APICORP’S Shareholders
APICORP’s Shareholders
APICORP is wholly owned by the member states of the Organisation of Arab Petroleum Exporting countries (OAPEC), as listed below:
United Arab Emirates 17% Bahrain 3% Algeria 5% Saudi Arabia 17% Syria 3% Iraq 10% Qatar 10% Kuwait 17% Libya 15% Egypt 3%
The Corporation is independent, both in its management and in the performance of its activities. APICORP conducts its operations on a commercial basis, in a business-like manner and with the intention of making a profit.
The corporation gives priority to joint Arab ventures, which serve the regional Arab market.
02 Arab Petroleum Investments Corporation Mission APICORP’S & vision
APICORP’s mission is to contribute to the development and the transformation of the Arab hydrocarbon and energy industries through equity and debt financing, advisory and research. These include all businesses, which are based on the development, processing or transportation of the products of the oil and gas industry and its downstream derivatives. We will measure our success by our ability to - Be the partner of choice of oil & gas and energy-related companies, both public and Private - Be recognized as a world-class professional institution and the leading source of Research on the Arab hydrocarbon and energy industries - Profitably complement the offering of private sector financial institutions We will achieve our vision by - Attracting and retaining the best professionals in the industry - Nurturing a performance culture throughout the Company - Pioneering solutions for our Clients - Maintaining a portfolio of activities weathering the cyclicality of the industry The Corporation may undertake all operations required for the fulfilment of its objectives, in particular: 1. initiate, study and promote petroleum, and petroleum related projects, and participate in their equity financing; 2. extend or guarantee medium and long-term loans to finance projects in the petroleum industry; 3. participate in the short-term financing of the international trade in Arab petroleum, gas and petrochemicals. 4. underwrite, purchase and sell the shares (and equity capital) of companies in the petroleum industry; and 5. issue its own bonds and borrow from Arab and international financial markets. Financial Summary 2002-2006
Arab Petroleum Investments Corporation 03 Board of Directors
Chairman of the Board Deputy Chairman of the Board Abdullah A. Al-Zaid Mohamed A. Dahmani For the Kingdom of Saudi Arabia For the Socialist Peoples' Libyan Arab Jamahiriya
Members of the board
Naser Mohamed Al-Sharhan Hassan M. Habib Al-Rufaie For the United Arab Emirates For the Republic of Iraq (Member of the Audit Committee)
Mahmood Hashim Al-Kooheji Ibrahim Ben A. Al-Mannaie For the Kingdom of Bahrain For the State of Qatar (Member of the Audit Committee)
Farid Baka Abbas Ali Naqi For the Democratic and Popular For the State of Kuwait Republic of Algeria (Chairman of the Audit Committee)
H.E. Eng. Sufian M. Al-Alao H.E. Eng. Sameh Fahmi For the Syrian Arab Republic For the Arab Republic of Egypt
04 Arab Petroleum Investments Corporation Executive Management
Ahmad Bin Hamad Al-Nuaimi Chief Executive and General Manager
Projects Department Financial Control Department Dr. Abdulla Ali Al-Ibrahim Omar Al Omar Senior Manager Senior Manager Talal Khalil Aymen F. Zeyada Business Development Manager Operations Manager Mediterranean & North Africa Business Group Khaled Yousef Dr. Abdul-Aziz Al-Idi Accounts and Control Manager Business Development Manager Mohamed Suba’a GCC Business Group Asst. Manager, Accounts and Control Mohamed Al-Mubarak Project and Trade Finance Department Asst. Operations Manager Nicolas Thevenot Senior Manager Legal Department Bassam Al-Tamimi Ali Hassan Fadel Manager Mediterranean & North Africa Business Group Legal Counsel Haitham A. Malaikah Manager, GCC Business Group Administration and Human Resources Ali Aissaoui Department Head of Research Abdulla A. Al-Nashwan Sami Al-Sunaid Senior Manager Manager, Trade Finance Samir Al-Ghonaimi Dr. Wichai Turongpun Administration Manager Economist, Research Unit Mahdi Al-Mahdi Kamel Ali BuKhamseen Head of Public Affairs Project Finance Officer Abdulaziz Al-Naimi Rajesh Ramanathan Human Resources Manager Project Finance Officer Information Systems Department Treasury and Capital Markets Department Mohamed I. El-Khouly Dino Roy Moretto Acting Manager Senior Manager Mohamed Mas'ada Hesham Farid Assistant Manager, Financial Applications Portfolio Manager Richard Burnell Internal Audit Manager, Money Markets & Foreign Exchange Abdul-Aziz Habib Al-Matar Faiq Hussain Head of Internal Audit Manager, Money Markets Ravi Kumar Portfolio Manager Arab Petroleum Investments Corporation 05 Chairman’s Statement
Chairman’s Statement
It is my pleasure to present to you, on behalf of the Board of Directors of Arab Petroleum Investments Corporation (APICORP), the 31st Annual Report on the Corporation’s activities and financial results for the year ended 31 December 2006.
