefits for those we support and also for Petrofac. Social performance For many of our projects, we have a regulatory, contractual or other requirement to manage the impact (both positive and negative) our business may have on the communities where we are active. Where this is the case, we are becoming ever more rigorous in the way we work with our clients to understand and manage these impacts. This means we are becoming better able to reduce risk and create value for the Company, our clients and neighbouring communities. We describe our approach to this as social performance. Our management framework Our Social Performance Framework governs how we manage social performance across the Group. Our Social Performance Standard and associated guidelines set the expectations and requirements that enable us to meet the commitments set out in the Petrofac Ethical, Social and Regulatory Policy as they relate to social performance. In 2015, we conducted a review of some of our key engineering, procurement and construction (EPC) contracts to identify areas where we have contractual requirements and/or regulatory responsibility for implementing any elements of social performance. This is enabling us to identify how social performance is relevant to this aspect of our business, and to ensure that it is implemented effectively across all relevant projects. Integrating social performance into our wider business processes During 2015, we continued to raise awareness of social performance issues across the Group and incorporate them into our wider business processes. For example, social performance considerations are incorporated into: • The Petrofac Enterprise Risk Management System (PERMS) • The risk assessment phase of pre-bidding and bidding processes (in order, for example, to anticipate potential community relations considerations) • Our approach to security (to understand and address any situations where community relations could constitute a security risk) For 2016, we will continue to increase the social performance awareness and capability across the Group and continue to implement the Framework. The Social Performance Standard is designed to be consistent with relevant international standards, such as the International Finance Corporation (IFC) Performance Standards on Environmental and Social Sustainability. In 2015, as part of a three-yearly review process, we refreshed the Standard and reviewed the related guidelines. The Framework is significant in four main ways: 1. It sets out our minimum expectations and requirements for those contracts where we have a regulatory or contractual accountability for managing social impacts 2. It provides consistent guidance across the Group on how we have decided to manage the various elements of social performance 3. It demonstrates to clients our approach to social performance and indicates our related credentials 4. It indicates to all stakeholders that we have a coherent approach to working in sensitive locations, and are capable of fulfilling internationally recognised social performance requirements Implementing the Social Performance Standard We implement our Social Performance Standard in countries where we are contractually responsible for managing community relations, such as Mexico and Tunisia. In both of these countries, we have completed social assessments and have mitigation measures in place to address identified issues. We also have dedicated community relations teams to manage our social performance commitments and engage regularly with our neighbouring communities. Petrofac supports local fishermen and the mangrove conservation project in Tabasco, Mexico. Petrofac Annual report and accounts 2015 / 59 Strategic report Corporate responsibility continued Social investment programmes Our social investments fall into two categories: • Community development – spending on initiatives that benefit neighbouring communities in our areas of operation. They are based on needs assessments to help local communities meet their long-term priorities. • Strategic corporate giving – spending on philanthropic initiatives that have altruistic aims but nonetheless contribute to Petrofac’s reputation. They are managed by our local offices, and are moving towards a focus on our Group-wide theme of science, technology, engineering and mathematics (STEM) education. In 2015, our spending on these social investments amounted to US$3.5 million. This was down from US$4.1 million in 2014, in part due to reduced expenditure in Mexico, where we have been renegotiating our contracts as part of the country’s energy sector reforms. Although the amount we spend may have decreased, we believe our approach is becoming progressively more rigorous and therefore more effective in contributing to tangible benefits for those we support and also for Petrofac. For example, we have strategic plans in place for all our IES assets, and a growing number of our corporate centres are involved in strategic corporate giving initiatives. One of our community meetings in Mexico. 60 / Petrofac Annual report and accounts 2015 • About our community development initiatives Where we operate assets and are directly accountable for managing social impacts, we implement community development programmes. In recent years, we were particularly active in Mexico, where we have been contractually committed to spending 1% of our total annual expenditure on sustainable initiatives (75% of which is cost-recoverable). With the renegotiation of our Mexican contracts, the level of capital expenditure has reduced and, therefore, the amount invested in community development has decreased from US$3 million in 2014 to US$2.6 million in 2015. Our focus is currently on finalising the implementation of existing initiatives as we prepare to work under new contract terms. Similarly, in Romania, where we are exiting from our operations, we have been closing out our existing social investment programme. Meanwhile, in Tunisia, we continue to face a challenging social context, including some instances of civil unrest (resulting, for example, in a 37-day shutdown at our Chergui concession during 2015), and our investment in community development initiatives has dropped 27% to US$334,000. However, as we prepare for a future drilling campaign, we remain engaged in an active community consultation process, and continue to target our community investment programmes on improving local livelihoods and education. A recent success in Tunisia was our work with the local agriculture association to invest in an oil press, which is the first on Kerkennah Island. This allows local farmers to process their olives without the need to transport them to the mainland, resulting in a saving of around 45%. During the last harvest, the press was used by over 450 farmers, who processed 650 tonnes of olive oil – around 40% of the islands’ total olive production. • About our strategic corporate giving programmes Petrofac has a formal corporate giving strategy, focusing on initiatives that promote STEM education and/or improve access to education and employability for young people from marginalised groups. We believe this focus fits well with our business while addressing global development priorities. Although guided by a Group-wide strategy, our related programmes are typically selected and implemented at a national or regional level and managed by local offices. Our strategic corporate giving also covers initiatives intended to enhance employee engagement. For example, we support matched-funding programmes, and often make donations to charities that are relevant to our employees or are located near to our offices. Examples include: • The Royal Academy of Engineering, UK In the UK, we have a long-standing partnership with the Royal Academy of Engineering and our Group Chief Executive, Ayman Asfari, is a Fellow of the Academy. Each year since 2009, we have supported the Royal Academy of Engineering Fellowship Programme, which provides funding for graduate engineers to pursue a one-year Masters programme in applied technical roles in the oil and gas industry, and has now benefited 31 fellows. In 2015, we also extended our support of the Academy’s STEM Teacher Connectors project, which employs an expanding network of Teacher Coordinators, who provide local STEM teachers with training, resources and networking opportunities. During the most recent academic year, an estimated 1,100 pupils from 68 schools benefited. • The Kincorth Academy Partnership, Aberdeen For several years, we have enjoyed a partnership with Kincorth Academy, a local secondary school in Aberdeen. We support various projects including STEM outreach programmes, CV writing and interview skills coaching. Our support involves a mix of financial, in-kind and employee volunteering contributions. Managing and monitoring our human rights performance Petrofac’s Ethical, Social and Regulatory Policy prevents us from engaging in any business activities that could implicate the Company – either directly or indirectly – in the abuse of human rights or the breach of internationally recognised labour standards. As such, we respect human rights as set out in the United Nations’ Universal Declaration of Human Rights, as well as the core conventions of the International Labour Organization (ILO). We also support the United Nations’ Guiding Principles on Business and Human Rights. Most human rights protections are covered in a range of Company policies and standards, such as our Code of Conduct, Social Performance Framework and HR policies. In line with the GRI G4 reporting requirements, and in response to stakeholder expectations (see the materiality matrix on page 50) we continue to recognise the need to: • Become more explicit in our reporting on human rights issues • Enhance our due diligence in relation to human rights issues, with an emphasis on the concerns that are most relevant to our sector – such as the management of large temporary workforces, particularly those working on projects that entail large numbers of contractors and subcontractors • Ensure that all related risks are appropriately monitored and managed Some of the graduate engineers from the Royal Academy of Engineering Fellowship Programme. During 2015, to become more explicit about our expectations, we updated several areas of our policy framework. For example, we developed a policy statement on child labour, which states that we will: • Not employ anyone under the age of 15 (in accordance with the ILO Conventions relating to child labour) • Adhere to minimum age provisions of any national labour laws and regulations which specify a higher minimum working age • Work with suppliers and contractors to ensure that they comply with this policy We also updated our Social Performance Standard to reflect our policy commitments to human rights. A priority for 2016 is to ensure that Petrofac complies with the requirements of the UK Modern Slavery Act. In particular, we intend to enhance our due diligence process to demonstrate our commitment to eliminating the risks of modern day slavery in our supply chain. Petrofac Annual report and accounts 2015 / 61 Strategic reportCorporate responsibility continued Economic performance As a global business, Petrofac operates in many different countries – and we seek to make a positive and tangible contribution to their respective economies. Quantifying and maximising our in-country value Local delivery has always been key to the Petrofac model – employing local people, working with local suppliers, and developing local capabilities. The concept of In-Country Value (ICV) seeks to formalise and quantify the net contribution Petrofac makes to the economies in which we operate. Across many of our projects, we have started to evaluate our impact. In future years, we aim to become more consistent in the way we set and monitor targets and to share the lessons learnt across the Group. Working with local suppliers Through the procurement of goods and services, we have an important opportunity to contribute to local economies and we always aim to work with local vendors and suppliers. This enables us to meet our contractual and regulatory obligations regarding local content. It also helps us to reduce costs and enhance relationships with clients and other local stakeholders. In 2015, just taking into account the key projects listed on page 37, we purchased more than US$2.2 billion worth of goods and services, more than 25% of which was supplied by vendors located within the country of operation. For various reasons, the level of local content varies significantly by country. For example, in Abu Dhabi, where we are delivering projects worth US$4.1 billion, more than 72% of our procurement was through locally registered vendors, and the equivalent figure for Saudi Arabia exceeds 66%. In 2016 we aim to harmonise the way that we gather data relating to local content, which should enable us to report our contributions more clearly in future. Supporting local employment We are also working towards gathering consistent data to report how many jobs are created and sustained on our key projects. Our goal is to understand the total number of jobs created, as well as the ratio between expatriate and local workers – to indicate the level of the local content of our workforces. As of December 2015, just taking into account the key projects listed on page 37, we supported over 55,000 jobs at our project sites. The vast majority of these, 93%, were through our sub- contractors, with a smaller number of expatriate and local Petrofac employees and contractors. 62 / Petrofac Annual report and accounts 2015 Total amount paid to governments in tax US$605m (2014: US$720 million) Value of goods and services ordered for key projects in ECOM US$2.2bn (2014: not reported) Number of jobs supported at key ECOM project sites 55,000+ (2014: not reported) Many of these subcontractor jobs are held by local people. In 2016, in order to understand the total number of people who are hired locally, we aim to analyse further and report on the make-up of our subcontractors’ workforces, as well as the employees at our country offices and other assets. Examples include: • Investing in Omani content Petrofac has a strong heritage in Oman dating back to 1988. Today, we continue to provide engineering, procurement and construction (EPC) services, and are also extending our local capabilities in engineering consultancy services (ECS), which enables us to support the development of local service providers and vendors. In addition, our recently expanded country office in Muscat demonstrates our commitment to working as an integral and sustainable part of the Omani market. We are currently delivering four strategic projects in the country (the Khazzan gas field project, the Yibal Khuff project, the Rabab Harweel Integrated Project, and the Sohar refinery improvement programme) with a combined value of more than US$5 billion. In partnership with Takatuf Oman, we are also developing a state of the art vocational training facility to train Omani school-leavers to international standards for careers in the oil field industry. At the end of 2015 we directly employed over 600 staff at our Muscat office and project sites, and more than 40% of them are Omani nationals. In addition, more than 14,500 people are employed through our contractors and work on our sites, many of whom are Omani nationals. As required by the government of Oman and in support of our clients’ respective ICV targets, we report regularly on our ICV spending. To date, on the four strategic projects mentioned above, we have invested over US$1 billion in ICV. Of this, 85% has been spent through local goods and services providers, as well as on supplier development and training support initiatives. • Developing local capabilities in Algeria Building on a 15-year track record in the country, we are currently delivering three major projects in Algeria, with a combined value of more than US$3.1 billion (namely, the In Salah Gas Southern Fields development, the Alrar Gas Compression plant and the Reggane North Development Project). In addition, we have an ongoing engineering services agreement with the In Salah Gas joint venture, and have entered into two further strategic agreements with Sonatrach, the Algerian state owned energy company. In combination, these assignments are benefiting the Algerian economy in several ways. For example, as of December 2015, we employed directly and through third parties over 800 people in the country, 56% of whom are Algerian nationals. Through our subcontractors, an additional 6,650 people are employed, 6,000 of whom are Algerian nationals. In combination, this equates to a ratio of over 86% in local content. Meanwhile, on the three major projects mentioned above, we spent a total of US$60 million in 2015 through local vendors. In addition, we have invested more than US$7 million in establishing a world-class training facility at Hassi Messaoud which, since 2010, has trained more than 850 local people. Making a significant contribution to public finances Through the taxes we pay, Petrofac makes a significant financial contribution to the public finances of the local economies in which we operate. For example: • We supported the Extractive Industries Transparency Initiative (EITI), which introduced country-by-country reporting on tax and non-tax payments made to governments in respect of companies’ extractive activities, and were actively involved in developing the related policies. The first submissions under this initiative will be made in 2016. • In 2015, we continued to contribute to research into the structure of business taxation and its economic impact by participating in the OECD’s public consultations into tax transparency, the issues surrounding base erosion and profit shifting (BEPS), and other proposed legislative initiatives. • We continue to maintain memberships of a number of industry groups that proactively participate in the development of future tax policy and transparency initiatives. Our worldwide contribution to public finances – total taxes paid The total amount that we pay is not confined to the corporate income tax disclosed within the financial statements. The total tax collected includes payments made in respect of: corporate income taxes, employee and employer taxes and social security payments, VAT and sales taxes and other taxes such as withholding, property and other indirect taxes. The total taxes collected shows the contribution made by Petrofac in payments to governments, so includes those taxes which are borne by Petrofac, as well as those collected by Petrofac but recoverable from tax authorities or customers and suppliers. VAT and sales taxes are shown on an accruals basis, which is not expected to be materially different to a paid basis. Our worldwide tax contribution – total taxes paid1 (US$m) In 2015, the total amount paid to governments in tax was US$605 million, comprising corporate income tax, employment taxes, other forms of tax and social security contributions. 912 720 605 2013 2014 2015 Bringing more transparency to our tax reporting Across the world, there are a number of new and proposed initiatives relating to increased transparency of companies’ reporting on tax arrangements and tax payments, as well as disclosure of tax policy, strategy, governance and risk management. We are fully supportive of such initiatives and, in many cases, are actively contributing to their development. 1 Total taxes collected have not been subject to audit. Petrofac Annual report and accounts 2015 / 63 Strategic reportCorporate responsibility continued Environmental protection We are committed to operating our business in an environmentally responsible manner and aim to make continuous reductions to the intensity of the environmental footprint of our global operations. In 2015, we continued to bring increased rigour and consistency to the way that we measure and manage our environmental performance. Improving consistency across our operations During 2015, we developed a new Group Health, Safety, Security, and Environmental (HSSE) Framework, which brings more rigour to our existing standards. With an integrated approach to managing HSSE, we also benefit from greater consistency across our operations, and become better able to make organisational improvements. To support the new HSSE Framework, our Group Environmental Data Reporting Guide (as developed in 2014), was rolled-out across the organisation. The content of this guide is aligned with recognised international reporting standards, such as the Greenhouse Gas Protocol, the Global Reporting Initiative, the Petroleum Industry Guidance on Voluntary Sustainability Reporting, and the UK’s Mandatory Greenhouse Gas Reporting Guidelines. With an enhanced reporting system, we can monitor and compare the performance across our operations more accurately, and manage and reduce our environmental footprint. Thanks to our new reporting methodology, Petrofac achieved a disclosure rating of 92 out of 100 for our response to the Climate Disclosure Project’s (CDP) climate change questionnaire. This rating indicates a comprehensive response to the questionnaire, as well as sound understanding and management of climate change-related issues – including greenhouse gas emissions – relevant to the Company. Our reporting principles and procedures Petrofac discloses greenhouse gas emissions in line with the mandatory GHG reporting requirements of the UK Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013 on a voluntary basis. In 2014, we commissioned Ricardo-AEA, a specialist consultancy, to assure and validate our greenhouse gas emissions data collection processes. In 2016, we plan to undertake a more extensive data assurance programme, consisting of field visits to various operations and in-depth surveys of our data collection processes. 64 / Petrofac Annual report and accounts 2015 To provide an accurate and consistent estimate, we have adopted the following principles: • Our emissions data is calculated in line with the principles of the Greenhouse Gas Protocol Corporate Accounting and Reporting Standard, produced by the World Resources Institute and the World Business Council for Sustainable Development – a globally recognised standard • Greenhouse gas emissions and our corporate carbon footprint report are based on: – For fuels and electricity use – emission factors published by the UK Department for the Environment, Food and Rural Affairs (DEFRA) – For gas flaring – The American Petroleum Institute’s SANGEA methodology using the chemical composition of the gas • For those operations that are jointly owned, we use an equity share approach to account for emissions • Those operations that are wholly controlled by third parties are excluded from our reporting • All Petrofac operational sites are included in this report To take into account the recently updated Greenhouse Gas Protocol Scope 2 Corporate Accounting guidance, we are reporting our emissions using the location-based method. As well as calculating our own emissions, we also monitor and report on air emission data to our clients for the facilities we manage on their behalf. We monitor the compliance of our North Sea operations in line with the Oslo-Paris Convention standards. In accordance with the European Environmental Emissions Monitoring System, we measure: • All discharges of hydrocarbons, heavy metal and radiation contamination • All air emissions of sulphur dioxide, nitrogen oxides, and volatile organic carbons In addition to greenhouse gas emissions data, we also collect data on the waste that leaves our facilities, which is typically segregated, measured and reported by category. Our environmental data collection and analysis enables us to monitor and improve our energy use and waste management, which helps to minimise our related environmental impact. The data is also made available to various stakeholders to demonstrate that we comply with all related requirements, and to show our commitment to environmental protection. Emissions and spill performance We have been monitoring and reporting our carbon emissions since 2008. In 2015 we saw a slight increase in our carbon emissions. This was primarily due to an increase in the production of crude oil at our Malaysian operations, and a consequential increase in energy consumption. With an enhanced reporting system, we can monitor more accurately and compare the performance across our operations, and manage and reduce our environmental footprint. We report an intensity metric for our GHG emissions in line with the GHG reporting requirement of the Companies Act 2006, with which we comply on a voluntary basis. We have chosen to use “tonnes/million US$ revenue” as this metric is the most representative across the entire business. Our combined scope 1 and scope 2 greenhouse gas emissions Tonnes of carbon emissions (000 tCO2e) 285 264 281 Breakdown of the greenhouse gas emissions (000 tCO2e) Year 2013 2014 2015 Greenhouse gas intensity tCO2e per million US$ revenue 44.9 42.4 41.0 2013 2014 2015 Scope 1 Scope 2 253 242 260 32 22 21 2013 2014 2015 In 2015, we participated in the first phase of the UK Government’s Energy Savings Opportunity Scheme (ESOS), and a qualified Lead Assessor was appointed to ensure compliance with the criteria. We encourage all of our employees and subcontractors to report even the smallest of oil spills. During the year, we experienced a 10% reduction in the total number of spills. Most of these occurred onshore and involved less than one barrel of hydrocarbon (or saltwater with traces of oil), and had a minimal environmental impact. Regrettably, we experienced 41 hydrocarbon spills involving more than one barrel. One of these took place in Malaysia and one in Oman, with all of the others occurring in Mexico and Romania. In each case, the appropriate spill-response measures were implemented and a full investigation was conducted. To improve further the way we respond to spills, we developed an Oil Spill Response Plan self-assessment tool, drawing on the international guidelines and recommendations published by IPIECA (the global oil and gas industry association for environmental and social issues), ARPEL (the regional association of oil, gas and biofuels sector companies in Latin America and the Caribbean), the International Oil Spill Conference (IOSC), and the International Union for Conservation of Nature (IUCN). This tool enables our teams to evaluate their spill response plans and identify opportunities for improvement. Continuing improvements in our energy efficiency For many years, energy efficiency has been an area of focus for the Company, as indicated by a large number of local initiatives. During 2015, we gave the subject more prominence by including it in the Policy Vision of our Environment Policy – which is intended to guide all our activities. Our commitment is demonstrated through the way that our teams often go beyond client requirements as they seek to optimise the energy efficiency of the facilities we design, develop and operate. Examples include: • Our operations team at the Santuario field in Mexico identified the potential to use a low energy Electric Submersible Pump (ESP) system for pumping crude oil. This newly installed system consumes around 30% less energy than its predecessor and has the potential to save 1,120Mwh of power per annum. • For the analyser package at the Mina Abdulla Refinery project for the Kuwait National Petroleum Company, our design team saw an opportunity to exceed the client’s original energy efficiency specifications. By optimising the number and positioning of analysers used in the project, the new design could reduce the associated cooling requirements. This is set to save the equivalent of 2,372Mwh of energy per annum. • At a construction project for the Kuwait Oil Company, our design teams convinced the client to accept several finished grade levels for the pipe racks (instead of the original plan of achieving a single finished grade level). In doing so, they eliminated the need to dispose of 442,000 cubic metres of soil offsite, thereby avoiding thousands of truck trips and saving the associated fuel. Finding new ways to reduce our environmental footprint We continue to raise awareness of environmental issues among our employees, and encourage them to implement local initiatives. Examples from 2015 include: • We introduced smart printing solutions among the 4,000 employees based at our offices in Sharjah, Abu Dhabi, Aberdeen and London. By deploying sophisticated new printers and software, which default to double-sided, black and white printing, we have reduced the use of paper and toner by more than 18%. • At our Pánuco site in Mexico, the local team stopped using a solvent-based oil conditioning compound and replaced it with a plant-based equivalent (derived from the locally grown species Jatropha Curcas). As well as being safer and more environmentally friendly, the new compound has superior viscosity reduction capabilities, which has reduced operational costs and enhanced pipeline delivery capabilities by 50%. • At the Reggane Nord Development project in Algeria, our teams worked with local communities to devise and implement an innovative waste management programme. This involved the segregation of waste, at source, using a colour-coded system, and enlisting locally-based companies to assist with its removal and recycling. As part of the programme, 60 of the colour-coded waste bins have also been donated to local schools, and Petrofac has provided training to pupils on responsible waste management. Petrofac Annual report and accounts 2015 / 65 Strategic report Corporate responsibility continued Ethics ‘Ethical’ is one of the six Petrofac values. Our Code of Conduct (the Code) sets out our expectations of everyone who works for and with Petrofac. We aim to make all employees and third parties who work with and for us aware of the Code and its content. If anyone is concerned that the Code may have been breached, we encourage them to report their suspicions without fear of retaliation – and there are several ways to do so. In order to achieve our business ambitions, it is important for Petrofac to be and to be seen as an ethical Company. We therefore aim to make all of our employees and partners aware of our commitment to ethical behaviour, and we continue to improve the scope and reach of our compliance programme. Giving clear guidance to employees and business partners The Code gives explicit guidance to our employees and business partners. Using clear, easy-to-follow language, it provides a series of examples of the types of behaviour we expect of those who work with and for Petrofac. It also states clearly the types of behaviour that would constitute a violation of our ‘Ethical’ value. The Code was last reviewed in 2013. Printed copies were subsequently distributed to all employees and it is routinely provided to all new employees and newly contracted third parties. By the close of 2015, more than 23,000 copies had been distributed. For 2016, we plan a further review of the Code, to ensure that it reflects new legislation. In particular, we plan to provide new guidance on anti-money laundering, trade sanctions and the UK’s Modern Day Slavery Act. Embedding the Code across our business During 2015, we continued to draw attention to the Code and its requirements. For example, all employees and contractors are expected to complete an e-learning programme that explains the Code’s principles through a range of everyday examples. The process began in 2014 with the launch of a web-based compliance portal that can be accessed via any connected device (such as a PC or tablet) by both Petrofac employees, contractors and, at our invitation, third parties who want to do business with us. During 2015, a further 2,000 employees completed the e-learning programme, bringing the total number to more than 16,000. Updating our Standard for the Prevention of Bribery and Corruption In 2015 we updated our Standard for the Prevention of Bribery and Corruption (the Standard), and introduced several new safeguards. The Standard is now more explicit in its language, has fewer exceptions, explains when such exceptions may apply, simplifies existing compliance processes and mandates competitive tendering processes across the Group. It also incorporates a new due diligence procedure and mandatory completion of e-learning and related training. The launch commenced in 2015 with face-to-face discussions with our most senior managers. As we continue the rollout in 2016, our focus will be to reach managers in the higher risk positions, from a compliance perspective. The completion of the associated e-learning course will be required amongst more than 3,000 employees and selected third parties. Enhancing our certification process Whilst following the Code is an obligation of all employees and contractors, upholding the Code and being alert to suspected breaches is a key accountability of all Petrofac managers – from first-level supervisors through to our executive leadership team. In 2015, we continued to refine our Code of Conduct Certification process – an annual exercise that provides the opportunity for all managers to raise any possible Code violations that may have occurred in the preceding 12 months. 66 / Petrofac Annual report and accounts 2015 Employees can access the web-based compliance portal and Code e-learning programme via any connected device. In 2015, some 2,500 managers were required to confirm that they had read and understood the Code and observed its requirements in all of their business dealings. Again, we use a web-based system to make the process accessible, and to track participation levels – which is usually close to 100%. Leaders required to certify compliance with the Code 2,500 Employees who completed the Code e-learning training in 2015 2,000 16,000 since 2014 During the year, we tightened up a number of questions, making them more rigorous, such as mandating the disclosure of any possible conflicts of interest. For this certification cycle we plan to implement a process whereby employees who do not have a valid reason for non-certification, will see a reduction in their bonus entitlement. Speaking Up about any breaches of the Code We encourage everyone involved with Petrofac to raise any concerns regarding unethical behaviour, or any questions regarding the Code. Furthermore, we have and implement a non-retaliatory policy against those who raise issues of concern in good faith. Reports can be made to line managers or their supervisors, or to the HR, legal or compliance teams. We also draw attention to Speak Up – our multi-language phone, online and email service, which enables any employee or third party to report suspected breaches of the Code. In 2015, 49 suspected breaches were reported to Speak Up, each of which was assessed independently and, where warranted, investigated or are in the process of being investigated. All confirmed violations are reported annually to the Audit Committee. Individuals who are found to be in breach of the Code may have their employment terminated. As a result of feedback from many investigations we plan to refine our Investigation Guidelines, bringing a more consistent approach to investigations that take place locally, and also more oversight to the way we scrutinise any suspected breaches of the Code and communicate outcomes. Screening third party suppliers and business partners We continue to refine the way that we screen our third party suppliers – allowing us to assess their level of technical, financial and reputational strength, and enabling us to mitigate the risks that they may pose to Petrofac. In 2015, for example, we piloted an online Due Diligence tool which gives Petrofac better visibility of the compliance related risks that third parties may represent to us and allows for timely mitigation steps to be adopted where appropriate. The interactive process, to be adopted across the Company in 2016, comprises a series of questionnaires and external assessments and puts the onus on potential suppliers to confirm that their ethical standards are consistent with our own. Petrofac Annual report and accounts 2015 / 67 Strategic reportChairman’s introduction Rijnhard van Tets Non-executive Chairman The development of the Company’s governance framework has been extremely important and, throughout this report, there are examples of how we are endeavouring to attain our corporate goals whilst underpinning our core values. 2015 objectives and highlights • Execution – both in terms of strategic implementation and operational delivery • Risk management – following a change to the Committee structure the Board increased its direct oversight of enterprise risks impacting the Company to ensure our internal control framework remains robust • Project delivery – greater oversight, especially in the current unpredictable industry environment • Succession planning – ensuring we have the right people in the right roles throughout the organisation to enable us to strive towards our goal of operational excellence • Board effectiveness – to understand the benefits of performance evaluations in order to seek continuous improvement • Stakeholder engagement – to understand the views of all stakeholders, particularly those of our shareholders Priorities for 2016 • Strategy execution – to ensure we are able to guide the Company back to its core strengths • Risk management – will continue to be a significant area of focus for the Board and executive management, ensuring the lessons learnt have been fully incorporated and understood throughout the organisation • Succession planning – will remain key to ensure all changes are managed effectively and any weaknesses or gaps identified • Stakeholder engagement – openly engaging with stakeholders to understand their views and discuss any areas of concern 68 / Petrofac Annual report and accounts 2015 Dear shareholder Whilst 2015 continued to be operationally challenging for Petrofac, the Board took the opportunity to reinforce the risk management culture, which is a key discipline for the whole Group. Following Stefano Cao’s departure from the Board in April, we reviewed the existing governance structure and decided to return direct ownership of enterprise risk management oversight to the Board. Rather than continue with a separate Board Risk Committee, amendments were made to the Audit Committee‘s terms of reference in order for it to assume full oversight of our internal control and risk management processes, thereby enabling this Committee to provide the necessary Board assurances. As a result of the substantial further losses experienced on the Laggan-Tormore project, during the year, the Board commissioned an independent review by KPMG of cost controls on that project as well as reviewing other key projects within OEC and risk management systems in general. This extensive analysis provided an in-depth evaluation, highlighting areas which will inform the Company’s risk assurance framework going forward. I am pleased to report that, after detailed search processes conducted during 2015, we will announce the appointment of two new Non-executive Directors on 24 February 2016. Andrea Abt and George Pierson will join the Board in May 2016, subject to shareholder approval, and the Board very much looks forward to working with them. Further details are set out on page 83. The development of the Company’s governance framework remains extremely important and we will continue to strive towards attaining our corporate goals whilst underpinning our values and focusing on our core strengths as we look to the future. Rijnhard van Tets Chairman 23 February 2016 Corporate Governance compliance With a premium listing on the London Stock Exchange, Petrofac is required under the UKLA Listing Rules to comply with the provisions of the UK Corporate Governance Code 2014 (UK Code), copies of which are publicly available at www.frc.org.uk. The UK Code sets out 18 main principles of good governance in relation to leadership, effectiveness, accountability, remuneration and relations with shareholders, with responsibility for compliance resting with the Board. The UK Code requires the Board to acknowledge its responsibility for ensuring the Annual Report, when taken as a whole, is fair, balanced and understandable, so that shareholders are provided with the necessary information to assess Company position, performance and strategy. This governance report, including the reports from the Nominations, Audit and Remuneration Committees, describes how the Company has applied each of the UK Code principles and provisions during the period under review. It is the Board’s opinion that, for the year ended 31 December 2015, the Company has been fully compliant with each of the principles and provisions of the UK Code. The Company’s auditors, Ernst & Young LLP (EY), are required to review whether or not the corporate governance report reflects the Company’s compliance with the principles of the UK Code specified for their review by the UKLA Listing Rules and to report if it does not reflect such compliance. No such report of non-compliance has been made. Related pages Our strategic review p20 Group Financial statements p108 Corporate structure and framework The Board is assisted by three committees, each of which is responsible for reviewing and overseeing activities within its particular terms of reference (copies of which are available on the Company’s website, www.petrofac.com). At each scheduled Board meeting, the chairman of each committee provides a summary of any committee meeting held since the previous Board meeting, with the minutes of all committee meetings circulated to the Board, when appropriate. Individual reports from each committee chairman for 2015 are provided on pages 82 to 106. In addition to these Board committees, the Company has a number of executive management committees which are involved in the day-to-day operational management of Petrofac and have been established to consider various issues and matters for recommendation to the Board and its committees. Corporate structure/framework Shareholders Elect the external auditors Elect the Directors Ongoing dialogue Board Provides leadership and direction for the Group. Sets overall strategy and oversees its implementation. Ensures appropriate systems and processes are in place to monitor and manage Group risk. Responsible for financial performance and corporate governance. Audit Committee Reviews and monitors the integrity of the Company’s financial statements, reporting processes, financial and regulatory compliance; the systems of internal control and risk management, including viability assessment; and the external and internal audit processes. Remuneration Committee Reviews and agrees remuneration policy. Determines individual compensation levels for Executive Directors and members of senior management. Ensures incentives are appropriate to encourage performance and provide alignment with shareholders. Nominations Committee Reviews the structure, size and composition of the Board. Takes primary responsibility for Director succession and for the Group’s succession planning processes. Committee report on pages 84 to 89 Committee report on pages 90 to 106 Committee report on pages 82 to 83 Executive Management Responsible for day-to-day operational management, the communication and implementation of strategic decisions, administrative matters and matters for recommendation to the Board and its Committees, underpinned by a number of management committees: Executive Committee Chief Executive Committee Disclosure Committee Group Risk Committee Treasury Committee Guarantee Committee Petrofac Annual report and accounts 2015 / 69 Governance Directors’ information Rijnhard van Tets Non-executive Chairman Ayman Asfari1 Group Chief Executive Marwan Chedid Group Chief Operating Officer Tim Weller Chief Financial Officer Appointed May 2007 May 2011 as Senior Independent Director August 2014 as Chairman Board Committees Chairman of the Nominations Committee Key strengths Extensive financial background, with solid international board and senior management experience. Excellent experience of governance and audit committees. Experience General partner of Laaken Asset Management NV. Advised the managing board of ABN AMRO between 2002 and 2007, having previously served as a managing board member for 12 years. External appointments Non-executive chairman of Euronext Amsterdam NV, Euronext NV and BNP Paribas OBAM NV. Appointed January 2012 January 2016 as Group COO Board Committees None Key strengths Thorough knowledge of the oil and gas sector and contracting environments. Solid commercial, operational and engineering experience. Excellent understanding of growing a business. Experience Joined Petrofac in 1992 when the business was first established in Sharjah. Previously worked for CCC, a major construction contractor based in the Gulf and the Middle East. Appointed as COO of the Engineering & Construction International business in 2007 and became MD of Engineering & Construction Ventures in 2009. Appointed as chief executive of ECOM in 2012 and most recently appointed as Group Chief Operating Officer with effect from 1 January 2016. External appointments Member of the board of trustees of the University of Balamand. Appointed October 2011 Board Committees None Key strengths Wide-ranging financial management experience, including strategic and financial planning, cost control and capital efficiencies. Experience of major systems implementation. External stakeholder communications and management experience. Experience Joined Petrofac in September 2011 from Cable & Wireless Worldwide, where he had been chief financial officer until July 2011. A Fellow of the Institute of Chartered Accountants in England and Wales with a degree in Engineering Science, he started his career with KPMG. Held chief financial officer roles with United Utilities Group PLC, RWE Thames Water Limited and Innogy Holdings PLC (now RWE npower Holdings PLC). He also served as a non-executive director of BBC Worldwide until March 2013. External appointments Non-executive director of the Carbon Trust and G4S plc. Appointed January 2002 Board Committees Member of the Nominations Committee Key strengths Distinguished record with strong operational leadership skills and international focus. Extensive business development skills, a wealth of oil industry knowledge and a clear strategic vision. Entrepreneurial track record. Experience Joined the Group in 1991 to establish Petrofac International, of which he was CEO. In 2005, led the successful initial public listing of the Company, valuing the business at £0.8 billion. Has more than 35 years’ experience in the oil and gas industry. Formerly worked as MD of a major civil and mechanical construction business in Oman. External appointments Founder and chairman of the Asfari Foundation. Member of the board of trustees of the American University of Beirut. Business Ambassador for the UK Prime Minister. Member of the board of trustees for the Carnegie Endowment for International Peace. Fellow of the Royal Academy of Engineering. Member of the Chatham House Senior Panel of Advisors. 1 Mr Asfari is a British citizen; however he is Syrian born and has dual nationality. As at the date of this report: Board tenure 5 years or more 3-5 years 1-2 years Less than 1 year 70 / Petrofac Annual report and accounts 2015 Executive and Non-executive Director balance Non-executive Chairman Executive Directors 3 Non-executive Directors 1 4 3 1 1 3 Thomas Thune Andersen Senior Independent Director Matthias Bichsel Non-executive Director Kathleen Hogenson Non-executive Director René Médori Non-executive Director Appointed May 2010 August 2014 as Senior Independent Director Board Committees Chairman of the Remuneration Committee and member of the Audit and Nominations Committees Key strengths Wide-ranging international experience with broad knowledge of the energy industry and markets. Proven track record executing growth strategies and mobilising and developing organisations, with strong HSE experience. Extensive knowledge at board and senior management level from both an executive and non-executive standpoint. Experience Spent 32 years at the A.P. Møller- Mærsk Group, ending as CEO and president of Mærsk’s oil and gas company. Served on Mærsk’s main board and its executive committee for four years. Was a non-executive director of SSE plc until July 2014. Has a board portfolio across companies in the energy and critical infrastructure sectors. External appointments Chairman of the Lloyd’s Register Group and board of trustees for the Lloyds Foundation. Chairman of DeepOcean Group and of Dong Energy A/S. Vice Chairman of VKR Holding. Appointed May 2015 Appointed August 2013 Appointed January 2012 Board Committees Member of the Audit, Nominations and Remuneration Committees Board Committees Member of the Audit, Nominations and Remuneration Committees Key strengths Over 35 years’ experience in the oil and gas industry. Extensive commercial and strategic knowledge. Deep understanding of operational and project management, as well as technology management. Experience Stepped down from the executive committee of Royal Dutch Shell plc at the end of 2014. Held a number of roles over his 34 year career with Shell, including director of Petroleum Development Oman; MD of deepwater services in Houston; executive vice president global exploration and executive vice president technical, of Shell Upstream. Ran Shell’s Project and Technology business from 2009. External appointments Vice-chairman of Sulzer AG. Non-executive director of Canadian Utilities Limited and South Pole Group. Member of the advisory board of Chrysalix Energy Venture Capital and of Highgate Capital Management. Key strengths Over 30 years’ experience in the oil and gas industry, with particular expertise in reservoir management and subsurface engineering. Entrepreneurial track record. Extensive commercial and strategic knowledge and proven operational leadership with an excellent understanding of growing a business. Experience President and CEO of Zone Energy LLC, a company she founded in 2009 which focuses on the acquisition, development and sale of oil and gas properties. From 2001 to 2007 was CEO of Santos USA Corporation, responsible for Santos Americas and Europe. Has held a number of senior roles at Santos Ltd, Unocal Corporation and Maxus Energy Corporation. External appointments President and CEO of Zone Oil & Gas LLC. Director of Parallel Petroleum LLC and trustee of the Society of Exploration Geophysicists. Board Committees Chairman of the Audit Committee and member of the Nominations Committee Key strengths Extensive and current international financial experience, with knowledge of balance sheet strengthening opportunities and financing arrangements. Well-established knowledge of governance and regulatory matters and a good understanding of operational and strategic management. Experience Finance director of Anglo American plc since September 2005. From June 2000 to May 2005 was group finance director of The BOC Group plc. Until June 2012, was a non- executive director of SSE plc. External appointments Executive director of Anglo American plc and non-executive director of De Beers and Anglo Platinum Limited. Gender diversity (Women as a percentage of the total) Board* Group Senior management Graduates * Excluding the Chairman 14% 13% 6% 20% Board skill set 2015 Oil and gas experience Engineering Finance International experience Regulatory and governance HSE Operational/strategic management 75% 63% 38% 100% 50% 63% 100% Petrofac Annual report and accounts 2015 / 71 As at the date of this report: Governance Our leadership team Paolo Bigi Regional Managing Director, Engineering & Construction Responsibility Joined Petrofac in 2015 as Executive Vice President for Business Management. In January 2016 he was appointed Regional MD for the onshore portfolio of the Engineering & Construction business. His responsibilities include all Petrofac’s onshore operations in the United Arab Emirates, Saudi Arabia, Algeria and Asia. Previous experience Paolo has a career extending over almost 30 years. He spent 23 years with Tecnimont where he was EVP and Deputy Chief Executive Officer. More recently Paolo worked with Borealis as EVP and also spent five years with Techint Engineering & Construction (European sector) as its CEO. Sunder Kalyanam Regional Managing Director, Engineering & Construction Responsibility Sunder has worked at Petrofac for 23 years and has held a range of positions within the Company. In January 2016 he was promoted from Executive Vice President to the position of Regional MD, Engineering & Construction. His responsibilities cover all Petrofac’s onshore operations in Kuwait, Iraq and Oman. Previous experience Sunder’s 30 years of experience have been gathered in an EPC and engineering consultancy environment covering multiple aspects of engineering design and project management, of oil and gas, refinery and petrochemical projects. Yves Inbona Managing Director, Offshore Capital Projects Responsibility Joined Petrofac in June 2012 as MD of our Offshore Capital Projects business. He is responsible for turnkey delivery of offshore platforms, floaters and pipelines in shallow and deep-water worldwide. He has extensive expertise in the offshore sector, having more than 30 years of industry experience. Previous experience During his time as chief operating officer of Saipem SpA, Yves managed the offshore business, which was the most profitable of all Saipem’s business units. He speaks seven languages and is a graduate engineer from Ecole Centrale de Paris. Craig Muir Group Managing Director, Engineering & Production Services Responsibility Joined Petrofac in 2012 as MD of Engineering & Consulting Services, where his responsibilities included the effective management and execution of Petrofac’s engineering service centres in Woking, India, Malaysia, Indonesia, Houston, Algeria and Nigeria, as well as our subsidiary businesses, KW Subsea, TNEI and Plant Asset Management. In January 2016 Craig was appointed Group Managing Director for Engineering & Production Services, which includes responsibility for all Petrofac’s reimbursable services, both onshore and offshore. This incorporates operations and maintenance; engineering, procurement and construction management; engineering; training and all consultancy services. Previous experience Before joining Petrofac, Craig held the position of executive vice president within growth regions covering the Middle East, North Africa and CIS for AMEC, based in Abu Dhabi. Prior to AMEC, he held numerous roles working in the oilfield service sector including those with KBR, Brown & Root and AOC International. He has worked in the North Sea, in the Middle East, and in Asia Pacific. Walter Thain Managing Director, Engineering & Production Services (West) Responsibility Walter has 18 years of service with Petrofac. He has held key roles in the UK and the UAE including: Vice President Operations; Vice President, Sales & Marketing, Training Services; Senior Vice President, OPO and MD, OPO. In January 2016, he was appointed MD for Engineering & Production Services (West). In this role he is accountable for growth and regional delivery across engineering, operations and training services within Europe, North Africa and the Americas, together with the global delivery of Petrofac’s consultancy services including asset management, well engineering and subsea pipeline engineering. Previous experience Walter is a Chartered Engineer with more than 25 years’ industry experience. Prior to joining Petrofac he held senior engineering and leadership positions with McDermott Engineering, delivering both brownfield and greenfield engineering projects. 72 / Petrofac Annual report and accounts 2015 Rob Jewkes Chief Operating Officer, Integrated Energy Services Responsibility Joined Petrofac in January 2004 to build a Europe-based engineering services business in Woking, UK, which now forms part of Petrofac’s Engineering & Production Services business. In 2009, he was appointed MD of Developments within the IES division, with responsibility for leveraging our engineering and project management capability through Risk Service Contracts and Equity Upstream Investments. In January 2014, Rob assumed the role of Chief Operating Officer, IES, with full responsibility for the IES business portfolio. Previous experience Rob has over 35 years’ experience in the oil and gas industry. Prior to joining Petrofac, he served as chief executive officer of Clough Engineering, the main operating company of the Australian engineering group Clough Limited. He holds a degree in Civil Engineering from the University of Western Australia. ES Sathyanarayanan Managing Director, Technical Services Responsibility Since joining Petrofac in 1995, Sathy’s career has covered many operational roles including systems engineer, engineering management, project management, and project director. His role has also included that of project sponsor and head of country operations for Iraq. As Managing Director for Technical Services, he is responsible for all engineering resources for Petrofac’s projects, including Petrofac’s three Indian offices in Mumbai, Chennai and Delhi. Previous experience His early experience was gained spending a number of years as a specialist mechanical engineer and systems engineer. Sathy has more than 28 years of experience in the oil and gas sector. Mary Hitchon Group Director of Legal, Secretarial and Compliance Services Responsibility Joining Petrofac in October 2005 shortly after the IPO, Mary had responsibility for the Group’s governance and listing rule compliance framework. Over the last 10 years she has built a company secretarial department and developed processes and procedures commensurate with a listed entity. She was appointed as Group Director of Legal, Secretarial and Compliance Services in January 2015 and now has responsibility for all key aspects of legal, regulatory and governance compliance across the Group. Previous experience Mary is a Fellow of the Institute of Chartered Secretaries with more than 20 years’ experience in a UK listed environment. Previously she worked at TBI plc, the AXA group and Savills plc. Christopher McDonald Group Head of Business Development Responsibility Joined Petrofac’s business development function in early 2011 and progressed to Executive Vice President. In January 2016 he was appointed Group Head of Business Development with responsibility for delivery of all new sales. Previous experience With more than 25 years of international experience in the oil and gas sector, Chris has previously worked with companies including Halliburton/KBR and also served on the board of M W Kellogg Ltd. Cathy McNulty Group Director of Human Resources Responsibility Joined Petrofac in February 2014 as Group HR Director and has overall responsibility for advising on all people aspects of the business. This includes developing the people strategy to support the Company in achieving its strategic ambitions, focusing on succession planning, talent management, leadership development, compensation and benefits, key hires, performance culture and employee engagement. She partners with the business leaders to build the strengths and capabilities needed to meet the changing demands of our markets and environments. Previous experience Has more than 25 years of experience in HR, and has held a number of senior roles, most recently with Arup, the international consulting and engineering group, and Hewlett Packard. Corporate Governance report Leadership Board organisation Our Chairman is responsible for leading the Board and ensuring its effectiveness, whilst maintaining a clear structure that permits the Board to both challenge and support management. It is very important that all Directors see the Chairman as a fair and impartial individual. The relationships between the Chairman and the Group Chief Executive and the Senior Independent Director (SID) are of particular importance, as these two individuals represent the views of management and Non-executive Directors, respectively. Ayman Asfari, as Group Chief Executive, is responsible for the day-to-day management of the Group and for the design and execution of company strategy. He is supported by his fellow Executive Directors and by his senior management team whose details are outlined on page 72. Regular private meetings between the Chairman and Group Chief Executive are held, allowing matters to be discussed both before and after they are considered by the Board. This enables them to reach a mutual understanding of each other’s views, especially in matters where initially they may not be in agreement. Thomas Thune Andersen, as SID, is available to shareholders to answer any questions or concerns which cannot be addressed by either the Chairman or the Group Chief Executive and is also available to marshal the opinions and views of the Non-executive Directors. The Chairman and SID maintain regular contact between scheduled Board meetings and time is also set aside at each meeting for the Chairman to meet with the Non-executive Directors without the presence of management. The combination of these meetings ensures that the Chairman is equally informed about the views of both management and Non-executive Directors and this assists him in setting Board meeting agendas and ensuring all Directors contribute during meetings through their individual and collective experience, challenge and support. Each of the Directors has varied career histories and considerable effort has been taken to ensure that the Board has the right balance of skills, diversity and industry expertise. Our Non-executive Directors are encouraged to share their skills and experience and each is well-positioned to support management, whilst providing constructive challenge. We are also fortunate that many of our Directors are able to bring their experience of the oil and gas industry to the boardroom. Board composition and roles At the date of this report, the Board has eight Directors comprising the Chairman, four Non-executive Directors and three Executive Directors. Full biographies of each of our Directors in office are shown on pages 70 and 71 and are also included in the 2016 Notice of Annual General Meeting (AGM). As recommended by the UK Code, the Company has clearly defined areas of responsibility, as set out opposite: Position Chairman Group Chief Executive Role • Leads the Board and facilitates the effective contribution of all Directors • Ensures effective communication with shareholders • Ensures effective communication flows between Directors • Ensures effective Board governance • Implements strategy and objectives • Develops manageable goals and priorities • Leads and motivates management teams • Develops proposals to present to the Board on all areas reserved for its judgement • Develops Group policies for approval by the Board and ensures implementation Senior Independent Director • Acts as a sounding board and confidant to the Chairman • Available to shareholders to answer questions which cannot be addressed by the Chairman or Group Chief Executive • Meets with other Directors to appraise the Chairman’s performance, and on such other occasions as deemed appropriate • Acts as an intermediary for other independent Directors Non-executive Directors • Support executive management whilst providing constructive challenge • Monitor the delivery of strategy within the risk management framework set by the Board • Bring sound judgement and objectivity to the Board’s decision Group Director of Legal, Secretarial & Compliance Services making process • Share skills and experience • Acts as Secretary to the Board and its Committees • Assists in and coordinates the Board evaluation process • Ensures the Board is kept informed and is consulted on all matters reserved to it and that papers and other information are delivered in a timely manner • Ensures the Board is kept informed on governance matters, providing advice through the Chairman • Available to individual Directors in respect of Board procedures and provides general support and advice Petrofac Annual report and accounts 2015 / 73 GovernanceCorporate Governance report continued Board activity during 2015 The Board has a schedule of matters reserved to it for formal decision, a copy of which is available on our website. While we recognise that there are a number of topics for which all boards should take responsibility, this year the Board concentrated on the following key areas, in support of the Company’s strategic objectives, which were underpinned by our core values. How the Board spent its time during the year (%) How the Audit Committee spent its time during the year (%) 7 21 10 39 13 30 44 15 5 8 5 3 Financial performance/reporting Internal control and risk management systems Governance, inc. shareholder engagement Code of Conduct/Whistleblowing Risk management and internal controls Tax update Leadership and people development, inc. succession External Audit, including non-audit services review Strategic matters Project approvals Financial reporting Governance/Other Strategic matters • Formal strategy review days with management, including updates at each meeting • Business presentations on strategic opportunities • Risks and opportunities associated with our OCP strategy • Future initiatives relating to IES business, including Mexican contract migrations • Business restructuring How the Nominations Committee spent its time during the year (%) 15 18 Financial performance/reporting • Extensively considered the Group’s financial performance, in light of key contract positions 12 as well as the effect of the declining oil price • Approved the budget and five-year plan and reviewed monthly reports on performance against budget and forecast • Reviewed the Company’s financial reporting obligations • Reviewed reports on the financial position of the Group, including treasury management Leadership and people development, including succession • Meetings held with executive management throughout the year • Discussed Board succession planning and composition, including a review of committee structures, following changes to the Board membership • Reviewed the development of talent within the Group, including succession planning for 55 Board composition Succession planning Governance/Other Search for Directors senior roles • Consideration of the impact of the Group reorganisation Risk management and internal controls • Extensive review of the Laggan-Tormore project and lessons learnt • Reviewed contract controls by KPMG and the impact on financial results • Deep dives on key projects to understand fully any risk management and control matters • Regularly reviewed significant enterprise risks, including those associated with HSSEIA and cyber security Project approvals • In accordance with our delegated authority framework, a number of contracts and other matters requiring Board approval were considered during the year. Whilst many of these projects are still within the bidding stage, further details of projects approved and announced during the year can be found on pages 4 and 5 Governance, including shareholder engagement • Discussed the Board evaluation process • Regularly reviewed reports from brokers and had an in-depth presentation from our house brokers • Reviewed shareholder feedback from meetings held with the Group Chief Executive, Chief Financial Officer and the Chairman • Reviewed reports on regulatory and governance matters impacting the organisation How the Remuneration Committee spent its time during the year (%) 20 10 10 7 53 2015 remuneration arrangements, including grant of awards Review of external environment 2016 remuneration review Governance/Other Review of share plans and performance conditions 74 / Petrofac Annual report and accounts 2015 Board meetings The Board meets face-to-face at least six times each year at scheduled meetings, held over a two-day period. The Board also meets on an ad hoc telephonic basis, to address items of business which arise and cannot be held over until the next planned meeting. Dedicated strategy days, as well as site visits, also form part of our annual programme of events. As a company incorporated in Jersey under the Companies (Jersey) Law 1991, at least half of our Board meetings are held in Jersey each year. At those meetings which are held outside Jersey, the Board is given the opportunity to meet with employees, customers, suppliers and partners, as it is felt this allows the Board to gain a wider understanding of Petrofac. Each year, members of operational and functional management, one and two tiers below director level, are invited to attend and present at certain Board and Committee meetings, which serves to enhance their knowledge of the business and allows the Board to see the implementation of agreed strategy in action. It is felt these presentations also enable Directors to deepen their understanding of Company culture at a local level, and gain an awareness of specific nuances which may not always be obvious within written reports. Management are also given the opportunity to meet the Directors informally during the year and we feel these meetings are valuable for personal development. Arrangements are also made for the Non-executive Directors to meet with and speak to a group of graduates at the Petrofac Academy while they are in Sharjah. Independent Physical Board meetings attended (eligible to attend) Ad-hoc telephonic Board meetings – usually held at short notice and attendance must take place outside of UK4 Director Rijnhard van Tets Thomas Thune Andersen Matthias Bichsel1 Kathleen Hogenson René Médori Ayman Asfari Marwan Chedid Tim Weller Former Directors Stefano Cao2 Yes Yes Yes Yes Yes No No No Yes 6 (6) 6 (6) 3 (3) 6 (6) 6 (6) 6 (6) 6 (6) 6 (6) 2 (2) Roxanne Decyk3 Yes 1 Matthias Bichsel joined the Board on 14 May 2015. 2 Stefano Cao stepped down from the Board on 29 April 2015. 3 Roxanne Decyk stepped down from the Board on 14 May 2015. 4 Directors may join meetings in an advisory capacity and, on such occasions, are neither included in the quorum 3 (3) of the meeting nor eligible to vote on any matter requiring a formal decision. 2 1 2 3 1 1 3 2 0 1 Related pages Our strategic review p20 Group financial statements p108 Board appointment and selection The Company has a formal, rigorous and transparent selection procedure for the appointment of new Directors and Board composition is considered very carefully by the Nominations Committee, whose membership is set out on page 82. As a result, significant time and effort are invested when appointing new Board members to ensure that the right balance and mix of directors, taking into account experience, skills and diversity, can be achieved. Care is taken to establish the existing commitments of all Non-executive Directors, who, on appointment, are each made aware of the need to allocate sufficient time to the Company to discharge their responsibilities effectively. In the event that a Director’s external commitments change once appointed, they are required to make the Board aware as soon as practicable so that any potential conflict of interest, time commitment challenge or residency status issue can be considered. A detailed report on the activities of the Nominations Committee is provided on pages 82 to 83. Active debate is encouraged during meetings before any Board decisions are taken, with all Directors encouraged to be open and forthright in their approach. We believe this boardroom culture helps to forge strong working relationships whilst enabling our Directors to engage fully with the Company and allowing them to make their best possible contribution. Re-appointment of Directors In line with the UK Code, all Directors seek re-appointment by shareholders at each AGM. In addition, the terms and conditions of appointment of all Directors are available for inspection by anyone at our registered office in Jersey and at our corporate services office in London. They are also made available for inspection during the 30 minutes prior to the start of our AGM each year. All Executive Directors have rolling service contracts and details of the provisions set out in these are detailed in the Remuneration Policy, which can be accessed at www.petrofac.com/remuneration. Petrofac Annual report and accounts 2015 / 75 GovernanceCorporate Governance report continued Effectiveness Role of the Board The UK Companies Act 2006 sets out a number of general duties to which all directors should adhere. As a Jersey incorporated company, Petrofac is not required to comply with this legislation, nevertheless, our Directors are informed by UK practice and in any event, act in good faith to promote the long-term success of the Company for the benefit of our stakeholders. As a unitary Board, each of our Directors shares equal responsibility for decisions taken, with Directors being collectively responsible for the strategic direction of the Company. The Board has been structured to ensure that no single individual can dominate the decision-making processes and we believe all Directors are able to work together in an atmosphere of openness, trust and mutual respect. It is felt that having an effective working relationship between our Executive and Non-executive Directors provides a robust governance framework, which is essential for the progression of the Company’s strategic aims. Information and support A tailored approach to developing agendas is adopted for each Board meeting, with the majority of each agenda comprising non-recurring items, such as strategic matters or project specific and investment related opportunities. Processes have been put in place to ensure the Board receives appropriate information at the correct time and, whilst some agenda items are brought to the Board on the basis of a six or 12-month rolling programme, operational and financial reports from the Group Chief Executive and Chief Financial Officer are standing items which are reviewed and discussed at each meeting. We believe this allows Directors to engage effectively and encourages scrutiny and constructive debate during each meeting, with Directors able to seek clarification from management where required. In addition, all Directors have access to independent external advice where they require further information in order to discharge their responsibilities. As part of our commitment to best practice, and as recommended by the UK Code, we endeavour to dispatch papers in a timely manner, usually one week prior to each meeting. Papers are provided electronically through a dedicated secure application, giving Directors instant access to papers, as well as additional reference documentation. Director development and training The Company is committed to providing continuing personal development training opportunities. We do not run an extensive programme of ‘one-size-fits all’ training. Instead, each Director is encouraged to pursue an individually tailored development programme throughout the year, and to attend any relevant external seminars run by professional advisers where the content is considered to be relevant. During 2015, various offices and site visits were accommodated, along with a mixture of formal seminars led by external advisers. In addition, an externally facilitated training session on forthcoming corporate governance changes was provided to the Audit Committee in November. This session was attended by Committee members, as well as all other Directors and members of executive management. It centred on the impact of regulatory and financial developments on the Group over the coming years, with particular focus given to the effect of three key items: risk management and viability reporting; mandatory audit firm rotation; and non-audit services restrictions. Directors were also encouraged, and in some cases required, to complete the Company’s eLearning training modules. These included modules on the Company’s Code of Conduct, the Share Dealing Code, Anti-Bribery and Corruption and Health and Safety Training. Training records for Directors are maintained and these are reviewed during the annual evaluation process. Over the course of this year, over 210 hours of training were recorded. Director induction Individually tailored induction programmes are prepared for each new appointment to the Board. It is felt this is the best approach as it allows the Company to account for differing requirements and to concentrate on key focus areas to ensure that the relevant Director is fully prepared for their new role, while taking their background and experience into consideration. The induction process is intended to be a broad introduction to the Group, so all new appointees spend time with each of the Executive Directors as well as senior members of operational and functional management, both individually and collectively, to be briefed on Group strategy and to gain a deeper understanding of the Company at an operational level. A comprehensive induction pack is provided to each new Director, which contains a wide range of materials including Board and committee dates for the next two years, copies of minutes from the previous year, the delegation of authority matrix, copies of Group policies, the Schedule of Matters reserved to the Board, Committee Terms of Reference, Code of Conduct and copies of prior years’ reports and accounts. Site visits and trips to operational centres are actively encouraged. Each new Director also attends a compulsory presentation led by our external legal advisers on the role and responsibilities of being a UK-listed company director and, depending on which committees they will join, presentations from the Group auditors and remuneration consultants are given. Matthias Bichsel joined the Board in May 2015 and details of his formal induction programme are set out opposite. 76 / Petrofac Annual report and accounts 2015 Name and position Matthias Bichsel, Non-executive Director Joined the Board May 2015 Strengths • Detailed operational and project management experience in oil and gas industry • Extensive international experience • Broad understanding of industry from a client’s perspective Focus areas • Increase knowledge of Petrofac • Understand UK governance framework including board committee activities and obligations • Meet with senior management teams Overview of induction programme • Met and received detailed presentations from Group functional heads (May – October) • Met and received detailed presentations from Business MDs (May – October) • Meetings with key advisers, including corporate lawyers and brokers (May) • Meeting with remuneration consultants ahead of joining Remuneration Committee (May) • Meeting with audit partners, ahead of joining Audit Committee (May) • Site visit to Sohar Refinery in Oman with the Board (October) Dealing with potential conflicts of interest As far as is possible, all Directors endeavour to avoid conflicts of interest with the Company. However, processes and procedures are in place in the event that any such potential conflicts arise during a term of appointment. On these occasions, Directors are required to identify and declare any actual or potential conflicts of interest, whether matter-specific or situational, with notifications required to be made by the Director concerned prior to, or at, a Board meeting. All Directors have a duty to update the whole Board of any changes in personal circumstances. The Company’s Articles of Association permit the Board to authorise conflicts which can be limited in scope. During the year, all conflict management procedures were adhered to, and managed and reported effectively. As previously reported, in August 2014 Thomas Thune Andersen was appointed as Chairman of Dong Energy A/S, which is a junior member of the client consortium on our Laggan-Tormore project. Following continued commercial discussions on this project during the year and the increased level of ongoing review of the contract, Thomas has continued to absent himself from all Board and Committee discussions relating to this project; has not received any papers on the contract; and minutes circulated to him have been redacted. As a result, it is felt that Thomas’s effectiveness as a Director of Petrofac has not been compromised. Deeds of indemnity In accordance with our Articles of Association and to the maximum extent permitted by Jersey law, all Directors and Officers of Petrofac Limited are provided with deeds of indemnity in respect of liabilities which may be incurred as a result of their office. In addition, Petrofac has appropriate insurance coverage regarding legal action which may be brought against its Directors and Officers. Neither the Company’s indemnities nor insurance would provide any cover where a Director or Officer was found to have acted fraudulently or dishonestly. Board visit to Sohar Every year our Board aims to visit a Petrofac site in conjunction with one of its scheduled meetings. This provides valuable insight into our projects and gives Directors the opportunity to meet our local teams, enabling the Board to see first-hand some of the issues that our employees deal with every day. In October 2015, the Board and senior management visited the Sohar refinery in Oman. During this trip, they met with site management, employees and graduates; took a tour of the site; and received presentations on both Petrofac’s presence in Oman as well as project cost control and risk management. This was an interesting visit for the Board as the project is mid-construction, so the site was extremely busy and enabled those in attendance to see a number of different aspects of project execution and delivery, as well as HSE matters in practice. Petrofac Annual report and accounts 2015 / 77 GovernanceCorporate Governance report continued Improvement areas previously identified: Theme Area for improvement Action undertaken Strategy Risk management Succession planning 2015 review: Theme Strategy A specific strategy section now included within each CEO report. Ahead of each strategy day, each Director is contacted for feedback after receipt of pre-reading documentation to enable better time management during the meeting. Greater oversight of the work of the Group Risk Committee provided, with more time spent by the Board reviewing enterprise risks and mitigations set out in the Company’s Key Risk Report (KRR). Delegated authority matrix updated to ensure Board and management are appropriately reviewing and approving projects. A specific session on succession planning built into the Board calendar and greater oversight given to talent management. More regular and rigorous updates on strategy execution Development of non-financial key performance indicators Enhanced enterprise risk identification and financial risk assessments in relation to projects subject to Board approval Improved oversight of ongoing project execution Increased focus on succession planning for both the Board and management Area for improvement Board strategy day to include a free-ranging discussion on the implications for the industry in the event that oil is subject to a more prolonged period of lower prices. External speakers to attend meetings to provide broader industry wide perspectives. Risk management Group risk management processes to be developed further to ensure they remain operationally effective thereby enabling the Board to improve its assessment and control of strategic risks. Succession planning Greater exposure to the second tier of management to assess that the talent pipeline is being developed appropriately. Continuing to ensure suitable mix and composition on the Board. Evaluation of Board effectiveness The Board continually strives to improve its effectiveness, understanding the benefits of annual performance evaluations for the Board as a whole, its Committees and for Directors on an individual basis. It is recognised that the performance evaluation process presents an opportunity to enhance overall board effectiveness and our Directors believe the process provides a valuable opportunity for continuous improvement, highlighting any recognised strengths or identifying any weaknesses. Following completion of an externally facilitated evaluation in 2013, the Chairman has led internal review processes during both 2014 and 2015, aiming to be as rigorous and objective as possible. One-to-one interviews with each Director and the Secretary to the Board have been held each year, helping the Chairman recognise individual performance and contribution, while identifying further development opportunities, both individually and for the Board as a whole. The outcome of the internal evaluation processes has been positive and, following completion of the review exercise in 2015, the Board is satisfied that it is operating effectively with each Director performing well in respect of their roles on the Board and its Committees. The results of the most recent evaluation process were presented to the Board in January 2016. In compliance with the UK Code, the evaluation exercise to be carried out during 2016 will be externally facilitated and details will be provided to shareholders in next year’s Annual Report. It is recognised that the Chairman’s effectiveness is also vital to that of the Board. Accordingly, led by Thomas Thune Andersen as SID, a review was carried out in respect of Rijnhard van Tets. Thomas consulted with each of the other Directors for input and feedback on Rijnhard’s performance during the year. The outcome of the review was reported back to the Chairman and it was further confirmed to the Board that Rijnhard’s Board leadership continued to be effective. 78 / Petrofac Annual report and accounts 2015 Accountability Risk management and internal control systems The Board is responsible for monitoring and reviewing the effectiveness of Petrofac’s risk management and internal control systems. Throughout the year, the Board and the Audit Committee received regular reports from members of management with responsibility for the Group’s material enterprise risks, as well as from the internal and external auditors to assist in the annual assessment of the effectiveness of the Group’s risk management and internal control systems. The KRR, which identifies the principal risks facing the Company and evaluates the likelihood of their incidence and their impact on the Group if they were to materialise, is maintained and this allows the Board to assess and monitor the existence and likely effectiveness of the actions that are planned to manage and mitigate such risks in order to avoid or reduce the impact of the underlying risk. The process of risk identification is both top-down and bottom-up which ensures management are able to review and challenge impacts and mitigations at each level of the organisation and address the risks for which they are organisationally responsible. To facilitate the year-end process, the Audit Committee completed a detailed review of processes in order that formal assurance on the robustness, integrity and effectiveness of the Group’s internal controls and the Group’s risk management systems in relation to the Group’s principal risks, including those which may threaten the Company’s strategy, business model, future performance, solvency and liquidity, could be given to the Board. The changes in processes implemented during the year, which are further detailed on pages 86 and 87, enabled the Board to take a view on whether or not the Group has sound risk management and internal control systems in place. Other than the significant control weaknesses identified and the mitigating actions taken in relation to the Laggan-Tormore project (further described on page 86), the Board i s satisfied that sound risk management and internal control systems have been in place across the Group throughout 2015 and as at the date when the 2015 financial statements were approved. Petrofac also seeks to ensure that a sound system of internal control, based on the Group’s policies and guidelines, is in place in all material associates and joint ventures. As with all companies, our systems of internal control and risk management are designed to identify, mitigate and manage rather than eliminate business risk and can only ever provide reasonable, and not absolute, assurance against material misstatement or loss. A detailed report on the activities of the Audit Committee is provided on pages 84 to 89. Delivery of our goals As detailed within the Strategic Report, Petrofac’s strategy and business plan set out the Group’s priorities which are designed to increase shareholder value over the medium to long-term. Five-year business plans, setting financial targets for the Company and incorporating risk analysis as a matter of course, are submitted to the Board annually for approval. The Group formally measures performance against these strategic goals and financial targets quarterly, with each Business Unit reporting its operational progress monthly. At each Board meeting, a full update on business operations is provided, highlighting and discussing any possible impediments to the delivery of our Group goals and noting all significant health, safety and security matters. The Board also receives comprehensive financial reports from our Chief Financial Officer, thus ensuring the Board is kept informed of the Group’s financial performance for the year to date, as compared with the year’s budget or the latest revised forecast, with full explanations for any variances. We continue to develop a broader set of financial and non-financial key performance indicators, which we believe should assist us in monitoring the delivery of our goals. Related pages Our strategic review p20 Group financial statements p108 Code of Conduct and Whistleblowing The Audit Committee is responsible for reviewing the adequacy and effectiveness of the Group’s compliance activities, which include the Company’s Code of Conduct and whistleblowing policy. Further details of our Code of Conduct, including our whistleblowing facility, are provided on page 67. In accordance with the Code of Conduct, any alleged breaches, both of a financial and non-financial nature, are reported to the Audit Committee. There were no such incidents involving the override of any major internal controls as set out in the Code of Conduct reported during 2015. Security During the course of the year, the Audit Committee also considered and discussed global security risks in light of both oil price volatility and increased international security threats. Particular focus was given to the changing security landscape in the Group’s key jurisdictions, as detailed on page 55. Actions to manage and mitigate security risks were undertaken to assist in providing assurance that the Board is kept informed of any significant changes within our core markets. UK Listing Rule 9.8.4R Disclosures There are no disclosures required to be made under UK Listing Rule 9.8.4R. Remuneration Directors’ remuneration All remuneration matters, including terms of appointment, for the Chairman, Executive Directors and key members of senior management are determined by the Remuneration Committee, whose membership is set out on page 90. Responsibility for setting the remuneration payable to the Non-executive Directors lies with the full Board, albeit independent external advice is taken. Non-executive Director fees are reviewed each year and further details are provided on page 99. A detailed report on the activities of the Remuneration Committee is provided on pages 90 to 106. Petrofac Annual report and accounts 2015 / 79 GovernanceCorporate Governance report continued Meetings held with shareholders by country 3 16 34 209* UK US and Canada Europe Other * Meetings held by teleconference with US investors included in UK numbers. Shareholder splits – by holding 36% 64% Retail Institutional Shareholder splits – by territory 14% 12% 49% 25% UK US and Canada Rest of Europe Rest of world Relations with shareholders Shareholder engagement The Board acknowledges its responsibility to promote the success of Petrofac for its many stakeholders, however, the principal focus remains with our shareholders. The opportunity to engage openly with shareholders is welcomed as it is believed that effective dialogue to understand shareholders’ views is very important. Shareholder sentiment has continued to be an area of Board discussion during the year, especially given changes to our earnings expectations and the resulting impact on our share price. A programme of meetings with both existing and potential shareholders is scheduled each year by our Investor Relations team. This programme includes meetings as well as question and answer sessions with stakeholders following the publication of our full and half year results, along with presentations to institutional investors and research analysts. In addition, management arranges calls and meetings with these groups usually following the release of trading updates to the market. 2015 shareholder meeting calendar Month January February March April May June July August September October November December Number of shareholder meetings held 2 13 including Full Year Results Live webcast of analyst/ investor presentation (replay available on our website) 44 29 27 22 including trading update 5 12 including Half Year Results Live webcast of analyst/ investor presentation (replay available on our website) 44 32 19 13 including trading update Over 50% of meetings held were attended by the Chairman, Group Chief Executive, and/or the Chief Financial Officer. The Chairman takes overall responsibility for ensuring the views of shareholders are communicated to the Board and, in 2015, met with nine of our largest institutional investors, who together hold approximately 30% of Petrofac’s shares. During these meetings a number of issues were discussed, including the operating environment and market pressures impacting the Company; governance matters in general and succession planning in particular; and strategic and operational performance, including concerns about recent execution issues. Our Non-executive Directors also engage with our shareholders as and when required and this year the Chairman and the Audit Committee Chairman both met with Standard Life to discuss a variety of matters, including control processes and changes implemented as a result of recently reported issues. The Group Chief Executive and Chief Financial Officer maintain a regular dialogue with our institutional shareholders through a programme of one-to-one and other meetings throughout the year, which focus on operational matters. Our Investor Relations team acts as a focal point for contact with investors throughout the year and brokers’ research notes are regularly circulated to Directors. A formal brokers’ report is circulated to the Board in advance of each meeting. This year a representative from one of our corporate brokers, Goldman Sachs, also attended one of our Board meetings to provide a thorough update on market sentiment, including areas of potential shareholder concern in relation to the Company. 80 / Petrofac Annual report and accounts 2015 Annual General Meeting (AGM) Full details of this year’s AGM, which will be held in London, are set out in the Notice of Meeting which accompanies this report and which is also available on our website. As a matter of good practice, all resolutions will be conducted on a poll and the results will be announced to the market as soon as possible after the meeting. All shareholders are invited to attend the Company’s AGM at which they have the opportunity to put questions to the Board and meet with all Directors. Shareholders who are unable to attend the AGM are invited to email questions in advance at agmquestions@ petrofac.com. I look forward to seeing as many of you as possible this year when my colleagues and I will be available to answer your questions. Rijnhard van Tets Chairman 23 February 2016 Shareholder communications Considerable emphasis is placed on communications with shareholders, whether they are institutional shareholders or private shareholders. Accordingly, financial reports and shareholder documents, regulatory market announcements, together with recorded interviews, are available on our website, which we hope encourages shareholders to become more informed investors. In addition, our full-year and half-year results presentations by Ayman Asfari, Tim Weller and other executives to our institutional investors and analysts are broadcast live and accordingly may be followed by all shareholders via our website. On 24 February 2016, when we issue our full year results in London each of our Executive Directors, as well as members of senior management, will be in attendance to answer questions on our business performance and strategic outlook. Our major shareholders In accordance with the FCA’s Disclosure and Transparency Rules (DTR 5), as at 31 December 2015 the Company had received notification of the following material interests in voting rights over the Company’s issued ordinary share capital (including qualifying financial instruments): Number of ordinary shares Percentage of issued share capital 62,958,426 18.20% 27,123,822 7.84% 21,885,097 6.33% 20,776,437 6.01% Ayman Asfari and family Maroun Semaan and family Standard Life Investments Ltd Deutsche Bank AG At the date of this report, all notifications remained as set out above, with the exception of Deutsche Bank AG, whose holding is 19,954,955 shares, which equates to 5.77% of the issued share capital. Petrofac Annual report and accounts 2015 / 81 GovernanceNominations Committee report Rijnhard van Tets Chairman of the Nominations Committee Role of the Committee • Regularly reviews the composition and structure of the Board and its Committees. • Identifies and recommends for Board approval suitable candidates to be appointed to the Board. • Considers succession planning processes for the Group as well as specific succession plans for Directors and other senior executives taking into account diversity, experience, knowledge and skills. Terms of reference The Committee reviewed its terms of reference during the year. Copies are available on our website. Membership and attendance at meetings held in 2015 Meetings attended (eligible to attend) 6 (6) 6 (6) 6 (6) 3 (3) 2 (2) 3 (3) 6 (6) 6 (6) Members Rijnhard van Tets Thomas Thune Andersen Ayman Asfari Matthias Bichsel1 Stefano Cao2 Roxanne Decyk3 Kathleen Hogenson René Médori 1 Matthias Bichsel joined the Committee on 14 May 2015 2 Stefano Cao stepped down from the Committee on 29 April 2015 3 Roxanne Decyk stepped down from the Committee on 14 May 2015 82 / Petrofac Annual report and accounts 2015 Dear shareholder 2015 was, once again, a busy year for the Committee. Board and senior management succession planning has been a key focus, along with the composition of the Board and its committees. The Committee has also taken an active role in reviewing employee talent, both in our core businesses as well as within the functions, thus ensuring the Company continues to invest in its employees to build a talent pipeline for the Company’s long-term success. 2015 changes As a result of the Board changes which took effect in 2014, and reflecting our process of ensuring that the Board membership is appropriately refreshed, we initiated a search for a new Non- executive Director at the end of 2014. Working with Korn Ferry, an executive search firm with whom we have no other relationship, to identify potential candidates with international and relevant industry experience, we were delighted to welcome Matthias Bichsel to the Board as a Non-executive Director in May 2015. Matthias has over 35 years’ relevant experience, ending his executive career at Royal Dutch Shell plc as director of projects & technology. He has brought an extensive understanding of project management within the oil and gas industry but from the client’s perspective, which is especially valuable, given that many of our clients are currently facing a particularly challenging time. In addition, of course, he also brings a valuable insight into the oil and gas industry in general. As we noted in last year’s report, Roxanne Decyk stepped down from the Board at our 2015 AGM in May. This was as a result of her US commitments significantly increasing to the extent that she was concerned that she could not give sufficient time to discharge her Petrofac responsibilities. Unexpectedly in April 2015, Stefano Cao also stepped down from the Board ahead of his appointment as chief executive officer of Saipem SpA. Roxanne and Stefano each contributed significantly to the Board during their respective tenures and we wish them both well for the future. We have previously expressed the view that Non-executive Directors should serve no longer than two three-year terms. Nevertheless, the Committee made the decision that, in light of the number of recent Board changes, not all of which were anticipated, it would recommend to the Board that Thomas continue on the Board as Senior Independent Director in order to provide continuity on the Board and within our Committees. I am delighted that Thomas has agreed, subject to shareholder approval, to extend his stay on the Board. Committee structures As a result of Stefano’s departure from the Board in April 2015, the Committee reviewed the remit and membership of the Board Risk Committee, of which he had been chairman. After significant debate, it was agreed that the Board Risk Committee would be incorporated into the Audit Committee with immediate effect, and that oversight of the Group’s enterprise risks would be exercised predominantly by the Board. The terms of reference of the Audit Committee were amended accordingly to enable it to take ownership of all aspects of internal control and risk management. Related pages Directors’ information p70 Following the Board changes effected during 2015, the Committee took the opportunity to review the composition of each Board Committee and a number of changes were recommended. Details of current memberships are disclosed within the individual reports of each Committee. 2015 focus Board succession planning continued to be a key focus for the Committee and, once again, more than 50% of its time was spent discussing various matters in relation to succession during the year. A breakdown of how the Committee spent its time during 2015 is set out on page 74. The Committee is very aware of its responsibilities in relation to Board and senior management succession plans to ensure that unforeseen changes are managed effectively and efficiently, without disruption to the Group’s strategy or day-to-day operations. The Committee also gave focus to the Group’s functional capability, following changes implemented during the year by management to ensure the organisation was being managed effectively. The Committee was keen to ensure the organisation had the most appropriate individuals in the right roles to implement effective internal controls. Consideration was also given to the internal Group reorganisation which was implemented at the end of the year and, as a result, the Committee is keen to meet with newly appointed managers during the course of 2016. 2016 plans A formal procedure for selecting and recruiting Board members is in place and extensive consideration is given to identifying the capabilities required of potential candidates, taking into account the balance of existing skills, knowledge, experience and diversity on the Board. Following the departure of both Stefano and Roxanne from the Board, we initiated further searches for two new Non- executive Directors during 2015. Working once again with Korn Ferry, a number of potential candidates with international and relevant industry experience were identified and we are delighted to be in a position to recommend to shareholders two new Non-executive Director appointments at our forthcoming AGM: Andrea Abt and George Pierson. Andrea spent her executive career with Siemens AG where she held a number of varied leadership positions. She brings an extensive understanding of supply chain management and has deep knowledge of the broader industrial sector, as well as being familiar with the UK governance regime. George is the former CEO of Parsons Brinckerhoff, the American multinational design and engineering firm. His engineering and managerial experience will be valuable, as will his understanding of the contractual arrangements by which our business is governed, given the current commercial environment in which we are working. The Board committee compositions will be reviewed by the Committee following these new appointments. Diversity Details of our current gender diversity statistics are set out on page 71. Whilst we achieved our published target of women on the Board at the start of 2015, our progress was unfortunately hampered when Roxanne Decyk stepped down from the Board in May. The appointment of Andrea Abt with effect from May 2016 will, however, help to mitigate the gender imbalance which still exists, and although consideration will be given to the appointment of another female Director during 2016, the Committee is keen to ensure that any future appointments are filled by the best available candidates for the role, irrespective of gender. Petrofac believes that diversity is wider than simply gender and, irrespective of background or gender, we recruit on merit and aim to hire the best candidates with the widest range of skills and experience. With over 80 nationalities employed within Petrofac, we consider that our business benefits greatly from a varied employee base which is essential for ensuring the Company’s long-term success. The Committee recognises nevertheless that, across the Group, a gender imbalance remains. However, despite engineering continuing to be a predominantly male-dominated profession, we are proud that approximately 18% of our graduate recruits during 2015 were female, demonstrating our ongoing commitment to build diversity from the bottom up. Whilst we may not yet have many women in senior engineering roles, we are committed to building and developing our female talent pipeline, but recognise that this takes time. Talent management Our current framework for performance and talent management allows us to identify clearly critical roles and gaps which, in turn, informs the succession planning process. Where any weaknesses or development opportunities are identified on an individual basis, action plans and bespoke training opportunities have been developed to ensure that high-calibre employees have the required skills and knowledge to become our future leaders. The Committee took an active role during 2015, reviewing with the HR function, the Group’s top 850 executives. Using a matrix structure to categorise these individuals has enabled individual development programmes to be progressed and has given greater insight into the Company’s succession planning process. The development of key performance indicators to enable management to assess progress in relation to the delivery of succession plans continues. The Committee’s oversight of talent management is an ongoing activity and, in January 2016, a more detailed review, focusing on emerging talent was undertaken; with further work planned to take place during the course of the year. Rijnhard van Tets Chairman of the Nominations Committee 23 February 2016 Petrofac Annual report and accounts 2015 / 83 GovernanceAudit Committee report René Médori Chairman of the Audit Committee Role of the Committee • Monitors the integrity of the Company’s financial statements and reviews significant financial reporting judgements. • Reviews the effectiveness of risk management and internal control systems, including viability statements, and provides assurance to the Board. • Monitors and reviews the effectiveness of the Group’s internal audit function. Principal matters considered during the year by the Audit and Board Risk Committees: January 2015 • Ernst & Young (EY) regulatory update on auditor rotation and independence • Key Risk Report (KRR) and risk management systems • Strategic risks related to the Petrofac JSD6000 vessel • Treasury report including policy review • Group HSSE framework and HSE performance at third party locations • Compliance update including 2015 plan and whistleblowing report • Reviews the effectiveness of the external audit process and independence of the external auditors. February 2015 • Approves the remuneration and terms of engagement of the external auditors and makes recommendations to the Board regarding their re-appointment. • Develops and implements the non-audit services policy. • Advises the Board on how it has discharged its responsibilities and considers whether the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable. • Internal control framework assurance • Internal audit full year report and draft 2015 plan • EY full year report including letters of representation • Hydrocarbon reserves assessment; long term contracting and impairment reports; and financial counterparty limits • 2014 results and announcement, including all relevant reports • Final dividend consideration • Non-audit services transactions and fees • Code of Conduct certification and related party transaction reports May 2015 Terms of reference Terms of reference setting out the role and responsibilities of the Committee were reviewed during the year. Amendments were made to widen the Committee’s remit following the disbandment of the Board Risk Committee and to incorporate Committee membership changes. Copies are available on our website. • KRR and risk management systems including examination of principal risks • Insurance programme renewal update • Security and compliance reports • Approval of appointment of KPMG to review cost controls in relation to the Laggan-Tormore project and assess the internal control framework in the OEC lump-sum contract portfolio Membership and attendance at meetings held during 2015 Members1 René Médori2 Thomas Thune Andersen Matthias Bichsel3 Meetings attended (eligible) 5 (5) 5 (5) 2 (2) 5 (5) Kathleen Hogenson 1 All members of the Committee are considered independent in accordance with the UK Corporate Governance Code (UK Code). 2 René Médori is considered to have recent and relevant financial experience in compliance with the UK Code. 3 Matthias Bichsel joined the Committee on 14 May 2015. In addition, a Board Risk Committee meeting was held in January 2015 under our previous governance structure. This was attended by all Committee members. An ad hoc telephonic meeting of the Committee was also held at short notice in May 2015, which was attended by René Médori and Matthias Bichsel. 