Financial Results
APICORP’s operations in 2006 achieved a net profit of US$51 million, compared to US$94.6 million in 2005. The significant increase in the net income during 2005 was achieved primarily through the selling of APICORP’s equity holding in the Egyptian Fertilizers Company, which generated US$58.8 million in profits. Excluding the profits from the Egyptian Fertilizers Company, net income from operations in 2006, surpassed that of the same period in 2005 by 42%.
The Corporation’s assets increased by 13% to US$2.6 billion, compared to US$2.3 billion in 2005, while total shareholders equity rose to US$897 million at the end of 2006, compared to US$848 million in 2005, a 6% increase.
Dividend Payable
In accordance with the Corporation’s Statutes, 10% of the net profit has been transferred to the Legal Reserve. The Board of Directors has authorized the distribution of US$ 20 million as cash dividends to the shareholders for the year 2006, and the transfer of the remaining profits to the company’s general reserve. Direct Equity Investments
In symbolizing APICORP’s objectives which are based on providing support and assistance to the petroleum and petrochemical industries in the Arab world, APICORP at the end of 2006, held direct equity investments in 14 Arab joint venture projects, situated in 7 Arab countries. The operations of these companies cover a wide spectrum of activities such as drilling and related services, extraction of LPG, production of poly ethylene, ethylene glycol, polypropylene to name a few. The total value of APICORP’s direct equity investments portfolio at 31 December 2006 was US$256.7 million, compared to US$234 million in 2005, or a 9.4% increase.
It is worth mentioning that APICORP’s direct investments portfolio achieved significant profits in 2006, amounted to US$30.1 million, an 85% increase over the US$16.3 million as dividends received in 2005. This significant increase in income from the company’s investments portfolio was a result of the unprecedented profit achieved by the Saudi European Petrochemical Company (Ibn Zahr) in which APICORP owns 10% of its share capital.
In connection with the new equity investments, APICORP, together with Danagaz Company of Bahrain and the Egyptian Gas Company (EGAS), established the Egyptian Bahraini Gas Derivatives
06 Arab Petroleum Investments Corporation Chairman’s Statement
Company, with a US$23 million in capital (of which APICORP owns 20%). Based in Egypt, this new company aims towards the extraction of propane and butane from associated gas. In addition, APCORP also took a 7% equity share in the US$430 million capital of the Egyptian Methanex Methanol Company (Emethanex).
The project aims to establish a complex in Damietta city for the production of methanol for export, with a production capacity of 3,600 tons/day. Other participants in the project beside APICORP are the Egyptian Petrochemicals Holding Company (ECHEM), the Canadian Methanex Corporation (Methanex), the Egyptian Gas Holding Company (EGAS) and the Egyptian Natural Gas Company (GASCO). Project and Trade Finance
2006 was another good year for the project and trade finance activity in terms of volume of activity and the financing mandates received, in addition to APICORP’s growing interest in Islamic financing.
Throughout 2006 APICORP concluded more than 20 project and trade finance transactions, valued at US$13 billion, with APICORP’s underwriting and commitment totalling around US$1.4 billion and US$970 million respectively, compared to 19 transactions in 2005, with a total value of around US$10 billion and an APICORP final take of around US$800 million. The total net income from project and trade activity by year-end 2006 was US$18.8 million, compared to US$17.2 million in 2005.
In project finance, APICORP was selected as the role bank in 9 landmark project financing transactions mainly in the downstream segment of the energy industry, with total value of US$10.5 billion.
In trade finance, APICORP continued its support of the Arab oil exports during 2006 through the participation in trade finance transactions totalling US$1.1. billion and a final take of US$175 million.