84 / Petrofac Annual report and accounts 2015 August 2015 • Outcome of KPMG reviews • Internal audit progress report • EY half year report and audit planning report for the full year • Investment and impairment reports regarding the carrying value of IES assets; and appropriateness of Company’s accounting policies • 2015 half year results and announcement, including all relevant reports • Dividend policy review and interim dividend payment • Annual review of external auditors’ independence and effectiveness • Revised terms of reference November 2015 • Internal audit progress report and draft 2016 plan • EY external audit progress report including changes to scope • Accounting issues review ahead of year end • Regulatory and governance update and KRR review • The Company’s compliance with its tax and whistleblowing obligations • Treasury and security updates Dear shareholder As has been previously reported, 2015 continued to be a challenging year for Petrofac, not least because of the operational and execution issues on key projects but also as a result of the tougher external environment in general. Throughout the year, the Committee continued to support the Board in its response to key concerns. In April 2015, Stefano Cao stepped down from the Board. As a consequence, the Board took the opportunity to review its Board committee structures and decided to incorporate the Board Risk Committee into the Audit Committee. As a result of this change, the remit of the Audit Committee was widened to encompass all aspects of risk management and internal control systems, whilst the Board retained its responsibility for oversight of the Group’s principal risks. On his appointment in May 2015, Matthias Bichsel joined the Committee. All members of the Committee have a wide range of business experience across various industries which allows us to work effectively and challenge management. During the course of the year, at the Board’s request, the Committee focused its attention on reviewing aspects of the Group’s internal control and risk management processes. This followed the further unanticipated losses on the Laggan-Tormore project announced in April 2015. To this end, an independent review by KPMG was commissioned. The review comprised two phases and further details relating to the assessment of the cost controls on the Laggan-Tormore project and the considerations in respect of the potential restatement of the 2014 financial statements are set out in the report on page 86. KPMG also undertook a review of the Group’s internal control framework in the lump-sum OEC contract portfolio more broadly and suggested certain improvements. Separately, management undertook a review of the operational control failings on the Laggan-Tormore project and the OEC operational control framework in general, focusing on execution issues and how lessons learnt had been implemented. As a result, the Committee agreed that the ability to identify, assess and understand risks in a timely manner had progressed, allowing effective mitigation of risks when necessary and greater visibility over critical events. It is expected that these lessons learnt will now provide greater assurance and oversight of risk throughout the organisation. Other matters considered by the Committee during the year are detailed in the following report. In considering the financial statements for 2015, the Committee concentrated on revenue and margin recognition for significant OEC contracts, together with the carrying value of IES assets in light of the current low oil price. The Committee concluded that management had adopted an appropriate approach in all significant areas. As part of the Committee’s year-end review, it also conducted a robust assessment of the principal risks facing the Company, as detailed on pages 30 to 33, including those that may threaten the Company’s strategy, business model, future performance, solvency and liquidity. As part of the year-end process, the Committee reported to the Board in February 2016 that aside from the findings in relation to the Laggan-Tormore project discussed above, which have been mitigated prior to the approval of the Accounts, the Group continues to operate a sound system of controls and, when taken as a whole, it considers the Annual Report and Accounts to be fair, balanced and understandable, providing shareholders with the necessary information to assess the Group’s position and performance, business model and strategy. Along with continuing to monitor and review the effectiveness of the Group’s risk management and internal control framework, the Committee’s priorities for 2016 are as follows: • Review of revenue and cost recognition in respect of key contracts • Effective identification of business environment risks and their mitigation • Ensuring that the provisions of the UK Code are met in relation to risk management and internal controls • Review of taxation matters in light of the enhanced global reporting environment Key issues discussed by the Committee are reported to the Board after each scheduled meeting and this practice will continue, thus ensuring any significant matters are considered and addressed appropriately. René Médori Chairman of the Audit Committee 23 February 2016 Petrofac Annual report and accounts 2015 / 85 Governance Audit Committee report continued Activities during the year The Committee assists the Board in the effective discharge of its responsibilities for financial reporting, internal control and risk management. As set out in our Directors’ statements on page 107, Directors are responsible for the preparation of Group financial statements, in accordance with International Financial Reporting Standards (IFRS). The Group has an internal control and risk management framework in place, which includes policies and procedures to ensure that adequate accounting records are maintained and transactions are accurately recorded. This ensures that the Company’s financial reports, including the financial reporting process, and communications to the market give a clear and balanced assessment of the Company’s position. In addition to the matters considered during the year, as set out on page 84, the Committee also reviewed the 2015 full year results and this Annual Report and Accounts, at the beginning of 2016. Internal controls and risk management The Board maintains oversight for enterprise risk and, in particular, establishes the Company’s risk appetite. It identifies and conducts a robust assessment of principal risks facing the Company and their connection to viability. Following the disbandment of the Board Risk Committee in May 2015, responsibility for monitoring and reviewing the integrity and effectiveness of the Group’s overall systems of risk management and internal controls, in accordance with the requirements of the FRC’s Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, was delegated to the Committee. The Committee’s remit was therefore broadened to consider strategic, financial, operational, and compliance controls, rather than principally focusing on the Company’s financial controls. As a result of this extended remit, the Committee now provides the Board with wider assurance that the risk management and internal control systems, as a whole, are sufficiently robust to mitigate the principal risks. The effectiveness of our risk management and internal controls is founded on our enterprise risk management (ERM) and internal control frameworks. Our ERM framework is based upon BS ISO 31000:2009, with our internal control assurance being provided in accordance with the revised COSO framework. Following the introduction of the revised UK Code and FRC guidance, we made a number of enhancements to align our methodologies for identifying, evaluating and managing risk during the course of the year. Our risk management systems are continually evolving, with operational processes becoming more systematised by moving risks into our Petrofac Enterprise Risk Management System (PERMS) database. The KRR identifies the principal risks facing the Group and includes heatmap analysis. It is part of the framework for determining risk and risk appetite and is a live document which highlights recent movements in exposure, thereby allowing the Committee to recognise and review the mitigation and/or management of new or changing risks. This report was considered at both Committee and Board level throughout the year and further details are included within the Strategic Report on pages 26 to 29. Major internal control themes were considered at each meeting, with particular attention given by the Committee to any weaknesses identified and the need for a systematic approach to be taken for managing risk. As well as regular reports from the Group Head of Enterprise Risk, further reports were provided by senior management and comprised deep-dives into the effectiveness of health and safety processes including at third party locations, strategic risks related to the Petrofac JSD6000, financial counterparty risk assessments, compliance contraventions, security, and information technology. These reports, together with other sources of information, have provided a balanced assessment of the principal risks and the effectiveness of the systems of internal control. Any control failings or weaknesses identified are discussed in these reports (including, for example, Laggan-Tormore related matters, compliance issues or whistleblowing statistics), along with the underlying reasons, the impact that they have had on the Company, and the actions being taken to rectify them. When reviewing these individual reports, the Committee considered how effectively risks have been identified; how they have been mitigated and managed; whether actions are being taken promptly to remedy any failings or weaknesses; and whether the causes of the failing or weakness have indicated poor decision-taking or a need for more extensive monitoring or a reassessment of process effectiveness. In May 2015, as part of an internal lessons learnt analysis following the identification of potential significant control weaknesses, the Committee appointed KPMG to carry out an independent review, specifically related to the Laggan–Tormore project. The review focused on project management and cost estimation processes with a view to assessing whether the financial statements for 2014 should be re-stated to reflect some or all of the incremental losses incurred on the project during 2015. As a result of the losses incurred, intense scrutiny has been given to whether the process for ongoing management and cost estimation in respect of this and other lump-sum projects was sufficiently robust. The Committee carefully considered the extensive analysis by KPMG and, after hearing the views of both EY and management, recommended to the Board that there should be no restatement of the 2014 financial statements. The KPMG review also considered the adequacy of the Company’s internal control framework by reviewing a representative sample of other lump-sum contracts in the OEC portfolio. The Committee discussed the control weaknesses highlighted by both KPMG and management, who had conducted a separate review at the request of the Committee. The Committee concluded that the processes associated with Laggan-Tormore, while representing a significant control weakness on this particular project, were not indicative of wider systematic failings within the portfolio but arose due to a number of shortcomings, principally an inability to understand and cost the risks associated with lump-sum construction execution within the UK. 86 / Petrofac Annual report and accounts 2015 Management have implemented a number of improvements to its procedures and controls in light of the issues identified and the Committee is satisfied that lessons had been learnt which are now being implemented across the wider Group. Assurance At the year end, formal assurance was provided to the Board that effective governance, risk management and internal control processes were in place, as required by the UK Code, to ensure that the Group would continue to be viable for at least the next three years. This assurance covered all material controls, including strategic, financial, operational and compliance controls. Treasury During the year, the Committee reviewed the financial risks associated with liquidity, commodity price risk and associated hedging options, and foreign exchange rate risk. In addition, following the disbandment of the Board Risk Committee, the Board delegated the authority to the Committee to consider and, if thought fit, amend the Company’s suite of treasury policies as set out in the Company’s Sovereign and Financial Market Risk policy (SFMR) (a copy of which is available at www.petrofac.com). In their review of the SFMR policy, the Committee considered the level of the Company’s financial counterparty risk exposures and agreed that the existing policies remained appropriate. The Committee took comfort that the Group Treasury team actively monitors all credit exposures with each financial institution and noted that progress was being made on the implementation of an updated Treasury Management System. Insurance Programme Given the scale and nature of the Group’s activities, Petrofac continued to develop its global insurance programme coverage during 2015 by strengthening its relationship with the Group’s insurance brokers and advisers. Following work instigated in 2014, further claims scenario workshops were carried out during 2015 within OEC and OPO, in conjunction with our insurers, brokers and loss adjusters. The principal objective was to stress-test the existing policies in order to provide assurance that the Group’s insurance arrangements remain “fit for purpose” and that the insurance programme is able to respond as expected in the event of a loss. Policy limits, deductibles and wording are reviewed each year at programme renewal to ensure that the optimum mix of policy coverage and competitive terms are in place. As a result of the claims workshops, wording enhancements were incorporated into policies. Further developments in our programme are expected during 2016 following a full market-testing exercise for our major policies. Internal audit To assist the Committee in monitoring and reviewing the integrity of the Group’s risk management and internal control systems, the Group Head of Internal Audit attends each meeting, where his reports are considered and discussed in detail. This, along with reports from the external auditors, provides the Committee with oversight and assurance that the Group’s risk management and internal control processes are operating effectively. Additionally, the Committee also meets separately with the Group Head of Internal Audit in advance of the full and half year results without executive management being present to discuss, among other matters, management’s responsiveness to internal audit recommendations and the effectiveness of the internal audit process. The Group Head of Internal Audit also has direct access to the Committee Chairman and meets with the external auditors whenever required. The Company’s annual internal audit plan was considered and approved by the Committee in February 2015. This was developed taking into account the outcomes of the previous year’s report, the external audit environment and discussions held with the Committee and senior management to ensure alignment with the Group’s risk appetite and business needs. In approving the plan, the Committee gave consideration to the Company’s principal risks and whether the plan’s geographic coverage was appropriate. Summary progress reports were provided at each subsequent meeting, detailing key findings of audits undertaken in the period under review. When significant areas of concern were highlighted by the reports, the Committee challenged management and, where required, action plans to address any matters raised were agreed, with follow-up reviews arranged. Any required revisions to the plan were considered and approved by the Committee during the year. During 2015, 98 internal audit assignments were carried out. Weaknesses identified included subcontractor management procedures, project cost controls and scheduling on certain OEC projects, financial and operational controls in remote or smaller entities and IT procedures regarding the ERP system in different business units. These findings were carefully considered by the Committee, with management given direction to ensure the necessary steps were taken to mitigate any arising issues. Following on from the work initiated in 2013, further fraud risk assessment exercises within the OPO business and in IES Mexico were completed during 2015. At the end of each assessment, the Committee was provided with a full review and given updates on the controls implementation process. Petrofac Annual report and accounts 2015 / 87 GovernanceAudit Committee report continued Significant judgements The Committee’s role is to assess whether the judgements or estimations made by management in preparing the accounts are reasonable and appropriate. Set out below are what we consider to be the most significant accounting areas which required a high level of judgement or estimation during the year and how these were addressed: Focus area Revenue and margin recognition – including ECOM long term contracts and IES contractual arrangements See note 2 for further information Why this area is significant The quantification and timing of the recognition of revenue and profit earned from all contracts, including fixed-price engineering, procurement and construction, operations & maintenance and IES arrangements is an important driver of the reported business performance of the Group. Impairment and fair value changes in IES assets and JSD6000 See note 2 for further information With extreme recent volatility in commodity prices and project delivery issues arising on IES projects it is important to assess regularly the appropriate carrying values of the investment portfolio through a robust impairment testing process, particularly as the potential amounts involved are material to the Group’s reported net income and balance sheet position. In addition, the cancellation of the JSD6000 shipyard construction contract poses a risk to the recoverable value of the vessel. Role of the Committee Conclusion The Committee concluded that the quantification and timing of revenue and margin recognition continues to be in line with IFRS requirements but it will continue to monitor this situation going forward. The Committee was satisfied that the results of the detailed asset impairment testing were reasonable and ensured that appropriate impairment and fair value adjustments were recorded in the Annual Report and Accounts. The Committee reviewed the reasonableness of judgements made regarding the cost to complete estimates, the timing of recognition of variation orders and the adequacy of contingency provisions to mitigate contract specific risks for projects significantly behind schedule. Consideration was also given to the assessments made in relation to the recognition of liquidated damage provisions and to the impact of certain larger contracts being entered into as part of consortiums. The Committee held discussions with Executive Directors and received regular internal audit reports into the operating effectiveness of internal controls relevant to these judgements. The external auditors challenged management on the revenue recognition amounts and reported their findings to the Committee. IES impairment test results were presented to the full Board at the year end and at the half year. These tests were based on rigorous assessments performed by the IES finance team and checked by the external auditors and were subsequently reviewed in detail by the Committee. Discussions in relation to the future plans in respect of the Group’s deepwater strategy were also held to determine the appropriate assumptions taken in relation to the JSD6000 vessel. The impact in particular of the negative oil price movement and its effect on asset impairment testing was considered as part of the year-end review process together with any changes in forecast production levels, operating expenditure and capital expenditure for each of the IES assets. Taxation See note 2 for further information Laggan-Tormore considerations See note 2 for further information The wide geographical spread of the Group’s operations and the increasingly complex nature of local tax rules in different jurisdictions increases the risk of misstatement of tax charges and management needs to make a number of difficult judgements around tax exposures given the commercial structure of individual contracts. The tax positions within the Group were reviewed by the Committee to ensure that the Group’s effective tax rate, tax provisions and the recognition of deferred tax assets and liabilities continue to be appropriate. Taxation issues were discussed with senior management and a report outlining key tax issues was reviewed. The external auditor also reported to the Committee on the findings of their audit of the Group’s tax charge and provisions. The Committee were satisfied that Group tax issues were being efficiently monitored and dealt with appropriately, but recent significant changes in the global tax landscape mean that the Company must continue to work on its ability to respond quickly to the enhanced global reporting requirements over the next few years. In light of the challenges faced in determining the losses on the Laggan-Tormore contract, it was imperative that appropriate consideration was given to accounting for the project, careful scrutiny given to key judgements, and for potential internal control weaknesses to be identified and mitigated. The Committee commissioned KPMG to carry out a review of the circumstances leading to the market announcement in April 2015, with a view to identifying issues from the Laggan-Tormore contract as they related to incremental losses and their potential effect on the prior year. The KPMG review also considered the Group’s internal controls in respect of the Laggan-Tormore project and in the lump-sum OEC contract portfolio more broadly. The Committee also received management reports highlighting key judgements made in relation to liquidated damages and costs-to-complete. The Committee concluded that weaknesses in internal controls in respect of the project subsisted up to and including 2015, but noted that management have implemented a number of mitigation actions and assigned further resources to mitigate the risk of further misstatements both in relation to this and other contracts. The Committee was also satisfied that the key judgements adopted at year-end were appropriate. 88 / Petrofac Annual report and accounts 2015 External auditors Ernst & Young LLP (EY), the Company’s auditors since initial listing in October 2005, provided the Committee with reports and advice throughout the year. The Committee remains satisfied as to the auditors’ effectiveness and, in making this assessment, had due regard to their expertise and understanding of the Group, their resourcing capabilities, culture, independence and objectivity. In addition, the Committee took into account its own interaction with EY, the preparatory steps taken by EY in advance of scheduled meetings, and the observations of executive management. The Committee met with the auditors without management present to discuss any significant issues, not least the conduct of the audit, in advance of the full and half year results. In addition, the Committee Chairman has regular contact with the lead audit partner outside of formal Committee meetings, not only to discuss formal agenda items for upcoming meetings, but also to review any other significant matters. Each year, EY set out their proposed audit strategy and scope to ensure that the audit is aligned with the Committee’s expectations. This is done with due regard to identification and assessment of business and financial statement risks which could impact the audit and continuing developments within the Group. In 2015, this included the additional losses recognised on the Laggan-Tormore project, arising from an increased cost-to-complete estimate, and progression of commercial negotiations on the IES assets. Where changes to the audit scope have occurred during the year, the Committee has been encouraged by the auditors’ interaction with the Committee Chairman and management to ensure no adverse impact occurs to the overall audit process. At year end, a report was provided to the Committee detailing areas of audit risk, the findings of which were reviewed and considered by the Committee. Audit tender The UK Competition and Markets Authority’s (CMA) Statutory Audit Services Order (Order) states, amongst other matters, that FTSE 350 listed companies should put their external audit contract out to public tender at least every 10 years. During the year, the Committee gave consideration to this legislation, as well as to the UK Code and the EU’s audit legislation, which will become effective from June 2016. It has been agreed that the Company’s audit contract will be put to competitive tender during 2016, with a view to appointing an external auditor for the year ended 31 December 2017. The Committee believes that such a competitive tender exercise will be in the best interests of shareholders as it will ensure continuing scrutiny and objectivity of the audit. This tender process is earlier than originally reported, as it was previously proposed to tender the audit after the end of our current audit partner tenure in 2018. The Committee will report on how this exercise was undertaken and its outcome in next year’s report. In addition, the Committee confirms compliance with the provisions of the CMA Order. Non-audit services To safeguard the objectivity of our external auditors and to ensure the independence of the audit is not compromised, the Company has a non-audit services policy that provides clear definitions of services that our external auditors may and may not undertake. To ensure compliance with this policy, the Committee regularly reviews the Group’s cumulative non-audit spend and, furthermore, gives prior approval to the appointment of EY should the nature or size of the proposed work require it. Taking into account reports from both management and EY, the Committee is satisfied that EY’s objectivity and independence has not been impaired by any non-audit work undertaken by them during the year. In addition, EY has confirmed that it was compliant with APB Ethical Standards in relation to the audit engagement. There were no breaches in 2015 of the US$300,000 non-audit threshold requiring prior approval by the Committee. During the year, the Committee also reiterated the importance of ensuring the non-audit fee remained below 50% of the total audit fee and the non-audit spend for the year, as a percentage of the overall audit fee, was 31.6% (2014: 21%). The majority of these costs relate to the use of EY in certain jurisdictions, mainly in North Africa, the Middle East and Central Asia, to provide advice and in-country tax compliance services. It is felt that, given EY’s knowledge of the Group and their presence in these regions, they continue to be the most appropriate provider of this work. Details of the fees in respect of audit and non-audit related services can be found on page 136 and in note 4e to the financial statements. The amended UK and EU audit legislation will introduce increased restrictions on audit firms providing certain non-audit services from June 2016. These restrictions will be considered by the Committee along with the Mandatory Auditor Rotation rules to ensure that the successful tender candidate is independent upon commencement of any new audit engagement. The Committee, however, considers that the existing policy remains appropriate and fit-for-purpose but will revisit the policy during 2016 in light of the new regulations. This exercise will be reported on in next year’s Annual Report. The current policy, a copy of which can be found on the Company’s website, is summarised below. Non-audit services policy • The external auditors are automatically prohibited from carrying out work which might impair their objectivity. • The Chief Financial Officer (CFO) will seek approval from the Committee before appointing the external auditors to carry out a piece of non-audit work where: – the fee is above US$300,000; or – total non-audit fees for the year are approaching 50% of the annual audit fee; or – the external auditors would ordinarily be prohibited from carrying out the work under the Company’s non-audit services policy, but not prohibited under Ethical Standard 5, and the CFO wants to appoint them due to exceptional circumstances. • The CFO may appoint the external auditor to do other types of non-audit work as listed in the policy. Petrofac Annual report and accounts 2015 / 89 GovernanceDirectors’ remuneration report Thomas Thune Andersen Chairman of the Remuneration Committee Role of the Committee • Determine and agree with the Board the broad policy and framework for the remuneration of Executive Directors, the Chairman and certain senior managers. Review the continued appropriateness and relevance of the Remuneration Policy. • Ensure that incentives are appropriate to encourage enhanced performance and provide alignment with long-term shareholder value. Approve the design of, and determine the targets for, performance related pay schemes. • Review the design of all share incentive plans before approval by the Board and shareholders. Monitor the application of the rules of such schemes and the overall aggregate amount of the awards. • Determine the remuneration of all Executive Directors, the Chairman and certain senior managers within the agreed policy, taking into account remuneration trends across the Company and remuneration practices in other peer companies. • Maintain contact with principal stakeholders, as required, on matters relating to remuneration. Terms of reference The Committee reviewed its terms of reference during the year. No amendments were made other than those needed to ensure they remained consistent with the current UK Corporate Governance Code (UK Code). Copies are available on our website. How to use this report This report has been divided into two sections: Annual Report on Remuneration Looking backwards This section provides details of how the Company’s Remuneration Policy was implemented during 2015. Within the report we have used different colours to differentiate between: • Fixed elements of remuneration; and • Variable elements of remuneration See pages 92 to 98 for more details. Looking forward This section provides details on how the Company will implement our Remuneration Policy in 2016. See pages 98 to 99 for more details. Policy Report Looking forward This section contains a table showing the details of the Company’s approved Remuneration Policy and accompanying notes. Membership and attendance (eligible) at meetings held in 2015 The full policy is available on www.petrofac.com/remuneration. See pages 101 to 106 for more details. Meetings attendance (eligible) 4 (4) 2 (2) 2 (2) 2 (2) 2 (2) Members Thomas Thune Andersen Matthias Bichsel1 Kathleen Hogenson2 Members who left during the year Stefano Cao3 Roxanne Decyk4 1 Matthias Bichsel joined the Committee on 14 May 2015 2 Kathleen Hogenson joined the Committee on 14 May 2015 3 Stefano Cao stepped down from the Committee on 29 April 2015 4 Roxanne Decyk stepped down from the Committee on 14 May 2015 90 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Dear shareholder On behalf of the Board and as Chairman of the Remuneration Committee, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2015, which is split into two parts: • Our Annual Report on Remuneration, which outlines how our Remuneration Policy was implemented in 2015, and how we intend to apply it in 2016. This will be subject to an advisory vote at the 2016 Annual General Meeting (AGM). • A summary of our Policy. This section contains a summary of the Policy that was approved by shareholders at the 2014 AGM and is for information only. 2015 business context As has been articulated elsewhere in this report, 2015 marked a year in which the Company refocused on its core strengths. Like the rest of the sector, Petrofac has had to adapt to challenging market conditions, but the Committee considers that the business is well-positioned for the future, with a record year-end order backlog, a robust pipeline of opportunities and excellent visibility of future revenues. Ultimately though, our financial performance in 2015 was significantly impacted by two difficult projects. As a result of losses on the Laggan-Tormore project, earnings fell short of our expectations at the start of the year. The Company also recognised impairments in respect of IES and the Greater Stella Area project in particular, reducing overall Group earnings to a loss of US$349 million. Despite these disappointments, the remainder of the core ECOM business continued to perform well. In addition, there were a number of positives from a financial perspective. As highlighted above, we finished the year with a record order backlog of US$20.7 billion, an increase of US$1.8 billion during the year. We also made effective progress on reducing our cost base, increased the cash which we generated from our operations for the second year in succession, and our underlying net margin remains at sector-leading levels. It is also pleasing that 2015 marked the second successive year in which there has been an overall improvement in HSSEIA performance, with zero fatalities and continued improvement against our Lost Time Injury and Recordable Injury Frequency metrics. Remuneration outcomes for 2015 The Committee made changes to the annual bonus framework for 2015, with the intention of ensuring greater transparency in our outcomes and increasing the proportion of the bonus which is dependent on financial performance. Under this framework, 60% of the bonus is dependent on the achievement of Group financial targets, with the remaining 40% subject to a balanced scorecard comprised of key health and safety, operational, strategic and individual objectives. The Committee reviewed the Group’s financial performance during 2015, as well as the achievements of the Executive Directors against the targets under their balanced scorecards. Whilst a number of the financial and balanced scorecard targets were achieved by the Group Chief Executive, he proposed that he should not be considered for a bonus in respect of 2015. The Committee accepted this proposal. The other two Executive Directors, Marwan Chedid and Tim Weller, received pay-outs of 32% and 33% of maximum, respectively. G o v e r n a n c e The performance period for the 2013 Performance Share Plan (PSP) cycle ended on 31 December 2015. Based on performance against the three-year relative TSR and EPS targets, the awards lapsed in full, resulting in zero payout. Remuneration in 2016 For 2016, there will be no increase in salary for our two UK-based Executive Directors, which represents the second consecutive year for which these individuals’ salaries have been frozen. Marwan Chedid, our UAE-based Executive Director, was promoted to Group Chief Operating Officer on 1 January 2016 and, to reflect the increased scope of this role, he received a salary increase of 10%, effective from that date. Salary increases in our wider UAE population were in the region of 3%. There will be no increase in the cash allowance for our UK-based Executive Directors, whilst that for Marwan Chedid has been increased by US$7,200 (3%), with effect from 1 January 2016. This reflects the increase in the general cost of living in the UAE. Following the changes which were made to our annual bonus framework last year, we will be operating the same framework for 2016. The maximum opportunity remains at 200% of base salary, with performance measured against financial targets (60%) and a balanced scorecard of key health and safety, operational, strategic and individual objectives (40%). The Committee has considered the EPS targets for the 2016 cycle of the PSP. Given the current challenging environment, and taking into account internal and external forecasts for the business, for the 2016 awards only, we are proposing to adjust the performance targets, such that threshold vesting will require EPS growth of 0.0% p.a., with target vesting at 2.5% p.a. and maximum vesting at 7.5% p.a. (from a pre-Laggan-Tormore 2015 EPS base-year figure of 129.41 c/s). The Committee considers that these represent stretching targets when viewed in the context of current performance expectations and the volatility within the sector at this time. Looking forward Our current Policy was approved by shareholders at the 2014 AGM. As such, 2016 will be the last year for which this applies and we expect to be seeking approval for a new Policy at our 2017 AGM. Our intention at this time is to carry out a broad review of the remuneration arrangements for our Executive Directors, with a view to ensuring that any new Policy remains appropriate for the prevailing business and market environment. If material changes are proposed we will consult with major shareholders in advance. The Committee values all feedback from shareholders, and hopes to receive your support at the forthcoming AGM. Thomas Thune Andersen Chairman of the Remuneration Committee 23 February 2016 Petrofac Annual report and accounts 2015 / 91 Directors’ remuneration report continued Annual Report on Remuneration Looking backwards The information presented from this section, until the relevant note on page 96, represents the audited section of this report. Single figure of remuneration The following table sets out the total remuneration for Executive Directors and Non-executive Directors for the year ended 31 December 2015, with prior year figures also shown. All figures are presented in USD. Director Executive Directors Ayman Asfari1 Marwan Chedid Tim Weller1 Non-executive Directors5 Rijnhard van Tets Thomas Thune Andersen Matthias Bichsel2 Kathleen Hogenson René Médori1 Former Directors Stefano Cao3 Roxanne Decyk4 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 Base salary/ fees (a) US$’000 Taxable benefits (b) US$’000 Cash in lieu of pension (and other benefits) (c) US$’000 Post- employment benefit (d) US$’000 Annual bonus (e) US$’000 Long-term incentives (f) US$’000 995 1,071 623 605 704 758 442 234 148 133 65 – 102 108 125 133 41 133 38 108 60 59 6 6 1 2 – – – – – – – – – – – – – – 107 115 239 230 107 115 – – – – – – – – – – – – – – – – 52 50 – – – – – – – – – – – – – – – – – – 400 600 459 453 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total US$’000 1,162 1,245 1,320 1,491 1,271 1,328 442 234 148 133 65 – 102 108 125 133 41 133 38 108 Notes to the table 1 UK-based Directors are paid in sterling. Amounts have been translated to US dollars based on the prevailing rate at the date of payment or award with the exception of the bonus amounts, which have been translated using the average exchange rate for 2015 of £1:US$1.53125. 2 Matthias Bichsel was appointed as a Director on 14 May 2015. The 2015 figure reflects the period from this date to 31 December 2015. 3 Stefano Cao ceased to be a Director from 29 April 2015. 4 Roxanne Decyk ceased to be a Director from 14 May 2015. 5 Non-executive Directors receive a basic fee of £67,000 per annum and additional fees of £15,000 per annum for acting as either the Chairman of a Board Committee or as the Senior Independent Director. Rijnhard van Tets, as Chairman, receives a fee of £290,000 per annum. These fees were last reviewed in August 2015. Amounts have been translated to US dollars based on the prevailing rate at the date of payment. Further notes to the table – methodology (a) Salary and fees – the cash paid in respect of 2015. (b) Benefits – the taxable value of all benefits paid in respect of 2015. UK-resident Executive Directors receive private health insurance, life assurance and long-term disability insurance. Ayman Asfari’s benefits primarily relate to the employment of a personal assistant who is partly engaged in support of the administration of his personal affairs. Marwan Chedid receives similar benefits to UK-resident Executive Directors and in addition receives other typical expatriate benefits, such as return flights to his permanent home. (c) Cash in lieu of pension and other benefits – UK-resident Executive Directors receive a cash allowance in place of benefits including, but not limited to, car allowances and pension contributions. Directors do not receive pension contributions from the Company. Marwan Chedid receives a cash allowance in respect of housing, utilities and transport, in line with local market practice. (d) Post-employment benefit – all non-UAE national employees, including Directors working in the UAE, are required by local statute to receive an end of service indemnity payment. These sums, based on years of service and salary, will be paid by the Company only on termination of the individual’s employment from the UAE. The total amount retained as at 31 December 2015 in respect of Marwan Chedid is US$1,140,056. (e) Annual bonus – cash bonus paid in respect of 2015. Ayman Asfari proposed that he should not receive a bonus for 2015 and the Committee endorsed his proposal. (f) Long-term incentives – as a result of the performance over the period 2013–2015, the 2013 Performance Share Plan will lapse in full on 19 March 2016. 92 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Group financial statements p108 Additional disclosures in respect of the single figure table Benefits The single figure table on page 92 sets out the total amount of benefits received by each Executive Director during 2015. The table below provides an overview of the most significant components of the relevant benefits. Director Ayman Asfari Marwan Chedid Provision of personal assistant US$58,688 Housing and transport – – US$239,196 Annual bonus As set out in last year’s report, the Committee implemented a new annual bonus framework for 2015. This framework is intended to ensure an increased transparency of outcomes, in line with best practice developments. We also took the opportunity to increase the proportion of the bonus which is dependent on financial performance, such that this comprised 60% of the bonus framework for 2015. The Committee considered the Group’s performance during 2015 against the measures and targets under the new framework. Our financial performance in 2015 was significantly impacted by two difficult projects, Laggan-Tormore and the Greater Stella Area. As a result, earnings fell short of our expectations at the start of the year resulting in no pay-out under either the Group Net Income or Group ROCE target. In terms of the other measures, the Company continued to attract significant new orders, leading to a record year-end order backlog and a broadly on-target pay-out under this measure. We also increased the cash which we generated from our operations for the second year in succession and this contributed towards a maximum pay-out under this element. As a result of this financial performance, the table below sets out the outcomes for the Executive Directors against our financial targets: Measure Group Net Income Group Order Intake Group Free Cash Flow Group ROCE Total (financial elements) 25% 15% 10% 10% 60% Weighting Threshold Target Maximum Performance US$417m US$6.0bn US$485m US$8.9bn US$553m US$10.0bn US$8.6bn (US$629m) (US$472m) (US$315m) US$271m1 14.1% 15.7% 17.3% 3.0% Actual 2015 outcome US$9m As a %of maximum 1 Cash flow from operating and investing activities net of proceeds from disposal of subsidiary. Pay-out as % of maximum 0% 48% 100% 0% 17% 29% As the table highlights, our financial performance resulted in a pay-out against the annual bonus financial measures of 29% of maximum (34% of salary). The remainder of the annual bonus (40%) is subject to a balanced scorecard of measures, aligned with our business plan and key corporate objectives. The scorecard captures key health & safety, operational, strategic and individual objectives. The scorecard ensures that the Committee considers not only the financial achievements which were delivered but also the wider health of the Company, safeguarding future years’ performance, and the manner and behaviours by which our performance has been delivered. Notable achievements under the balanced scorecard include: • Strong safety performance, with zero fatalities during the year and continued improvement in our Lost Time Injury Frequency and Recordable Injury Frequency rates; • Organisational restructuring exercise and associated cost saving targets achieved, as announced to the market in December 2015; and • Delivery of a number of key operational project milestones. The table below provides an overview of the annual bonuses received by each Executive Director, based on performance against the financial metrics and their individual performance against their balanced scorecards: Financial element (60%) – Performance Balanced scorecard element (40%) – Overall – 2015 annual bonus – 29% of maximum 37% of maximum 32% of maximum US$400,000 29% of maximum 39% of maximum 33% of maximum £300,000 As a % of base salary – 64% 65% Ayman Asfari1 Marwan Chedid Tim Weller 1 Ayman Asfari proposed that he not be considered for a bonus in respect of 2015. Petrofac Annual report and accounts 2015 / 93 GovernanceDirectors’ remuneration report continued Performance Share Plan The performance conditions for the 2013 award are set out below. These targets were not achieved and, as a result, the award has lapsed in full. a) 50% of the award – three-year relative TSR performance against a sectorial peer group (the ‘Index’) b) 50% of the award – three-year EPS growth Three-year Petrofac TSR performance Percentage of TSR element vesting EPS growth per annum Percentage of EPS element vesting Less than the Index Equal to the Index 25% out-performance of the Index 0% 10% or less 30% 15% 100% 20% or more 0% 30% 100% Straight-line vesting operates between these points. Straight-line vesting operates between these points. The peer group for the 2013 award is set out below: Aker Solutions AMEC Saipem Schlumberger The table below provides an overview of Petrofac’s performance against the 2013 PSP award targets and resulting vesting: Actual performance Vesting as % of element Chicago Bridge & Iron Co. SNC-Lavalin Group Relative TSR Under-performance of the Index by 30% Fluor Corporation Foster Wheeler Halliburton JGC Maire Tecnimont Technip Tecnicas Reunidas Wood Group (John) WorleyParsons EPS growth Total vesting -75.7% per annum 0% 0% 0% Scheme interests awarded during the financial year Performance Share Plan awards As outlined in the policy table on page 104, PSP awards are granted over Petrofac shares representing an opportunity to receive ordinary shares if performance conditions are met over the relevant three year period. The number of shares under award is determined by reference to a percentage of base salary. Details of the actual number of shares granted are set out on page 95. The following table provides details of the awards made under the PSP on 6 March 2015. Performance for these awards is measured over the three financial years from 1 January 2015 to 31 December 2017. Maximum vesting (% of face value) End of performance period 100% 31-Dec-17 Ayman Asfari Marwan Chedid Tim Weller Type of award Face value Performance shares £1,299,995 £821,230 £919,998 Face value (% of salary) 200% 200% 200% Threshold vesting (% of face value) For TSR element (50% of award) 30% of face value For EPS element (50% of award) 0% of face value Awards were made based on a share price of 880.60 pence, and the face values shown have been calculated on this basis. This share price represents the five-day average share price up to 6 March 2015. The Committee reviewed targets in early 2015 by reference to a number of internal and external reference points to ensure that they are positioned at a level which it considers appropriate and stretching in the context of the business strategy and earnings expectations for the next three years, whilst ensuring that they do not drive unacceptable levels of risk and encourage inappropriate behaviours. There was no change to the EPS targets for the 2015 awards from those adopted for the 2014 awards, which were as follows: EPS growth per annum Percentage of EPS element vesting 7.5% or less 10% 15% or more 0% 30% 100% The TSR peer group used for this award is the same as outlined above, save that Maire Tecnimont is replaced by Baker Hughes as per the 2014 awards, FosterWheeler has been removed from the group on account of its acquisition by AMEC (which has become AMEC FosterWheeler), and Jacobs Engineering has been added as a new constituent to retain a consistent number of companies. The TSR outperformance requirements and associated vesting schedule remain unchanged from those adopted for prior year awards. 94 / Petrofac Annual report and accounts 2015 Share Incentive Plan awards UK-based Executive Directors are eligible to participate in HMRC-approved all-employee share plans on the same basis as other eligible employees. During 2015, Tim Weller participated in the Share Incentive Plan (SIP) and purchased 181 shares. Payments for loss of office Stefano Cao and Roxanne Decyk ceased to be Directors from 29 April 2015 and 14 May 2015 respectively and no payment for loss of office was made to either individual. Statement of Directors’ shareholding and share interests Directors’ shareholdings held during the year and as at 31 December 2015 and share ownership guidelines Following discussions with shareholders in relation to the VCP in 2012, the Committee introduced a shareholding requirement of 300% of base salary over a period of five years from the date of appointment for those Executive Directors participating in the plan. At this time, there is no Executive Director with more than five years’ service who is yet to meet the guidelines. Nevertheless, in view of the recent out-turns of the VCP and PSP, the Committee took the decision during 2015 to extend this time period for Executive Directors and will keep this position under review going forward. Ayman Asfari was not a participant in the VCP and was therefore not subject to the formal shareholding requirement. In any event, Ayman already had a substantial shareholding interest in the Company, significantly in excess of the required levels. Until the relevant shareholding guidelines have been met, Executive Directors are encouraged to retain vested shares earned under the Company’s incentive plans. Unvested share awards are not taken into account when considering an Executive Director’s progress towards the shareholding requirements. Shareholding requirements and the number of shares held by Directors during the year and as at 31 December 2015 are set out in the table below: Directors’ interests in shares as at 31 December 2015 Shareholding requirement as a % of salary (Target – % achieved) Shares owned outright at 31 December 2015 (or at the date of leaving) Interests in share incentive schemes, awarded subject to performance conditions at 31 December 2015 Shares owned outright at 31 December 2014 Director Ayman Asfari1 Marwan Chedid2 Tim Weller2 Thomas Thune Andersen Matthias Bichsel Kathleen Hogenson René Médori Rijnhard van Tets Former Director Stefano Cao4 No formal shareholding requirement 300% (1004%) 300% (56%) – – – – – – 62,958,426 1,540,092 97,2913 4,000 – – – 100,000 – 335,620 203,610 235,433 – – – – – – 62,958,426 1,393,092 77,110 4,000 – – – 100,000 – Roxanne Decyk5 1 Although Ayman Asfari does not have formal shareholding requirements, he substantially exceeds the shareholding requirement set for the other Executive Directors. 2 Marwan Chedid and Tim Weller are expected to build up a shareholding of three times salary over a period of five years from appointment. Whilst at this time, Tim Weller has yet to meet the shareholding requirement fully, he has taken steps to acquire shares since his appointment. Marwan Chedid’s shareholding requirement has been met in full. For the purposes of determining Executive Director shareholdings, the individual’s salary and the share price as at 31 December 2015 of 796 pence has been used. 5,804 5,804 – – 3 Includes shares purchased through the SIP totalling 501 shares as at 31 December 2015. 4 Stefano Cao ceased to be a Director from 29 April 2015. 5 Roxanne Decyk ceased to be a Director from 14 May 2015. The shares owned outright reflect the position at the date she stepped down from the Board. Petrofac Annual report and accounts 2015 / 95 GovernanceDirectors’ remuneration report continued Share interests – share awards at 31 December 2015 Share awards held at the year end, including awards of shares made during 2015, to Executive Directors are given in the table below: Director and date of grant Plan Number of shares under award at 31 December 20141 Shares granted in year Dividend shares granted in year2 Shares lapsed in year Shares vested in year Total number of shares under award at 31 December 2015 Dates from which shares ordinarily vest Ayman Asfari 19 March 2012 24 May 2013 19 March 2014 6 March 2015 Marwan Chedid 19 March 2012 24 May 2013 19 March 2014 6 March 2015 Tim Weller 19 March 2012 24 May 2013 19 March 2014 6 March 2015 PSP PSP PSP PSP PSP PSP PSP PSP PSP PSP PSP PSP 76,965 85,061 87,451 – – – – 147,626 – 76,9653 4,114 4,229 7,139 – – – 50,518 50,730 50,230 – – – – 93,258 – 50,5183 2,453 2,429 4,510 – – – 43,292 59,264 60,835 – – – – 104,474 – 43,2923 2,866 2,942 5,052 – – – – – – – – – – – – – – – – 19 March 2015 89,1754 19 March 2016 91,680 6 March 2017 154,765 6 March 2018 335,620 – 19 March 2015 53,1834 19 March 2016 52,659 97,768 203,610 6 March 2017 6 March 2018 – 19 March 2015 62,1304 19 March 2016 63,777 6 March 2017 109,526 6 March 2018 235,433 1 The award amounts disclosed under the PSP are the maximum number that may vest if all performance conditions attached to the awards are satisfied in full. 2 Dividends awarded on shares granted under the share plans are reinvested to purchase further shares. 3 Following the end of the three-year performance period in respect of the March 2012 PSP award, the performance conditions were not satisfied and the award lapsed in full. 4 Shares awarded on 24 May 2013 did not satisfy performance conditions and therefore no awards will vest on 19 March 2016. Share interests – share options Share options held at the year end by Executive Directors are given in the table below: Director and date of grant Marwan Chedid1 18 May 2012 18 May 2012 18 May 2012 Tim Weller1 18 May 2012 18 May 2012 18 May 2012 Plan VCP VCP VCP VCP VCP VCP Exercise price (p) Number of options awarded Shares lapsed Total number of options at in year 31 December 2015 Dates from which ordinarily exercisable 1710.28 1710.28 1710.28 112,910 112,910 112,910 1710.28 1710.28 1710.28 46,726 46,726 46,726 – – – – – – 112,910 18 May 2016 112,910 18 May 2017 112,910 18 May 2018 338,730 46,726 18 May 2016 46,726 18 May 2017 46,726 18 May 2018 140,178 1 The share options granted under the VCP did not satisfy performance conditions and therefore all shares will lapse. This represents the end of the audited section of the report. 96 / Petrofac Annual report and accounts 2015 Historical TSR performance and Group Chief Executive remuneration outcomes The chart below compares the TSR performance of the Company over the past seven years with the TSR of the FTSE 250 Index. This index has been chosen because it is a recognised equity market index of which Petrofac has been a member since December 2014. The table below the chart summarises the CEO single figure for total remuneration, annual bonus payouts and LTIP vesting levels as a percentage of maximum opportunity over this period. TSR chart – one month average basis 600 500 400 300 200 100 0 n o 0 0 1 o t d e s a b e r ( R S T ) 9 0 0 2 y r a u n a J 1 2009 2010 2011 2012 2013 2014 2015 2016 Petrofac FTSE 250 Source: Datastream Group Chief Executive Group Chief Executive single figure of remuneration (US$’000) Annual bonus payout (as a % of maximum opportunity) PSP vesting out-turn (as a % of maximum opportunity) 2009 3,501 2010 4,889 2011 6,088 2012 4,663 100% 100% 75% 81% 100% 100% 100% 100% 2013 2,658 59% 13% 2014 1,245 0% 0% 2015 1,162 0% 0% Percentage change in remuneration of the Group Chief Executive The table below illustrates the increase in salary, benefits (excluding cash allowance in lieu of pension) and annual bonus for the Group Chief Executive and that of a representative group of the Company’s employees. For these purposes, we have used all UK-based employees as the comparator group, as this represents the most appropriate comparator group for reward purposes for our UK-based Group Chief Executive. Group Chief Executive 0%1 1%2 % change in base salary 2015/2014 % change in benefits (excluding cash allowance in lieu of pension) 2015/2014 % change in annual bonus 2015/2014 N/A3 All UK-based employees 1 Base salary is paid in sterling but translated into US dollars based on the prevailing rate at the date of payment (as set out on page 92). 2 The increase relates solely to remuneration paid to Mr Asfari’s personal assistant who is partly engaged in support of the administration of his personal affairs 0% 0% -50% and on which he incurs a taxable benefit. Further details are set out on page 93. 3 The Group Chief Executive proposed that he should not be considered for a bonus in both 2014 and 2015 and the Committee accepted these proposals. Petrofac Annual report and accounts 2015 / 97 Governance Directors’ remuneration report continued Relative importance of the spend on pay The chart below illustrates the change in total remuneration, dividends paid and net profit from 2014 to 2015. The figures presented have been calculated on the following bases: • Dividends – dividends paid in respect of the financial year. • Net profit – our reported net profit in respect of the financial year. This is a key performance indicator for the Company. The Committee therefore believes it is the most direct reflection of our underlying financial performance. • Total remuneration – represents total salaries paid to all Group employees in respect of the financial year (see page 136 of the report for an explanation as to how this value is calculated). Note that this includes social security costs, benefit and pension costs and share-based payment expenses. Spend in respect of the financial year chart 2014 compared with 2015 Dividends, Net profit and Total remuneration. Spend in respect of the financial year US$m 2014 2015 Looking forward to 2016 Implementation of Remuneration Policy in 2016 This section provides an overview of how the Committee is proposing to implement our Remuneration Policy in 2016. Base salary In determining salary increases for 2016, the Committee took into account a number of factors, including the level of salary increases in the wider workforce, internal and external positioning and the general economic climate. For 2016, there will be no increase in salary for our two UK-based Executive Directors. This represents the second consecutive year for which these individuals’ salaries have been frozen. Marwan Chedid, our UAE-based Executive Director, was promoted to Group Chief Operating Officer on 1 January 2016 and, to reflect the increased scope of this role, he received a salary increase of 10%, effective from this date. Salary increases in our wider UAE population were in the region of 3%. The table below shows base salaries for 2016: 3.2% 1,338 1,296 Ayman Asfari Marwan Chedid Tim Weller 2016 basic salary 2015 basic salary £650,000 £650,000 US$685,500 US$623,150 £460,000 £460,000 581 -0.4% 226 227 -98.5% 9 Dividends Net proﬁt* Total remuneration *Before exceptional items and certain re-measurements Benefits The Committee sets benefits in line with our policy set out on page 101 and detailed on our website. There are no changes proposed to the benefit framework in 2016. Cash allowance in lieu of pension and car allowance No increase in cash allowance is proposed for UK-based Executive Directors. The cash allowance for Marwan Chedid, a UAE based Executive Director, has been increased by US$7,200 (3%) with effect from 1 January 2016. This reflects an increase in line with inflation in the UAE. The table below shows cash allowances for 2016. Ayman Asfari Marwan Chedid Tim Weller 2016 cash allowance in lieu of pension 2015 cash allowance in lieu of pension £70,000 £70,000 US$246,400 US$239,200 £70,000 £70,000 98 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Group financial statements p108 Annual bonus The maximum annual bonus opportunity for Executive Directors will remain at 200% of base salary in 2016. As detailed elsewhere in this report, the Committee implemented a new annual bonus framework last year, with the intention of ensuring increased transparency of outcomes and greater emphasis on financial performance. The same framework will be used for 2016. The table below sets out the financial elements, which comprise 60% of the total annual bonus: Comparator group (the Index) Aker Solutions Fluor Corp AMEC FosterWheeler Halliburton Baker Hughes Jacobs Engineering Chicago Bridge & Iron JGC Corp Saipem Schlumberger Tecnicas Reunidas Wood Group (John) SNC-Lavalin WorleyParsons Technip Measure Weighting in total bonus Vesting schedule Financial measures Group Net Income Group Order Intake Group Free Cash Flow Group ROCE 25% 15% 10% 10% The remainder of the annual bonus, 40%, will be based upon a balanced scorecard, providing the Committee with the ability to consider not only financial achievements, but also the wider health of the Company and the manner and behaviours by which our performance has been delivered. The scorecard includes measures related to health and safety, operational, strategic and individual objectives. At this stage, the Committee considers that the annual bonus targets for 2016 remain commercially sensitive. However, as seen on page 93, this year we have provided full disclosure of the financial targets for the 2015 annual bonus and would currently intend to provide the same level of disclosure next year. The annual bonus is subject to clawback provisions. Performance Share Plan The usual maximum PSP award for Executive Directors is 200% of base salary (awards up to 300% of base salary can be made in exceptional circumstances). For 2016, it is proposed that all Executive Directors will receive an award of 200% of base salary. There are no changes to the performance measures used for the 2016 PSP awards, although we have taken the opportunity to adjust the EPS targets to reflect growth forecasts from our 2015 base year. Awards will be based on three-year performance against the following measures: • 50% – Relative TSR performance against a sectoral peer group • 50% – Compound annual EPS growth 1) TSR element There are no changes proposed to the comparator group or the degree of out-performance required, which are both set out below for reference. Three-year performance against the Index Vesting as a % of maximum Performance equal to the Index 25% out-performance of the Index Straight-line vesting between the points above 30% 100% 2) EPS element The remaining 50% of the 2016 PSP award will be subject to a three-year EPS performance condition. To reflect the current challenging environment, the Committee has taken the opportunity to realign the EPS targets for the 2016 awards with internal and external performance forecasts for the Company. As such, we have adjusted the targets as set out in the table below. The Committee considers that these represent stretching targets and significant payouts will only be available for delivery of strong three-year performance. EPS growth 0% per annum 2.5% per annum 7.5% per annum Vesting as a % of maximum 0% 30% 100% Straight-line vesting between each of the points above These growth rates will be measured from a pre-Laggan-Tormore EPS figure for 2015 of 129.41 cents per share, which the Committee considers provides a more appropriate base-year figure from which to measure our forward-looking growth aspirations. It is our intention to review the EPS target range when we submit a new remuneration policy for shareholder approval next year. PSP awards are subject to malus and clawback provisions. Non-executive Director remuneration The table below shows the Non-executive Director current fee structure which is unchanged from 2015: Chairman of the Board fee Basic Non-executive Director fee Board Committee Chairman fee Senior Independent Director fee 2016 fees £290,000 £67,000 £15,000 £15,000 There are no fees paid for membership of Board Committees. Petrofac Annual report and accounts 2015 / 99 GovernanceDirectors’ remuneration report continued Consideration by the Directors of matters relating to Directors’ remuneration Support for the Committee During the year, the Committee received independent advice on executive remuneration matters from Deloitte LLP (Deloitte). Deloitte were formally appointed as advisers by the Committee in October 2005, following a recommendation from the Non-executive Chairman at the time. Deloitte is a member of the Remuneration Consultants Group and, as such, voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Committee has reviewed the advice provided by Deloitte during the year and is satisfied that it has been objective and independent. Total fees received by Deloitte in relation to the remuneration advice provided to the Committee during 2015 amounted to £97,035 based on the required time commitment. During 2015, Deloitte also provided other tax and financial advisory services and a secondee who assisted in routine internal finance functions. The individuals listed in the table below, none of whom were Committee members, materially assisted the Committee in considering executive remuneration and attended at least part of one meeting by invitation during the year: Attendee Position Comments Rijnhard van Tets Chairman of Board Ayman Asfari Cathy McNulty Group Chief Executive Group Director of HR Mary Hitchon Secretary to the Board Carol Arrowsmith Bill Cohen Deloitte LLP Deloitte LLP To provide context for matters under discussion Secretary to Committee Adviser Adviser None of the individuals attended part of any meeting in which their own compensation was discussed. Governance The Board and the Committee consider that, throughout 2015 and up to the date of this report, the Company has complied with the provisions of the UK Code relating to Directors’ remuneration. In addition, the guidelines issued by the Investment Association (IA) and the Pensions and Lifetime Savings Association (PLSA) have been noted. The Committee endeavours to consider executive remuneration matters in the context of alignment with risk management and, during the year, had oversight of any related factors to be taken into consideration. The Committee believes that the remuneration arrangements in place do not raise any health and safety, environmental, social or ethical issues, nor inadvertently motivate irresponsible behaviour. External board appointments Executive Directors are normally entitled to accept one non- executive appointment outside the Company with the consent of the Board. Any fees received may be retained by the Director. As at the date of this report, Tim Weller is a non-executive director with The Carbon Trust and G4S plc, for which he received £17,000 and £79,375 respectively in fees during the year. Shareholder voting The table below outlines the result of the advisory vote on the 2014 Directors’ Remuneration Report received at the 2015 AGM. Annual Report on Remuneration Number of votes cast (excluding abstentions) 251,062,093 For Against Abstentions 250,283,790 778,303 2,174,932 99.69% 0.31% The Committee is pleased to note that over 99% of shareholder votes approved the 2014 Directors’ Remuneration Report. Since our listing in October 2005, we have received at least 95% support for the Directors’ Remuneration Report at all AGMs (excluding abstentions) and the Committee would like to take this opportunity to thank shareholders for their support over this period. The table below outlines the result of the advisory vote on the 2013 Policy Report received at the AGM held on 15 May 2014. Remuneration Policy Report Number of votes cast (excluding abstentions) 226,175,875 For Against Abstentions 175,228,016 50,947,859 26,723,606 77.47% 22.53% The Company submitted its Remuneration Policy Report to shareholders as an advisory resolution at the 2014 AGM. As the Company does not benefit from the statutory protections of the UK Companies Act 2006, some of the provisions set out in the regulations were therefore not fully adopted, which resulted, we believe, in the slightly lower votes in favour of the resolution. Consultation with key institutions took place during 2014 and the Company is aware of the matters raised. The Committee intends to keep these concerns under consideration when our policy is next reviewed. Availability of documentation Service contracts and letters of appointment for all Directors are available for inspection by any person at our registered office in Jersey and at our corporate services office in London. They will also be available for inspection during the 30 minutes prior to the start of our AGM to be held in London in May 2016. Annual General Meeting As set out in my statement on page 91, with consideration to the new remuneration reporting regulations, our Annual Report on Remuneration will be subject to an advisory shareholder vote at the AGM to be held on 19 May 2016. On behalf of the Board Thomas Thune Andersen Chairman of the Remuneration Committee 23 February 2016 100 / Petrofac Annual report and accounts 2015 Policy report Looking forward Our Directors’ Remuneration Policy (the ‘Policy’) was approved by shareholders at the AGM held on 15 May 2014 for a period of up to three years. In order to provide the context in which individual remuneration decisions have been made during the year, the approved policy table, and notes to the table, have been included below. The full Remuneration Policy, as approved, is available at www.petrofac.com/remuneration. The policy for Executive Directors is designed in line with the remuneration philosophy and principles that underpin remuneration for the wider Group and all our reward arrangements are built around common objectives and principles. As a Jersey-incorporated company, Petrofac does not have the benefit of the statutory protections afforded by the UK Companies Act 2006. While the Policy Report was not submitted as a binding resolution at the 2014 AGM, the Committee considers the vote of shareholders to be binding in its application. However, if there is any inconsistency between the Company’s Policy Report (as approved by shareholders) and any contractual entitlement or other right of a Director, the Company may be obliged to honour that existing entitlement or right. Fixed remuneration Element/Purpose and link to strategy Salary Core element of remuneration, paid for doing the expected day-to-day job Benefits Provide employees with market competitive benefits Performance measures • None Operation Maximum opportunity • The Committee takes into consideration a number of factors when setting salaries, including (but not limited to): – size and scope of the individual’s responsibilities; – the individual’s skills, experience and performance; – typical salary levels for comparable roles within appropriate pay comparators; and • Whilst there is no maximum salary level, any increases will normally be broadly in line with the wider employee population within the relevant geographic area. • Higher increases may be made under certain circumstances, at the Committee’s discretion. For example, this may include: – increase in the scope and/or responsibility of the individual’s role; and – pay and conditions elsewhere in – development of the individual within the Group. the role. • Basic salaries are normally reviewed at the • In addition, where an Executive Director beginning of each year, with any change usually being effective from 1 January. has been appointed to the Board at a lower than typical salary, larger increases may be awarded to move them closer to market practice as their experience develops. • None • Whilst no maximum level of benefits is prescribed, they are generally set at an appropriate market competitive level, taking into account a number of factors, which may include: – the jurisdiction in which the individual is based; – the level of benefits provided for other employees within the Group; and – market practice for comparable roles within appropriate pay comparators. • The Committee keeps the benefit policy and benefit levels under regular review. • UK-based Executive Directors receive benefits which typically may include (but are not limited to) private health insurance for the Executive Director and their family, life assurance and long-term disability insurance. • UAE-based Executive Directors receive similar benefits to UK-resident Executive Directors and in addition receive other typical expatriate benefits, which may include (but are not limited to) children’s education, return flights to their permanent home and appropriate insurance arrangements. • Where Executive Directors are required to relocate, the Committee may offer additional expatriate benefits, if considered appropriate. • UK-based Executive Directors are also eligible to participate in any tax-approved all employee share plans operated by the Company on the same basis as other eligible employees. Petrofac currently operates a Share Incentive Plan in the UK. Petrofac Annual report and accounts 2015 / 101 GovernanceDirectors’ remuneration report continued Element/Purpose and link to strategy Operation Cash allowance in lieu of pension and other benefits Provide employees with an allowance for benefits and retirement planning • UK-resident Executive Directors receive a cash allowance in place of certain benefits including, but not limited to, car allowances and pension contributions. • UAE-resident Executive Directors receive a cash allowance in respect of housing, utilities and transport, in line with local market practice. End of service indemnity Paid to UAE-based Executive Directors only, in order to comply with local UAE statute • A statutory end of service payment is due to all non-UAE national employees working in the UAE at the end of their contracted employment. • The Company accrues an amount each year in order to satisfy this indemnity when it falls due. Pension No Executive Director currently participates in a formal pension arrangement • Executive Directors receive a cash allowance in lieu of pension provision (see above). • The Company operates defined contribution pension arrangements across the Group. In line with legal requirements, the Company offers participation in the UK pension plan to its UK-based Executive Directors. However, both current UK-based Executive Directors chose to opt out of these arrangements and, as such, continue to receive a cash allowance in lieu of pension provision. Maximum opportunity Performance measures • Whilst there is no maximum level of cash • None allowance prescribed, in general, the levels provided are intended to be broadly market typical for role and geographic location. • The levels of cash allowance provided are kept under regular review by the Committee. • Normally, in determining any increase to cash allowances, the Committee will have regard to the rate of increase in the cost of living in the local market and other appropriate indicators. • The statutory payment is based on the • None individual’s number of years of service and salary level at the time of their departure. • None • Although both current UK-based Executive Directors have opted to receive a cash allowance in lieu of pension provision, this position is kept under review. • As the Committee would want to conduct a thorough review prior to Executive Directors joining a Group pension arrangement, it would not be appropriate to provide a maximum level of pension provision at this time. However, if this did occur, the level of provision would typically be dependent on seniority, the cost of the arrangements, market practice and pension practice elsewhere in the Group. 102 / Petrofac Annual report and accounts 2015 Operation Maximum opportunity Performance measures Variable remuneration Element/Purpose and link to strategy Annual bonus Incentivise delivery of the business plan on an annual basis Rewards performance against key performance indicators which are critical to the delivery of our business strategy • Delivery in cash. • Awards based on performance in the relevant financial year. • Performance measures are set annually and pay-out levels are determined by the Committee after the year end, based on performance against those targets. • Maximum bonus opportunity • The precise bonus targets are set by the of 200% of basic salary. Committee each year, taking into account a number of internal and external reference points, including the Company’s key strategic objectives for the year. • When setting these targets, the Committee ensures that they are appropriately stretching in the context of the business plan and that there is an appropriate balance between incentivising Executive Directors to meet financial targets for the year and to deliver specific non-financial, strategic, operational and personal goals. This balance allows the Committee to effectively reward performance against the key elements of our strategy. • Measures used typically include (but are not limited to): – HSE and integrity measures; – financial measures; – Group and/or business service line strategic and operational performance measures; and – people-related measures. • Normally, each of these measures will have a broadly equal weighting but the Committee will keep this under review on an annual basis. • Typically, 30% of the maximum opportunity is paid for ‘threshold’ performance, i.e. the minimum level of performance which results in a payment. Share Incentive Plan1 (SIP) Encourage long-term shareholding and to align the interests of UK employees with shareholders • Participants may invest gross salary to purchase ordinary shares. • The Company does not make awards of Matching, Free or Dividend Shares under the SIP. • None • Participants may invest up to the prescribed HMRC limits in operation which is currently £1,800 gross salary per tax year. 1 The Committee may, in the event of any variation of the Company’s share capital, demerger, delisting, or other event which may affect the value of awards, adjust or amend the terms of awards in accordance with the rules of the relevant share plan. In the case of the SIP, any required changes may be subject to HMRC approval. Petrofac Annual report and accounts 2015 / 103 GovernanceDirectors’ remuneration report continued Element/Purpose and link to strategy Performance Share Plan1 Incentivise Executive performance over the longer term Rewards the delivery of targets linked to the long-term strategy of the business, and the creation of shareholder value over the longer term Operation Maximum opportunity Performance measures • Award levels are determined by reference to individual performance prior to grant. • Vesting of awards is dependent on achievement of stretching three-year performance targets. • At vesting, the Committee considers if the Company’s TSR is a genuine reflection of the underlying Company performance and may reduce or cancel the portion of award subject to TSR if it considers it appropriate. • Awards are normally made in the form of conditional share awards, but may be awarded in other forms if appropriate (such as nil cost options). Awards may also be satisfied in cash. • Additional shares are accrued in lieu of dividends and paid on any shares which vest. • The Committee may adjust or amend the terms of the awards in accordance with the plan rules. • New PSP rules were approved by shareholders at the 2014 AGM. All PSP awards now incorporate malus and clawback provisions, such that the Committee may reduce or cancel unvested awards or require repayment of amounts already paid out at any time up to the second anniversary of the vesting date of the relevant award, in a number of specific circumstances, including: – material misstatement of financial results; – material failure of risk management; – material breach of any relevant health and safety or environment regulations; and – serious reputational damage to the Company (or any Group member). • The maximum award that can be granted in respect of a financial year of the Company under the PSP is 200% of basic salary (or in circumstances which the Committee deems to be exceptional, awards up to 300% of base salary can be granted). • Awards vest based on three-year performance against a combination of financial and share price performance measures. The ultimate goal of the Company’s strategy is to provide long-term sustainable returns to shareholders. The Committee strives to do this by aligning the performance measures under the PSP with the long-term strategy of the Company and considers that strong performance under the chosen measures should result in sustainable value creation: – financial measure – to reflect the financial performance of our business and a direct and focused measure of Company success. The Committee sets targets to be appropriately stretching, with regard to a number of internal and external reference points. – share price performance measure – a measure of the ultimate delivery of shareholder returns. This promotes alignment between Executive Director reward and the shareholder experience. Targets are set with reference to wider market practice and positioned at a level which the Committee considers to represent stretching performance. • Normally the weighting would be split equally across these two measures. • For ‘threshold’ levels of performance under the financial performance measure, 0% of the award vests, increasing to 100% of the award for maximum performance. • For ‘threshold’ levels of performance under the share price performance measure, 30% of the award vests, increasing to 100% of the award for maximum performance. • The Committee sets targets each year, achievement of which it considers would represent stretching performance in the context of the business plan. • The Committee may amend the performance conditions applicable to an award if events happen which cause the Committee to consider that it fails to fulfil its original purpose and would not be materially less difficult to secure. 1 The Committee may, in the event of any variation of the Company’s share capital, demerger, delisting, or other event which may affect the value of awards, adjust or amend the terms of awards in accordance with the rules of the relevant share plan. In the case of the SIP, any required changes may be subject to HMRC approval. 104 / Petrofac Annual report and accounts 2015 Related pages Our strategic review p20 Directors’ information p70 Notes to the policy table Legacy matters The Committee can make remuneration payments and payments for loss of office outside of the Policy set out above, where the terms of the payment were agreed before the Policy came into effect, or at a time when the relevant individual was not a Director of the Company (provided that, in the opinion of the Committee, the payment was not in consideration for the individual becoming a Director of the Company). This includes the exercise of any discretion available to the Committee in connection with such payments. For these purposes, payments include the Committee satisfying awards of variable remuneration and, in relation to an award over shares, the terms of the payment are agreed at the time the award is granted. In relation to the Company’s recruitment policy for new appointments to the Board, full details of which are available at www.petrofac.com/remuneration, the Committee will have regard to the best interests of both Petrofac and its shareholders when agreeing remuneration arrangements and remains conscious of the need to pay no more than is necessary, particularly when determining buy-out arrangements. Non-executive Directors Element/Purpose and link to strategy Operation Opportunity Performance measures Non-executive Director (NED) fees Core element of remuneration, paid for fulfilling the relevant role • NEDs receive a basic annual fee (paid • Current fee levels can be found in the Annual • None quarterly) in respect of their Board duties. Report on Remuneration on page 99. • Fees are set at a level which is considered appropriate to attract and retain the calibre of individual required by the Company. • Fee levels are normally set by reference to the level of fees paid to NEDs serving on boards of similarly sized, UK-listed companies and the size, responsibility and time commitment required of the role. • The Company’s Articles of Association provide that the total aggregate remuneration paid to the Chairman and NEDs will be within the limits set by shareholders. The current aggregate limit of £1 million was approved by shareholders at the 2011 AGM. • Further fees are paid to NEDs in respect of chairmanship of Board Committees and as Senior Independent Director. No fees are paid for membership of a Board committee. • The Non-executive Chairman receives an all-inclusive fee for the role. • The remuneration of the Non-executive Chairman is set by the Remuneration Committee. • The Board as a whole is responsible for determining NED fees. These fees are the sole element of NED remuneration. NEDs are not eligible for annual bonus, share incentives, pensions or other benefits. • Fees are typically reviewed annually. • Expenses incurred in the performance of duties for the Company may be reimbursed or paid for directly by the Company, as appropriate, including any tax due on the payments. Minor amendments The Committee may make minor amendments to the policy set out above (for regulatory, exchange control, tax or administrative purposes or to take account of a change in legislation) without obtaining shareholder approval for that amendment. Petrofac Annual report and accounts 2015 / 105 GovernanceDirectors’ remuneration report continued Illustration of the Remuneration Policy Petrofac’s remuneration arrangements have been designed to ensure that a significant proportion of pay is dependent on the delivery of stretching short and long-term performance targets, aligned with the creation of sustainable shareholder value. The Committee considers the level of remuneration that may be received under different performance outcomes to ensure that this is appropriate in the context of the performance delivered and the value added for shareholders. The charts opposite provide illustrative values of the remuneration package in 2016 for Executive Directors under three assumed performance scenarios: Assumed performance Assumptions used Fixed pay All performance scenarios Variable pay Minimum performance Performance in line with expectations Maximum performance • Consists of total fixed pay, including base salary and cash allowance (as at 1 January 2016) and benefits (as received during 2015) • No pay-out under the annual cash bonus • No vesting under the Performance Share Plan • 50% of the maximum pay-out under the annual cash bonus (i.e. 100% of salary) • 30% vesting under the Performance Share Plan (i.e. 60% of salary) • 100% of the maximum pay-out under the annual cash bonus (i.e. 200% of salary) • 100% vesting under the Performance Share Plan (i.e. 200% of salary) 1 We have used a maximum PSP award opportunity of 200% of base salary, in line with the usual maximum award under the plan rules. Please note that in circumstances which the Committee deems to be exceptional, awards up to 300% of base salary may be made. Performance Share Plan awards have been shown at face value, with no share price growth or discount rate assumptions. All-employee share plans have been excluded, as have any legacy awards held by Executive Directors. For UK-based Executive Directors who are paid in sterling, amounts have been translated to US dollars based on the average exchange rate for 2015 of £1:US$1.53125. These charts provide illustrative values of the remuneration package in 2016. Actual outcomes may differ from those shown: Group Chief Executive – Ayman Asfari All ﬁgures expressed as a % of total Salary Benefits Cash Allowance US$000 US$995 US$60 US$107 Fixed remuneration US$1,162 PSP Annual bonus Fixed remuneration US$5,143 39% 39% US$2,755 22% 36% US$1,162 100% 42% 22% Below threshold Target Maximum Group Chief Operating Officer – Marwan Chedid All ﬁgures expressed as a % of total Salary Benefits Cash Allowance US$000 US$685 US$6 US$246 Fixed remuneration US$937 PSP Annual bonus Fixed remuneration Chief Financial Officer – Tim Weller All ﬁgures expressed as a % of total Salary Benefits Cash Allowance US$000 US$704 US$1 US$107 Fixed remuneration US$812 PSP Annual bonus Fixed remuneration US$3,677 37% 37% 26% US$2,033 20% 34% 46% Target Maximum US$937 100% Below threshold US$3,630 39% 39% 22% US$1,940 22% 36% 42% Target Maximum US$812 100% Below threshold 106 / Petrofac Annual report and accounts 2015 Directors’ statements Directors’ responsibilities The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. The Directors have chosen to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS). The Directors are also responsible for the preparation of the Directors’ remuneration report, which they have chosen to prepare, being under no obligation to do so under Jersey law. The Directors are also responsible for the preparation of the corporate governance report under the Listing Rules. Jersey Company law (the ‘Law’) requires the Directors to prepare financial statements for each financial period in accordance with generally accepted accounting principles. The financial statements are required by law to give a true and fair view of the state of affairs of the Company at the period end and of the profit or loss of the Company for the period then ended. In preparing these financial statements, the Directors should: • Select suitable accounting policies and then apply them consistently • Make judgements and estimates that are reasonable • Specify which generally accepted accounting principles have been adopted in their preparation and • Prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Company will continue in business The Directors are responsible for keeping proper accounting records which are sufficient to show and explain the Company’s transactions and to disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements prepared by the Company comply with the requirements of the Law. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Directors’ approach The Board’s objective is to present a fair, balanced and understandable assessment of the Company’s position and prospects, particularly in the Annual Report, Half year results announcement and other published documents and reports to regulators. The Board has established an Audit Committee to assist with this obligation. Going concern The Company’s business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report on pages 14 to 23. The financial position of the Company, its cash flows, liquidity position and borrowing facilities are described in the financial review on pages 46 to 49. In addition, note 31 to the financial statements includes the Company’s objectives, policies and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities; and its exposures to credit risk and liquidity risk. The Company has considerable financial resources together with long-term contracts with a number of customers and suppliers across different geographic areas and industries. As a consequence, the Directors believe that the Company is well placed to manage its business risks successfully. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. Responsibility statement under the Disclosure and Transparency Rules Each of the Directors listed on pages 70 and 71 confirms that, to the best of their knowledge: • The Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy; • The financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and • The Strategic Report contained on pages 1 to 67 includes a fair view of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Tim Weller Chief Financial Officer Petrofac Annual report and accounts 2015 / 107 GovernanceGROUP FINANCIAL STATEMENTS 109 117 118 119 120 121 122 Independent auditor’s report to the members of Petrofac Limited Consolidated income statement Consolidated statement of other comprehensive income Consolidated statement of financial position Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the consolidated financial statements 108 / Petrofac Annual report and accounts 2015 21-Independent-auditors-report-p108-116-AN-070316.indd 108 07/03/2016 11:40 Independent auditor’s report to the members of Petrofac Limited This report is made solely to the Company’s members, as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991 and engagement letter dated 9 November 2015. Our opinion on the financial statements In our opinion Petrofac Limited’s financial statements (the “financial statements”): • give a true and fair view of the state of the Group and of the Parent Company’s affairs as at 31 December 2015 and of the Group’s loss and Parent Company’s profit for the year then ended; • have been properly prepared in accordance with International Financial Reporting Standards (IFRSs); and • have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991. Opinion on other matters requested by the Group and Company In our opinion: • the information given in the Strategic Report set out on pages 26 to 29 and the Governance Report set out on page 79 and pages 86 to 87 with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements; • the information given in the Strategic Report is consistent with the Group financial statements; and • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the basis of preparation as described therein. What we have audited We have audited the financial statements of Petrofac Limited which comprise: Group Parent company Consolidated income statement for the year then ended Company income statement for the year then ended Consolidated statement of financial position as at 31 December 2015 Company statement of financial position as at 31 December 2015 Consolidated statement of other comprehensive income for the year then ended Company statement of other comprehensive income for the year then ended Consolidated statement of changes in equity for the year then ended Company statement of changes in equity for the year then ended Consolidated statement of cash flows for the year then ended Company statement of cash flows for the year then ended Related notes 1 to 32 to the financial statements Related notes 1 to 21 to the financial statements The financial reporting framework that has been applied in their preparation is applicable law and IFRSs. 21-Independent-auditors-report-p108-116-AN-070316.indd 109 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 109 Financial statementsIndependent auditor’s report to the members of Petrofac Limited continued Our assessment of risk of material misstatement We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any opinion on these individual areas. What we concluded to the Audit Committee We concluded that revenue and margin recognised in the year is materially correct on the basis of our procedures performed both at group and by component audit teams. Risk Our response to the risk Revenue and margin recognition – including ECOM long term contracts Refer to the Audit Committee Report (page 88); Accounting policies (page 123 and 131); and Note 4 of the Consolidated financial statements (page 136) ECOM Accounting for ECOM long term contracts requires significant management judgement and estimation which increases the risk of bias or error. Significant management judgement is required in recognising revenue on fixed-price engineering, procurement and construction contracts and estimation is applied in recognising variation orders, project costs-to-complete and provisions for liquidated damages. These judgements are also subject to the risk of management override of controls in place. For operation and maintenance contracts based on achievement of KPI’s, there is estimation involved in the assessment of the appropriate timing of revenue recognition. IES The complex and material nature of arrangements that exist in IES increases the likelihood and magnitude of potential statement in revenue recognition. Significant management judgement and precision is required to accurately recognise revenue on the different commercial assets. The component audit team based in the UAE with close oversight from the primary audit engagement team performed the following: • The appropriate recognition and timing of variation orders (VOs). We verified whether VOs recognised in revenue met the conditions prescribed under IAS 11. We discussed the judgements made in the timing of VOs being recognised. For assessed VOs still in negotiation for a significant period of time, we discussed with and challenged management on the likelihood of client approval and obtained representations where necessary. • The potential for liquidated damages. We analysed projects behind schedule and discussed with management the likelihood of the liquidated damages claims being levied. We obtained correspondence with clients and verified the consistency of application across contracts. • The adequacy of contingency provisions. We verified whether provision releases were recognised in line with Group accounting policy. We analysed contingency movements throughout the life of the contract and through discussion, challenged individual project directors on whether remaining contingency is sufficient to cover residual risks on the project. • Determination of the percentage of completion. We obtained an understanding of milestones agreed with the customers and systems in place to split the contracts into their component parts. We analysed the impact of VOs in establishing completion percentage. • Assessment of costs-to-complete. We tested controls around the cost estimation process, tested the historical accuracy of previous forecasts and discussed with project directors and cost controllers. We also verified that costs were correctly accrued at period end and costs-to-complete accurately reflected productivity and latest rates. Particular focus was placed on the Laggan- Tormore contract. • Accounting for consortium contracts. We obtained material contracts, tested the timing of revenue recognised and verified that correct joint arrangement accounting was applied. We investigated any legal disputes between consortium partners. • Contracts based on KPIs. We discussed management’s estimation of milestones and KPIs achieved and verified whether revenue was recognised in the correct period. • IES contracts – Where applicable, we reconciled barrels lifted per entitlement to revenue recognised on these assets. For tariff based remuneration structures, we vouched monthly revenue to the production data reports which determine revenue under the contract. For the risk services contract, we tested the related operating expenditure for the year which determines the revenue recognised on the operating phase of the contract. 110 / Petrofac Annual report and accounts 2015 21-Independent-auditors-report-p108-116-AN-070316.indd 110 07/03/2016 11:40 Risk Our response to the risk What we concluded to the Audit Committee We concluded that the results of impairment and fair value re-measurements in respect of IES assets and the JSD6000 are complete and accurate and that the carrying values presented at 31 December 2015 are materially correct. The primary audit team performed audit procedures on financial models for assets accounted at fair value and for those IES assets where impairment indications existed. We obtained the respective discounted cash flow models and tested key assumptions. • We compared forecast oil and gas price curves with the market data, and tested for reasonableness the longer term oil and gas prices; • We compared planned future operating and capital expenditure and production profiles with those used in prior periods and met with Company reserves assurance personnel to understand the key cost and reserve assumptions used; • We used an internal EY valuation specialist to assist with our consideration of the discount rate; • We identified key judgements in respect of the outcome of commercial negotiations and discussed with management and corroborated with written communication. We discussed with management and understood the future plans related to resuming construction of the JSD6000 and corroborated to recent documentation. We utilised taxation specialists in our London team to identify jurisdictions to be included in audit scope. We also involved local tax specialists in the relevant jurisdictions where we deemed it necessary. We identified and discussed tax exposures estimated by management, obtained the risk analysis associated with these exposures along with claims or assessments made by tax authorities to date. We also tested the calculation and disclosure of current and deferred tax to ensure compliance with local tax rules and the Group’s accounting policies. We corroborated management’s assessment of the likelihood of the realisation of deferred tax balances by analysing future business performance. We concluded that management’s judgements in relation to current and deferred income tax balances were sound and resulted in a materially correct presentation in the Group financial statements. Potential impairment and fair value change of IES assets and JSD6000 Refer to the Audit Committee Report (page 88); Accounting policies (page 128); and Note 5 of the Consolidated financial statements (page 138) IES assets The low oil price environment has a significant impact on the current and future financial performance of IES. It also influences the level of investment in the industry and demand for Petrofac services. The oil price is a key assumption in the oil and gas assets impairment testing and financial asset revaluations. In addition, the IES business has not met its stretching growth targets and in some cases has not performed in line with the initial investment case. This has impacted the recoverable amount of assets within the business. Operational challenges on certain IES projects have resulted in IES performance being weaker than forecast. JSD6000 Petrofac has terminated the construction contract for JSD6000 and is appraising proposals for an alternative shipyard, which poses a risk that the value of the vessel may not be recoverable if the project does not proceed. Taxation Refer to the Audit Committee Report (page 88); Accounting policies (page 132); and Note 7 of the Consolidated financial statements (page 139) The wide geographical spread of the Group’s operations, the complexity of application of local tax rules in many different jurisdictions and transfer pricing risks affecting the allocation of income and costs charged between jurisdictions and businesses increase the risk of misstatement of tax balances. The assessment of tax exposures by management requires judgement given the structure of individual contracts and the increasing activity of tax authorities in the jurisdictions in which Petrofac operates. Furthermore, the recognition of deferred tax assets and liabilities needs to be performed regularly to ensure that any changes in local tax laws and profitability of associated contracts are appropriately considered. 21-Independent-auditors-report-p108-116-AN-070316.indd 111 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 111 Financial statementsIndependent auditor’s report to the members of Petrofac Limited continued What we concluded to the Audit Committee We reported to the Committee at the August 2015 interim review that we were satisfied on qualitative and quantitative grounds, and after taking into account the level of disclosures made in the interim and full year financial statements, that no restatement was necessary. We updated this analysis and reached the same conclusion as at 31 December 2015. We reported that we concur with the Group’s disclosures in relation to the significant weakness in internal controls relating to this contract. In respect of liquidated damages, we are satisfied that judgement not to book a provision has been based on appropriate analysis and is reasonable in the circumstances. We have completed our planned procedures on the costs-to-complete and are satisfied that the basis upon which the contract losses have been calculated was rigorous and these losses are materially stated at 31 December 2015. Risk Our response to the risk Potential prior year adjustment We discussed and evaluated management’s quantitative and qualitative analysis of amounts relating to prior periods and, whilst judgemental, we considered that assessment to be reasonable. The estimated impact on profit before tax in the prior period was 4.5% to 9.5% before exceptional items. Further, we assessed the following qualitative factors: • The total losses on Laggan-Tormore, which at 31 December 2015 exceed US$600m • Impact on prior year net assets of 2.8% • The lack of impact on banking covenants, management remuneration, and historical trends and • The level of disclosure made by the Company in the interim and full year financial statements After considering carefully the nature and the quantum of the estimated amounts relating to prior period, and qualitative significance of the adjustment, we concurred with the directors that these amounts, whilst significant, were not material and the prior period financial statements did not require restating. The estimated impact on prior periods has been charged to the income statement in the current period and the Group has separately identified losses on this contract as a separate item. We concurred with this accounting treatment and with the detailed disclosures made in the financial statements about the impact of the misstatement on the prior periods’ financial statements. Internal controls We concur with the Company that there existed a significant deficiency in internal controls intended to mitigate material misstatements on the Laggan-Tormore contract. We have considered the mitigating actions taken and have assigned further resources to ensure these actions appropriately reduce the risk of further misstatements on this contract. Costs-to-complete We have also assigned further resources to audit, in detail, the costs-to-complete on this contract at year end. This includes obtaining detailed schedules, challenging key elements to the costs, including expected recoveries, reconciliation of vendor statements and holding discussions with senior management to corroborate the assumptions made. Liquidated damages We have discussed the likelihood of being levied with liquidated damages with senior management and the Audit Committee, and obtained supporting evidence for this judgement. Laggan-Tormore related matters Refer to the Audit Committee Report (page 88) and Note 2 of the Consolidated financial statements (page 125) Potential prior year restatement The Board commissioned KPMG to carry out a review of the circumstances leading up to the 19 April 2015 market update on the Laggan-Tormore project with a view to identifying the issues for consideration relating to the incremental losses and their effect on the prior year. The Group has stated in its financial statements that its losses on Laggan-Tormore recognised in the prior year were understated by between US$27m and US$57m after tax. The Directors have concluded that no restatement of the 2014 reported results is required. In reaching this conclusion, the Directors considered the quantum of the prior year overstatement of profit in conjunction with relevant qualitative considerations. These are further explained in note 2 to the financial statements. Internal controls In light of the challenges faced by the Company in concluding on the appropriate recognition of losses on the Laggan-Tormore contract, it was identified that this may represent a significant deficiency in internal controls. The Audit Committee has concluded that such a deficiency existed in 2015 and has implemented mitigating actions in the 2015 year end reporting process. Costs-to-complete As the contract is nearing completion at year end, and in light of the control weaknesses above, there is a heightened risk of material misstatement in determining the remaining costs-to-complete of the project at year end. Liquidated damages The Group has made a significant judgement in determining whether potential liquidated damages arising from contract delays will be successfully pursued by the customer, and no provision has been recorded in the current year. 112 / Petrofac Annual report and accounts 2015 21-Independent-auditors-report-p108-116-AN-070316.indd 112 07/03/2016 11:40 In the prior year, our auditor’s report included a risk of material misstatement in relation to initial recognition and determination of subsequent accounting at inception for contracts in the Integrated Energy Services segment of the business. In the current year, this risk has been removed because no new contracts have been entered into during 2015 which require determination of initial accounting. In the prior year, our auditor’s report included a risk of material misstatement in relation to revenue and margin recognition related to ECOM contracts only. In the current year, this revenue recognition risk has been expanded and now also includes revenue recognition of existing IES contracts. Due to the decreased level of materiality in the current year, IES contracts have a relatively greater significance to the financial statements. In the current year, we have also included a risk of potential impairment of the JSD6000 vessel due to the termination of the shipyard contract for this vessel in October. The scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements. We take into account size, risk profile, the organisation of the group and effectiveness of group-wide controls, changes in the business environment and other factors when assessing the level of work to be performed at each entity. In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of significant accounts in the financial statements, we selected 13 components covering entities within Jersey, Malaysia, Mexico, United Kingdom, Tunisia and the United Arab Emirates, which represent the principal business units within the Group. Of the 13 components selected, we performed an audit of the complete financial information of 8 components (“full scope components”) which were selected based on their size or risk characteristics. For another 2 components (“specific scope components”), we performed audit procedures on specific accounts within that component that we considered had the potential for the greatest impact on the significant accounts in the financial statements either because of the size of these accounts or their risk profile. For 1 component (“review scope component”), we primarily performed analytical procedures and inquiries of management. For the remaining 2 components (“specified procedures scope components”) we performed procedures on fixed assets and financial assets balances only. The audit scope for specified procedures are those where we perform procedures that address only specific account assertions rather than the account balance as a whole. The reporting components where we performed full scope audit procedures accounted for 89% (2014: 95%) of the Group’s profit before tax, Laggan-Tormore related losses and exceptional items, 90% (2014: 65%) of the Group’s revenue and 89% (2014: 76%) of the Group’s total assets. The audit scope of specific scope components did not include testing of all significant accounts of the component but will have contributed to the coverage of significant accounts tested for the Group. For the current year, the specific scope components accounted for 3% (2014: 24%) of the Group’s revenue. Of the remaining components that together represent 11% of the Group’s Profit before tax, Laggan Tormore related losses and exceptional items none are individually greater than 6% of the Group for this metric. For these components, we performed other procedures, including assessing and testing management’s group wide controls. We also performed analytical review on a component basis and tested consolidation journals to identify the existence of, and respond to, any further risks of misstatement that could have been material to the Group financial statements. The charts below illustrate the coverage obtained from the work performed by our audit teams. Profit before tax, Laggan Tormore related losses and exceptional items (%) Revenue (%) 16 (5) 3 7 Total assets (%) 2 9 89 90 89 Full scope components Specific scope components Other procedures Full scope components Specific scope components Other procedures Full scope components Specific scope components Other procedures 21-Independent-auditors-report-p108-116-AN-070316.indd 113 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 113 Financial statementsIndependent auditor’s report to the members of Petrofac Limited continued Changes from the prior year Our scope allocation in the current year is broadly consistent with 2014 in terms of overall coverage of the Group and the number of full and specific scope entities. However we have made some changes in the identity of components subject to full and specific scope audit procedures. Changes in our scope since the 2014 audit included moving the OPO business in the United Kingdom from a specific scope to a full audit scope component due to its higher proportional contribution to the Group in the current year. In light of decreased materiality, to ensure appropriate coverage of group audit risk related to revenue recognition from a quantitative and qualitative perspective the OPO Iraq business has been brought into scope as a specific scope component for revenue and cost of sales (and related balance sheet accounts) in the current year. Involvement with component teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at each of the components by us, as the primary audit engagement team, or by component auditors from other EY global network firms operating under our instruction. Audit procedures were performed on the 8 full scope components by our component audit teams in Dubai (4), Malaysia (2), Mexico (1) and Aberdeen (1). For the 2 specific scope and 2 specified procedures scope components, where the work was performed by component auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained as a basis for our opinion on the Group as a whole. The Group audit team continued to follow a programme of planned visits that has been designed to ensure that a senior member of the team visits each of the full audit scope locations at least once a year. During the current year’s audit cycle, visits were undertaken by the primary audit team (including a primary team audit partner) to the component teams in the United Arab Emirates (4 full scope and 1 specific scope component), Malaysia (2 full scope components) and Mexico (1 full scope component). The Global Team Planning Event was held in London with representatives of the teams from Aberdeen, United Arab Emirates, Mexico and Malaysia all attending. Dependent on the timing of our visits, these involved discussion of the audit approach with the component team and any issues arising from their work, consideration of the approach to revenue recognition, reviewing key working papers, attending the audit planning meeting and attending the audit closing meeting, including the discussion of fraud and error. In concluding the year end audit the primary team visited the main operating and finance location in Sharjah, UAE to perform the audit of the consolidation and financial statements and to interact closely with the local team. The primary team interacted regularly with the component teams where appropriate during various stages of the audit, reviewed key working papers and were responsible for the scope and direction of the audit process. This, together with the additional procedures performed at Group level, gave us appropriate evidence for our opinion on the Group financial statements. Our application of materiality The scope of our work is influenced by materiality. We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion. Materiality For the purposes of determining whether the financial statements are free from material misstatement, we define materiality as the magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures. We determined materiality for the Group to be US$25m (2014: US$30m), which represented 5% (2014: 5%) of adjusted profit before tax. We believe that adjusting for the items described below provides us with a consistent year on year basis for determining materiality and is appropriate in the light of the volatile market conditions, driven by the extended decline in oil prices and exceptional cost overruns on Laggan-Tormore contract. For 2015, these non-recurring items related to exceptional items and certain re-measurements of US$355m (refer to Note 5 of the financial statements) and Laggan-Tormore relates losses of US$480m (refer to Note 3 of the financial statements). These two items are subject to a combination of full scope audit procedures and specified procedures. Starting basis Reported pre-tax (loss)/proﬁt – US$(335)m (2014: US$171m) Adjustments • Exceptional items increase basis by US$835m (2014: US$429m) • Laggan-Tormore relates losses – US$480m • Exceptional items and certain re-measurements – US$355m Materiality • Totals US$500m (2014: US$600m) • Materiality of US$25m (2014: US$30m) (5% of materaility basis) 114 / Petrofac Annual report and accounts 2015 21-Independent-auditors-report-p108-116-AN-070316.indd 114 07/03/2016 11:40 Performance materiality The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality. On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that performance materiality was 50% (2014: 50%) of our planning materiality, namely US$12.5m (2014: US$15m). We have set performance materiality at this percentage due to our past experience of the audit that indicate a higher risk of misstatements, both corrected and uncorrected. Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated to components was US$2.5m to US$10.0m (2014: US$3.8m to US$10.7m). Reporting threshold An amount below which identified misstatements are considered as being clearly trivial. We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of US$1.25m (2014: US$1.5m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. Reclassification differences are only reported to the Audit Committee where the difference exceeds 2% of the applicable primary financial statement line items. We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; nd the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Respective responsibilities of directors and auditor As explained more fully in the Directors’ Responsibilities Statement set out on page 107, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. In addition the Company has also instructed us to: • report as to whether the information given in the Corporate Governance Statement with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements; • report whether the information given in the Strategic Report is consistent with the Group financial statements; • report whether the section of the Directors’ Remuneration Report that is described as audited has been properly prepared in accordance with the basis of preparation described therein; and • review the Directors’ statement in relation to going concern as set out on page 107, and longer-term viability, as set out on page 29 which for a premium listed UK incorporated company is specified for review by the Listing Rules of the Financial Conduct Authority. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 21-Independent-auditors-report-p108-116-AN-070316.indd 115 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 115 Financial statementsIndependent auditor’s report to the members of Petrofac Limited continued Matters on which we are required to report by exception ISAs (UK and Ireland) reporting We are required to report to you if, in our opinion, financial and non-financial information in the annual report is: • materially inconsistent with the information in the audited financial statements; or • apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or • otherwise misleading. In particular, we are required to report whether we have identified any inconsistencies between our knowledge acquired in the course of performing the audit and the directors’ statement that they consider the annual report and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the entity’s performance, business model and strategy; and whether the annual report appropriately addresses those matters that we communicated to the audit committee that we consider should have been disclosed. Under Companies (Jersey) Law 1991 we are required to report to you if, in our opinion: • proper accounting records have not been kept by the parent company, or proper returns adequate for our audit have not been received from branches not visited by us; or • the parent company’s financial statements are not in agreement with the accounting records and returns; or • we have not received all the information and explanations we require for our audit. The Company has voluntarily complied with, and has instructed us to review: • the Directors’ statement in relation to going concern, set out on page 107, and longer-term viability, set out on page 29. This statement is specified for review by the Listing Rules of the Financial Conduct Authority for premium listed UK incorporated companies. We are required to review: • the part of the Corporate Governance Statement relating to the Company’s compliance with the provisions of the UK Corporate Governance Code specified for our review. Companies (Jersey) Law 1991 reporting Listing Rules review requirements We have no exceptions to report. We have no exceptions to report. We have no exceptions to report. Statement on the Directors’ Assessment of the Principal Risks that Would Threaten the Solvency or Liquidity of the Entity ISAs (UK and Ireland) reporting We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to: • the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity; • the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated; • the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and • the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. We have nothing material to add or to draw attention to. John Flaherty for and on behalf of Ernst & Young LLP London 23 February 2016 Notes: 1. The maintenance and integrity of the Petrofac Limited web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site. 2. Legislation in Jersey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 116 / Petrofac Annual report and accounts 2015 21-Independent-auditors-report-p108-116-AN-070316.indd 116 07/03/2016 11:40 117 Consolidated income statement For the year ended 31 December 2015 Consolidated income statement For the year ended 31 December 2015 Revenue Cost of sales Gross profit Selling, general and administration expenses Exceptional items and certain re- measurements Other operating income Other operating expenses Profit/(loss) from operations before tax and finance (costs)/income Finance costs Finance income Share of profits/(losses) of associates/joint ventures Profit/(loss) before tax Income tax (expense)/credit Profit/(loss) for the year Notes 4a 4b 4c 5 4f 4g 6 6 14 7a Attributable to: Petrofac Limited shareholders Non-controlling interests 11 Earnings/(loss) per share (US cents) on profit attributable to Petrofac Limited shareholders *Business performance US$m 6,844 (6,429) 415 (328) – 24 (9) 102 (101) 9 10 20 (6) 14 9 5 14 Exceptional items and certain re-measurements US$m – – – – Total 2015 US$m 6,844 (6,429) 415 *Business performance US$m 6,241 (5,242) 999 (328) (368) (354) (354) – – (354) – – (1) (355) (3) (358) (358) – (358) 24 (9) (252) (101) 9 9 (335) (9) (344) (349) 5 (344) – 95 (42) 684 (79) 22 7 634 (33) 601 581 20 601 Exceptional items and certain re-measurements US$m – – – – (463) – – (463) – – – (463) 2 (461) (461) – (461) Total 2014 US$m 6,241 (5,242) 999 (368) (463) 95 (42) 221 (79) 22 7 171 (31) 140 120 20 140 – Basic – Diluted 8 8 2.65 2.65 (105.30) (105.30) (102.65) (102.65) 170.38 168.99 (135.29) (134.18) 35.09 34.81 * This measurement is shown by Petrofac as it is used as a means of measuring the underlying performance of the business, see note 2. The attached notes 1 to 32 form part of these consolidated financial statements. 22-Financials-Shareholder-p117-185-AN-070316.indd 117 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 117 Financial statements 118 Consolidated statement of other comprehensive income For the year ended 31 December 2015 Consolidated statement of other comprehensive income For the year ended 31 December 2015 (Loss)/profit for the year Other Comprehensive Income Net gain on maturity of cash flow hedges recycled in the year Net changes in fair value of derivatives and financial assets designated as cash flow hedges Changes in fair value of available-for-sale financial asset Foreign currency translation losses Other comprehensive loss to be reclassified to consolidated income statement in subsequent periods Total comprehensive (loss)/income for the year Attributable to: Petrofac Limited shareholders Non-controlling interests The attached notes 1 to 32 form part of these consolidated financial statements. Notes 2015 US$m (344) 2014 US$m 140 24 24 24 24 11 (11) (47) (16) – (74) (418) (415) (3) (418) (14) (21) – (22) (57) 83 76 7 83 118 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 118 07/03/2016 11:40 119 Consolidated statement of financial position At 31 December 2015 Consolidated statement of financial position At 31 December 2015 Assets Non-current assets Property, plant and equipment Goodwill Intangible assets Investments in associates/joint ventures Available-for-sale investment Other financial assets Income tax receivable Deferred tax assets Current assets Inventories Work in progress Trade and other receivables Due from related parties Other financial assets Income tax receivable Cash and short-term deposits Total assets Equity and liabilities Equity Share capital Share premium Capital redemption reserve Treasury shares Other reserves Retained earnings Equity attributable to Petrofac Limited shareholders Non-controlling interests Total equity Non-current liabilities Interest-bearing loans and borrowings Provisions Other financial liabilities Deferred tax liabilities Current liabilities Trade and other payables Due to related parties Interest-bearing loans and borrowings Other financial liabilities Income tax payable Billings in excess of cost and estimated earnings Accrued contract expenses Total liabilities Total equity and liabilities Notes 2015 US$m 2014 US$m 10 12 13 14 15 16 7c 17 18 19 29 16 20 21 21 21 22 24 11 25 26 16 7c 27 29 25 16 18 30 1,775 1,698 80 107 74 169 752 8 80 115 186 71 185 790 9 34 3,045 3,088 13 1,794 2,124 2 455 10 1,104 5,502 8,547 7 4 11 (111) (16) 1,335 1,230 2 1,232 16 1,602 2,783 2 435 18 986 5,842 8,930 7 4 11 (101) 31 1,909 1,861 10 1,871 1,270 1,710 331 659 141 273 756 151 2,401 2,890 2,510 2,670 1 520 336 113 201 1,233 4,914 7,315 8,547 3 9 317 105 265 800 4,169 7,059 8,930 The financial statements on pages 117 to 167 were approved by the Board of Directors on 23 February 2016 and signed on its behalf by Tim Weller – Chief Financial Officer. The attached notes 1 to 32 form part of these consolidated financial statements. Petrofac Annual report and accounts 2015 / 119 22-Financials-Shareholder-p117-185-AN-070316.indd 119 07/03/2016 11:40 Financial statements 120 Consolidated statement of cash flows For the year ended 31 December 2015 Consolidated statement of cash flows For the year ended 31 December 2015 Notes 2015 US$m 2014 US$m Operating activities (Loss)/profit before tax Exceptional items and certain re-measurements Profit before tax, exceptional items and certain re-measurements Adjustments to reconcile profit before tax, exceptional items and certain re-measurements to net cash flows: Depreciation, amortisation and write off Share-based payments Difference between other long-term employment benefits paid and amounts recognised in the income statement Net finance expense Gain arising from disposal of non-current asset Provision for costs in excess of revenues on a contract Share of profits of associates/joint ventures Other non-cash items, net 5 4b, 4c 4d 26 6 4f 30 14 Working capital adjustments: Trade and other receivables Work in progress Due from related parties Inventories Other current financial assets Trade and other payables Billings in excess of cost and estimated earnings Accrued contract expenses Due to related parties Long-term receivables from customers Other non-current items, net Cash generated from operations Restructuring, redundancy and migration costs paid Interest paid Income taxes paid, net Net cash flows from operating activities Investing activities Purchase of property, plant and equipment Payments for intangible oil and gas assets Loan extended to an associate/investments in associate and joint ventures Dividend received from associates/joint ventures Loan in respect of the development of the Greater Stella Area Proceeds from disposal of property, plant and equipment Proceeds from disposal of subsidiary, net of cash disposed Proceeds from repayments of loans on disposal of subsidiary Interest received Net cash flows used in investing activities Financing activities Interest-bearing loans and borrowings obtained, net of debt acquisition cost Repayment of interest-bearing loans and borrowings, including finance leases Treasury shares purchased Equity dividends paid, net Net cash flows (used in)/from financing activities Net increase in cash and cash equivalents Net foreign exchange difference Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December The attached notes 1 to 32 form part of these consolidated financial statements. 120 / Petrofac Annual report and accounts 2015 16 16 13 14 14 16 4f 4f 22 20 (335) 355 20 200 23 15 92 (8) 48 (10) (67) 313 605 (192) (2) 3 55 (168) (64) 367 (2) 915 (50) (38) 827 (13) (96) (49) 669 (169) (17) (2) 8 (182) 2 41 – 1 (318) 171 463 634 244 22 8 57 (56) 27 (7) (16) 913 (407) (129) 26 – 131 441 11 (93) (40) 853 (63) – 790 – (66) (76) 648 (470) (119) (13) 10 (199) 2 39 220 2 (528) 985 (943) (39) (223) (220) 131 (7) 977 1,101 1,696 (1,172) (25) (225) 274 394 (2) 585 977 22-Financials-Shareholder-p117-185-AN-070316.indd 120 07/03/2016 11:40 121 Consolidated statement of changes in equity For the year ended 31 December 2015 Consolidated statement of changes in equity For the year ended 31 December 2015 Attributable to Petrofac Limited shareholders Issued share capital US$m Share premium US$m Capital redemption reserve US$m *Treasury shares US$m (note 22) Other reserves US$m (note 24) Retained earnings US$m Non- controlling interests US$m Total US$m Total equity US$m Balance at 1 January 2015 (Loss)/profit for the year Other comprehensive loss Total comprehensive loss for the year Share-based payments charge (note 23) Shares vested during the year (note 22) Transfer to reserve for share-based payments (note 23) Treasury shares purchased (note 22) Income tax on share-based payments reserve Dividends (note 9) Balance at 31 December 2015 7 – – – – – – – – – 7 4 – – – – – – – – – 4 11 (101) 31 1,909 1,861 10 1,871 – – – – – – – – – – – – – 29 – (39) – – – (66) (66) 23 (27) 23 – – – (349) – (349) – (2) – – – (349) (66) (415) 23 – 23 (39) – (223) (223) 11 (111) (16) 1,335 1,230 5 (8) (3) – – – – – (5) 2 (344) (74) (418) 23 – 23 (39) – (228) 1,232 Attributable to Petrofac Limited shareholders Issued share capital US$m Share premium US$m Capital redemption reserve US$m *Treasury shares US$m (note 22) Other reserves US$m (note 24) Retained earnings US$m Non- controlling interests US$m Total US$m Total equity US$m Balance at 1 January 2014 Profit for the year Other comprehensive loss Total comprehensive income for the year Share-based payments charge (note 23) Shares vested during the year (note 22) Transfer to reserve for share-based payments (note 23) Treasury shares purchased (note 22) Income tax on share-based payments reserve Dividends (note 9) Balance at 31 December 2014 7 – – – – – – – – – 7 4 – – – – – – – – – 4 11 (110) 63 2,014 1,989 3 1,992 – – – – – – – – – – – – – 34 – (25) – – – (44) (44) 22 (33) 24 – (1) – 120 – 120 – (1) – – – 120 (44) 76 22 – 24 (25) (1) (224) (224) 20 (13) 7 – – – – – – 140 (57) 83 22 – 24 (25) (1) (224) 11 (101) 31 1,909 1,861 10 1,871 * Shares held by Petrofac Employee Benefit Trust and Petrofac Joint Venture Companies Employee Benefit Trust. The attached notes 1 to 32 form part of these consolidated financial statements. 22-Financials-Shareholder-p117-185-AN-070316.indd 121 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 121 Financial statements 122 Notes to the consolidated financial statements For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 1 Corporate information The consolidated financial statements of Petrofac Limited and its subsidiaries (collectively, the Group) for the year ended 31 December 2015 were authorised for issue in accordance with a resolution of the Directors on 23 February 2016. Petrofac Limited (the ‘Company’) is a limited liability company registered and domiciled in Jersey under the Companies (Jersey) Law 1991 and is the holding company for the international group of Petrofac subsidiaries. The Company’s 31 December 2015 financial statements are shown on pages 169 to 184. The Group’s principal activity is the provision of services to the oil and gas production and processing industry. Information on the Group’s subsidiaries and joint ventures is contained in note 32 to these consolidated financial statements. Information on other related party relationships of the Group is provided in note 29. 2 Summary of significant accounting policies Basis of preparation The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and applicable requirements of Jersey law. The consolidated financial statements have been prepared on a historical cost basis, except for available-for-sale (AFS) financial assets, derivative financial instruments, financial assets held at fair value through profit and loss and contingent consideration that have been measured at fair value. Certain items of inventory are carried at net realisable value. The consolidated financial statements are presented in United States dollars and all values are rounded to the nearest million (US$m), except when otherwise indicated. Basis of consolidation The consolidated financial statements comprise the financial statements of Petrofac Limited and its subsidiaries as at 31 December 2015. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including: • The contractual arrangement with the other vote holders of the investee • Rights arising from other contractual arrangements • The Group’s voting rights and potential voting rights The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary. Profit or loss and each component of other comprehensive income (OCI) are attributed to the Petrofac Limited shareholders and to the non- controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value. Presentation of results Petrofac presents its results in the income statement to identify separately the contribution of impairments, certain re-measurements, restructuring and redundancy costs, contract migration costs and material deferred tax movements arising due to foreign exchange differences in jurisdictions where tax is computed based on the functional currency of the country in order to provide readers with a clear and consistent presentation of the underlying operating performance of the Group’s ongoing business. New standards and interpretations The Group has adopted new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2015. Although these new standards and amendments apply for the first time in 2015, they do not have a material impact on the consolidated financial statements of the Group. Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Group’s consolidated financial statements are listed below and include only those standards and interpretations that are likely to have an impact on the disclosures, financial position or performance of the Group at a future date. The Group intends to adopt these standards when they become effective. IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. IFRS 9 brings together all three aspects of the accounting for financial instruments project: classification and measurement, impairment and hedge accounting. IFRS 9 is effective for annual periods beginning on or after 1 January 2018, with early application permitted. Except for hedge accounting, retrospective application is required but providing comparative information is not compulsory. For hedge accounting, the requirements are generally applied prospectively, with some limited exceptions. The adoption of IFRS 9 will have an effect on the classification and measurement of the Group’s financial assets and financial liabilities. The Group is currently assessing the impact of IFRS 9 and plans to adopt the new standard on the required effective date. IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and will supersede all current revenue recognition requirements under IFRS (e.g. IAS 11 Construction Contracts, IAS 18 Revenue and IFRIC 18 Transfers of Assets from Customers). The new standard will be applied using a five-step model and a core principle of recognising revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer. The principles in IFRS 15 are more prescriptive and provide a more structured approach to measuring and recognising revenue. Either a full or modified retrospective application is required for annual periods beginning on or after 1 January 2018. Early adoption is permitted. The Group is currently 122 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 122 07/03/2016 13:59 123 assessing the impact of IFRS 15 and plans to adopt the new standard on the required effective date. Amendments to IFRS 11 Joint Arrangements: Accounting for Acquisitions of Interests The amendments to IFRS 11 require that a joint operator accounting for the acquisition of an interest in a joint operation, in which the activity of the joint operation constitutes a business, must apply the relevant IFRS 3 principles for business combinations accounting. The amendments also clarify that a previously held interest in a joint operation is not re- measured on the acquisition of an additional interest in the same joint operation while joint control is retained. In addition, a scope exclusion has been added to IFRS 11 to specify that the amendments do not apply when the parties sharing joint control, including the reporting entity, are under common control of the same ultimate controlling party. The amendments apply to both the acquisition of the initial interest in a joint operation and the acquisition of any additional interests in the same joint operation and are prospectively effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group, however they will be applied to any future transactions. Amendments to IAS 16 and IAS 38: Clarification of Acceptable Methods of Depreciation and Amortisation The amendments clarify the principle in IAS 16 and IAS 38 that revenue reflects a pattern of economic benefits that are generated from operating a business (of which the asset is part) rather than the economic benefits that are consumed through use of the asset. As a result, a revenue- based method cannot be used to depreciate property, plant and equipment and may only be used in very limited circumstances to amortise intangible assets. The amendments are effective prospectively for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are expected to impact the Group’s Production Enhancement Contracts (PECs) in Mexico, given that the Group is in the process of migrating its current PECs to Production Sharing Contracts in near future, therefore the impact is not considered to be material. Amendments to IFRS 10 and IAS 28: Sale or Contribution of Assets between an Investor and its Associate or Joint Venture The amendments address the conflict between IFRS 10 and IAS 28 in dealing with the loss of control of a subsidiary that is sold or contributed to an associate or joint venture. The amendments clarify that the gain or loss resulting from the sale or contribution of assets that constitute a business, as defined in IFRS 3, between an investor and its associate or joint venture, is recognised in full. Any gain or loss resulting from the sale or contribution of assets that do not constitute a business, however, is recognised only to the extent of unrelated investors’ interests in the associate or joint venture. These amendments must be applied prospectively and are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments are not expected to have any impact on the Group, however they will be applied to any future transactions. Significant accounting judgements and estimates Judgements In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect on the amounts recognised in the consolidated financial statements: • Revenue recognition on fixed-price engineering, procurement and construction contracts: the Group recognises revenue on fixed- price engineering, procurement and construction contracts using the percentage-of-completion method, based on surveys of work performed. The Group has determined this basis of revenue recognition is the best available measure of progress on such contracts • Revenue recognition on consortium contracts: the Group recognises its share of revenue and backlog revenue from contracts agreed as part of a consortium. The Group uses the percentage-of-completion method based on surveys of work performed to recognise revenue for the period and then recognises their share of revenue and costs as per the agreed consortium contractual arrangement. In selecting the appropriate accounting treatment, the main considerations are: (cid:1) Determination of whether the joint arrangement is a joint venture or joint operation (though not directly related to revenue recognition this element has a material impact on the presentation of revenue for each project) (cid:1) At what point can the revenues, costs and margin from this type of service contract be estimated/reliably measured in accordance with IAS 11; and (cid:1) Whether there are any other remaining features unique to the contract that are relevant to the assessment In selecting the most relevant and reliable accounting policies for IES contracts the main considerations are as follows: • Determination of whether the joint arrangement is a joint venture or joint operation; though not directly related to revenue recognition this element has a material impact on the presentation of revenue for each project • Whether the multiple service elements under the contract should be bifurcated such as construction phase followed by an operations and maintenance stage • Whether the Group has legal rights to the production output and therefore is able to book reserves in respect of the project • The nature and extent, if any, of volume and price financial exposures under the terms of the contract • The extent to which the Group’s capital investment is at risk and the mechanism for recoverability under the terms of the contract • At what point can the revenues from each type of contract be estimated/reliably measured in accordance with IAS 18 • Whether there are any other remaining features unique to the contract that are relevant to the assessment Revenue recognition on Integrated Energy Services (IES) contracts: • The Group assesses on a case by case basis the most appropriate treatment for its various commercial structures which include Risk Service Contracts, Production Enhancement Contracts and Equity Upstream Investments including Production Sharing Contracts (see accounting policies note on page 131 for further details) Statement of financial position classification of Integrated Energy Services (IES) contracts: • The Group assesses on a case by case basis the most appropriate balance sheet classification of its Risk Service Contracts, Production Enhancement Contracts and Equity upstream investments (see accounting policy notes on page 131) • In selecting the most appropriate policies for IES contracts the main judgements are as follows: (cid:1) The Greater Stella Area (GSA) asset is treated in the consolidated statement of financial position as a financial asset and measured through profit and loss on the basis that there is currently a short- term loan receivable from the consortium partners to fund Petrofac’s share of the field development costs which cannot be converted to a 20% equity share in the GSA licence until the start of production from the field and DECC approval for Petrofac to acquire this interest in the asset. We believe this classification most accurately reflects the risks borne throughout the development of GSA and allows ongoing revaluation to its expected conversion value to property, plant and equipment at the date Petrofac is formally recognised on the licence 22-Financials-Shareholder-p117-185-AN-070316.indd 123 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 123 Financial statements 124 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 • Deferred tax assets: the Group recognises deferred tax assets on all applicable temporary differences where it is probable that future taxable profits will be available for utilisation. This requires management to make judgements and assumptions regarding the amount of deferred tax that can be recognised based on the magnitude and likelihood of future taxable profits. The carrying amount of deferred tax assets at 31 December 2015 was US$80m (2014: US$34m) • Contingent consideration: the Group assesses the amount of consideration receivable on disposal of non-current assets which requires the estimation of the fair value of additional consideration receivable from third parties. Where it is considered probable that such consideration is due to the Group, these amounts are recognised as receivable. At 31 December 2015 US$nil was recognised as a due receivable (2014: US$34m) • Income tax: the Company and its subsidiaries are subject to routine tax audits and also a process whereby tax computations are discussed and agreed with the appropriate authorities. Whilst the ultimate outcome of such tax audits and discussions cannot be determined with certainty, management estimates the level of provisions required for both current and deferred tax on the basis of professional advice and the nature of current discussions with the tax authority concerned • Recoverable value of property, plant and equipment, intangible oil and gas assets, other intangible assets and other financial assets: the Group determines at each reporting date whether there is any evidence of indicators of impairment in the carrying value of its property, plant and equipment, intangible oil and gas assets, other intangible assets and other financial assets. Where indicators exist, an impairment test is undertaken which requires management to estimate the recoverable value of its assets which is initially based on its value in use. When necessary, fair value less costs of disposal is estimated, for example by reference to quoted market values, similar arm's length transactions involving these assets or risk adjusted discounted cash flow models. For certain oil and gas assets, where impairment triggers were identified, the recoverable amounts for these assets were estimated using fair value less costs of disposal discounted cash flow models. In relation to impairment testing performed for the Mexican PEC assets which have a combined carrying value of US$642m at 31 December 2015, assumptions were made in determining the expected outcome of ongoing contractual negotiations in respect of the planned migration to PSC type arrangements. These include the expected working interest in the PSC and financial and fiscal terms achieved. The determination of the recoverable amount of the JSD6000 under construction involved assumptions in respect of the remaining capital cost of the project, forecast market conditions, achievable market share and the timing of re-commencement of construction. In 2015 there were pre-tax impairment charges and fair value re-measurements of US$274m (2014: US$415m) post-tax US$254m (2014: US$413m) which are explained in note 5. The key sources of estimation uncertainty for these tests are consistent with those disclosed in notes 5 and 12 • Units of production depreciation: estimated proven plus probable reserves are used in determining the depreciation of oil and gas assets such that the depreciation charge is proportional to the depletion of the remaining reserves over the shorter of: life of the field or the end of the respective licence/concession period. These calculations require the use of estimates including the amount of economically recoverable reserves and future oil and gas capital expenditure 2 Summary of significant accounting policies continued (cid:1) The Mexican and Romanian PEC assets are classified as tangible oil and gas assets in the consolidated statement of financial position as they have direct exposure to variable field production levels, and indirect exposure to changes in commodity prices. These exposures impact the generation of cash from the assets and any financial return thereon, including the risk of negative financial return. We believe this classification is most appropriate due to the nature of expenditure and it is aligned with our treatment in respect of PSC type arrangements where the risk/reward profile is similar (cid:1) The Berantai Risk Services contract (RSC) is treated as a financial asset receivable in the consolidated statement of financial position and measured at fair value through profit and loss – a designation made at inception. This classification was selected as most appropriate due to the lower exposure to risk as would typically be the case for a greenfield hydrocarbon development. As such it was determined that classification as property, plant and equipment was not appropriate. We believe this designation also results in more relevant information than the other financial asset categories, as it recognises directly in the income statement any changes in value of the project based on our performance against the key performance indicators in the contract (see accounting policies on page 129) Estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: • Provisions for liquidated damages claims (LDs): the Group provides for LD claims where there have been significant contract delays and it is considered probable that the customer will successfully pursue such a claim. This requires an estimate of the amount of LDs payable under a claim which involves a number of management judgements and assumptions regarding the amounts to recognise • Project cost to complete estimates: at each reporting date the Group is required to estimate costs to complete on fixed-price contracts. Estimating costs to complete on such contracts requires the Group to make estimates of future costs to be incurred, based on work to be performed beyond the reporting date. This estimate will impact revenues, cost of sales, work-in-progress, billings in excess of costs and estimated earnings and accrued contract expenses • Recognition of contract variation orders (VOs): the Group recognises revenues and margins from VOs where it is considered probable that they will be awarded by the customer and this requires management to assess the likelihood of such an award being made by reference to customer communications and other forms of documentary evidence • Onerous contract provisions: the Group provides for future losses on long-term contracts where it is considered probable that the contract costs are likely to exceed revenues in future years. Estimating these future losses involves a number of assumptions about the achievement of contract performance targets and the likely levels of future cost escalation over time. US$71m was outstanding at 31 December 2015 (2014: US$57m) • Impairment of goodwill: the Group determines whether goodwill is impaired at least on an annual basis. This requires an estimation of the value in use of the cash-generating units to which the goodwill is allocated. Estimating the value in use requires the Group to make an estimate of the expected future cash flows from each cash-generating unit and also to determine a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill at 31 December 2015 was US$80m (2014: US$115m) (note 12) 124 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 124 07/03/2016 11:40 125 • Decommissioning costs: the recognition and measurement of decommissioning provisions involves the use of estimates and assumptions which include the existence of an obligation to dismantle and remove a facility or restore the site on which it is located, the appropriate discount and inflation rates to use in determining the net present value of the liability, the estimated costs of decommissioning based on internal and external estimates and the payment dates for expected decommissioning costs. As a result, actual costs could differ from estimated cost estimates used to provide for decommissioning obligations. The provision for decommissioning at 31 December 2015 of US$230m (2014: US$189m) represents management’s best estimate of the present value of the future decommissioning costs required Potential prior year restatement of the Group's year end 31 December 2014 reported results In the 31 December 2014 consolidated financial statements authorised for issue on 25 February 2015, the Group recognised a loss in respect of Laggan-Tormore of US$230m for the year ended 31 December 2014, taking cumulative losses on the project to US$180m (given that an amount of US$50m had been recognised as profits in respect of the project in the years prior to 2014). The loss recorded in 2014 was based on a total cost-to-complete forecast prepared by site management and reviewed and approved by the senior OEC leadership team in January 2015. On 19 April 2015, the Group announced an additional loss in respect of Laggan-Tormore of US$195m based on a revised cost-to-complete forecast reviewed by the Board on 18 April 2015. Given the scale of these incremental losses and the proximity of the timing of the market update to our year-end results announcement, the Board has considered whether any of the incremental losses should have been recognised at the time of the preparation of the 2014 accounts and be accounted for as a prior year adjustment. As a result, the Board commissioned KPMG to carry out a review of the circumstances leading up to the 19 April 2015 market update with a view to identifying the issues for consideration relating to the incremental losses. The Audit Committee, on behalf of the Board, has evaluated the report prepared by KPMG and considered management’s recommendation with regard to the need to restate the Group’s 2014 results. Management determined that the range of over-statement of 2014 profit after tax is US$27m to US$57m. There is no effect on cash flows and the balance sheet impact is immaterial. The Directors have concluded that no restatement of the 2014 reported results is required. In reaching this conclusion, the Directors considered the quantum of the prior year overstatement of profit in conjunction with relevant qualitative considerations. Specifically, the amount of the restatement is only a component of total post-tax losses now incurred on the contract of US$608m and in the context of these total contract losses the Directors do not consider that correcting the prior year to reflect an earlier recognition of this element of the contract loss is material to users of the financial statements. The Directors also assessed the disclosures made on Laggan-Tormore by the Group and the impact on each of the Group’s financial highlights as reported for 2014 and in these consolidated financial statements in reaching the conclusion. Provision for potential liquidated damages claims (LDs) in respect of the Laggan-Tormore contract The Group provides for LD claims where there have been significant contract delays and it is considered probable that the customer will successfully pursue such a claim. This requires an estimate of the amount of LDs contractually payable under a claim, and the likelihood that any amount will be levied. This involves a number of management judgements and assumptions regarding the appropriate amounts to recognise. The delay in commissioning the Laggan-Tormore plant in Shetland could result in a claim for liquidated damages under the contract with our client, Total. No provision has been recorded for any potential claim as management believes that liquidated damages are not likely to be claimed as the revised completion schedule has now been achieved and the gas plant has been successfully handed over in line with our client’s expectation. Investment in associates and joint ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. A joint operation is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets and obligations for the liabilities relating to the arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Group’s investments in its associate and joint venture are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Group’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. The consolidated income statement reflects the Group’s share of the results of operations of the associate or joint venture. Any change in OCI of those investees is presented as part of the Group’s OCI. In addition, when there has been a change recognised directly in the equity of the associate or joint venture, the Group recognises its share of any changes, when applicable, in the statement of changes in equity. The aggregate of the Group’s share of profit or loss of an associate and a joint venture is shown on the face of the consolidated income statement outside operating profit and represents profit or loss after tax and non- controlling interests in the subsidiaries of the associate or joint venture. Any unrealised gains and losses resulting from transactions between the Group and the associate and joint venture are eliminated to the extent of the interest in its associates and joint ventures. The financial statements of the associate or joint venture are prepared for the same reporting period as the Group. When necessary, adjustments are made to bring the accounting policies in line with those of the Group. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss on its investment in its associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value and recognises any loss as an exceptional item in the consolidated income statement. Petrofac Annual report and accounts 2015 / 125 22-Financials-Shareholder-p117-185-AN-070316.indd 125 07/03/2016 11:40 Financial statements 126 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 2 Summary of significant accounting policies continued Upon loss of significant influence over the associate or joint control over the joint venture, the Group measures and recognises any retained investment at its fair value. Any difference between the carrying amount of the associate or joint venture upon loss of significant influence or joint control and the fair value of the retained investment and proceeds from disposal is recognised in the consolidated income statement. Joint operations The Group’s interests in joint operations are recognised in relation to its interest in a joint operation’s: • Assets, including its share of any assets held jointly • Liabilities, including its share of any liabilities incurred jointly • Revenue from the sale of its share of the output arising from the joint operation • Share of the revenue from the sale of the output by the joint operation • Expenses, including its share of any expenses incurred jointly Under joint operations, the expenses that the Group incurs and its share of the revenue earned is recognised in the consolidated income statement. Assets controlled by the Group and liabilities incurred by it are recognised in the consolidated statement of financial position. Foreign currency translation The Group’s consolidated financial statements are presented in US dollars, which is also the parent company’s functional currency. For each entity, the Group determines the functional currency and items included in the financial statements of each entity are measured using that functional currency. The Group uses the direct method of consolidation and on disposal of a foreign operation, the gain or loss that is reclassified to profit or loss reflects the amount that arises from using this method. Transactions and balances Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss with the exception of monetary items that are designated as part of the hedge of the Group’s net investment of a foreign operation. These are recognised in OCI until the net investment is disposed of, at which time the cumulative amount is reclassified to profit or loss. Tax charges and credits attributable to exchange differences on those monetary items are also recorded in OCI. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of the gain or loss on the change in fair value of the item (i.e., translation differences on items whose fair value gain or loss is recognised in OCI or profit or loss are also recognised in OCI or profit or loss, respectively). Group companies On consolidation, the assets and liabilities of foreign operations are translated into United States dollars at the rate of exchange prevailing at the reporting date and their statements of profit or loss are translated at exchange rates prevailing at the dates of the transactions. The exchange differences arising on translation for consolidation are recognised in OCI. On disposal of a foreign operation, the component of OCI relating to that particular foreign operation is recognised in the consolidated income statement. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the spot rate of exchange at the reporting date. Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value. Cost comprises the purchase price or construction cost and any costs directly attributable to making that asset capable of operating as intended. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset. Depreciation is provided on a straight-line basis, other than on oil and gas assets, at the following rates: 10% – 12.5% Oil and gas facilities Plant and equipment 4% – 33% Buildings and leasehold improvements 5% – 33% Office furniture and equipment Vehicles (or lease term if shorter) 25% – 50% 20% – 33% Tangible oil and gas assets are depreciated, on a field-by-field basis, using the unit-of-production method based on entitlement to proven and probable reserves, taking account of estimated future development expenditure relating to those reserves; refer to page 45 for life of these fields. Each asset’s estimated useful life, residual value and method of depreciation are reviewed and adjusted if appropriate at each financial year end. No depreciation is charged on land or assets under construction. The carrying amount of an item of property, plant and equipment is derecognised on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from the de-recognition of an item of property, plant and equipment is included in the consolidated income statement when the item is derecognised. Gains are not classified as revenue. Non-current assets held for sale Non-current assets or disposal groups are classified as held for sale when it is expected that the carrying amount of an asset will be recovered principally through sale rather than continuing use. Assets are not depreciated when classified as held for sale. Borrowing costs Borrowing costs directly attributable to the construction of qualifying assets, which are assets that necessarily take a substantial period of time to prepare for their intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use. All other borrowing costs are recognised as interest payable in the consolidated income statement in the period in which they are incurred. 126 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 126 07/03/2016 11:40 127 Business combinations and goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interests in the acquiree. For each business combination, the Group elects whether to measure the non- controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, any previously held equity interest is re-measured at its acquisition date fair value and any resulting gain or loss is recognised in the consolidated income statement. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non- controlling interests, and any previous interest held, over the net fair value of the identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Group reassesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognised at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognised in the consolidated income statement. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that such carrying value may be impaired. All transaction costs associated with business combinations are charged to the consolidated income statement in the year of such combination. For the purpose of impairment testing, goodwill acquired is allocated to the cash-generating units that are expected to benefit from the synergies of the combination. Each unit or units to which goodwill is allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes and is not larger than an operating segment determined in accordance with IFRS 8 ‘Operating Segments’. Impairment is determined by assessing the recoverable amount of the cash-generating units to which the goodwill relates. Where the recoverable amount of the cash-generating units is less than the carrying amount of the cash-generating units and related goodwill, an impairment loss is recognised. Where goodwill has been allocated to cash-generating units and part of the operation within those units is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the value portion of the cash-generating units retained. Contingent consideration payable on a business combination When, as part of a business combination, the Group defers a proportion of the total purchase consideration payable for an acquisition, the amount provided for is the acquisition date fair value of the consideration. The unwinding of the discount element is recognised as a finance cost in the consolidated income statement. Changes in estimated contingent consideration payable on acquisition are recognised in the consolidated income statement unless they are measurement period adjustments which arise as a result of additional information obtained after the acquisition date about the facts and circumstances existing at the acquisition date, which are adjusted against carried goodwill. Contingent consideration that is classified as equity is not re-measured and subsequent settlement is accounted for within equity. Intangible assets – non oil and gas assets Intangible assets acquired in a business combination are initially measured at cost being their fair values at the date of acquisition and are recognised separately from goodwill where the asset is separable or arises from a contractual or other legal right and its fair value can be measured reliably. After initial recognition, intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Intangible assets with a finite life are amortised over their useful economic life using a straight-line method unless a better method reflecting the pattern in which the asset’s future economic benefits are expected to be consumed can be determined. The amortisation charge in respect of intangible assets is included in the selling, general and administration expenses line of the consolidated income statement. The expected useful lives of assets are reviewed on an annual basis. Any change in the useful life or pattern of consumption of the intangible asset is treated as a change in accounting estimate and is accounted for prospectively by changing the amortisation period or method. Intangible assets are tested for impairment whenever there is an indication that the asset may be impaired. Oil and gas assets Capitalised costs The Group’s activities in relation to oil and gas assets are limited to assets in the evaluation, development and production phases. Oil and gas evaluation and development expenditure is accounted for using the successful efforts method of accounting. Evaluation expenditures Expenditure directly associated with evaluation (or appraisal) activities is capitalised as an intangible oil and gas asset. Such costs include the costs of acquiring an interest, appraisal well drilling costs, payments to contractors and an appropriate share of directly attributable overheads incurred during the evaluation phase. For such appraisal activity, which may require drilling of further wells, costs continue to be carried as an asset whilst related hydrocarbons are considered capable of commercial development. Such costs are subject to technical, commercial and management review to confirm the continued intent to develop, or otherwise extract value. When this is no longer the case, the costs are written-off in the income statement. When such assets are declared part of a commercial development, related costs are transferred to tangible oil and gas assets. All intangible oil and gas assets are assessed for any impairment prior to transfer and any impairment loss is recognised in the consolidated income statement. Development expenditures Expenditures relating to development of assets which includes the construction, installation and completion of infrastructure facilities such as platforms, pipelines and vessels are capitalised within property, plant and equipment as oil and gas facilities. Expenditures relating to the drilling and completion of production wells are capitalised within property, plant and equipment as oil and gas assets. Changes in unit-of-production factors Changes in factors which affect unit-of-production calculations are dealt with prospectively in accordance with the treatment of changes in accounting estimates, not by immediate adjustment of prior years’ amounts. Petrofac Annual report and accounts 2015 / 127 22-Financials-Shareholder-p117-185-AN-070316.indd 127 07/03/2016 11:40 Financial statements 128 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 2 Summary of significant accounting policies continued Decommissioning Provision for future decommissioning costs is made in full when the Group has an obligation to dismantle and remove a facility or an item of plant and to restore the site on which it is located, and when a reasonable estimate of that liability can be made. The amount recognised is the present value of the estimated future expenditure. An amount equivalent to the discounted initial provision for decommissioning costs is capitalised and amortised over the life of the underlying asset on a unit-of-production basis over proven and probable reserves. Any change in the present value of the estimated expenditure is reflected as an adjustment to the provision and the oil and gas asset. The unwinding of the discount applied to future decommissioning provisions is included under finance costs in the consolidated income statement. Impairment of assets (excluding goodwill) At each statement of financial position date, the Group reviews the carrying amounts of its tangible and intangible assets to assess whether there is an indication that those assets may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs of disposal and its value in use. In assessing value in use, the estimated future cash flows attributable to the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Fair value less costs of disposal is based on the risk-adjusted discounted cash flow models and includes value attributable to contingent resources. A post-tax discount rate is used in such calculations. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised immediately in the consolidated income statement, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment is treated as a revaluation increase. Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Cost comprises purchase price, cost of production, transportation and other directly allocable expenses. Costs of inventories, other than raw materials, are determined using the first-in- first-out method. Costs of raw materials are determined using the weighted average method. Work in progress and billings in excess of cost and estimated earnings Fixed price lump sum engineering, procurement and construction contracts are presented in the statement of financial position as follows: • For each contract, the accumulated cost incurred, as well as the estimated earnings recognised at the contract’s percentage of completion less provision for any anticipated losses, after deducting the progress payments received or receivable from the customers, are shown in current assets in the statement of financial position under ‘work in progress’ • Where the payments received or receivable for any contract exceed the cost and estimated earnings less provision for any anticipated losses, the excess is shown as ‘billings in excess of cost and estimated earnings’ within current liabilities Trade and other receivables Trade receivables are recognised and carried at original invoice amount less an allowance for any amounts estimated to be uncollectable. An estimate for doubtful debts is made when there is objective evidence that the collection of the full amount is no longer probable under the terms of the original invoice. Impaired debts are derecognised when they are assessed as uncollectable. Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised in the consolidated income statement as a finance cost. Fair value measurement The Group measures financial instruments, such as derivatives, receivable from customer under Berantai RSC, available-for-sale financial assets and amounts receivable in respect of the development of the Greater Stella Area at fair value at each reporting date. Fair value related disclosures for financial instruments are disclosed in note 16. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: • In the principal market for the asset or liability, or • In the absence of a principal market, in the most advantageous market for the asset or liability The principal or the most advantageous market must be accessible by the Group. 128 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 128 07/03/2016 11:40 129 The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1 – Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable • Level 3 – Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Subsequent measurement For purposes of subsequent measurement financial assets are classified in the following categories: • Financial assets at fair value through profit or loss • Loans and receivables • Available-for-sale financial assets Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value reported in the consolidated income statement. The fair value changes to undesignated forward currency contracts are reported within other operating income/expenses. The fair value changes relating to the internal rate of return under the Berantai RSC receivable are recognised as revenue whereas the unwinding of discount is reported as finance income. Negative fair value changes on the Berantai RSC as a result of changes in the expected recovery of the receivable and negative fair value changes to the amounts receivable in respect of the development of the Greater Stella Area are recorded as an expense in the consolidated income statement (refer to note 5). Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the consolidated income statement. This category generally applies to trade and other receivables. Available-for-sale (AFS) financial assets AFS financial assets include equity investments. Equity investments classified as AFS are those that are neither classified as held-for-trading nor designated at fair value through profit or loss. After initial measurement, AFS financial assets are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income and credited in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the consolidated income statement within other operating income/expenses, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the consolidated income statement in other operating income/expenses. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings including bank overdrafts, financial guarantee contracts and derivative financial instruments. Subsequent measurement For purposes of subsequent measurement financial assets are classified in the following categories: • Financial liabilities at fair value through profit or loss • Loans and borrowings 22-Financials-Shareholder-p117-185-AN-070316.indd 129 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 129 Financial statements 130 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Pensions and other long-term employment benefits The Group has various defined contribution pension schemes in accordance with the local conditions and practices in the countries in which it operates. The amount charged to the consolidated income statement in respect of pension costs reflects the contributions payable in the year. Differences between contributions payable during the year and contributions actually paid are shown as either accrued liabilities or prepaid assets in the statement of financial position. The Group’s other long-term employment benefits are provided in accordance with the labour laws of the countries in which the Group operates, further details of which are given in note 26. Share-based payment transactions Employees (including Directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. In valuing equity-settled transactions, no account is taken of any service or performance conditions, other than conditions linked to the price of the shares of Petrofac Limited (‘market conditions’), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the relevant employees become fully entitled to the award (the ‘vesting period’). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance conditions and service conditions are satisfied. Equity awards cancelled are treated as vesting immediately on the date of cancellation, and any expense not recognised for the award at that date is recognised in the consolidated income statement. Petrofac Employee Benefit Trusts The Petrofac Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust warehouse ordinary shares purchased to satisfy various new share scheme awards made to the employees of the Company and its joint venture partner employees, which will be transferred to the members of the schemes on their respective vesting dates subject to satisfying any performance conditions of each scheme. The trusts continue to be included in the Group financial statements under IFRS 10. Treasury shares For the purpose of making awards under the Group’s employee share schemes, shares in the Company are purchased and held by the Petrofac Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust. All these shares have been classified in the statement of financial position as treasury shares within equity. Shares vested during the year are satisfied with these shares. 2 Summary of significant accounting policies continued Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Group that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. The Group has not designated any financial liability as at fair value through profit or loss. Loans and borrowings This is the category most relevant to the Group. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the EIR method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings. For more information, refer to note 25. De-recognition of financial assets and liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset) is de-recognised where: • The rights to receive cash flows from the asset have expired • The Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or • The Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset Financial liabilities A financial liability is de-recognised when the obligation under the liability is discharged or cancelled or expires. If an existing financial liability is replaced by another from the same lender, on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a de-recognition of the original liability and the recognition of a new liability such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in the consolidated income statement. Offsetting of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. 130 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 130 07/03/2016 11:40 131 Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at inception date and whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys the right to use the asset. Revenues from fixed-price contracts are recognised on the percentage- of-completion method, measured by milestones completed or earned value once the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under finance leases are recognised as non-current assets of the Group at the lower of their fair value at the date of commencement of the lease and the present value of the minimum lease payments. These assets are depreciated on a straight-line basis over the shorter of the useful life of the asset and the lease term. The corresponding liability to the lessor is included in the consolidated statement of financial position as a finance lease obligation. Lease payments are apportioned between finance costs in the income statement and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. The Group has entered into various operating leases the payments for which are recognised as an expense in the consolidated income statement on a straight-line basis over the lease terms. Pre-contract/bid costs Pre-contract/bid costs incurred are recognised as an expense until there is a high probability that the contract will be awarded, after which all further costs are recognised as assets and expensed over the life of the contract. Revenue recognition Revenue is recognised to the extent that it is probable economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria also apply: Onshore Engineering & Construction Revenues from fixed-price lump-sum contracts are recognised using the percentage-of-completion method, based on surveys of work performed once the outcome of a contract can be estimated reliably. In the early stages of contract completion, when the outcome of a contract cannot be estimated reliably, contract revenues are recognised only to the extent of costs incurred that are expected to be recoverable. Revenues from cost-plus-fee contracts are recognised on the basis of costs incurred during the year plus the fee earned measured by the cost-to-cost method. Revenues from reimbursable contracts are recognised in the period in which the services are provided based on the agreed contract schedule of rates. Provision is made for all losses expected to arise on completion of contracts entered into at the statement of financial position date, whether or not work has commenced on these contracts. Incentive payments are included in revenue when the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payments can be measured reliably. Variation orders are only included in revenue when it is probable they will be accepted and can be measured reliably and claims are only included in revenue when negotiations have reached an advanced stage such that it is probable that the claim will be accepted and can be measured reliably. Offshore Projects & Operations and Engineering & Consulting Services Revenues from reimbursable contracts are recognised in the period in which the services are provided based on the agreed contract schedule of rates. Incentive payments are included in revenue when the contract is sufficiently advanced that it is probable that the specified performance standards will be met or exceeded and the amount of the incentive payments can be measured reliably. Claims are only included in revenue when negotiations have reached an advanced stage such that it is probable the claim will be accepted and can be measured reliably. Integrated Energy Services Equity Upstream Investments Oil and gas revenues comprise the Group’s share of sales from the processing or sale of hydrocarbons from the Group’s Equity Upstream Investments on an entitlement basis, when the significant risks and rewards of ownership have been passed to the buyer. Production Enhancement Contracts Revenue from production enhancement contracts is recognised based on the volume of hydrocarbons produced in the period and the agreed tariff and the reimbursement arrangement for costs incurred. Risk Services Contract (RSC) Revenue from the Risk Services Contract is recognised as follows: • The construction services element of the RSC is accounted for using a percentage-of-completion method at the end of the reporting period measured on the basis of the extent of the schedule of work completed to date. Due to uncertainties about the eventual financial outcome of the construction work no margin is recognised in the early stages of the construction and revenues are only recognised to the extent of costs until the outcome can be estimated reliably • The operation and management activities revenues/margins are recognised on a proportionate basis over the life of the contract on the basis of the level of operating expenditure incurred each year • The total remuneration fee is a multiple of the estimated capital expenditure (control budget agreed with the customer) with this multiple designed to deliver the contractor’s internal rate of return which is determined by the contractor’s performance against a matrix of KPIs which include actual cost of field development vs control budget set, the time taken to achieve first gas from the field and the timing of final project completion • Payment of cost recovery commences from first oil/gas in equal quarterly instalments over seven years and payment of the remuneration fee commences from the quarter following completion of the construction phase of the project and concludes at the end of the RSC term. These receivable amounts under the RSC are classified as a financial asset at fair value through profit or loss as the contract is managed and the performance evaluated by management on a fair value basis. For measurement purposes, fair value principles are applied to calculate the present value of earned remuneration under the contract by discounting back to present value and then splitting between due within one year and long-term receivables within other financial assets (see note 16 on page 148) 22-Financials-Shareholder-p117-185-AN-070316.indd 131 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 131 Financial statements 132 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued For the year ended 31 December 2015 The fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of oil price collar contracts is determined by reference to market values for similar instruments. For the purposes of hedge accounting, hedges are classified as: • Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability; or • Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction The Group formally designates and documents the relationship between the hedging instrument and the hedged item at the inception of the transaction, as well as its risk management objectives and strategy for undertaking various hedge transactions. The documentation also includes identification of the hedging instrument, the hedged item or transaction, the nature of risk being hedged and how the Group will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in the hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. The treatment of gains and losses arising from revaluing derivatives designated as hedging instruments depends on the nature of the hedging relationship, as follows: Cash flow hedges For cash flow hedges, the effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income in net unrealised gains/(losses) on derivatives, while the ineffective portion is recognised in the consolidated income statement. Amounts taken to other comprehensive income are transferred to the consolidated income statement when the hedged transaction affects the consolidated income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains separately in equity until the forecast transaction occurs and affects the consolidated income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the consolidated income statement. Embedded derivatives Contracts are assessed for the existence of embedded derivatives at the date that the Group first becomes party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows. Embedded derivatives which are not clearly and closely related to the underlying asset, liability or transaction are separated and accounted for as standalone derivatives. 2 Summary of significant accounting policies continued Income taxes Income tax expense represents the sum of current income tax and deferred tax. Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to the taxation authorities. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the statement of financial position date. Deferred tax is recognised on all temporary differences at the statement of financial position date between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, with the following exceptions: • Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss • In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future; and • Deferred tax assets are recognised only to the extent that it is probable that a taxable profit will be available against which the deductible temporary differences carried forward tax credits or tax losses can be utilised The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilised. Unrecognised deferred tax assets are reassessed at each statement of financial position date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the asset is realised or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the statement of financial position date. Current and deferred tax is charged or credited directly to other comprehensive income or equity if it relates to items that are credited or charged to, respectively, other comprehensive income or equity. Otherwise, income tax is recognised in the consolidated income statement. Derivative financial instruments and hedging The Group uses derivative financial instruments such as forward currency contracts and oil price collars and forward contracts to hedge its risks associated with foreign currency and oil price fluctuations. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives that do not qualify for hedge accounting are taken to the consolidated income statement. 132 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 132 07/03/2016 11:40 133 3 Segment information The Group delivers its services through the four reporting segments set out below: • Onshore Engineering & Construction which provides engineering, procurement and construction project execution services to the onshore oil and gas industry • Offshore Projects & Operations which provides offshore engineering, operations and maintenance onshore and offshore and engineering, procurement and construction project execution services to the offshore oil and gas industry • Engineering & Consulting Services which provides technical engineering, consultancy, conceptual design, front end engineering and design (FEED) and project management consultancy (PMC) across all sectors including renewables • Integrated Energy Services which co-invests with partners in oil and gas production, processing and transportation assets, provides production improvement services under value aligned commercial structures and oil and gas related technical competency training and consultancy services Management separately monitors the trading results of its four reporting segments for the purpose of making an assessment of their performance and for making decisions about how resources are allocated. Interest costs and income arising from borrowings and cash balances which are not directly attributable to individual operating segments are allocated to Corporate rather than allocated to individual segments. In addition, certain shareholder services related overheads, intra-group financing and consolidation adjustments are managed at a corporate level and are not allocated to reporting segments. The presentation of the Group results below also separately identifies the effect of the Laggan-Tormore loss, asset impairments, certain re- measurements, restructuring and redundancy costs, contract migration costs and material deferred tax movements arising due to foreign exchange differences in jurisdictions where tax is computed based on the functional currency of the country. Results excluding these non-recurring items are used by management and presented in order to provide readers with a clear and consistent presentation of the underlying operating performance of the business. The following tables represent revenue and profit information relating to the Group’s reporting segments for the year ended 31 December 2015. Year ended 31 December 2015 Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Corporate & others Consolidation adjustments & eliminations Business performance US$m US$m US$m US$m US$m US$m US$m Exceptional items and certain re-measurements US$m Revenue External sales 4,368 1,458 Inter-segment sales 15 26 Total revenue 4,383 1,484 502 213 715 516 15 531 Segment results 425 66 70 33 (480) – – – – – – – Total US$m 6,844 – 6,844 – – – 7 – (18) – 6,844 (269) (269) – 6,844 – – – (1) 600 (354) 246 – – (480) (18) – (480) – (18) (55) 66 70 33 (11) (1) 102 (354) (252) – – – (55) (48) 49 (5) 1 – – 67 1 – – (1) – – 69 (19) – – 10 (53) 8 (2) 7 – – – (48) 1 (58) 4 – – – – – (1) – – – 10 (101) 9 20 (55) 49 (5) (1) – – 9 (101) 9 (355) (335) (3) (58) – – 49 (5) (59) 68 50 5 (54) (1) 9 (358) (349) Laggan-Tormore loss Unallocated corporate costs Profit/(loss) before tax and finance income/(costs) Share of profits /(losses) of associates/joint ventures Finance costs Finance income Profit/(loss) before income tax Income tax (expense)/credit Laggan-Tormore tax relief Non-controlling interests Profit/(loss) for the year attributable to Petrofac Limited shareholders 22-Financials-Shareholder-p117-185-AN-070316.indd 133 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 133 Financial statements Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 3 Segment information continued Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Corporate & others Consolidation adjustments & eliminations US$m US$m US$m US$m US$m US$m Total US$m Other segment information Capital expenditures: Property, plant and equipment Intangible oil and gas assets Charges: Depreciation Amortisation and write off Exceptional items and certain re-measurements Other long-term employment benefits Share-based payments Year ended 31 December 2014 35 – 46 – 5 20 15 121 – 7 – 24 1 3 6 – 9 – – – 1 95 10 124 4 326 1 2 3 – 9 – – – 2 – – 1 – – – – Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Corporate & others Consolidation adjustments & eliminations Business performance US$m US$m US$m US$m US$m US$m US$m Integrated Energy Services exceptional items and certain re-measurements US$m Revenue External sales 3,207 2,000 Inter-segment sales 34 9 Total revenue 3,241 2,009 276 161 437 768 14 782 Segment results 595 119 39 165 (200) (30) – – – – – – – – – (4) – (11) 1(10) (218) (228) 6,241 – 6,241 – – – 211 925 (463) 462 – – (230) – (230) (11) – (11) 260 10 196 4 355 22 23 Total US$m 6,241 – 6,241 395 89 39 165 (15) 11 684 (463) 221 – – – – – – – – – 7 (25) 20 395 89 39 167 28 (28) – (20) 3 – (6) – – (36) – – – (54) 2 (67) 6 – – – – – 7 (79) 22 – – – 7 (79) 22 11 634 (463) 171 – – – (36) 3 (20) 2 – (34) 3 – (20) 403 64 33 131 (61) 11 581 (461) 120 Laggan-Tormore loss Unallocated corporate costs Profit/(loss) before tax and finance income/(costs) Share of profits of associates/joint ventures Finance costs Finance income Profit/(loss) before income tax Income tax (expense)/credit Laggan-Tormore tax relief Non-controlling interests Profit/(loss) for the year attributable to Petrofac Limited shareholders 1 Negative elimination of external sales shown above of US$10m represents a Group adjustment to the overall project percentage of completion on the Laggan-Tormore project as OEC and OPO are reflecting in their segment’s progress on their own respective shares of the total project scope. 2 Represents release of previously eliminated margin relating to West Desaru and Berantai vessel on disposal of subsidiary. 134 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-100316.indd 134 10/03/2016 12:48 135 Onshore Engineering & Construction Offshore Projects & Operations Engineering & Consulting Services Integrated Energy Services Corporate & others Consolidation adjustments & eliminations US$m US$m US$m US$m US$m US$m Total US$m Other segment information Capital expenditures: Property, plant and equipment Intangible oil and gas assets Charges: Depreciation Amortisation and write off Exceptional items and certain re-measurements Other long-term employment benefits Share-based payments 28 – 43 – – 18 11 171 – 18 – – 1 4 9 – 6 – – – 1 437 144 159 14 463 – 3 12 – 4 – – – 3 11 – – – – – – 668 144 230 14 463 19 22 Geographical segments The following tables present revenue from external customers based on their location and non-current assets by geographical segments for the years ended 31 December 2015 and 2014. Year ended 31 December 2015 Oman US$m United Arab Emirates US$m Algeria US$m United Kingdom US$m Kuwait US$m Malaysia US$m Saudi Arabia US$m Other countries US$m Consolidated US$m Revenues from external customers 1,408 1,395 833 804 555 520 332 997 6,844 Non-current assets: Property, plant and equipment Intangible oil and gas assets Other intangible assets Goodwill United Kingdom US$m United Arab Emirates US$m Mexico US$m Romania US$m Malaysia US$m Tunisia US$m Other countries US$m Consolidated US$m 34 11 4 48 426 – – 29 489 – 17 – – – – – 736 74 – 3 52 1 – – 38 1,775 – – – 86 21 80 Year ended 31 December 2014 United Kingdom United Arab Emirates US$m US$m Algeria US$m Malaysia US$m Oman US$m Kuwait US$m Saudi Arabia US$m Other countries US$m Consolidated US$m Revenues from external customers 1,401 925 688 515 469 450 355 1,438 6,241 Non-current assets: Property, plant and equipment Intangible oil and gas assets Other intangible assets Goodwill United Kingdom US$m United Arab Emirates US$m Mexico US$m Romania US$m Malaysia US$m Tunisia US$m Other countries US$m Consolidated US$m 54 11 7 67 299 – – 44 421 – 23 – – – – – 800 135 – 3 61 9 – – 63 1,698 1 – 1 156 30 115 Revenues disclosed in the above tables are based on where the project is located. Revenues representing greater than 10% of Group revenues arose from two customers amounting to US$1,515m in the Onshore Engineering & Construction segment (2014: two customers, US$525m in the Onshore Engineering & Construction segment and US$449m in the Offshore Projects & Operations segment). 22-Financials-Shareholder-p117-185-AN-070316.indd 135 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 135 Financial statements 136 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 4 Revenues and expenses a. Revenue Rendering of services Sale of crude oil and gas 2015 US$m 6,700 144 6,844 2014 US$m 6,044 197 6,241 Included in revenues from rendering of services are Offshore Projects & Operations, Engineering & Consulting Services and Integrated Energy Services revenues of a ‘pass-through’ nature with zero or low margins amounting to US$400m (2014: US$226m).The revenues are included as external revenues of the Group since the risks and rewards associated with recognition are assumed by the Group. b. Cost of sales During 2015, included in cost of sales is depreciation charged on property, plant and equipment of US$168m (2014: US$210m) (note 10) and intangible amortisation of US$1m (2014: US$2m other intangible amortisation and oil and gas intangible written off amounting to US$8m). Also included in cost of sales are forward points and ineffective portions on derivatives designated as cash flow hedges and losses on undesignated derivatives of US$3m (2014: US$10m).These amounts are an economic hedge of foreign exchange risk but do not meet the criteria within IAS 39 and are most appropriately recorded in cost of sales. c. Selling, general and administration expenses Staff costs Depreciation (note 10) Amortisation (note 13) Write off of intangible oil and gas assets (note 13) Other operating expenses Other operating expenses consist mainly of office, travel, legal and professional and contracting staff costs. d. Staff costs Total staff costs: Wages and salaries Social security costs Defined contribution pension costs Other long-term employee benefit costs (note 26) Expense of share-based payments (note 23) 2015 US$m 2014 US$m 195 28 3 – 102 328 223 20 3 1 121 368 2015 US$m 2014 US$m 1,209 1,164 58 26 22 23 68 23 19 22 1,338 1,296 Of the US$1,338m (2014: US$1,296m) of staff costs shown above, US$1,143m (2014: US$1,073m) is included in cost of sales, with the remainder in selling, general and administration expenses. The average number of payrolled staff employed by the Group during the year was 16,635 (2014: 16,135). e. Auditor’s remuneration The Group paid the following amounts to its auditors in respect of the audit of the financial statements and for other services provided to the Group: Group audit fee Audit of accounts of subsidiaries Others 2015 US$m 2014 US$m 2 2 1 5 2 1 1 4 Others include audit related assurance services of US$400,000 (2014: US$380,000), tax advisory services of US$430,000 (2014: US$210,000), tax compliance services of US$290,000 (2014: US$240,000) and other non-audit services of US$50,000 (2014: US$40,000). 136 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 136 07/03/2016 11:40 137 f. Other operating income Gain on disposal of non-current asset Foreign exchange gains Other income 2015 US$m 2014 US$m 8 2 14 24 56 30 9 95 Other income includes US$9m contractual break fee earned in Integrated Energy Services for exiting the Bowleven Etinde project and US$2m representing income from sale of scrap on projects in Onshore Engineering and Construction (2014: US$5m receipt of liquidated damages from a vendor for late delivery of a MOPU). Disposal of non-current asset On 13 August 2014, the Group sold 80% of the share capital of Petrofac FPSO Holding Limited which via its subsidiaries owns interests in the FPSO Berantai, FPF3 (formerly Jasmine venture) and FPF5 (formerly Ocean Legend) to PetroFirst Infrastructure Holdings Limited for an initial cash consideration of US$307m. At 31 December 2014, there was a further US$34m of contingent consideration payable and this together with the initial consideration of US$307m resulted in the recognition of a total gain on disposal of US$56m in the IES segment in 2014, which included a fair value gain of US$31m on initial recognition of the remaining 20% investment in associate. During 2015, upon final completion of the disposal, the fair value of the consideration for 80% of the equity was increased by US$7m due to the receipt of the pending investment approval by PetroFirst Infrastructure Holdings Limited. Consequently, a US$1m fair value gain was recognised on the remaining 20% investment in associate. The consideration of US$41m was received in full by 31 December 2015. The gain on disposal has been computed as follows: Fair value of consideration for 80% of the equity received in cash Proceeds from repayments of loans due from FPSO Holding Limited Fair value of contingent consideration for 80% of the equity receivable at reporting date Total consideration Property, plant and equipment Cash Finance lease receivables Trade and other receivables Debt acquisition costs Total book value of assets disposed Berantai RSC project financing debt transferred Trade and other payables Total book value of liabilities disposed Due to/due from related parties arising on disposal Due from related parties Due to related parties Allocated goodwill written off (note 12) Transaction costs Fair value gain on initial recognition of remaining 20% investment in associate Gain on disposal 2015 US$m 2014 US$m 7 – 7 – 7 – – – – – – – – – – – – – – 1 8 87 220 307 34 341 (31) (48) (336) (16) (3) (434) 128 25 153 23 (40) (17) (15) (3) 31 56 22-Financials-Shareholder-p117-185-AN-070316.indd 137 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 137 Financial statements 138 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 4 Revenues and expenses continued g. Other operating expenses Foreign exchange losses Other expenses 2015 US$m 2014 US$m 4 5 9 39 3 42 Other expenses mainly comprise US$2m write-off of due from related party balances relating to Professional Mechanical Repair Services Company and PetroFirst Infrastructure Limited. 5 Exceptional items and certain re-measurements Impairment of assets including goodwill Fair value re-measurements Onerous leasehold property provisions and impairments Group reorganisation costs Others Foreign exchange translation losses on deferred tax balances Tax relief on exceptional items and certain re-measurements Income statement charge for the year 2015 US$m 2014 US$m 95 214 15 17 14 355 25 (22) 3 358 172 261 – – 30 463 – (2) (2) 461 Impairment of assets and fair value re-measurements As a result of significantly lower commodity price expectations, the Group reviewed the carrying value of its PM304 oil and gas assets. The review was carried out on a fair value less costs of disposal basis, which was calculated to be US$329m, using risk adjusted cash flow projections (a level 3 measurement) discounted at a post-tax rate of 9.0%. This resulted in a pre-tax impairment of US$53m (post-tax US$33m) which has been allocated proportionately to intangible oil and gas assets and property, plant and equipment. Management has used forward curve oil prices of US$41 per barrel for 2016, US$48 per barrel for 2017, US$65 per barrel for 2018, US$70 per barrel for 2019 and US$75 per barrel for 2020 and beyond. A 10% decrease in commodity prices would result in an additional pre-tax impairment charge of US$87m (post-tax US$54m). The Group has reviewed the carrying value of goodwill allocated to the IES portfolio in light of revised commodity price expectations and underlying asset performance during the year. As a result of this review, a further impairment charge of US$33m (post-tax US$33m) has been recognised in respect of IES goodwill (2014: US$18m post-tax US$18m). As a result of a re-assessment of oil and gas forward prices, the Group revalued its loan receivable from Ithaca Energy in respect of the Greater Stella Area in the UK. The revaluation exercise was carried out on a fair value basis using risk adjusted cash flow projections discounted at a post-tax rate of 9.0%. This resulted in a pre-tax reduction in fair value of the Greater Stella Area receivable of US$214m (post-tax US$214m) (2014: US$207m post-tax US$207m) in the IES segment. In 2014, a revaluation charge to profit and loss of US$54m (post-tax US$44m) (2015: nil) was also recognised in respect of Berantai RSC in Malaysia and warrants held over shares in Seven Energy International Limited) in the IES segment. In 2014, US$172m of impairment charges related to the Ticleni Production Enhancement Contract in Romania (US$134m; post-tax US$137m), the FPSO Opportunity and OML119 in Nigeria (US$20m; post-tax US$25m) and IES goodwill impairment (US$18m; post-tax US$18m). Fair value less costs of disposal are determined by discounting the post-tax cash flows expected to be generated from oil and gas production net of selling costs taking into account assumptions that market participants would typically use in estimating fair values. Post-tax cash flows are derived from projected production profiles for each asset taking into account forward market commodity prices over the relevant period and, where external forward prices are not available, the Group’s Board-approved five year business planning assumptions are used. As each field has different reservoir characteristics and contractual terms the post-tax cash flows for each asset are calculated using individual economic models which include assumptions around the amount of recoverable reserves, production costs, life of the field/licence period and the selling price of the commodities produced. Onerous leasehold property provision US$15m of onerous leasehold property provision represents the write-off of US$6m of leasehold property improvements and the estimated future costs of US$9m relating to vacant leasehold office buildings at Quattro House and Bridge View in Aberdeen, UK for which the leases expire in 2024 and 2026 respectively. 138 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 138 07/03/2016 11:40 139 Group reorganisation costs During the last quarter of 2015, the Group undertook a major review of how the future organisation should be structured and the costs relating to this exercise including staff redundancy costs, office closure costs and other restructuring type expenses amounted to US$17m (post-tax US$15m). Taxation US$25m of foreign exchange losses on the retranslation of deferred tax balances denominated in Malaysian Ringgits have been incurred during the year in respect of IES’s oil and gas activities in Malaysia due to an approximate 25% weakening in the Malaysian local currency versus the US dollar. 6 Finance (costs)/income Finance costs Long-term borrowings Finance leases Unwinding of discount on provisions (note 26) Total finance costs Finance income Bank interest Unwinding of discount on long-term receivables from customers (note 16) Total finance income 7 Income tax a. Tax on ordinary activities The major components of income tax expense are as follows: Business performance Exceptional items and certain re-measurements US$m US$m Total 2015 US$m Business performance US$m Exceptional items and certain re-measurements US$m Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred tax Relating to origination and reversal of temporary differences Recognition of tax losses relating to prior years Adjustments in respect of deferred tax of previous years Income tax expense/(credit) reported in the income statement Income tax reported in equity Deferred tax related to items charged directly to equity Current income tax related to share schemes Foreign exchange movements on translation Income tax income reported in equity 69 (1) (49) 5 (18) 6 (1) – 1 – (2) – 5 – – 3 – – – – 67 (1) (44) 5 (18) 9 (1) – 1 – 108 (89) 16 (2) – 33 2 (1) – 1 – – (7) 5 – (2) – – – – The split of the Group’s tax charge between current and deferred tax varies from year to year depending largely on: • the variance between tax provided on the percentage of completion of projects versus that paid on accrued income for engineering, procurement and construction contracts; and • the tax deductions available for expenditure on Risk Service Contracts and Production Enhancement Contracts (PECs), which are partially offset by the creation of losses. See 7c below for the impact on the movements in the year. 22-Financials-Shareholder-p117-185-AN-070316.indd 139 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 139 2015 US$m 2014 US$m (48) (49) (4) (101) 1 8 9 (54) (19) (6) (79) 2 20 22 Total 2014 US$m 108 (89) 9 3 – 31 2 (1) – 1 Financial statements 140 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 7 Income tax continued b. Reconciliation of total tax charge A reconciliation between the income tax expense and the product of accounting profit multiplied by the Company’s domestic tax rate is as follows: Accounting profit before tax At Jersey’s domestic income tax rate of 0% (2014: 0%) Expected tax charge in higher rate jurisdictions Expenditure not allowable for income tax purposes Income not subject to tax Adjustments in respect of previous years Adjustments in respect of losses not previously recognised/derecognised Unrecognised tax losses Other permanent differences Effect of change in tax rates At the effective income tax rate of negative 2.7% (2014: 18.4%) 20 – (33) 8 (3) (19) (4) 50 1 6 6 Business performance Exceptional items and certain re-measurements US$m US$m Total 2015 US$m Business performance US$m 634 – 69 15 – (90) (4) 39 4 – Exceptional items and certain re-measurements US$m (463) – (38) 1 – 1 2 6 26 – Total 2014 US$m 171 – 31 16 – (89) (2) 45 30 – (355) (335) – (31) – – – 9 – 25 – – (64) 8 (3) (19) 5 50 26 6 3 9 33 (2) 31 The Group's effective tax rate for the year ended 31 December 2015 is negative 2.7% (2014: 18.4%). The Group’s effective tax rate, excluding the impact of impairments and certain re-measurements, for the year ended 31 December 2015 is 30.0% (2014: 5.2% tax charge). A number of factors have impacted the effective tax rate, excluding the impact of impairments and certain re-measurements, this year, principally being the net release of tax provisions held in respect of income taxes which is partially offset by the impact of tax losses created in the year for which the realisation against future taxable profits is not probable. In line with prior years, the effective tax rate is also driven by the mix of profits in the jurisdictions in which profits are earned. From 1 April 2015, the main UK corporation tax rate reduced from 21% to 20%. Further reductions were announced in the UK budget on 8 July 2015 which will reduce the standard rate of UK corporation tax to 19% from 1 April 2017 and 18% from 1 April 2020. These changes in the UK rate were substantively enacted prior to the reporting date and therefore the impact of the change is included within the current year charge. From 1 January 2016, the main Malaysian rate of corporation tax will reduce by 1% to 24%. This change was substantively enacted prior to 31 December 2014. The impact of the change was included within the previous year tax charge. c. Deferred tax Deferred tax relates to the following: Deferred tax liabilities Fair value adjustment on acquisitions Accelerated depreciation Profit recognition Overseas earnings Other temporary differences Gross deferred tax liabilities Deferred tax assets Losses available for offset Decelerated depreciation for tax purposes Share scheme Profit recognition Decommissioning Other temporary differences Gross deferred tax assets Net deferred tax liability/deferred tax (credit)/charge Of which: Deferred tax assets Deferred tax liabilities 140 / Petrofac Annual report and accounts 2015 Consolidated statement of financial position Consolidated income statement 2015 US$m 2014 US$m 2015 US$m 2014 US$m – (48) 10 3 8 (66) (2) – 2 1 35 (1) 35 26 – – (15) (1) – 1 – (33) (57) 12 2 249 68 3 10 332 2 297 58 – 2 359 172 108 5 5 3 57 29 271 61 80 141 3 4 5 58 64 242 117 34 151 22-Financials-Shareholder-p117-185-AN-070316.indd 140 07/03/2016 11:40 141 Included within the net deferred tax asset are UK tax losses of US$305m (2014: US$40m). This represents the losses which are expected to be utilised based on management’s projection of future taxable profits. As a result of the UK rate change noted in 7b, the effective tax rate on the loss utilisation over this period is expected to be 18.5%. d. Unrecognised tax losses and tax credits Deferred income tax assets are recognised for tax loss carry forwards and tax credits to the extent that the realisation of the related tax benefit through offset against future taxable profits is probable. The Group did not recognise deferred income tax assets of US$525m (2014: US$231m). Expiration dates for tax losses No earlier than 2020 No expiration date Tax credits (no expiration date) 2015 US$m 2014 US$m 66 447 513 12 525 18 201 219 12 231 During 2015, the Group has not recognised any tax benefit from the utilisation of tax losses (2014: US$1m), no recognition of previously unrecognised losses (2014: US$4m) and has derecognised tax losses from a prior period of US$5m (2014: US$2m). 8 Earnings per share Basic earnings per share amounts are calculated by dividing the profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the profit attributable to ordinary shareholders, after adjusting for any dilutive effect, by the weighted average number of ordinary shares outstanding during the year, adjusted for the effects of ordinary shares granted under the employee share award schemes which are held in trust. The following reflects the income and share data used in calculating basic and diluted earnings per share: Profit attributable to ordinary shareholders for basic and diluted earnings per share excluding exceptional items and certain re-measurements (Loss)/profit attributable to ordinary shareholders for basic and diluted earnings per share including exceptional items and certain re-measurements Weighted average number of ordinary shares for basic earnings per share Effect of dilutive potential ordinary shares granted under share-based payment schemes1 Adjusted weighted average number of ordinary shares for diluted earnings per share 2015 US$m 2014 US$m 9 (349) 2015 Shares million 340 – 340 581 120 2014 Shares million 341 3 344 1 For the year ended 31 December 2015, potentially issuable ordinary shares under share-based payment schemes are excluded from the diluted earnings per ordinary share calculation, as their inclusion would decrease the loss per ordinary share. 9 Dividends paid and proposed Declared and paid during the year Equity dividends on ordinary shares: Final dividend for 2013: 43.80 cents per share Interim dividend 2014: 22.00 cents per share Final dividend for 2014: 43.80 cents per share Interim dividend 2015: 22.00 cents per share Proposed for approval at AGM (not recognised as a liability as at 31 December) Equity dividends on ordinary shares Final dividend for 2015: 43.80 cents per share (2014: 43.80 cents per share) 2015 US$m 2014 US$m – – 149 74 223 149 75 – – 224 2015 US$m 2014 US$m 152 152 Petrofac Annual report and accounts 2015 / 141 22-Financials-Shareholder-p117-185-AN-070316.indd 141 07/03/2016 11:40 Financial statements 142 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 10 Property, plant and equipment Oil and gas assets US$m Oil and gas facilities Land, buildings and leasehold improvements Plant and equipment US$m US$m US$m Vehicles US$m Office furniture and equipment Assets under construction US$m US$m 828 172 – 264 5 (13) 448 225 (48) – – – 1,256 625 97 – 73 – – (4) – – – – 1,426 621 (200) (116) (99) – – – (415) (78) (32) – – – (175) (24) (15) 17 – – (197) (42) (15) – – – 343 28 (7) – 13 (3) 374 4 (44) – 34 (4) 364 (162) (52) – 6 (5) 2 (211) (40) (6) 44 2 30 15 – – 3 (1) 47 – (4) – 8 (1) 50 (18) (12) (2) – – 1 (31) (4) – 2 (6) 1 23 2 (1) – – – 24 2 (1) – – – 183 26 (9) – (14) (6) 180 15 (6) – 8 (4) 25 193 (19) (3) – 1 – – (21) (2) – 1 – – (119) (23) – 8 5 3 (126) (30) – 6 6 1 29 200 – – (7) – 222 146 – – (50) – 318 – – (29) – – – (29) – – – – – Total US$m 1,884 668 (65) 264 – (23) 2,728 260 (55) 73 – (9) 2,997 (693) (230) (145) 32 – 6 (1,030) (196) (53) 53 – 4 Cost At 1 January 2014 Additions Disposals Transfer from intangible oil and gas assets (note 13) Transfers Exchange difference At 1 January 2015 Additions/(adjustments) Disposals Transfer from intangible oil and gas assets (note 13) Transfers Exchange difference At 31 December 2015 Depreciation & impairment At 1 January 2014 Charge for the year Charge for impairment (note 5) Disposals Transfers Exchange difference At 1 January 2015 Charge for the year Charge for impairment (note 5) Disposals Transfers Exchange difference At 31 December 2015 Net carrying amount: At 31 December 2015 At 31 December 2014 (525) (254) (211) (38) (22) (143) (29) (1,222) 901 841 367 428 153 163 12 16 3 3 50 54 289 193 1,775 1,698 Additions to oil and gas assets mainly comprise Santuario, Magallanes and Arenque PECs of US$61m, Pánuco PEC of US$26m (2014: Santuario, Magallanes and Arenque PECs of US$160m, and Pánuco PEC of US$12m) and US$18m relating to block PM304 in Malaysia which is offset by change in estimates for decommissioning provision relating to block PM304 in Malaysia of US$8m. Negative adjustment to oil and gas facilities represents a reduction due to a revised finance lease agreement with the lessor on an FPSO for block PM304 in Malaysia. Additions to oil and gas facilities in 2014 mainly comprised an FPSO acquired under a finance lease for block PM304 in Malaysia of US$184m, the upgrade of the FPF4 at a cost of US$5m and upgrade work on the Berantai vessel of US$10m. Transfer from intangible oil and gas assets of US$73m comprises Cendor phase 2 field development costs on block PM304 in Malaysia (2014: field development costs on block PM304 in Malaysia of US$236m and Ticleni PEC costs of US$28m). Of the total charge for depreciation in the income statement, US$168m (2014: US$210m) is included in cost of sales and US$28m (2014: US$20m) in selling, general and administration expenses. Assets under construction mainly represent expenditures incurred in relation to construction of the JSD6000 installation vessel. Interest capitalised on construction of JSD6000 installation vessel in 2015 amounted to US$2m (2014: US$nil). 142 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 142 07/03/2016 11:40 143 Included in ‘oil and gas facilities’, ‘land, buildings and leasehold improvements’ and ‘plant and equipment’ is property, plant and equipment under finance lease agreements, for which net book values are as follows: Net book value At 1 January Finance leased assets arising on disposal of subsidiary (note 4f) Additions/(adjustments) Depreciation Exchange difference At 31 December 2015 US$m 401 – (4) (46) – 351 2014 US$m 19 215 197 (30) – 401 Additions to finance leased assets in 2014 mainly comprised an FPSO acquired under a finance lease for block PM304 in Malaysia of US$184m. 11 Material partly-owned subsidiaries Petrofac Emirates LLC is the only material partly-owned subsidiary in the Group and the proportion of the nominal value of issued shares controlled by the Group is disclosed in note 32. Movement of non-controlling interest in Petrofac Emirates LLC 2015 US$m 2014 US$m At 1 January Profit for the year Net unrealised losses on derivatives Dividend paid At 31 December The balance of non-controlling interests relate to other partly-owned subsidiaries that are not material to the Group. Financial information of Petrofac Emirates LLC that has material non-controlling interests is provided below: Summarised income statement Revenue Cost of sales Gross profit Selling, general and administration expenses Finance income Profit for the year Attributable to non-controlling interest Net unrealised (gains)/losses on derivatives Net unrealised (losses)/gains on derivatives at 1 January Movement during the year Net unrealised losses on derivatives at 31 December Attributable to non-controlling interest Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Total equity Attributable to non-controlling interest Summarised cash flow information Operating Investing Financing 12 5 (8) (5) 4 2015 US$m 1,320 (1,247) 73 (56) 1 18 5 (52) (31) (83) (21) 526 240 766 738 10 748 18 4 90 (65) – 5 20 (13) – 12 2014 US$m 848 (715) 133 (54) – 79 20 23 (75) (52) (13) 604 200 804 745 10 755 49 12 133 (38) – Dividends of US$20m were declared during 2015, of which US$5m is attributable to non-controlling interest (2014: US$nil). These dividends were adjusted against related party balances in the standalone books. Petrofac Annual report and accounts 2015 / 143 22-Financials-Shareholder-p117-185-AN-070316.indd 143 07/03/2016 11:40 Financial statements 144 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 12 Goodwill A summary of the movements in goodwill is presented below: At 1 January Impairment (note 5) Goodwill written off on disposal of subsidiary (note 4f) Exchange difference At 31 December 2015 US$m 115 (33) – (2) 80 2014 US$m 155 (18) (15) (7) 115 Goodwill of US$33m (2014: US$18m) relating to the Integrated Energy Services cash-generating unit was impaired at 30 June 2015 (note 5). Goodwill written off on disposal of subsidiary during 2014 related to the sale of 80% of the share capital of Petrofac FPSO Holding Limited to PetroFirst Infrastructure Holdings Limited (note 4f). Goodwill acquired through business combinations has been allocated to four groups of cash-generating units, for impairment testing as follows: • Onshore Engineering & Construction • Offshore Projects & Operations • Engineering & Consulting Services • Integrated Energy Services These represent the lowest level within the Group at which the goodwill is monitored for internal management purposes. The Group considers cash-generating units to be individually significant where they represent greater than 25% of the total goodwill balance. Onshore Engineering & Construction, Offshore Projects & Operations, Engineering & Consulting Services and Integrated Energy Services cash-generating units Recoverable amounts have been determined based on value in use calculations, using discounted pre-tax cash flow projections. Management have adopted projection periods appropriate to each unit’s value in use. For Onshore Engineering & Construction, Offshore Projects & Operations and Engineering & Consulting Services cash-generating units the cash flow projections are based on financial budgets approved by senior management covering a five-year period. For the Integrated Energy Services business the cash flows are based on economic models over the length of the contracted period for Production Enhancement Contracts, Equity Upstream Investments and Risk Service Contracts. For other operations included in Integrated Energy Services, cash flows are based on financial budgets approved by senior management covering a five-year period, extrapolated at a growth rate of 2.5% per annum. Carrying amount of goodwill allocated to each group of cash-generating units Onshore Engineering & Construction unit Offshore Projects & Operations unit Engineering & Consulting Services unit Integrated Energy Services unit 2015 US$m 2014 US$m 29 26 25 – 80 29 28 24 34 115 Key assumptions used in value in use calculations for the Onshore Engineering & Construction, Offshore Projects & Operations and the Engineering & Consulting Services units Market share: the key management assumptions relate to continuing to maintain existing levels of business and grow organically in international markets. Discount rate: management has used a pre-tax discount rate of 11.6% per annum (2014: 11.6% per annum) derived from the estimated weighted average cost of capital of the Group. A 100 basis point increase in the pre-tax discount rate to 12.6% would result in no additional impairment charges. Key assumptions used in value in use calculations for the Integrated Energy Services unit at 30 June 2015 The following key assumptions were included in the value in use calculations at 30 June 2015 at which point in time the remaining amount of goodwill of US$33m was fully impaired: Market share: for the Training business which is within Integrated Energy Services, the key assumptions relate to management’s assessment of maintaining the unit’s market share in the UK and developing further the business in international markets. Capital expenditure: the Production Enhancement Contracts in the Integrated Energy Services unit require a minimum level of capital spend on the projects in the initial years to meet contractual commitments. If the capital is not spent, a cash payment of the balance is required which does not qualify for cost recovery. The level of capital spend assumed in the value in use calculation is that expected over the period of the budget based on the current field development plans which assumes the minimum spend is met on each project and the contracts remain in force for the entire duration of the project. For other equity upstream investments, the level of capital spend assumed is based on sanctioned field development plans and represents the activities required to access commercial reserves. 144 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 144 07/03/2016 11:40 145 Reserve volumes and production profiles: management has used its internally developed economic models of reserves and production profiles as inputs in to the value in use for the Production Enhancement Contracts, Risk Service Contracts and Equity Upstream Investments. These economic models are revised annually as part of the preparation of the Group’s five year business plans which are approved by the Board. Management used forward curve oil prices at 30 June 2015 of US$66 per barrel for the year to 30 June 2016, US$71 per barrel for the year to 30 June 2017 and US$80 per barrel for July to December 2017 and long-term planning prices of US$85 per barrel for 2018 and US$90 per barrel for 2019 and beyond to determine reserve volumes (2014: US$61 per barrel for 2015 and US$69 per barrel for 2016, US$80 per barrel for 2017, US$85 per barrel for 2018 and US$90 per barrel for 2019 and beyond). Growth rate: estimates are based on management’s assessment of market share having regard to macro-economic factors and the growth rates experienced in the recent past in the markets in which the unit operates. A growth rate of 2.5% per annum has been applied for businesses within the Integrated Energy Services cash-generating unit where the cash flows are not based on long-term contractual arrangements. Discount rate: management has used a pre-tax discount rate of 11.6% per annum (2014: 11.6% per annum). The discount rate is derived from the estimated weighted average cost of capital (WACC) of the Group and has been calculated using an estimated risk free rate of return adjusted for the Group’s estimated equity market risk premium. 13 Intangible assets Intangible oil and gas assets Cost: At 1 January Additions Assets related to increase in decommissioning provision (note 26) Transfer to oil and gas assets (note 10) Impairments (note 5) Write off (note 4b and note 4c) Net book value of intangible oil and gas assets at 31 December Other intangible assets Cost: At 1 January Impairments (note 5) Transfer to receivables Exchange difference At 31 December Accumulated amortisation: At 1 January Amortisation Exchange difference At 31 December Net book value of other intangible assets at 31 December Total intangible assets 2015 US$m 2014 US$m 156 10 – (73) (7) – 86 53 – (5) – 48 (23) (4) – (27) 21 107 290 97 47 (264) (5) (9) 156 60 (4) – (3) 53 (20) (5) 2 (23) 30 186 Intangible oil and gas assets Oil and gas assets (part of the Integrated Energy Services segment) additions comprise US$10m (2014: US$137m) of capitalised expenditure on the Group’s assets in Malaysia. There were investing cash outflows relating to capitalised intangible oil and gas assets of US$17m (2014: US$119m) in the current period arising from pre-development activities. Transfers within intangible oil and gas assets represent transfers to oil and gas assets relating to block PM304 in Malaysia of US$73m (2014: US$236m and Ticleni PECs of US$28m) (note 10). In 2014, the US$8m write off of intangible oil and gas assets was in respect of a dry well in Chergui and US$1m was in respect of Bowleven licence costs written off. Other intangible assets Other intangible assets comprising project development expenditure, customer contracts, proprietary software and patent technology are being amortised over their estimated economic useful life on a straight-line basis and the related amortisation charges included in cost of sales and selling, general and administration expenses (note 4b and 4c). 22-Financials-Shareholder-p117-185-AN-070316.indd 145 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 145 Financial statements 146 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 14 Investments in associates/joint ventures As at 1 January 2014 Loan made to Petrofac FPF1 Limited Share of profits Fair valuation gain on initial recognition of investment in associate (note 4f) Transfer to available-for-sale investment (note 15) Dividends received As at 1 January 2015 Additions Loan made to Petrofac FPF1 Limited Share of profits Fair valuation gain on initial recognition of investment in associate (note 4f) Dividends received As at 31 December 2015 Associates US$m 210 13 4 31 (185) (7) 66 – 1 7 1 (6) 69 Joint ventures US$m 5 – 3 – – (3) 5 1 – 2 – (3) 5 Total US$m 215 13 7 31 (185) (10) 71 1 1 9 1 (9) 74 Dividends received include US$5m received from PetroFirst Infrastructure Limited, US$3m received from TTE Petrofac Limited and US$1m receivable from PetroFirst Infrastructure Limited at 31 December 2015 (2014: US$7m received from PetroFirst infrastructure Limited and US$3m received from TTE Petrofac Limited). Included in share of profits is an impairment loss of US$1m relating to a reduction in scope of construction work at a training centre in Oman (note 5). In 2014, fair value gain of US$31m represented the increase in fair value of the remaining 20% share in PetroFirst Infrastructure Limited post disposal of 80% of the share capital of Petrofac FPSO Holding Limited (note 4f). Associates PetroFirst Infrastructure Limited Petrofac FPF1 Limited 2015 US$m 2014 US$m 29 40 69 28 38 66 Interest in associates Summarised financial information of PetroFirst Infrastructure Limited and Petrofac FPF1 Limited, based on their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated financial statements are set out below: Revenue Cost of sales Gross profit Selling, general and administration expenses Finance (expense)/income, net Profit Group’s share of profit for the year Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Group’s share of net assets Carrying amount of the investment 2015 US$m 2014 US$m 68 (17) 51 – (14) 37 7 25 562 587 17 264 281 306 69 69 28 – 28 (8) (6) 14 4 40 595 635 20 328 348 287 66 66 The associates had no contingent liabilities or capital commitments as at 31 December 2015 and 2014. 146 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 146 07/03/2016 11:40 147 14 Investments in associates/joint ventures continued Interest in joint ventures Summarised financial information of the joint ventures1, based on their IFRS financial statements, and reconciliation with the carrying amount of the investment in consolidated financial statements are set out below: Revenue Cost of sales Gross profit Selling, general and administration expenses Finance (expense)/income, net Profit before income tax Income tax Profit Group’s share of profit for the year Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Group’s share of net assets Carrying amount of the investment 1 A list of these joint ventures is disclosed in note 32. 2015 US$m 25 (19) 2014 US$m 35 (26) 6 (1) – 5 (1) 4 2 14 6 20 9 1 10 10 5 5 9 (2) – 7 (1) 6 3 20 5 25 11 4 15 10 5 5 The joint ventures had no contingent liabilities or capital commitments as at 31 December 2015 and 2014. The joint ventures cannot distribute their profits until they obtain consent from the venturers. 15 Available-for-sale investment On 15 April 2014, Seven Energy secured additional equity capital that resulted in dilution of the Company’s interest in Seven Energy from 23.5% to 15.4%. Following the dilution of ownership interest, the Group did not exercise significant influence over the activities of Seven Energy and as a result transferred the investment of US$185m from investment in associate to available-for-sale investment (note 14). During 2015, a reduction in fair value of US$16m has been recognised in other comprehensive income through reserve for unrealised gains/(losses) on available-for-sale financial asset (2014: US$nil). 