Looking forward, during 2007, APICORP will continue to play a leading and effective role in arranging project and trade finance loans for the oil and gas industry in the Arab region. In addition to providing financial advisory services, particularly within the Kingdom of Saudi Arabia, being the largest market for project financing in the region. It is expected that the APICORP loan portfolio in 2007 will rise to US$1.6 billion. The Strategy Committee
In accordance with Board of Director’s Resolution issued on its 1st July 2006 meeting, the company appointed an in-house committee to undertake a review of the APICORP’s strategy over the medium term. The committee’s initial task was the evaluation and selection of the consultants who would be involved in the structure and a detailed study of the company’s strategy for the next five years. In September Bain & Company was chosen by the committee to prepare the strategy study within an approved time frame for presentation to the Board of Directors at their first meeting in 2007. The Banking Unit in the Kingdom of Bahrain
APICORP Bahrain, on completion of the design and installation of its new offices located on the 26th floor of the Al-Moayyed Tower, commenced operations during the last quarter of 2006.
On behalf of the Board of Directors, I would like to record my thanks and gratitude to the management and staff of APICORP for their efforts and dedication, which directly impacted the good results achieved by the Corporation; and I would be more happy to register with pride our sincere thanks to the governments of the member states, for their continued and fruitful cooperation as well as their everlasting support to APICORP.
I am also honoured to convey our utmost thanks and appreciations to the government of the Custodian of the Two Holy Mosques, Kingdom of Saudi Arabia, for the special care it engulfs the Corporation with.
Abdullah A. Al-Zaid Chairman of the Board of Directors Arab Petroleum Investments Corporation 07 Global Context, Regional Economic and Energy Investment Outlook for the Arab World
Much of the focus in the first half of 2006 was on the oil producers’ high net savings and their potential destination for both public and private investments. However, the fall of oil prices from their July 2006 peak, the continuation of the depreciation of the US dollar and the relentless inflation in the cost of energy project portfolios have shifted attention to the ability of the oil and gas producers to augment capacity in order to bring additional supply to the market. Moreover, broader issues of concern include the extent to which the global and regional economic trends will continue to provide a supportive environment for the region’s energy investment.
Global and regional economic trends
Following the strong performance of 5.3% in 2004, the highest in recent memory, global economic growth slowed to 4.9% in 2005 before peaking again at 5.2% in 2006. Looking forward, despite substantial uncertainty the prospect is for a more sustainable global growth path than originally anticipated. On the one hand, the US economy, which showed exceptional resilience in recent years, may moderately improve. On the other hand, the strong growth momentum in China and India is expected to continue into 2007. As a result, global growth is projected at 4.7%.
This relatively favorable external environment and the prudent macro-economic policies pursued by governments in the Arab world have laid the foundation for a strong macroeconomic performance. The region as a whole has recorded an average growth of 6.7% over the last three years. Although slightly moderating, this trend is expected to continue, as growth should average 6.1% in 2007.
Sustained world economic expansion, which has increased demand for oil and gas in recent years, has helped boost prices, which greatly benefited the net oil and gas 1 exporting countries. In particular, APICORP’s shareholding-countries, whose economic growth is still largely founded on hydrocarbon revenues, have until 2006 slightly outperformed the rest of the region. Due, however, to the current relatively lower oil price environment, they are expected to lose their regional growth advantage in 2006.
1 Ten shareholding countries minus Iraq, due to this country's exceptional circumstances.
08 Arab Petroleum Investments Corporation Global Context, Regional Economic and Energy Investment Outlook for the Arab World
As a consequence of a continuing weakening of the US dollar since 2003, inflation in the region has increased consistently to 8.1% in 2005 and 7.1% in 2006 to reflect higher import prices from non-US dollar areas. Inflation in the shareholding countries, which was negligible until 2003 moved upward in parallel. Despite the waning of the dollar exchange effect, inflation in the region is expected to be higher in 2007, nearly double that of the anticipated world’s average of 3.6%.
Benefiting from strong increases in oil export volumes and prices, most countries in the region have strengthened their fiscal positions. This encouraged partial retirement of long-term debt, which led to a significant reduction of public debt as a percentage of GDP from 62% in 2002 to 35% in 2006. In contrast, however, aggregate foreign exchange reserves, which reached a peak of 22 months of imports in 2005, have since dwindled to 12 months as a result of a sharp increase in both the volume and cost of imports of goods and services in the shareholding countries.
The net savings accumulated during the long upward oil cycle of 1999-2006, which correspond to the excess of private saving over investment and taxes over government spending, reached the record level of US$695 billion in the shareholding countries at the end of 2006. Contrary to the “petrodollar surpluses” of the 1970s, which were “recycled” through foreign commercial banks and the IMF, investment of these savings have been diversified across a broad spectrum of foreign assets.