22-Financials-Shareholder-p117-185-AN-070316.indd 147 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 147 Financial statements 148 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 16 Other financial assets and other financial liabilities Other financial assets Non-current Receivable under the Berantai RSC Receivable from joint venture partners Classification 2015 US$m 2014 US$m Fair value through profit and loss Loans and receivables Forward currency contracts designated as hedges (note 31) Designated as cash flow hedges Restricted cash Current Loans and receivables Receivable under the Berantai RSC Fair value through profit and loss Receivable in respect of the development of the Greater Stella Area Fair value through profit and loss Receivable from joint venture partners Forward currency contracts designated as hedges (note 31) Forward currency contracts undesignated (note 31) Oil derivative (note 31) Restricted cash Other financial liabilities Non-current Finance lease creditors (note 28) Loans and receivables Designated as cash flow hedges Fair value through profit and loss Designated as cash flow hedges Loans and receivables Loans and borrowings Forward currency contracts designated as hedges (note 31) Designated as cash flow hedges Current Finance lease creditors (note 28) Contingent consideration payable Forward currency contracts designated as hedges (note 31) Forward currency contracts undesignated (note 31) Oil derivative (note 31) Interest payable Loans and borrowings Fair value through profit and loss Designated as cash flow hedges Fair value through profit and loss Designated as cash flow hedges Fair value through profit and loss 303 330 78 41 752 54 160 155 26 12 12 36 455 631 28 659 239 – 66 1 – 30 336 343 396 50 1 790 38 192 150 27 – 20 8 435 738 18 756 234 1 74 – – 8 317 The long-term and short-term receivables under the Berantai RSC represent the discounted value of amounts due under the contract which are being recovered over a six year period from 2013 in line with the contractual terms of the project. The short-term receivable in respect of the development of the Greater Stella Area represents a loan made to the consortium partners to fund Petrofac’s share of the development costs of the field. The short-term and long-term receivable from joint venture partners represents the 70% gross up on the finance lease liability in respect of oil and gas facilities relating to block PM304 in Malaysia that are included 100% in the Group’s consolidated statement of financial position. This treatment is necessary to reflect the legal position of the Group as the contracting entity for this lease. The Group’s 30% share of this liability is US$208m (2014: US$234m). Restricted cash comprises deposits with financial institutions and joint venture partners securing various guarantees and performance bonds associated with the Group’s trading activities (note 28).This cash will be released on the maturity of these guarantees and performance bonds. 148 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 148 07/03/2016 11:40 149 Fair value measurement The following financial instruments are measured at fair value using the hierarchy below for determination and disclosure of their respective fair values: Level 1: Unadjusted quoted prices in active markets for identical financial assets or liabilities Level 2: Other valuation techniques where the inputs are based on significant observable factors Level 3: Other valuation techniques where the inputs are based on significant unobservable market data Set out below is a comparison of the carrying amounts and fair values of financial instruments as at: Level Carrying amount Fair value 2015 US$m 2014 US$m 2015 US$m 2014 US$m Financial assets Cash and short-term deposits Restricted cash Available-for-sale investment Receivable under Berantai RSC Receivable in respect of the development of the Greater Stella Area Oil derivative Euro forward currency contracts – designated as cash flow hedge Kuwaiti Dinar forward currency contracts – designated as cash flow hedge Sterling forward currency contracts – designated as cash flow hedge Sterling forward currency contracts – undesignated Financial liabilities Interest-bearing loans and borrowings Senior notes Term Loan Revolving credit facility Export Credit Agency Funding Bank overdrafts Finance lease creditors Contingent consideration Euro forward currency contracts – designated as cash flow hedge Level 2 Level 2 Level 3 Level 3 Level 3 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 2 Level 3 Level 2 Malaysian Ringgit forward currency contracts – designated as cash flow hedge Level 2 Sterling forward currency contracts – designated as cash flow hedge Kuwaiti Dinar forward currency contracts – designated as cash flow hedge Sterling forward currency contracts – undesignated Level 2 Level 2 Level 2 1,104 77 169 357 160 12 99 3 2 12 745 499 530 13 3 870 – 72 18 3 1 1 986 9 185 381 192 20 77 – – – 743 498 469 – 9 972 1 91 – 1 – – 1,104 77 169 357 160 12 99 3 2 12 750 500 540 17 3 870 – 72 18 3 1 1 986 9 185 381 192 20 77 – – – 750 500 475 – 9 972 1 91 – 1 – – The Group considers that the carrying amounts of trade and other receivables, work-in-progress, trade and other payables, other current and non- current financial assets and liabilities approximate their fair values and are therefore excluded from the above table. The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values: • The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Derivatives valued using valuation techniques with market observable inputs are mainly foreign exchange forward contracts and oil derivatives. Externally provided sources of quoted market prices have been used to determine the fair values of forward currency contracts, interest rate swaps and oil derivatives. • The fair values of long-term interest-bearing loans and borrowings and finance lease creditors are equivalent to their amortised costs determined as the present value of discounted future cash flows using the effective interest rate. 22-Financials-Shareholder-p117-185-AN-070316.indd 149 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 149 Financial statements 150 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 16 Other financial assets and other financial liabilities continued • The fair value of the receivable under Berantai RSC has been calculated using a discounted cash flow model. The valuation requires management to make certain assumptions about unobservable inputs to the model; the oil price assumptions used are the same as disclosed in note 5 and other significant unobservable inputs are disclosed in the table below: Internal rate of return Discount rate 2015 11.5% 6.0% 2014 11.5% 6.0% Management regularly assesses a range of reasonably possible alternatives for those significant unobservable inputs and determines their impact on the total fair value. The fair value of the receivable under Berantai RSC is only sensitive to a reasonable change in the internal rate of return and the discount rate. The table below explains the impact on the fair value of the receivable as a result of changes to these inputs: 100 basis points decrease in the internal rate of return 100 basis points decrease in the discount rate 100 basis points increase in the discount rate Reconciliation of fair value measurement of the receivable under Berantai RSC: As at 1 January Billings during the year Fair value loss included in revenue Fair value loss on contract receivables (note 5) Unwinding of discount Receipts during the year As at 31 December 2015 US$m (19) 2 (2) 2015 US$m 381 55 (4) – 8 (83) 357 2014 US$m (1) 2 (2) 2014 US$m 476 65 (3) (43) 20 (134) 381 • The fair value of the available-for-sale investment in Seven Energy has been calculated using a discounted cash flow model. The oil price assumptions used are the same as disclosed in note 5; the risk adjusted cash flow projections are discounted at a post-tax rate of 9.0% The table below explains the impact on the fair value of the available-for-sale investment as a result of changes to these inputs: 10% decrease in the oil price (per barrel) 10% increase in the oil price (per barrel) 100 basis points decrease in the discount rate 100 basis points increase in the discount rate Reconciliation of fair value measurement of the available-for-sale investment: As at 1 January Transferred from investment in associate Fair value change (note 15) As at 31 December 2015 US$m 2014 US$m (3) 5 12 (9) 2015 US$m 185 – (16) 169 (4) 4 14 (14) 2014 US$m – 185 – 185 150 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 150 07/03/2016 11:40 151 • The fair value of the receivable in respect of the development of the Greater Stella Area has been calculated using a discounted cash flow model that represents the value which management expects would be converted to oil and gas assets upon transfer of legal title of the licence on achieving first oil. The oil price assumptions used are the same as disclosed in note 5; the risk adjusted cash flow projections are discounted at a post-tax rate of 9.0%. The table below explains the impact on the fair value of the amounts receivable in respect of the development of the Greater Stella Area as a result of changes to these inputs: 10% decrease in the oil price (per barrel) 10% increase in the oil price (per barrel) 10% decrease in the gas price (per mcf) 10% increase in the gas price (per mcf) 6 month delay in production 100 basis points decrease in the discount rate 100 basis points increase in the discount rate Reconciliation of fair value measurement of the amounts receivable in respect of the development of the Greater Stella Area: As at 1 January Advances during the year to the partners Fair value loss (note 5) As at 31 December 17 Inventories Crude oil Stores and raw materials Included in the consolidated income statement are costs of inventories expensed of US$106m (2013: US$43m). 18 Work in progress and billings in excess of cost and estimated earnings Cost and estimated earnings Less: billings Work in progress Billings Less: cost and estimated earnings Billings in excess of cost and estimated earnings Total cost and estimated earnings Total billings 2015 US$m 2014 US$m (22) 22 (26) 27 (45) 16 (15) 2015 US$m 192 182 (214) 160 (29) 27 (30) 30 (8) 17 (19) 2014 US$m 200 199 (207) 192 2015 US$m 2014 US$m 4 9 13 3 13 16 2015 US$m 2014 US$m 19,517 15,892 (17,723) (14,290) 1,794 1,602 1,589 (1,388) 201 5,638 (5,373) 265 20,905 21,265 19,312 19,928 22-Financials-Shareholder-p117-185-AN-070316.indd 151 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 151 Financial statements 152 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 19 Trade and other receivables Trade receivables Retentions receivables Advances Prepayments and deposits Receivables from joint venture partners Other receivables 2015 US$m 1,224 349 262 38 100 151 2014 US$m 1,680 344 275 47 196 241 2,124 2,783 Other receivables mainly consist of Value Added Tax recoverable of US$65m (2014: Value Added Tax recoverable of US$140m and US$34m receivable from PetroFirst Infrastructure Holdings Limited relating to disposal of 80% of the share capital of Petrofac FPSO Holding Limited). Trade receivables are non-interest bearing and are generally on 30 to 60 days’ terms. Trade receivables are reported net of provision for impairment. The movements in the provision for impairment against trade receivables totalling US$1,236m (2014: US$1,684m) are as follows: Specific impairment US$m 2015 General impairment US$m 2014 Total US$m Specific impairment General impairment US$m US$m At 1 January Charge/(reversal) for the year Amounts written off At 31 December At 31 December, the analysis of trade receivables is as follows: Unimpaired Impaired Less: impairment provision Net trade receivables 2015 Unimpaired Impaired Less: impairment provision Net trade receivables 2014 Neither past due nor impaired US$m 832 – 832 – 832 1,228 – 1,228 – 1,228 < 30 days US$m 156 – 156 – 156 285 – 285 – 285 2 10 (1) 11 31–60 days US$m 129 – 129 – 129 74 1 75 – 75 2 (1) – 1 4 9 (1) 12 4 – (2) 2 1 1 – 2 Number of days past due 61–90 days US$m 91–120 days US$m 121–360 days US$m > 360 days US$m 18 – 18 – 18 15 1 16 – 16 12 6 18 (3) 15 21 1 22 – 22 46 9 55 (5) 50 37 4 41 (2) 39 22 6 28 (4) 24 15 2 17 (2) 15 Total US$m 5 1 (2) 4 Total US$m 1,215 21 1,236 (12) 1,224 1,675 9 1,684 (4) 1,680 The credit quality of trade receivables that are neither past due nor impaired is assessed by management with reference to externally prepared customer credit reports and the historic payment track records of the counterparties. Advances represent payments made to certain of the Group’s subcontractors for projects in progress, on which the related work had not been performed at the statement of financial position date. Receivables from joint venture partners are amounts recoverable from venture partners on the Block PM304, Berantai RSC and on consortium contracts in the OEC segment. All trade and other receivables are expected to be settled in cash. Certain trade and other receivables will be settled in cash using currencies other than the reporting currency of the Group, and will be largely paid in sterling, euros and Kuwaiti dinars. 152 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 152 07/03/2016 11:40 153 20 Cash and short-term deposits Cash at bank and in hand Short-term deposits Total cash and bank balances 2015 US$m 1,102 2 1,104 2014 US$m 899 87 986 Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group, and earn interest at respective short-term deposit rates. The fair value of cash and bank balances is US$1,104m (2014: US$986m). For the purposes of the consolidated statement of cash flows, cash and cash equivalents comprise the following: Cash at bank and in hand Short-term deposits Bank overdrafts (note 25) 21 Share capital The share capital of the Company as at 31 December was as follows: 2015 US$m 1,102 2 (3) 1,101 2014 US$m 899 87 (9) 977 2015 US$m 2014 US$m Authorised 750,000,000 ordinary shares of US$0.020 each (2014: 750,000,000 ordinary shares of US$0.020 each) 15 15 Issued and fully paid 345,912,747 ordinary shares of US$0.020 each (2014: 345,912,747 ordinary shares of US$0.020 each) 7 7 The movement in the number of issued and fully paid ordinary shares is as follows: Ordinary shares: Ordinary shares of US$ 0.020 each at 1 January 2014 Issued during the year Ordinary shares of US$0.020 each at 1 January 2015 Ordinary shares of US$0.020 each at 31 December 2015 Number 345,912,747 – 345,912,747 345,912,747 The share capital comprises only one class of ordinary shares. The ordinary shares carry a voting right and the right to a dividend. Share premium: The balance on the share premium account represents the amount received in excess of the nominal value of the ordinary shares. Capital redemption reserve: The balance on the capital redemption reserve represents the aggregated nominal value of the ordinary shares repurchased and cancelled. 22 Treasury shares For the purpose of making awards under the Group’s employee share schemes, shares in the Company are purchased and held by the Petrofac Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust. All these shares have been classified in the statement of financial position as treasury shares within equity. The movements in total treasury shares are shown below: At 1 January Acquired during the year Vested during the year At 31 December 2015 2014 Number US$m Number 4,985,937 2,800,000 101 5,672,691 39 1,000,000 (1,770,417) (29) (1,686,754) 6,015,520 111 4,985,937 US$m 110 25 (34) 101 Shares vested during the year include dividend shares and 8% uplift adjustment made in respect of the EnQuest demerger of 105,365 shares (2014: 102,514 shares). 22-Financials-Shareholder-p117-185-AN-070316.indd 153 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 153 Financial statements 154 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 23 Share-based payment plans Performance Share Plan (PSP) Under the PSP, share awards are granted to Executive Directors and a restricted number of other senior executives of the Group. The shares vest at the end of three years subject to continued employment and the achievement of certain pre-defined market and non-market-based performance conditions. The 50% market performance based part of these awards is dependent on the total shareholder return (TSR) of the Group compared with an index composed of selected relevant companies. The fair value of the shares vesting under this portion of the award is determined by an independent valuer using a Monte Carlo simulation model taking into account the terms and conditions of the plan rules and using the following assumptions at the date of grant: Expected share price volatility (based on median of comparator Group’s three-year volatilities) Share price correlation with comparator group Risk-free interest rate Expected life of share award Fair value of TSR portion 2015 awards 2014 awards 22 Mar 2013 18 Apr 2013 24 May 2013 awards awards awards 2012 awards 28.5% 26.4% 0.7% 3 years 562p 32.7% 40.4% 1.2% 3 years 827p 34.6% 44.0% 0.4% 34.7% 44.3% 0.4% 33.9% 42.0% 0.5% 3 years 3 years 3 years 692p 492p 571p 38.0% 46.0% 0.4% 3 years 1,103p The non-market-based condition governing the vesting of the remaining 50% of the total award is subject to achieving between 7.5% and 15% earnings per share (EPS) growth targets over a three-year period. The fair values of the equity-settled award relating to the EPS part of the scheme are estimated, based on the quoted closing market price per Company share at the date of grant with an assumed vesting rate per annum built into the calculation (subsequently trued up at year end based on the actual leaver rate during the period from award date to year end) over the three-year vesting period of the plan. Deferred Bonus Share Plan (DBSP) Under the DBSP selected employees are required to defer a proportion of their annual cash bonus into Company shares (‘Invested Award’). Following such an award, the Company will generally grant the participant an additional award of a number of shares bearing a specified ratio to the number of his or her invested shares (‘Matching Shares’), typically using a 1:1 ratio. Subject to a participant’s continued employment, invested and matching share awards may either vest 100% on the third anniversary of grant; or alternatively, vest one-third on the first anniversary of the grant, one-third on the second anniversary and the final proportion on the third anniversary. At the year end the values of the bonuses settled by shares cannot be determined until the Remuneration Committee has approved the portion of the employee bonuses to be settled in shares. Once the portion of the bonus to be settled in shares is determined, the final bonus liability to be settled in shares is transferred to the reserve for share-based payments. The costs relating to the Matching Shares are recognised over the corresponding vesting period and the fair values of the equity-settled Matching Shares granted to employees are based on the quoted closing market price at the date of grant with the charge adjusted to reflect the expected vesting rate of the plan. Share Incentive Plan (SIP) All UK employees, including UK Executive Directors, are eligible to participate in the SIP. Employees may invest up to sterling £1,800 per tax year of gross salary (or, if lower, 10% of salary) to purchase ordinary shares in the Company. There is no holding period for these shares. Restricted Share Plan (RSP) Under the RSP, selected employees are made grants of shares on an ad hoc basis. The RSP is used primarily, but not exclusively, to make awards to individuals who join the Group part way through the year, having left accrued benefits with a previous employer. The fair values of the awards granted under the RSP at various grant dates during the year are based on the quoted market price at the date of grant adjusted for an assumed vesting rate over the relevant vesting period. Value Creation Plan (VCP) During 2012 the Company introduced a one-off Value Creation Plan (VCP) which is a share option scheme for Executive Directors and key senior executives within the Company. VCP is a premium priced share option scheme with options granted with an exercise price set at a 10% premium to the grant date price. Options will only vest to the extent of satisfying Group and divisional profit after tax targets, together with various other performance underpins and risk/malus provisions that can be imposed at the discretion of the Remuneration Committee. The share options would vest in equal tranches on the fourth, fifth and sixth anniversaries of the original grant date but may be exercised up to eight years from the date of grant. The VCP share options were fair valued by an independent valuer using a Black-Scholes option pricing model taking into account the rules of the plan and using the following key assumptions: Share price at the date of grant Exercise price Expected lives of the award Share price volatility Share price dividend yield Risk-free interest rates Per share fair values 154 / Petrofac Annual report and accounts 2015 Tranche 1 Tranche 2 Tranche 3 1,555p 1,710p 6 years 41% 2.3% 1.1% 451p 1,555p 1,710p 6.5 years 41% 2.3% 1.2% 467p 1,555p 1,710p 7 years 41% 2.3% 1.3% 482p 22-Financials-Shareholder-p117-185-AN-070316.indd 154 07/03/2016 11:40 155 Share-based payment plans information The details of the fair values and assumed vesting rates of the share-based payment plans are below: 22 Mar PSP (EPS portion) 18 Apr 24 May DBSP RSP Fair value per share Assumed vesting rate Fair value per share Assumed vesting rate Fair value per share Assumed vesting rate Fair value per share Assumed vesting rate Fair value per share Assumed vesting rate 2015 awards 2014 awards 2013 awards 2012 awards 890p 1,376p 1,446p 1,705p 0.0% 0.0% – – – – – – – – 890p 94.1% 927p 95.0% 1,376p 84.3% 1,157p 0.0% 1,266p 0.0% 1,340p 0.0% 1,446p 79.0% 1,366p 0.0% – – – – 1,705p 83.2% 1,555p 96.7% 88.1% 70.6% The following table shows the movements in the number of shares held under the share-based payment plans outstanding but not exercisable: PSP DBSP RSP VCP Total 2015 Number 2014 Number 2015 *Number 2014 *Number 2015 Number 2014 Number 2015 Number 2014 Number 2015 Number 2014 Number Outstanding at 1 January 1,139,931 1,315,870 3,822,196 3,708,306 357,363 538,874 1,354,828 1,701,150 6,674,318 7,264,200 Granted during the year Vested during the year Forfeited during the year 775,188 406,830 3,460,960 2,226,630 67,719 82,591 – (43,308) (1,579,408) (1,802,020) (123,213) (227,892) – – – 4,303,867 2,716,051 – (1,702,621) (2,073,220) (430,143) (539,461) (351,115) (310,720) (33,524) (36,210) (515,333) (346,322) (1,330,115) (1,232,713) Outstanding at 31 December 1,484,976 1,139,931 5,352,633 3,822,196 *Includes Invested and Matching Shares 268,345 357,363 839,495 1,354,828 7,945,449 6,674,318 The number of shares still outstanding but not exercisable at 31 December 2015 for each award is as follows: PSP DBSP RSP VCP Total 2015 Number 2014 Number 2015 *Number 2014 *Number 2015 Number 2014 Number 2015 Number 2014 Number 2015 Number 2015 awards 735,364 – 3,235,692 – 67,719 – 2014 awards 368,627 401,931 1,391,665 2,034,728 68,273 82,591 2013 awards 380,985 413,763 725,276 1,191,476 119,035 170,189 – – – – 4,038,775 – 1,828,565 2,519,250 – 1,225,296 1,775,428 2014 Number – 2012 awards 2011 awards 2010 awards – – – 324,237 – – – – – 595,992 13,318 65,239 839,495 1,354,828 852,813 2,340,296 – – – – 20,565 18,779 – – – – – – 20,565 18,779 Total awards 1,484,976 1,139,931 5,352,633 3,822,196 268,345 357,363 839,495 1,354,828 7,945,449 6,674,318 * Includes Invested and Matching Shares. The average share price of the Company shares during 2015 was US$12.84 (sterling equivalent of £8.39) (2014: US$19.19 (sterling equivalent of £11.65)). The number of outstanding shares excludes the 8% uplift adjustment made in respect of the EnQuest demerger and dividend shares shown below: PSP DBSP 2015 Number 2014 Number 2015 *Number – – 318 2014 *Number 318 105,633 105,633 72,514 358,476 202,781 72,514 358,794 203,099 RSP 2015 Number 83 13,527 13,610 2014 Number 384 Total 2015 Number 401 2014 Number 702 14,873 477,636 290,168 15,257 478,037 290,870 EnQuest 8% uplift Dividend shares Outstanding at 31 December * Includes Invested and Matching Shares. 22-Financials-Shareholder-p117-185-AN-070316.indd 155 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 155 Financial statements 156 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 23 Share-based payment plans continued The charge in respect of share-based payment plans recognised in the consolidated income statement is as follows: PSP *DBSP RSP VCP Total 2015 US$m 2014 US$m 2015 US$m 2014 US$m 2015 US$m 2014 US$m 2015 US$m 2014 US$m 2015 US$m 2014 US$m Share-based payment charge/(credit) * Represents charge on Matching Shares only. – – 21 19 2 3 – – 23 22 The Group has recognised a total charge of US$23m (2014: US$22m) in the consolidated income statement during the year relating to the above employee share-based schemes (see note 4d) which has been transferred to the reserve for share-based payments along with US$23m of the bonus liability accrued for the year ended 31 December 2014 which has been settled in shares granted during the year (2013 bonus of US$24m). For further details on the above employee share-based payment schemes refer to pages 94 to 97, 99 and 103 to 104 of the Directors’ remuneration report. 24 Other reserves Balance at 1 January 2014 Foreign currency translation Net gains on maturity of cash flow hedges recycled in the year Net changes in fair value of derivatives and financial assets designated as cash flow hedges Share-based payments charge (note 23) Transfer during the year (note 23) Shares vested during the year Deferred tax on share-based payments reserve Balance at 31 December 2014 Attributable to: Petrofac Limited shareholders Non-controlling interests Balance at 31 December 2014 Balance at 1 January 2015 Net gains on maturity of cash flow hedges recycled in the year Net changes in fair value of derivatives and financial assets designated as cash flow hedges Changes in fair value of available-for-sale financial asset Share-based payments charge (note 23) Transfer during the year (note 23) Shares vested during the year Balance at 31 December 2015 Attributable to: Petrofac Limited shareholders Non-controlling interests Balance at 31 December 2015 Net unrealised (gains)/losses on derivatives US$m Net unrealised gains/(losses) on available-for- sale financial asset US$m Foreign currency translation Reserve for share-based payments US$m US$m Total US$m 28 – (14) (21) – – – – (7) 6 (13) (7) (7) (11) (47) – – – – (65) (44) (21) (65) – – – – – – – – – – – – – – – (16) – – – (16) (16) – (16) (29) (22) – – – – – – (51) (51) – (51) (51) – – – – – – (51) (51) – (51) 64 – – – 22 24 (33) (1) 76 76 – 76 76 – – – 23 23 (27) 95 95 – 95 63 (22) (14) (21) 22 24 (33) (1) 18 31 (13) 18 18 (11) (47) (16) 23 23 (27) (37) (16) (21) (37) Nature and purpose of other reserves Net unrealised gains/(losses) on derivatives The portion of gains or losses on cash flow hedging instruments that are determined to be effective hedges is included within this reserve net of related deferred tax effects. When the hedged transaction occurs or is no longer forecast to occur, the gain or loss is transferred out of equity to the consolidated income statement. Realised net gains amounting to US$11m (2014: US$14m net gain) relating to foreign currency forward contracts and financial assets designated as cash flow hedges have been recognised in cost of sales. The forward currency points element and ineffective portion of derivative financial instruments relating to forward currency contracts and gains on undesignated derivatives amounting to US$3m (2014: US$10m) have been recognised in cost of sales. 156 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 156 07/03/2016 11:40 157 Net unrealised gains/(losses) on available-for-sale financial asset This reserve records fair value changes on available-for-sale financial assets held by the Group, net of deferred tax effects. Realised gains and losses on the sale of available-for-sale financial assets are recognised as other operating income or other operating expenses in the consolidated income statement. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements in foreign subsidiaries. It is also used to record exchange differences arising on monetary items that form part of the Group’s net investment in subsidiaries. Reserve for share-based payments The reserve for share-based payments is used to record the value of equity-settled share-based payments awarded to employees and transfers out of this reserve are made upon vesting of the original share awards. The transfer during the year reflects the transfer from accrued expenses within trade and other payables of the bonus liability relating to the year ended 2014 of US$23m (2013 bonus of US$24m) which has been voluntarily elected or mandatorily obliged to be settled in shares during the year (note 23). 25 Interest-bearing loans and borrowings The Group had the following interest-bearing loans and borrowings outstanding: 31 December 2015 Actual interest rate % 31 December 2014 Actual interest rate % Effective interest rate % Maturity1 2015 US$m 2014 US$m Current Bank overdrafts (i) US/UK LIBOR + 1.50% US/UK LIBOR + 1.50% US/UK LIBOR + 1.50% on demand Term Loan (iii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% August 2016 Export Credit Agency Funding (v) US LIBOR + 1.50% US LIBOR + 1.50% Refer note (v) below – Non-current Senior notes Term Loan (ii) 3.40% 3.40% 3.68% 3 years (iii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% n/a Revolving credit facility (RCF) (iv) US LIBOR + 0.95% US LIBOR + 1.50% US LIBOR + 0.95% 5 years Less: Debt acquisition costs net of accumulated amortisation and effective interest rate adjustments Discount on senior notes issuance Total interest-bearing loans and borrowings 1 As at 31 December 2015. Details of the Group’s interest-bearing loans and borrowings are as follows: 3 500 17 520 750 – 540 9 – – 9 750 500 475 1,290 1,725 (18) (2) 1,270 1,790 (13) (2) 1,710 1,719 (i) Bank overdrafts Bank overdrafts are drawn down in US dollars and sterling denominations to meet the Group’s working capital requirements. These are repayable on demand. (ii) Senior notes Petrofac has an outstanding aggregate principal amount of US$750m Senior Notes due in 2018 (Notes). The Group pays interest on the Notes at an annual rate equal to 3.40% of the outstanding principal amount. Interest on the Notes is payable semi-annually in arrears in April and October each year. The Notes are senior unsecured obligations of the Company and will rank equally in right of payment with the Company’s other existing and future unsecured and unsubordinated indebtedness. Petrofac International Ltd and Petrofac International (UAE) LLC irrevocably and unconditionally guarantee, jointly and severally, the due and prompt payment of all amounts at any time becoming due and payable in respect of the Notes. The Guarantees are senior unsecured obligations of each Guarantor and will rank equally in right of payment with all existing and future senior unsecured and unsubordinated obligations of each Guarantor. (iii) Term Loan On 31 August 2014, Petrofac entered into a US$500m two year term loan facility with a syndicate of five international banks. The facility, which matures on 31 August 2016, is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015, the Term Loan lenders granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in compliance with its financial covenant obligations for that period. The loan was fully drawn as of 31 December 2015 (31 December 2014: US$500m). Interest is payable on the facility at US LIBOR + 0.85%. 22-Financials-Shareholder-p117-185-AN-070316.indd 157 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 157 Financial statements 158 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 25 Interest-bearing loans and borrowings continued (iv) Revolving Credit Facility Petrofac has a US$1,200m five year committed revolving credit facility with a syndicate of international banks, which is available for general corporate purposes. The facility, which was signed on 11 September 2012, was amended and extended in June 2015 and will now mature on 2 June 2020. The facility is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015, the facility lenders granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in compliance with its financial covenant obligations for that period. As at 31 December 2015, US$540m was drawn under this facility (31 December 2014: US$475m). Interest is payable on the drawn balance of the facility at US LIBOR + 0.95% and in addition utilisation fees are payable depending on the level of utilisation. (v) Export Credit Agency funding On 26 February 2015, Petrofac entered into a US$58m, 14 year term loan facility guaranteed by the Italian Export Credit Agency SACE. On 30 July 2015, Petrofac entered into a US$108m term loan facility guaranteed by the UK Export Credit Agency UKEF, on substantially the same terms as the SACE facility. The two facilities are linked to the procurement of certain goods and services from Italian and UK exporters, respectively, in connection with the construction of the Petrofac JSD6000 vessel. Repayment of the loans was intended to commence from the date of delivery of the vessel. Following the termination of the vessel construction contract, the facilities are not currently available for drawing and Petrofac is in discussions with the two Export Credit Agencies to amend the facilities and agree a revised date for the commencement of repayments. Petrofac cannot be certain that these discussions will result in agreement with the two ECAs, in which case the facilities will be terminated and no further drawings will be made. As at 31 December 2015, US$17m was drawn under the SACE facility (31 December 2014: US$nil). No drawings have been made under the UKEF facility. 26 Provisions At 1 January 2014 Additions during the year Paid in the year Exchange difference Unwinding of discount At 1 January 2015 Additions during the year Paid in the year Revision of estimates Unwinding of discount At 31 December 2015 Other long-term employment benefits provision Provision for decommissioning Other provisions US$m US$m US$m Total US$m 71 19 (11) – – 79 22 (7) – – 94 136 47 – – 6 189 45 – (8) 4 230 6 – – (1) – 5 2 – – – 7 213 66 (11) (1) 6 273 69 (7) (8) 4 331 Other long-term employment benefits provision Labour laws in the United Arab Emirates require employers to provide for other long-term employment benefits. These benefits are payable to employees on being transferred to another jurisdiction or on cessation of employment based on their final salary and number of years’ service. All amounts are unfunded. The long-term employment benefits provision is based on an internally produced end of service benefits valuation model with the key underlying assumptions being as follows: Average number of years of future service Average annual % salary increases Discount factor Senior employees are those earning a base of salary of over US$96,000 per annum. Discount factor used is the local Dubai five-year Sukuk rate. Senior employees Other employees 5 6% 5% 3 4% 5% Provision for decommissioning The decommissioning provision primarily relates to the Group’s obligation for the removal of facilities and restoration of the sites at the PM304 field in Malaysia, Chergui in Tunisia and Santuario, Magallanes, Arenque and Pánuco Production Enhancement Contracts in Mexico. Additions during the year of US$40m were in relation to Santuario, Magallanes, Arenque and Pánuco Production Enhancement Contracts in Mexico. The liability is discounted at the rate of 4.28% on PM304 (2014: 4.28%), 6.0% on Chergui (2014: 6.00%) and 6.18% on Santuario, Magallanes, Arenque and Pánuco Production Enhancement Contracts (2014: 5.38%). The unwinding of the discount is classified as a finance cost (note 6).The Group estimates that the cash outflows against these provisions will arise in 2026 on PM304, 2031 on Chergui, 2033 on Santuario and Magallanes, 2040 on Arenque and 2039 on Pánuco Production Enhancement Contracts. Other provisions This represents amounts set aside to cover claims against the Group which will be settled via the captive insurance company Jermyn Insurance Company Limited. 158 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 158 07/03/2016 11:40 159 27 Trade and other payables Trade payables Advances received from customers Accrued expenses Other taxes payable Other payables 2015 US$m 485 1,102 772 34 117 2014 US$m 564 975 921 46 164 2,510 2,670 Advances received from customers represent payments received for contracts on which the related work had not been performed at the statement of financial position date. Other payables mainly consist of retentions held against subcontractors of US$71m (2014: US$78m) and amounts payable to joint venture partners of US$23m (2014: US$35m). Certain trade and other payables will be settled in currencies other than the reporting currency of the Group, mainly in sterling, euros and Kuwaiti dinars. 28 Commitments and contingencies Commitments In the normal course of business the Group will obtain surety bonds, letters of credit and guarantees, which are contractually required to secure performance, advance payment or in lieu of retentions being withheld. Some of these facilities are secured by issue of corporate guarantees by the Company in favour of the issuing banks. At 31 December 2015, the Group had letters of credit of US$7m (2014: US$10m) and outstanding letters of guarantee, including performance, advance payments and bid bonds of US$4,974m (2014: US$4,211m) against which the Group had pledged or restricted cash balances of, in aggregate, US$37m (2014: US$9m). At 31 December 2015, the Group had outstanding forward exchange contracts amounting to US$3,592m (2014: US$2,276m). These commitments consist of future obligations either to acquire or to sell designated amounts of foreign currency at agreed rates and value dates (note 31). Leases The Group has financial commitments in respect of non-cancellable operating leases for office space and equipment. These non-cancellable leases have remaining non-cancellable lease terms of between one and 17 years and, for certain property leases, are subject to renegotiation at various intervals as specified in the lease agreements. The future minimum rental commitments under these non-cancellable leases are as follows: Within one year After one year but not more than five years More than five years 2015 US$m 2014 US$m 29 56 60 145 25 69 74 168 Included in the above are commitments relating to the lease of office buildings in Aberdeen, United Kingdom of US$86m (2014: US$115m). Minimum lease payments recognised as an operating lease expense during the year amounted to US$47m (2014: US$44m). Long-term finance lease commitments are as follows: Oil and gas facilities and plant and equipment The commitments are as follows: Within one year After one year but not more than five years More than five years Future minimum lease payments Finance cost US$m US$m Present value US$m 350 653 233 1,236 111 203 52 366 239 450 181 870 The finance leased assets mainly comprise oil and gas facilities in Berantai RSC and Block PM304 in Malaysia and the lease term for these leases range between four to nine years. The above finance lease commitments include 70% gross up of US$485m (2014: US$546m) on finance leases in respect of oil and gas facilities relating to block PM304 in Malaysia, which is necessary to reflect the legal position of the Group as the contracting entity for these leases. 22-Financials-Shareholder-p117-185-AN-070316.indd 159 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 159 Financial statements 160 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 160 Notes to the consolidated financial statements continued 28 Commitments and contingencies continued Capital commitments At 31 December 2015, the Group had capital commitments of US$500m (2014: US$1,034m) excluding the above lease commitments. Included in the US$500m of commitments are: 28 Commitments and contingencies continued Capital commitments At 31 December 2015, the Group had capital commitments of US$500m (2014: US$1,034m) excluding the above lease commitments. Included in the US$500m of commitments are: Building of the Petrofac JSD6000 installation vessel Production Enhancement Contracts in Mexico Further appraisal and development of wells as part of Block PM304 in Malaysia Costs in respect of Ithaca Greater Stella Field development in the North Sea Commitments in respect of the construction of a new training centre in Oman 2015 US$m 93 3 240 164 – 2014 US$m Building of the Petrofac JSD6000 installation vessel 392 Production Enhancement Contracts in Mexico 229 Further appraisal and development of wells as part of Block PM304 in Malaysia 192 Costs in respect of Ithaca Greater Stella Field development in the North Sea 193 Commitments in respect of the construction of a new training centre in Oman 28 29 Related party transactions The consolidated financial statements include the financial statements of Petrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is the ultimate parent entity of the Group. 29 Related party transactions The consolidated financial statements include the financial statements of Petrofac Limited and the subsidiaries listed in note 32. Petrofac Limited is the ultimate parent entity of the Group. The following table provides the total amount of transactions which have been entered into with related parties: The following table provides the total amount of transactions which have been entered into with related parties: Joint ventures Associates Key management personnel interests Sales to related parties US$m Purchases from related parties US$m Amounts owed by related parties US$m 2015 2014 2015 2014 2015 2014 – – – – – – – – – – – – – 1 2 1 – – All sales to and purchases from joint ventures are made at normal market prices and the pricing policies and terms of these transactions are approved by the Group’s management. All related party balances will be settled in cash. All related party balances will be settled in cash. Compensation of key management personnel The following details remuneration of key management personnel of the Group comprising Executive and Non-executive Directors of the Company and other senior personnel. Further information relating to the individual Directors is provided in the Directors’ remuneration report on pages 90 to 106. Short-term employee benefits Share-based payments Fees paid to Non-executive Directors 30 Accrued contract expenses Accrued contract expenses Reserve for contract losses 2015 US$m 9 1 1 11 2015 US$m 1,162 71 1,233 2014 US$m Short-term employee benefits 12 Share-based payments 3 Fees paid to Non-executive Directors 1 16 30 Accrued contract expenses 2014 US$m Accrued contract expenses 743 Reserve for contract losses 57 800 Amounts owed to related parties US$m Joint ventures – 3 Associates 1 – Key management personnel interests – Sales to Purchases related parties US$m from by related related parties US$m parties US$m Amounts owed Amounts owed to related parties US$m 2015 2014 2015 2014 2015 2014 – – – – – – – – – – – – – All sales to and purchases from joint ventures are made at normal market prices and the pricing policies and terms of these transactions are approved by the Group’s management. Compensation of key management personnel The following details remuneration of key management personnel of the Group comprising Executive and Non-executive Directors of the Company and other senior personnel. Further information relating to the individual Directors is provided in the Directors’ remuneration report on pages 90 to 106. The 2015 reserve for contract losses includes provision to cover costs in excess of revenues on the Laggan-Tormore contract of US$48m (2014: US$27m) and provision for an onerous contract of US$12m relating to Ticleni Production Enhancement Contract in Romania of which US$6m has been provided during the year (2014: US$30m). In 2015, an onerous contract provision of US$2m in relation to a reduction in scope of construction work at a training centre in Oman has been recognised in IES segment and an onerous leasehold property provision of US$9m relating to vacant leasehold office buildings at Quattro House and Bridge View in Aberdeen, UK for which their leases expire in 2024 and 2026 respectively has been recognised in Offshore Projects & Operations (note 5). The 2015 reserve for contract losses includes provision to cover costs in excess of revenues on the Laggan-Tormore contract of US$48m (2014: US$27m) and provision for an onerous contract of US$12m relating to Ticleni Production Enhancement Contract in Romania of which US$6m has been provided during the year (2014: US$30m). In 2015, an onerous contract provision of US$2m in relation to a reduction in scope of construction work at a training centre in Oman has been recognised in IES segment and an onerous leasehold property provision of US$9m relating to vacant leasehold office buildings at Quattro House and Bridge View in Aberdeen, UK for which their leases expire in 2024 and 2026 respectively has been recognised in Offshore Projects & Operations (note 5). 2015 US$m 2014 US$m 93 3 240 164 – 392 229 192 193 28 – 1 2 1 – – 9 1 1 11 – 3 1 – – – 12 3 1 16 2015 US$m 2014 US$m 2015 US$m 1,162 71 1,233 2014 US$m 743 57 800 160 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 160 07/03/2016 11:40 161 31 Risk management and financial instruments Risk management objectives and policies The Group’s principal financial assets and liabilities, other than derivatives, comprise available-for-sale financial assets, trade and other receivables, amounts due from/to related parties, cash and short-term deposits, work-in-progress, interest-bearing loans and borrowings, trade and other payables and contingent consideration. The Group’s activities expose it to various financial risks particularly associated with interest rate risk on its variable rate cash and short-term deposits, loans and borrowings and foreign currency risk on conducting business in currencies other than reporting currency as well as translation of the assets and liabilities of foreign operations to the reporting currency. These risks are managed from time to time by using a combination of various derivative instruments, principally forward currency contracts in line with the Group’s hedging policies. The Group has a policy not to enter into speculative trading of financial derivatives. The Board of Directors of the Company has established an Audit Committee to help identify, evaluate and manage the significant financial risks faced by the Group and their activities are discussed in detail on pages 84 to 89. The other main risks besides interest rate and foreign currency risk arising from the Group’s financial instruments are credit risk, liquidity risk and commodity price risk and the policies relating to these risks are discussed in detail below: Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the value of the Group’s interest-bearing financial liabilities and assets. The Group’s exposure to market risk arising from changes in interest rates relates primarily to the Group’s long-term variable rate debt obligations and its cash and bank balances. The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s cash and bank balances are at floating rates of interest. Interest rate sensitivity analysis The impact on the Group’s pre-tax profit and equity due to a reasonably possible change in interest rates on loans and borrowings at the reporting date is demonstrated in the table below. The analysis assumes that all other variables remain constant. 31 December 2015 31 December 2014 Pre-tax profit Equity 100 basis point increase US$m 100 basis point decrease 100 basis point increase US$m US$m 100 basis point decrease US$m (7) (9) 7 9 – – – – The following table reflects the maturity profile of these financial liabilities and assets that are subject to interest rate risk: Year ended 31 December 2015 Financial liabilities Floating rates Bank overdrafts (note 25) Term loans (note 25) Export Credit Agency funding (note 25) Financial assets Floating rates Cash and short-term deposits (note 20) Restricted cash balances (note 16) Within 1 year US$m 1–2 years US$m 2–3 years US$m 3–4 years US$m 4–5 years US$m More than 5 years US$m 3 500 17 520 1,104 36 1,140 – – – – – – – – – – – – 41 41 – – – – – – – – 540 – 540 – – – – – – – – – – Total US$m 3 1,040 17 1,060 1,104 77 1,181 22-Financials-Shareholder-p117-185-AN-070316.indd 161 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 161 Financial statements 162 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 31 Risk management and financial instruments continued Year ended 31 December 2014 Financial liabilities Floating rates Bank overdrafts (note 25) Term loans (note 25) Financial assets Floating rates Cash and short-term deposits (note 20) Restricted cash balances (note 16) Within 1 year US$m 1–2 years US$m 2–3 years US$m 3–4 years US$m 4–5 years US$m More than 5 years US$m Total US$m 9 – 9 986 8 994 – 500 500 – 1 1 – 475 475 – – – – – – – – – – – – – – – – – – – – – 9 975 984 986 9 995 Financial liabilities in the above table are disclosed gross of debt acquisition costs, effective interest rate adjustments and discount on senior notes of US$20m (2014: US$15m). Interest on financial instruments classified as floating rate is re-priced at intervals of less than one year. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. Foreign currency risk The Group is exposed to foreign currency risk on sales, purchases, and translation of assets and liabilities that are in a currency other than the functional currency of its operating units. The Group is also exposed to the translation of the functional currencies of its units to the US dollar reporting currency of the Group. The following table summarises the percentage of foreign currency denominated revenues, costs, financial assets and financial liabilities, expressed in US dollar terms, of the Group totals. Revenues Costs Current financial assets Non-current financial assets Current financial liabilities Non-current financial liabilities 2015 % of foreign currency denominated items 19.4% 47.8% 18.0% 0.0% 24.9% 0.0% 2014 % of foreign currency denominated items 26.5% 56.5% 33.6% 0.0% 36.4% 1.3% The Group uses forward currency contracts to manage the currency exposure on transactions significant to its operations. It is the Group’s policy not to enter into forward contracts until a highly probable forecast transaction is in place and to negotiate the terms of the derivative instruments used for hedging to match the terms of the hedged item to maximise hedge effectiveness. Foreign currency sensitivity analysis The income statements of foreign operations are translated into the reporting currency using a weighted average exchange rate of conversion. Foreign currency monetary items are translated using the closing rate at the reporting date. Revenues and costs in currencies other than the functional currency of an operating unit are recorded at the prevailing rate at the date of the transaction. The following significant exchange rates applied during the year in relation to US dollars: Sterling Kuwaiti dinar Euro 2015 2014 Average rate Closing rate Average rate Closing rate 1.53 3.32 1.11 1.47 3.29 1.09 1.65 3.51 1.33 1.55 3.42 1.21 The following table summarises the impact on the Group’s pre-tax profit and equity (due to change in the fair value of monetary assets, liabilities and derivative instruments) of a reasonably possible change in US dollar exchange rates with respect to different currencies: 31 December 2015 31 December 2014 162 / Petrofac Annual report and accounts 2015 Pre-tax profit Equity +10% US dollar rate increase −10% US dollar rate decrease +10% US dollar rate increase US$m US$m US$m −10% US dollar rate decrease US$m (24) (9) 24 9 53 85 (53) (85) 22-Financials-Shareholder-p117-185-AN-070316.indd 162 07/03/2016 11:40 163 Derivative instruments designated as cash flow hedges At 31 December, the Group had foreign exchange forward contracts as follows: Euro purchases Sterling purchases/(sales) Kuwaiti dinar sales Saudi Riyal purchases Malaysia Ringgit purchases Yen sales Contract value 2015 US$m 997 (225) (1,095) 38 115 (3) 2014 US$m 643 (394) (313) – – (3) Fair value (undesignated) Fair value (designated) Net unrealised gain/(loss) 2015 US$m 2014 US$m 2015 US$m – 11 – – – – 11 – – – – – – – 27 (1) 2 – (18) – 10 2014 US$m (14) (1) – – – – (15) 2015 US$m (31) (10) 8 – (22) – (55) 2014 US$m (22) (3) – – – – (25) The above foreign exchange contracts mature and will affect income between January 2016 and June 2019 (2014: between January 2015 and June 2019). At 31 December 2015, the Group had cash and short-term deposits designated as cash flow hedges with net unrealised losses of US$3m (2014: US$2m loss) as follows: Euro cash and short-term deposits Fair value Net unrealised gain/(loss) 2015 US$m 17 2014 US$m 22 2015 US$m (3) 2014 US$m (2) During 2015, changes in fair value loss of US$64m (2014: gains US$50m) relating to these derivative instruments and financial assets were taken to equity and losses of US$13m (2014: US$8m gain) were recycled from equity into cost of sales in the income statement. The forward points and ineffective portions of the above foreign exchange forward contracts and loss on undesignated derivatives of US$3m (2014: US$10m) were recognised in the income statement (note 4b). Commodity price risk – oil prices The Group is exposed to the impact of changes in oil and gas prices on its revenues and profits generated from sales of crude oil and gas. The Group’s policy is to manage its exposure to the impact of changes in oil and gas prices using derivative instruments, primarily swaps and collars. Hedging is only undertaken once sufficiently reliable and regular long-term forecast production data is available. During the year the Group entered into various crude oil swaps hedging oil production of 754,097 barrels (bbl) (2014: 608,999 bbl) with maturities ranging from May 2016 to September 2016. In addition, fuel oil swaps were also entered into for hedging gas production of 39,292 metric tonnes (MT) (2014: 46,260MT) with maturities from May 2016 to September 2016. The fair value of oil derivatives at 31 December 2015 was an asset of US$12m (2014: US$20m asset) with net unrealised gains deferred in equity of US$12m (2014: US$20m gain). During the year, US$24m gain (2014: US$6m gain) was recycled from equity into the consolidated income statement on the occurrence of the hedged transactions and a gain in the fair value recognised in equity of US$17m (2014: US$27m gain). The following table summarises the impact on the Group’s pre-tax profit and equity (due to a change in the fair value of oil derivative instruments and the underlifting asset/overlifting liability) of a reasonably possible change in the oil price: 31 December 2015 31 December 2014 Pre-tax profit Equity +30 US$/bbl increase −30 US$/bbl decrease US$m US$m +30 US$/bbl increase US$m −30 US$/bbl decrease US$m – – – – (24) (18) 24 18 For sensitivity relating to the impact of changes in the oil price on other financial assets, refer to pages 150 and 151. Credit risk The Group trades only with recognised, creditworthy third parties. Business Unit Risk Review Committees (BURRC) evaluate the creditworthiness of each individual third-party at the time of entering into new contracts. Limits have been placed on the approval authority of the BURRC above which the approval of the Board of Directors of the Company is required. Receivable balances are monitored on an ongoing basis with appropriate follow-up action taken where necessary. At 31 December 2015, the Group’s five largest customers accounted for 46.5% of outstanding trade receivables, retention receivables, work in progress, receivable under Berantai RSC and receivable in respect of the development of the Greater Stella Area (2014: 48.7%). With respect to credit risk arising from the other financial assets of the Group, which comprise cash and cash equivalents, short and long-term receivables from customers (including the Berantai RSC and Greater Stella Area projects), available-for-sale financial assets and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counterparty, with a maximum exposure equal to the carrying amount of these instruments. 22-Financials-Shareholder-p117-185-AN-070316.indd 163 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 163 Financial statements 164 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 31 Risk management and financial instruments continued Liquidity risk The Group’s objective is to ensure sufficient liquidity is available to support future growth. Our strategy includes the provision of financial capital and the potential impact on the Group’s capital structure is reviewed regularly. The Group is not exposed to any external capital constraints. The maturity profiles of the Group’s financial liabilities at 31 December are as follows: Year ended 31 December 2015 Financial liabilities Interest-bearing loans and borrowings Finance lease creditors Trade and other payables (excluding advances from customers and other taxes payable) Due to related parties Derivative instruments Interest payments Year ended 31 December 2014 Financial liabilities Interest-bearing loans and borrowings Finance lease creditors Trade and other payables (excluding advances from customers and other taxes payable) Due to related parties Contingent consideration Derivative instruments Interest payments 6 months or less US$m 6–12 months US$m 1–2 years US$m 2–5 years US$m More than 5 years US$m Contractual undiscounted cash flows US$m Carrying amount US$m 20 237 500 113 – 214 1,290 439 – 233 1,810 1,236 1,790 870 1,323 1 53 24 51 – 14 23 – – 21 29 – – 7 33 – – – – 1,658 701 264 1,769 233 1,374 1,374 1 95 109 4,625 1 95 – 4,130 6 months or less US$m 6–12 months US$m 1–2 years US$m 2–5 years US$m More than 5 years US$m Contractual undiscounted cash flows US$m Carrying amount US$m 9 225 – 118 500 243 1,225 542 – 326 1,734 1,454 1,719 972 1,307 342 3 – 47 25 – 1 24 25 1,616 510 – – – 13 49 805 – – – 8 62 1,837 – – – – – 1,649 1,649 3 1 92 161 3 1 92 – 326 5,094 4,436 The Group uses various funded facilities provided by banks and its own financial assets to fund the above mentioned financial liabilities. Capital management The Group’s policy is to maintain a healthy capital base to sustain future growth and maximise shareholder value. The Group seeks to optimise shareholder returns by maintaining a balance between debt and equity attributable to Petrofac Limited shareholders (capital) and monitors the efficiency of its capital structure on a regular basis. The gearing ratio and return on shareholders’ equity is as follows: Cash and short-term deposits Interest-bearing loans and borrowings (A) Net debt (B) Equity attributable to Petrofac Limited shareholders (C) (Loss)/profit for the year attributable to Petrofac Limited shareholders (D) Gross gearing ratio (A/C) Net gearing ratio (B/C) Shareholders’ return on investment (D/C) 2015 US$m 1,104 (1,790) (686) 1,230 (349) 145.5% 55.8% (28.4%) 2014 US$m 986 (1,719) (733) 1,861 120 92.4% 39.4% 6.4% 164 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 164 07/03/2016 11:40 165 32 Subsidiaries and joint arrangements At 31 December 2015, the Group had investments in the following active subsidiaries and joint arrangements: Name of company Active subsidiaries Petrofac Algeria EURL Petrofac (Cyprus) Limited Eclipse Petroleum Technology Limited K W Limited Oilennium Limited Petrofac (Malaysia-PM304) Limited Petrofac Contracting Limited Petrofac Engineering Limited Petrofac Services Limited Petrofac UK Holdings Limited The New Energy Industries Limited TNEI Services Limited Caltec Limited Petrofac Energy Developments UK Limited Petrofac Deutschland GmbH Jermyn Insurance Company Limited Petrofac Engineering India Private Limited Petrofac Engineering Services India Private Limited Petrofac Information Services Private Limited PT. Petrofac IKPT International Petrofac Integrated Energy Services Limited Monsoon Shipmanagement Limited Petrofac Energy Developments (Ohanet) Jersey Limited Petrofac Energy Developments International Limited Petrofac Facilities Management International Limited Petrofac FPF004 Limited Petrofac GSA Limited Petrofac International Ltd Petrofac Offshore Management Limited Petrofac Platform Management Services Limited Petrofac Training International Limited Petroleum Facilities E & C Limited Petrofac (JSD 6000) Limited Petrofac E&C Sdn Bhd Petrofac Energy Developments Sdn Bhd Petrofac Engineering Services (Malaysia) Sdn Bhd PFMAP Sdn Bhd SPD Well Engineering Sdn Bhd Country of incorporation 2015 2014 Proportion of nominal value of issued shares controlled by the Group Algeria Cyprus England England England England England England England England England England England England Germany Guernsey India India India Indonesia Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Jersey Malaysia Malaysia Malaysia Malaysia Malaysia 100 100 100 100 100 100 100 100 1100 1100 100 100 100 1100 100 1100 100 100 100 51 1100 – 100 1100 1100 100 100 1100 100 100 1100 1100 100 100 100 70 100 100 100 100 100 100 100 100 100 100 1100 1100 100 100 100 1100 100 1100 100 100 100 51 1100 100 100 1100 1100 100 100 1100 100 100 1100 1100 100 100 100 70 100 100 22-Financials-Shareholder-p117-185-AN-070316.indd 165 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 165 Financial statements 166 Notes to the consolidated financial statements continued For the year ended 31 December 2015 Notes to the consolidated financial statements continued 32 Subsidiaries and joint arrangements continued Country of incorporation 2015 2014 Proportion of nominal value of issued shares controlled by the Group Mexico Mexico Mexico Mexico Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands Nigeria Nigeria Norway Norway Oman Romania Russia Russia Russia Saudi Arabia Scotland Scotland Scotland Scotland Scotland Scotland Scotland Scotland Scotland Singapore Singapore United Arab Emirates United Arab Emirates United Arab Emirates United Arab Emirates United Arab Emirates United States United States United States British Virgin Islands 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 240 100 100 100 100 250 100 100 100 100 100 100 100 100 100 100 100 100 1100 100 75 100 100 100 249 100 1100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 240 100 100 100 100 250 100 100 100 100 100 100 100 100 100 100 100 100 1100 100 75 100 100 100 249 100 1100 100 100 Name of company Active subsidiaries continued H&L/SPD Americas S. de R.L. Petrofac Mexico SA de CV Petrofac Mexico Servicios SA de CV Operadora de Campos del Noreste S.A. de C.V. Petrofac Global Employment B.V. Petrofac Kazakhstan B.V. Petrofac Mexico Holdings B.V. Petrofac Netherlands Cooperatief U.A. Petrofac Netherlands Holdings B.V. Petrofac Treasury B.V. PTS B.V. Petrofac Kazakhstan Ventures B.V. Petrofac Nigeria B.V. Petrofac Norge B.V. Petrofac Oman B.V. Petrofac Energy Services Nigeria Limited Petrofac International (Nigeria) Limited Petrofac Holdings AS Petrofac Norge AS Petrofac E&C Oman LLC Petrofac Solutions & Facilities Support S.R.L PKT Technical Services Ltd PKT Training Services Ltd Sakhalin Technical Training Centre Petrofac Saudi Arabia Company Limited Atlantic Resourcing Limited Petrofac Facilities Management Group Limited Petrofac Facilities Management Limited Petrofac Training Limited Scotvalve Services Limited SPD Limited Stephen Gillespie Consultants Limited Petrofac Training Group Limited Petrofac Training Holdings Limited Petrofac South East Asia Pte Ltd Petrofac Training Institute Pte Limited Petrofac Emirates LLC (note 11) Petrofac E&C International Limited Petrofac FZE Petrofac International (UAE) LLC SPD LLC Petrofac Energy Developments (Ohanet) LLC Petrofac Inc. Petrofac Training Inc. SPD Group Limited 166 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 166 07/03/2016 11:40 167 Name of joint arrangement Joint Arrangements Joint ventures Costain Petrofac Limited TTE Petrofac Limited Principal activities Country of incorporation Proportion of nominal value of issued shares controlled by the Group 2015 2014 Engineering, procurement and construction management services England Operation and management of a training centre Jersey China Petroleum Petrofac Engineering Services Cooperatif U.A. Consultancy for Petroleum and chemical engineering Netherlands Takatuf Petrofac Oman LLC Professional Mechanical Repair Services Company Construction, operation and management of a training centre Oman Operation of service centre providing mechanical services to oil and gas industry Saudi Arabia Joint operations PetroAlfa Servicios Integrados de Energia SAPI de CV Services to oil and gas industry Petro-SPM Integrated Services S.A. de C.V. Production enhancement for Pánuco Mexico Mexico Bechtel Petrofac JV NGL 4 JV Petrofac/Black & Veatch JV Petrofac/Bonatti JV Petrofac/Daelim JV Petrofac/ETAP JV PM304 JV Berantai JV Engineering, procurement and construction management of a project in UAE Unincorporated EPC for a project in UAE Unincorporated Tendering and execution of a project in Kazakhstan EPC for a project in Algeria EPC for a project in Oman Oil and gas exploration and production from Chergui concession Oil and gas exploration and production in Malaysia Oil and gas exploration and production in Malaysia Unincorporated Unincorporated Unincorporated Unincorporated Unincorporated Unincorporated Petrofac/Samsung/CB&I CFP EPC for a project in Kuwait Unincorporated Please note that only active companies are shown in the above tables. All dormant companies have been omitted. 1 Directly held by Petrofac Limited. 2 Companies consolidated as subsidiaries on the basis of control. 50 50 49 40 50 350 450 535 545 580 570 550 545 530 551 547 50 50 49 40 50 350 450 515 545 580 570 550 545 530 551 547 3 Joint arrangement classified as joint operation on the basis of contractual arrangement, whereby the activities of the arrangement are primarily designed for the provision of output to the venturers, this indicates that the venturers have rights to substantially all the economic benefits of the assets of the arrangement. 4 Joint arrangement classified as joint operation on the basis of contractual arrangement between the joint venturers to be jointly and severally liable for performance under Pánuco ISC. 5 The unincorporated arrangement between the venturers is a joint arrangement as, contractually, all the decisions about the relevant activities require unanimous consent by the venturers and all unincorporated joint arrangements are included in the Group’s results as joint operations. The Company’s interest in joint ventures is disclosed on page 147. 22-Financials-Shareholder-p117-185-AN-070316.indd 167 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 167 Financial statements COMPANY FINANCIAL STATEMENTS 169 Company income statement 169 Company statement of other comprehensive income Company statement of financial position Company statement of cash flows Company statement of changes in equity Notes to the Company financial statements 170 171 172 173 168 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 168 07/03/2016 11:40 169 Company income statement 169 For the year ended 31 December 2015 Company statement of financial position At 31 December 2015 Company statement of financial position At 31 December 2015 Revenue General and administration expenses Other operating income Revenue Other operating expenses General and administration expenses Profit before tax and finance (costs)/income Other operating income Finance costs Other operating expenses Finance income Profit before tax and finance (costs)/income Profit before tax Finance costs Income tax expense Finance income Profit for the year Profit before tax Income tax expense Profit for the year Company statement of other comprehensive income For the year ended 31 December 2015 Company statement of other comprehensive income Company statement of other comprehensive income For the year ended 31 December 2015 For the year ended 31 December 2015 Profit for the year Other comprehensive loss Changes in fair value of available-for-sale financial asset (note11) Profit for the year Total comprehensive income for the year Other comprehensive loss Changes in fair value of available-for-sale financial asset (note11) The attached notes 1 to 21 form part of these Company financial statements. Total comprehensive income for the year The attached notes 1 to 21 form part of these Company financial statements. Notes 3 4 Notes 5 3 6 4 5 7 6 7 7 7 2015 US$m 1,324 2015 (17) US$m 7 1,324 (769) (17) 545 7 (39) (769) 14 545 520 (39) – 14 520 520 – 520 2014 US$m 398 2014 (13) US$m 128 398 (277) (13) 236 128 (46) (277) 21 236 211 (46) – 21 211 211 – 211 2015 US$m 520 2015 US$m (16) 520 504 (16) 504 2014 US$m 211 2014 US$m – 211 211 – 211 22-Financials-Shareholder-p117-185-AN-070316.indd 169 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 169 Financial statements 170 Company statement of financial position At 31 December 2015 Company statement of financial position At 31 December 2015 Assets Non-current assets Property, plant and equipment Investments in subsidiaries Available-for-sale investment Other non-current assets Current assets Trade and other receivables Amounts due from subsidiaries Other financial assets Cash and short-term deposits Total assets Equity and liabilities Equity attributable to Petrofac Limited shareholders Share capital Share premium Capital redemption reserve Treasury shares Other reserves Retained earnings Total equity Non-current liabilities Interest-bearing loans and borrowings Long-term employee benefit provisions Current liabilities Interest-bearing loans and borrowings Trade and other payables Other financial liabilities Amounts due to subsidiaries Total liabilities Total equity and liabilities Notes 2015 US$m 2014 US$m 9 11 12 18 13 21 14 17 17 18 12 1 389 169 10 569 – 219 185 7 411 1 36 1,685 1,345 14 4 1,704 2,273 – 48 1,429 1,840 7 4 11 (111) 73 682 666 740 1 741 517 1 19 329 866 7 4 11 (101) 70 387 378 1,242 1 1,243 – 1 13 205 219 1,607 2,273 1,462 1,840 The financial statements on pages 169 to 184 were approved by the Board of Directors on 23 February 2016 and signed on its behalf by Tim Weller – Chief Financial Officer. The attached notes 1 to 21 form part of these Company financial statements. 170 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 170 07/03/2016 13:59 171 Company statement of cash flows For the year ended 31 December 2015 Company statement of cash flows For the year ended 31 December 2015 Operating activities Profit before tax Adjustments for: Net finance expense Reduction in valuation of share warrants Gain on disposal Gain on de-recognition of investment in an associate Provision for doubtful debts on amounts due from subsidiaries, net Impairment of Investment in a subsidiary Other non-cash items, net Operating profit before working capital changes Amounts due from subsidiaries Trade and other receivables Trade and other payables Amounts due to subsidiaries Cash generated from/(used in) operations Interest paid Net cash flows generated from/(used in) operating activities Investing activities Investment in a subsidiary Proceeds from disposal of subsidiary, net of transaction costs Purchase of property, plant and equipment Repayment of investment by subsidiaries Interest received Net cash flows (used in)/generated from investing activities Financing activities Interest bearing loans and borrowings obtained, net of debt acquisition cost Debt financing fees paid relating to Group borrowings Treasury shares purchased Equity dividends paid* Net cash flows (used in)/generated from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December * Dividend payments have been made by both the Company and subsidiary entities. The attached notes 1 to 21 form part of these Company financial statements. Notes 2015 US$m 2014 US$m 520 211 7 6 25 – 5 (7) 5 – 6 6 465 294 (7) 1,290 (740) – – 118 668 (36) 632 (464) 41 (1) – – 25 11 (118) (9) 254 – (3) 371 (516) (1) (1) (345) (492) (45) (537) – 84 – 88 21 (424) 193 12 (5) (39) (220) (252) (44) 48 4 498 – (25) (221) 252 (92) 140 48 9 5 9 14 13 22-Financials-Shareholder-p117-185-AN-070316.indd 171 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 171 Financial statements 172 Company statement of changes in equity For the year ended 31 December 2015 Company statement of changes in equity For the year ended 31 December 2015 Issued share capital US$m (note 21) Share premium US$m Capital redemption reserve US$m *Treasury shares US$m (note 14) Other reserves US$m (note 15) Retained earnings US$m Total equity US$m Balance at 1 January 2014 Net profit for the year Other comprehensive income Total comprehensive income Shares vested during the year Treasury shares purchased (note 14) Transfer to reserve for share-based payments Dividends (note 8) Balance at 1 January 2015 Net profit for the year Other comprehensive loss Total comprehensive income for the year Shares vested during the year Treasury shares purchased (note 14) Transfer to reserve for share-based payments Dividends (note 8) Balance at 31 December 2015 7 – – – – – – – 7 – – – – – – – 7 4 – – – – – – – 4 – – – – – – – 4 11 (110) – – – – – – – – – – 34 (25) – – 11 (101) – – – – – – – – – (39) – – 11 (111) 57 – – – (33) – 46 – 70 – (16) – 46 – 73 401 211 – 211 (1) – – 370 211 – 211 – (25) 46 (224) (224) 387 520 – (2) – – (223) 682 378 520 (16) 504 – (39) 46 (223) 666 – (16) 520 29 (27) *Shares held by Petrofac Employee Benefit Trust and Petrofac Joint Venture Companies Employee Benefit Trust. The attached notes 1 to 21 form part of these Company financial statements. 172 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 172 07/03/2016 11:40 173 Notes to the Company financial statements For the year ended 31 December 2015 1 Corporate information The financial statements of Petrofac Limited (the ‘Company’) referred to as the Company financial statements for the year ended 31 December 2015 were authorised for issue in accordance with a resolution of the Directors on 23 February 2016. Petrofac Limited is a limited liability company registered in Jersey under the Companies (Jersey) Law 1991 and is the holding company for the international Group of Petrofac subsidiaries (together the ‘Group’). The Group’s principal activity is the provision of facilities solutions to the oil and gas production and processing industry. 2 Summary of significant accounting policies Basis of preparation The separate financial statements have been prepared on a historical cost basis, except for derivative financial instruments and available-for-sale financial investments that have been measured at fair value. The functional and presentation currency of the separate financial statements is US dollars and all values in the separate financial statements are rounded to the nearest million (US$m) except where otherwise stated. Statement of compliance The separate financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and applicable requirements of Jersey law. New standards and interpretations The Company has adopted new and revised standards and interpretations issued by the International Accounting Standards Board (IASB) and the International Financial Reporting Interpretations Committee (IFRIC) of the IASB that are relevant to its operations and effective for accounting periods beginning on or after 1 January 2015. Although these new standards and amendments apply for the first time in 2015, they do not have a material impact on the financial statements of the Company. Standards issued but not yet effective Standards issued but not yet effective up to the date of issuance of the Company’s financial statements are listed below and include only those standards and interpretations that are likely to have an impact on the disclosures, financial position or performance of the Company at a future date. The Company intends to adopt these standards when they become effective. Amendments to IAS 27: Equity Method in Separate Financial Statements The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. Entities already applying IFRS and electing to change to the equity method in their separate financial statements will have to apply that change retrospectively. The amendments are effective for annual periods beginning on or after 1 January 2016, with early adoption permitted. These amendments will not have any impact on the Company’s financial statements, since the Company will continue to account for its investments in subsidiaries, joint ventures and associates at cost. Investments in subsidiaries Investments in subsidiaries are stated at cost less any provision for impairment. Investments in associates Investments in associates are stated at cost less any provision for impairment. Financial assets Initial recognition and measurement Financial assets are classified, at initial recognition, as financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, available-for-sale financial assets, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial assets are recognised initially at fair value plus, in the case of financial assets not recorded at fair value through profit or loss, transaction costs that are attributable to the acquisition of the financial asset. Subsequent measurement For purposes of subsequent measurement financial assets are classified in the following categories: • Financial assets at fair value through profit or loss • Loans and receivables • Available-for-sale financial assets Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets held for trading and financial assets designated upon initial recognition at fair value through profit or loss. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments as defined by IAS 39. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate (EIR) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the income statement. This category generally applies to trade and other receivables and amounts due from subsidiaries. Available-for-sale (AFS) financial assets AFS financial assets include equity investments. Equity investments classified as AFS are those that are neither classified as held-for-trading nor designated at fair value through profit or loss. After initial measurement, AFS financial assets are subsequently measured at fair value with unrealised gains or losses recognised in other comprehensive income and credited in the available-for-sale reserve until the investment is derecognised, at which time the cumulative gain or loss is recognised in the income statement within other operating income/expenses, or the investment is determined to be impaired, when the cumulative loss is reclassified from the AFS reserve to the income statement in other operating income/expenses. Financial liabilities Initial recognition and measurement Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. 22-Financials-Shareholder-p117-185-AN-070316.indd 173 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 173 Financial statements 174 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements For the year ended 31 December 2015 Equity-settled transactions The cost of equity-settled transactions with employees is measured by reference to the fair value at the date on which they are granted. In valuing equity-settled transactions, no account is taken of any service or performance conditions, other than conditions linked to the price of the shares of Petrofac Limited (‘market conditions’), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the relevant employees become fully entitled to the award (the ‘vesting period’). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group’s best estimate of the number of equity instruments that will ultimately vest. The income statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No expense is recognised for awards that do not ultimately vest, except for awards where vesting is conditional upon a market or non-vesting condition, which are treated as vesting irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance conditions are satisfied. Equity awards cancelled are treated as vesting immediately on the date of cancellation, and any expense not recognised for the award at that date is recognised in the income statement. The Company operates a number of share award schemes on behalf of the employees of the Group which are described in detail in note 23 of the consolidated financial statements of the Group. The reserve for share-based payments is used to record the value of equity-settled share-based payments awarded to employees and transfers out of this reserve are made upon vesting of the original share awards. The share-based payments charges pertaining to fellow Group companies are recharged to them and shown as investment in subsidiaries. Subsequently they are transferred to due from subsidiaries and settled in cash. Significant accounting estimates Sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below: • Recoverable value of investments in subsidiaries and provision for losses on amounts due from subsidiaries: the Company determines at each reporting date whether there is any evidence of indicators of impairment in the carrying value of its investments in subsidiaries. Where indicators exist, an impairment test is undertaken which requires management to estimate the recoverable value of its assets which is based on its value in use. The value in use calculation is based on management’s business planning process which involves assumptions relating to future profitability, discount rate and inflation. A similar exercise is undertaken to determine the recoverability of amounts due from subsidiaries, after initially assessing the net assets of the subsidiary. The carrying value of investments in and amounts due from subsidiaries was US$389m and US$1,685m respectively (2014: US$219m and US$1,345m respectively). 2 Summary of significant accounting policies continued The Company’s financial liabilities include trade and other payables, loans and borrowings, amounts due to subsidiaries and derivative financial instruments. Subsequent measurement For purposes of subsequent measurement financial assets are classified in the following categories: • Financial liabilities at fair value through profit or loss • Loans and borrowings Financial liabilities at fair value through profit or loss Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IAS 39. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in the statement of profit or loss. Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IAS 39 are satisfied. Loans and borrowings After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate (EIR) method. Gains and losses are recognised in profit or loss when the liabilities are derecognised as well as through the EIR amortisation process. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the statement of profit or loss. This category generally applies to interest-bearing loans and borrowings. For more information, refer to note 17. Cash and cash equivalents Cash and cash equivalents consist of cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purpose of the cash flow statement, cash and cash equivalents consists of cash and cash equivalents as defined above, net of any outstanding bank overdrafts. Employee Benefit Trusts The Petrofac Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust (EBTs) are treated as extensions of the activities of the Company and accordingly the Company financial statements include all transactions and balances of the EBTs except for transaction and balances between the Company and the EBTs. Share-based payment transactions Employees (including Directors) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (‘equity-settled transactions’). 174 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 174 07/03/2016 11:40 175 3 Revenues Dividends from subsidiaries and associates are recognised when the right to receive payment is established. Dividend income from subsidiaries Dividend income from associates (note 10) 4 General and administration expenses Staff costs Other operating expenses 2015 US$m 1,318 6 1,324 2014 US$m 391 7 398 2015 US$m 2014 US$m 10 7 17 8 5 13 Included in other operating expenses above is auditor’s remuneration of US$74,075 (2014: US$76,480) related to the fee for the audit of the parent company financial statements. It excludes fees in relation to the audit of the Group financial statements, which are borne by Petrofac Services Limited. 5 Other operating income Gain on disposal – 80% share capital of Petrofac FPSO Holding Limited Gain on derecognition of investment in an associate Share-based payment credit 2015 US$m 7 – – 7 2014 US$m 118 9 1 128 On 13 August 2014, the Company sold 80% of the share capital of Petrofac FPSO Holding Limited which via its subsidiaries owns interests in the FPSO Berantai, FPF3 (formerly Jasmine venture) and FPF5 (formerly Ocean Legend) to PetroFirst Infrastructure Holdings Limited for an initial consideration of US$87m. The transaction costs were US$3m. At 31 December 2014, there was a further US$34m of deferred consideration payable and this together with the initial consideration of US$84m (net of transaction costs of US$3m) resulted in the recognition of a total gain on disposal of US$118m. During 2015, upon final completion of the disposal, the fair value of the consideration for 80% of the equity was increased by US$7m due to the receipt of the pending investment approval by PetroFirst Infrastructure Holdings Limited. The consideration of US$41m was received in full by 31 December 2015. 6 Other operating expenses Decrease in Seven Energy warrant valuation Revolving credit facility, senior notes and term loan acquisition cost amortisation Exchange loss Provision for doubtful debts on amounts due from subsidiaries, net Impairment of investment in a subsidiary (note 9) Others 2015 US$m 2014 US$m – 5 1 465 294 4 769 11 4 5 254 – 3 277 Amounts due from subsidiaries provided for during the year mainly comprise US$224m relating to Petrofac GSA Limited, US$147m relating to Petrofac Facilities Management Limited and US$46m relating to Petrofac UK Holdings Limited (2014: US$207m relating to Petrofac GSA Limited and US$15m relating to Petrofac FPF004 Limited). As a result of significantly lower commodity price expectations, the revaluation of the Greater Stella asset (refer to note 5 of the Group’s consolidated financial statements), and the losses incurred on the Laggan-Tormore contract, the Company undertook a review for impairment of its investments in subsidiaries and recoverability of amounts due from subsidiaries. The review was carried out on a value in use basis discounted at a pre-tax rate of 11.6%. This resulted in an impairment of US$294m (2014: US$nil), and a provision for doubtful debts of US$465m (2014: US$254m). Impairment of investments in a subsidiary during the year has been recorded against the investment held by the Company in Petrofac UK Holdings Limited, reducing its carrying amount to recoverable amount of US$328m. 22-Financials-Shareholder-p117-185-AN-070316.indd 175 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 175 Financial statements 176 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements continued 7 Finance (costs)/income Finance costs Long-term borrowings On amounts due to subsidiaries Total finance costs Finance income On amounts due from subsidiaries Total finance income 8 Dividends paid and proposed Declared and paid during the year Equity dividends on ordinary shares: Final dividend for 2013: 43.80 cents per share Interim dividend 2014: 22.00 cents per share Final dividend for 2014: 43.80 cents per share Interim dividend 2015: 22.00 cents per share 2015 US$m 2014 US$m (35) (4) (39) 14 14 (45) (1) (46) 21 21 2015 US$m 2014 US$m – – 149 74 223 149 75 – – 224 2015 US$m 2014 US$m Proposed for approval at AGM (not recognised as a liability as at 31 December) Equity dividends on ordinary shares Final dividend for 2015: 43.80 cents per share (2014: 43.80 cents per share) 152 152 9 Investments in subsidiaries At 1 January Investment made in/(repaid by) subsidiaries Impairment of investment in a subsidiary (note 6) Invested bonus in Deferred Bonus Share Plan (DBSP) charged to subsidiaries Receipt of invested bonus in DBSP from subsidiaries Share-based payment amounts receivable from subsidiaries Transferred to due from subsidiaries As at 31 December 2015 US$m 219 464 (294) 23 (23) 23 (23) 389 2014 US$m 307 (88) – 25 (25) 22 (22) 219 176 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 176 07/03/2016 11:40 177 At 31 December 2015, the Company had investments in the following active subsidiaries: Name of company Trading subsidiaries Petrofac Energy Developments UK Limited Petrofac Services Limited Petrofac UK Holdings Limited Jermyn Insurance Company Limited Petrofac International Limited Petrofac Energy Developments International Limited Petrofac Facilities Management International Limited Petrofac Integrated Energy Services Limited Petrofac Training International Limited Petroleum Facilities E & C Limited Petrofac South East Asia Pte Limited Petrofac Inc. 10 Investment in associate At 1 January Gain on derecognition of investment in an associate (note 5) Transfer to available-for-sale investment (note 11) At 31 December Country of incorporation 2015 2014 Proportion of nominal value of issued shares controlled by the Company England England England Guernsey Jersey Jersey Jersey Jersey Jersey Jersey Singapore USA 100 100 100 100 100 100 100 100 100 100 99 100 100 100 100 100 100 100 100 100 100 100 99 100 2015 US$m 2014 US$m – – – – 176 9 (185) – The investment in PetroFirst Infrastructure Holdings Limited is accounted for at cost by the Company. The historic cost of the investment is US$nil at 31 December 2015 (2014: US$nil). Dividends from PetroFirst during 2015 amounted to US$5m (2014: US$7m) received in cash and US$1m (2014: US$nil) receivable at 31 December 2015 (note 3). 11 Available-for-sale investment On 15 April 2014, Seven Energy secured additional equity capital that resulted in dilution of the Company’s interest in Seven Energy from 23.5% to 15.4%. Following the dilution of ownership interest, the Group did not exercise significant influence over the activities of Seven Energy and as a result transferred the investment of US$185m from investment in associate to available-for-sale investment. During 2015, a reduction in fair value of US$16m has been recognised in other comprehensive income through reserve for unrealised gains/(losses) on available-for-sale financial asset (2014: US$nil). 12 Amounts due from/due to subsidiaries Amounts due from/due to subsidiaries comprise both interest and non-interest bearing short-term loans provided to/received from subsidiaries listed in note 9. 13 Cash and short-term deposits Cash at bank and in hand The fair value of cash and bank balances is US$4m (2014: US$48m). 2015 US$m 4 2014 US$m 48 22-Financials-Shareholder-p117-185-AN-070316.indd 177 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 177 Financial statements 178 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements continued 14 Treasury shares For the purpose of making awards under the Group’s employee share schemes, shares in the Company are purchased and held by the Petrofac Employee Benefit Trust and the Petrofac Joint Venture Companies Employee Benefit Trust. All these shares have been classified in the statement of financial position as treasury shares within equity. The movements in total treasury shares are shown below: At 1 January Acquired during the year Vested during the year At 31 December 15 Other reserves Balance at 1 January 2014 Shares vested during the year Transfer to reserve for share-based payments Balance at 1 January 2015 Changes in fair value of available-for-sale financial asset Shares vested during the year Transfer to reserve for share-based payments Balance at 31 December 2015 2015 2014 Number US$m Number 4,985,937 2,800,000 (1,770,417) 6,015,520 101 5,672,691 39 1,000,000 (29) (1,686,754) 111 4,985,937 US$m 110 25 (34) 101 Net unrealised gains/(losses) on available-for- sale financial asset US$m Reserve for share- based payments US$m – – 57 (33) Total US$m 57 (33) – 46 46 – (16) 70 – 70 (16) – (27) (27) – 46 46 (16) 89 73 Nature and purpose of other reserves Net unrealised gains/(losses) on available-for-sale financial asset This reserve records fair value changes on available-for-sale financial assets held by the Company. Reserve for share-based payments The reserve for share-based payments is used to record the value of equity-settled share-based payments awarded to employees and transfers out of this reserve are made upon vesting of the original share awards. The transfer during the year into share-based payments reserve of US$46m (2014: US$46m) is the charge for share-based payments awards by the Company to its own employees as well as employees of subsidiaries, including bonus amounts converted into shares. 16 Share-based payment plans Share based payment charge Share-based payment plan information is disclosed in note 23 of the consolidated financial statements of the Group. The following table shows the movements in the number of shares held under the Group employee schemes for the employees of the Company: Outstanding at 1 January 2014 Granted during the year Transferred to subsidiaries Vested during the year Forfeited during the year Outstanding at 1 January 2015 Granted during the year Transferred from subsidiaries Transferred to subsidiaries Vested during the year Forfeited during the year Outstanding but not exercisable at 31 December 2015 178 / Petrofac Annual report and accounts 2015 Deferred Bonus Share Plan Number Performance Share Plan Number 34,754 23,238 3,070 92,105 7,918 – (24,256) (6,764) (8,654) (53,620) 28,152 22,406 39,639 8,460 640 (220) – – (12,619) – (1,313) (28,324) 37,046 19,775 22-Financials-Shareholder-p117-185-AN-070316.indd 178 07/03/2016 11:40 179 Year ended 31 December 2015 Made up of following awards: 2013 2014 2015 Year ended 31 December 2014 Made up of following awards: 2012 2013 2014 Deferred Bonus Share Plan Number Performance Share Plan Number 3,812 11,620 21,614 37,046 6,292 5,023 8,460 19,775 Deferred Bonus Performance Share Plan Share Plan Number Number 2,846 7,730 17,576 28,152 28,324 6,292 5,023 39,639 17 Interest-bearing loans and borrowings The Group had the following interest-bearing loans and borrowings outstanding: 31 December 2015 Actual interest rate % 31 December 2014 Actual interest rate % Effective interest rate % Maturity1 2015 US$m 2014 US$m Current Term Loan (ii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% August 2016 Export Credit Agency Funding (iii) US LIBOR + 1.50% – US LIBOR + 1.50% Refer note (iii) below (i) 3.40% 3.40% 3.68% 3 years (ii) US LIBOR + 0.85% US LIBOR + 0.85% US LIBOR + 0.85% n/a Non-current Senior notes Term Loan Less: Debt acquisition costs net of accumulated amortisation and effective interest rate adjustments Discount on senior notes issuance Total interest-bearing loans and borrowings 1 As at 31 December 2015. Details of the Company’s interest-bearing loans and borrowings are as follows: 500 17 517 750 – 750 – – – 750 500 1,250 (8) (2) 740 1,257 (6) (2) 1,242 1,242 (i) Senior notes Petrofac has an outstanding aggregate principal amount of US$750m Senior Notes due in 2018 (Notes). The Group pays interest on the Notes at an annual rate equal to 3.40% of the outstanding principal amount. Interest on the Notes is payable semi-annually in arrears in April and October each year. The Notes are senior unsecured obligations of the Company and will rank equally in right of payment with the Company’s other existing and future unsecured and unsubordinated indebtedness. Petrofac International Limited and Petrofac International (UAE) LLC irrevocably and unconditionally guarantee, jointly and severally, the due and prompt payment of all amounts at any time becoming due and payable in respect of the Notes. The Guarantees are senior unsecured obligations of each Guarantor and will rank equally in right of payment with all existing and future senior unsecured and unsubordinated obligations of each Guarantor. 22-Financials-Shareholder-p117-185-AN-070316.indd 179 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 179 Financial statements 180 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements continued 17 Interest-bearing loans and borrowings continued (ii) Term Loan On 31 August 2014, Petrofac entered into a US$500m two year term loan facility with a syndicate of five international banks. The facility, which matures on 31 August 2016, is unsecured and is subject to two financial covenants relating to leverage and interest cover. Prior to 31 December 2015, the Term Loan lenders granted a waiver of the leverage covenant for the year ending 31 December 2015 as a result of which Petrofac was in compliance with its financial covenant obligations for that period. The loan was fully drawn as of 31 December 2015 (31 December 2014: US$500m). Interest is payable on the facility at US LIBOR + 0.85%. (iii) Export Credit Agency funding On 26 February 2015, Petrofac entered into a US$58m, 14 year term loan facility guaranteed by the Italian Export Credit Agency SACE. On 30 July 2015, Petrofac entered into a US$108m term loan facility guaranteed by the UK Export Credit Agency UKEF, on substantially the same terms as the SACE facility. The two facilities are linked to the procurement of certain goods and services from Italian and UK exporters, respectively, in connection with the construction of the Petrofac JSD6000 vessel. Repayment of the loans was intended to commence from the date of delivery of the vessel. Following the termination of the vessel construction contract, the facilities are not currently available for drawing and Petrofac is in discussions with the two Export Credit Agencies to amend the facilities and agree a revised date for the commencement of repayments. Petrofac cannot be certain that these discussions will result in agreement with the two ECAs, in which case the facilities will be terminated and no further drawings will be made. As at 31 December 2015, US$17m was drawn under the SACE facility (31 December 2014: US$nil). No drawings have been made under the UKEF facility. 18 Other financial assets and other financial liabilities Other financial assets Forward currency contracts Other financial liabilities Forward currency contracts Interest payable 2015 US$m 14 2014 US$m – 13 6 19 6 7 13 Fair value measurement The following financial instruments are measured at fair value using the hierarchy below for determination and disclosure of their respective fair values: Level 1: Unadjusted quoted prices in active markets for identical financial assets or liabilities Level 2: Other valuation techniques where the inputs are based on significant observation factors Level 3: Other valuation techniques where the inputs are based on significant unobservable market data The fair value of the Company’s financial instruments and their carrying amounts included within the Company’s statement of financial position are set out below: Financial assets Available-for-sale investment (note 11) Forward currency contracts Cash and short-term deposits (note 13) Financial liabilities Interest-bearing loans and borrowings (note 17) Forward currency contracts Carrying amount Fair value Level 2015 US$m 2014 US$m 2015 US$m 2014 US$m Level 3 Level 2 Level 2 169 14 4 185 – 48 169 14 4 185 – 48 Level 2 1,257 1,242 1,267 1,250 Level 2 13 6 13 6 The Company considers that the carrying amounts of trade and other receivables, amounts due from/due to subsidiaries, trade and other payables and other current financial liabilities approximate their fair values and are therefore excluded from the above table. The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The assumptions about unobservable inputs relating to available-for-sale investment and the impact on the fair values of the available-for-sale investment as a result of changes to these inputs are disclosed in note 16 to the Group’s consolidated financial statements. 180 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 180 07/03/2016 11:40 181 19 Risk management and financial instruments Risk management objectives and policies The Company’s principal financial assets and liabilities are amounts due from and due to subsidiaries, available-for-sale investment, cash and short- term deposits and interest-bearing loans and borrowings. The Company’s activities expose it to various financial risks particularly associated with interest rate risks on its external variable rate loans and borrowings. The Company has a policy not to enter into speculative trading of financial derivatives. The other main risks besides interest rate are foreign currency risk, credit risk and liquidity risk and the policies relating to these risks are discussed in detail below: Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect the value of the Company’s interest-bearing financial liabilities and assets. The Company does not hedge its exposure on its interest-bearing funding to/from subsidiaries. Interest rate sensitivity analysis The impact on the Company’s pre-tax profit and equity due to a reasonably possible change in interest rates is demonstrated in the table below. The analysis assumes that all other variables remain constant. 31 December 2015 31 December 2014 Pre-tax profit Equity 100 basis point increase 100 basis point decrease 100 basis point increase US$m US$m US$m 100 basis point decrease US$m 2 1 (2) (1) – – – – The following table reflects the maturity profile of interest bearing financial assets and liabilities that are subject to interest rate risk: Year ended 31 December 2015 Financial liabilities Floating rates Term loan Export Credit Agency Funding Amount due to subsidiaries (interest-bearing) Financial assets Floating rates Cash and short-term deposits (note 13) Amount due from subsidiaries (interest-bearing) Within 1 year US$m 1–2 years US$m 2–3 years US$m 3–4 years US$m 4–5 years US$m More than 5 years US$m Total US$m 500 17 324 841 4 1,190 1,194 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 500 17 324 841 4 1,190 1,194 22-Financials-Shareholder-p117-185-AN-070316.indd 181 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 181 Financial statements 182 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements continued 19 Risk management and financial instruments continued Year ended 31 December 2014 Financial liabilities Floating rates Term loan Amount due to subsidiaries (interest-bearing) Financial assets Floating rates Cash and short-term deposits (note 13) Amount due from subsidiaries (interest-bearing) Within 1 year US$m 1–2 years US$m 2–3 years US$m 3–4 years US$m 4–5 years US$m More than 5 years US$m Total US$m – 201 201 48 562 610 500 – 500 – – – – – – – – – – – – – – – – – – – – – – – – – – – 500 201 701 48 562 610 Financial liabilities in the above table are disclosed gross of debt acquisition costs and effective interest rate adjustments of US$10m (2014: US$8m). Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. Foreign currency risk Almost all of the financial assets and liabilities of the Company are denominated in US dollars. The foreign currency exposure at 31 December 2015 is limited to sterling £190m with an equivalent value of US$280m (2014: sterling £315m equivalent US$487m). The following table summarises the impact on the Company’s pre-tax profit and equity (due to change in the fair value of monetary assets, liabilities and derivative instruments) of a reasonably possible change in US dollar exchange rates with respect to different currencies: 31 December 2015 31 December 2014 Pre-tax profit Equity +10% US dollar rate increase US$m 28 49 –10% US dollar rate decrease US$m +10% US dollar rate increase US$m –10% US dollar rate decrease US$m (28) (49) – – – – At 31 December 2015, the Company had foreign exchange forward contracts as follows: Sterling (purchases) Euro (sales) Contract value Fair value (undesignated) 2015 US$m 410 (254) 2014 US$m (491) 94 2015 US$m 2014 US$m 14 (13) 1 – (6) (6) The above foreign exchange contracts mature and will affect income between January 2016 and August 2018 (2014: between January 2015 and July 2016). Credit risk The Company’s principal financial assets are cash and short-term deposits and amounts due from subsidiaries. The Company manages its credit risk in relation to cash and short-term deposits by only depositing cash with financial institutions that have high credit ratings provided by international credit rating agencies. Liquidity risk The Company’s objective is to maintain a balance between continuity of funding and flexibility through the use of term loans and senior notes to reduce its exposure to liquidity risk. 182 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 182 07/03/2016 11:40 183 The maturity profiles of the Company’s financial liabilities at 31 December 2015 are as follows: Year ended 31 December 2015 Financial liabilities Interest-bearing loans and borrowings Trade and other payables Amounts due to subsidiaries Interest payments Derivative instruments Year ended 31 December 2014 Financial liabilities Interest-bearing loans and borrowings Trade and other payables Amounts due to subsidiaries Interest payments Derivative instruments 6 months or less US$m 6–12 months US$m 1–2 years US$m 2–5 years US$m More than 5 years US$m Contractual undiscounted cash flows US$m Carrying amount US$m 17 1 – 16 11 45 500 – 329 14 2 845 – – – 26 – 26 750 – – 21 – 771 – – – – – – 1,267 1,257 1 329 77 13 1 329 – 13 1,687 1,600 6 months or less US$m 6–12 months US$m 1–2 years US$m 2–5 years US$m More than 5 years US$m Contractual undiscounted cash flows US$m Carrying amount US$m – 1 – 18 2 21 – – 205 18 2 225 500 750 – – 35 2 – – 48 – 537 798 – – – – – – 1,250 1,242 1 205 119 6 1 205 – 6 1,581 1,454 The Company uses various funded facilities provided by banks and its own financial assets to fund the above mentioned financial liabilities. Capital management The Company’s policy is to maintain a healthy capital (equity) base using a combination of external and internal financing to support its activities as the holding company for the Group. The Company’s gearing ratio is as follows: Cash and short-term deposits (note 13) Interest-bearing loans and borrowings (A) (note 17) Net (debt) (B) Total equity (C) Gross gearing ratio (A/C) Net gearing ratio (B/C) 2015 US$m 4 (1,257) (1,253) 666 2014 US$m 48 (1,242) (1,194) 378 188.7% 328.6% 188.1% 315.9% 22-Financials-Shareholder-p117-185-AN-070316.indd 183 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 183 Financial statements 184 Notes to the Company financial statements continued For the year ended 31 December 2015 Notes to the Company financial statements continued 20 Related party transactions The Company’s related parties consist of its subsidiaries and the transactions and amounts due to/due from them are either of funding or investing nature (note 9). The remuneration paid by the Company to its Non-executive Directors was US$1m (2014: US$1m). The Company is also re-charged a portion of the key management personnel cost by one of its subsidiaries. The amount recharged during the year was US$1m (2014: US$1m). For further details of the full amount of key management personnel costs refer to the Group’s consolidated financial statements. The Company is listed as a guarantor of the Revolving Credit Facility obtained by a wholly owned subsidiary. 21 Share capital The movements in share capital are disclosed in note 21 to the consolidated financial statements of the Group. 184 / Petrofac Annual report and accounts 2015 22-Financials-Shareholder-p117-185-AN-070316.indd 184 07/03/2016 11:40 Shareholder information as at December 2015 Registrar Capita Registrars (Jersey) Limited 12 Castle Street St Helier Jersey JE2 3RT Corporate Brokers Goldman Sachs Peterborough Court 133 Fleet Street London EC4A 2BB JP Morgan Cazenove 25 Bank Street Canary Wharf London E14 5JP Legal Advisers to the Company Freshfields Bruckhaus Deringer LLP 65 Fleet Street London EC4Y 1HS Company Secretary and registered office Elian Corporate Services (Jersey) Limited 44 Esplanade St Helier Jersey JE4 9WG Auditors Ernst & Young LLP 1 More London Place London SE1 2AF Corporate and Financial PR Tulchan Communications Group 85 Fleet Street London EC4Y 1AE Stock Exchange Listing Petrofac shares are listed on the London Stock Exchange using code ‘PFC.L’. Financial Calendar* 19 May 2016 27 May 2016 30 August 2016 October 2016 * Dates are based on current expectations. Annual General Meeting Final dividend payment Half Year Results announcement Interim dividend payment Copies of all announcements will be available on the Company’s website at www.petrofac.com following their release. 22-Financials-Shareholder-p117-185-AN-070316.indd 185 07/03/2016 11:40 Petrofac Annual report and accounts 2015 / 185 Glossary A AGM Annual General Meeting AIRB Asset Integrity Review Board Appraisal Well A well drilled into a discovered accumulation to provide data necessary to define a Field Development Plan for the accumulation B Backlog Backlog consists of the estimated revenue attributable to the uncompleted portion of lump-sum engineering, procurement and construction contracts and variation orders plus, with regard to engineering, operations, maintenance and Integrated Energy Services contracts, the estimated revenue attributable to the lesser of the remaining term of the contract and five years. Backlog will not be booked on Integrated Energy Services contracts where the Group has entitlement to reserves. The Group uses this key performance indicator as a measure of the visibility of future earnings. Backlog is not an audited measure Barrel A unit of volume measurement used for petroleum bbl One barrel of oil Block A subdivision of an underground petroleum reservoir, by a resource owner, for the purposes of licensing and administering exploration, appraisal and production of resources, by oil and gas companies boe Barrel of oil equivalent bpd Barrel per day Brownfield Development Further investment in a mature field, to enhance its production capacity, thereby increasing recovery and extending field life C Capex Capital expenditure CIS Commonwealth of Independent States Cost plus KPIs A reimbursable contract which includes an incentive income linked to the successful delivery of key performance indicators (KPIs) CPECC China Petroleum Engineering & Construction Corporation CPPES China Petroleum Petrofac Engineering Services CR Corporate responsibility D DBSP Deferred Bonus Share Plan DECC Department of Energy and Climate Change (UK) Decommissioning The re-use, recycling and disposal of redundant oil and gas facilities Downstream The downstream sector commonly refers to the refining of petroleum crude oil and the processing and purifying of raw natural gas, as well as the marketing and distribution of products derived from crude oil and natural gas Duty Holder A contracting model under which Petrofac provides a complete managed service, covering production and maintenance work, both offshore and onshore, to reduce the costs of operating and to extend the life of the facilities E EBITDA Calculated as profit before tax and net finance income, but after our share of profits/losses from associates (as per the consolidated income statement), adjusted to add back charges for depreciation and amortisation (as per note 3 to the financial statements) EBT Employee Benefit Trust ECS Engineering & Consulting Services. This service line is Petrofac’s centre of technical engineering excellence, delivering early-stage engineering studies, including conceptual and front-end engineering and design work, across onshore and offshore oil and gas fields ECOM Engineering, Construction, Operations & Maintenance, one of two divisions, which designs and builds oil and gas facilities and operates, manages and maintains them on behalf of Petrofac’s customers EPC Engineering, Procurement and Construction EPCIC Engineering, Procurement, Construction, Installation and Commissioning EPCI Engineering, Procurement, Construction and Installation EPS Earnings per share ExCom Executive Committee F FEED Front End Engineering and Design Field Development Plan (FDP) A document setting out the manner in which a hydrocarbon discovery is to be developed and operated FPSO Floating Production, Storage and Offloading vessel FPF Floating Production Facility G Gas field A field containing natural gas but no oil Greenfield development Development of a new field 186 / Petrofac Annual report and accounts 2015 23-Glossary-p186-188-AN-070316.indd 186 07/03/2016 11:40 H Hydrocarbon A compound containing only the elements hydrogen and carbon – can be solid, liquid or gas HSE Health & Safety Executive (UK) HSSEIA Health, safety, security, environment and integrity assurance I IAS International Accounting Standards IFRS International Financial Reporting Standards IOC International oil company IES Integrated Energy Services. The IES division harnesses Petrofac’s existing service capabilities and delivers them on an integrated basis to resource holders with the aim of supporting the development of their oil and gas resources, enhancing production from their mature reservoirs and helping them to build national capability K KPI Key performance indicator L LNG Liquefied natural gas Lump-sum turnkey project An agreement in which a contractor designs, constructs, and manages a project until it is ready to be handed over to the customer and operation can begin immediately LTI Lost time injury M MENA Middle East and North Africa region mm boe Million barrels of oil equivalents mmscfd Million standard cubic feet per day MOPU Mobile offshore production unit MOU Memorandum of understanding N NOC National oil company O OCP Offshore Capital Projects. A service line which specialises in offshore engineering, procurement, installation and construction services for greenfield projects OEC Onshore Engineering & Construction. A service line, which delivers onshore engineering, procurement and construction projects OECD Organisation for Economic Cooperation and Development Oil field A geographic area under which an oil reservoir lies OPEC Organisation of Petroleum Exporting Countries OPO Offshore Projects & Operations. A service line which specialises in offshore engineering and construction services, for brownfield projects, and the provision of operations and maintenance support, on and offshore P PEC Production Enhancement Contract is where Petrofac is paid a tariff per barrel for oil and gas production and therefore has no commodity price exposure. PECs are appropriate for mature fields which have a long production history PMC Project Management Contractor – managing an external construction contractor to manage construction of a facility PSC Production Sharing Contract PSP Performance Share Plan R Reimbursable services Where the cost of Petrofac’s services are reimbursed by the customer plus an agreed margin RI Recordable injury ROCE Return on capital employed RSC Risk Service Contract is where Petrofac develops, operates and maintains a field, while the resource holder retains ownership and control of its reserves RSP Restricted Share Plan S SIP Share Incentive Plan SURF Subsea Umbilicals, Risers and Flowlines T TSR Total shareholder return U UKCS United Kingdom Continental Shelf UNGC United Nations Global Compact Upstream The segment of the petroleum industry having to do with exploration, development and production of oil and gas resources V VCP Value Creation Plan Petrofac Annual report and accounts 2015 / 187 23-Glossary-p186-188-AN-070316.indd 187 07/03/2016 11:40 Designed and produced by SampsonMay Telephone: 020 7403 4099 www.sampsonmay.com Printed by PUSH www.push-print.com This report has been printed on Regency Satin which is certified by the Forest Stewardship Council® and contains 10% recovered fibre, diverting waste from landfill. The paper is made at a mill with EMAS and ISO 14001 environmental management system accreditation. This report has been printed using inks made from non-hazardous vegetable oil derived from renewable sources. Over 90% of solvents are recycled for further use and recycling initiatives are in place for all other waste associated with this production. The printers are FSC and ISO 14001 certified with strict procedures in place to safeguard the environment throughout all their processes. They have also registered with and have had audits carried out by the Carbon Trust to reduce their carbon footprint. 188 / Petrofac Annual report and accounts 2015 23-Glossary-p186-188-AN-070316.indd 188 07/03/2016 11:40 P e t r o f a c A n n u a l r e p o r t a n d a c c o u n t s 2 0 1 5 Petrofac Services Limited 117 Jermyn Street London SW1Y 6HH United Kingdom Tel: +44 20 7811 4900 Fax: +44 20 7811 4901 www.petrofac.com

Continue reading text version or see original annual report in PDF format above