Ten shareholding countries minus Iraq, due to this country’s exceptional circumstances. Arab Petroleum Investments Corporation 09 Global Context, Regional Economic and Energy Investment Outlook for the Arab World
Record liquidity excess, which is largely the result of higher export revenues and substantial repatriation of funds held abroad, has contributed to the surge in domestic asset prices witnessed until early 2006. Regrettably, some of these markets had been pushing up share prices valuation well in excess of their underlying fundamentals as evidenced by an overall forward-looking price-earning ratio well above 40. Not unexpectedly, therefore, most of the stocks have witnessed sharp corrections and a relentless decline throughout 2006. Although currently stabilizing, the extent of their recovery is likely to be determined by developments in the world oil and currency markets.
Oil and currency markets developments
Recent trends in oil and currency markets have raised serious concerns within the oil-producing community, of which APICORP’s shareholding countries. The value of the 2 OPEC reference basket (ORB), which reached an all time high of US$72/bl during the first week of August 2006, fell to US$48/bl during the third week of January 2007. It would have declined further if not for the combination of OPEC’s output cuts and revised higher world oil demand. However, although the ORB moved up strongly as a result, the continuing depreciation of the US dollar (the currency for pricing, invoicing and settlement of oil trades) has persistently weakened the producers’ purchasing power. Oil prices expressed in Euro for instance have settled 21% lower.
10 Arab Petroleum Investments Corporation 2 The ORP price differential relative to light sweet crude benchmarks such as WTI has been minus US$3.75/bl on average in recent months. Global Context, Regional Economic and Energy Investment Outlook for the Arab World
Outlook for the Arab energy investments
With a share of 56% of the world’s proven oil reserves and 30% of proven natural gas reserves, the Arab world is well endowed to bridge the widening gap between rising global energy demand and largely stagnant or even declining supplies from other areas. The region, which in 2006 contributed 33% of the world’s production of crude oil and condensate and 13% of that of natural gas, has pursued ambitious plans to fully develop its potential on the assumption that the call on the region’s hydrocarbon products will continue to grow.
This requires huge investments whose funding weighs heavily in the overall capital demand and supply of the region. APICORP’s estimates that in 2006 the region invested some US$57 billion in new energy projects, 82% of which in the hydrocarbon chain including petrochemicals and fertilizers and 18% in the power and combined power-water sector. This level of investment is equivalent to 5% of Arab GDP and 19% of Arab gross accumulation of fixed capital for 2006. Looking forward, these investment figures are set to increase larger and faster.
Indeed, APICORP’s review of energy investments in the Arab world for the period 2007-2011 has underscored much higher levels of capital requirements of some US$345 billion. As detailed below, this represents a 57% increase over the last annual survey of US$220 billion for the period 2006-2010. Past surveys have shown that rising capital investment was mostly matched with an increase in the number of projects. This time, however, the number of projects has leveled off. The factors most responsible for the current upsurge are notable changes in scope and/or scale of key projects and soaring project costs across the board.
Energy capital investment requirements
MENA Arab world Reviews US $ bn Increase % US $ bn Increase % 2004-08 180 - 150 - 2005-09 210 17 175 17 2006-10 260 24 220 26 2007-11 395 52 345 57
APICORP Reasearch
Arab Petroleum Investments Corporation 11 Global Context, Regional Economic and Energy Investment Outlook for the Arab World
Reflecting the distribution of hydrocarbon resources, nearly half the energy investments are concentrated in three countries namely Saudi Arabia, Qatar and Algeria. However, the countries most responsible for the current upsurge are Kuwait, Egypt, Qatar and Libya, as their combined capital investment requirements have risen by more than 80%. Qatar, which has shown a stronger momentum, has moved from third to second place in the country ranking.
12 Arab Petroleum Investments Corporation Global Context, Regional Economic and Energy Investment Outlook for the Arab World
Of the expected US$345 billion total energy capital investment in the Arab world, the oil supply chain accounts for 41%, the gas chain for 45% and the oil-or-gas-fuelled power generation sector for the remaining 14%. The Figure below shows the extent to which the investment outlook in each link of the supply chain has evolved. It reveals a much higher increase in the downstream sector, most dramatically in the oil-based refining/petrochemical and the natural gas-based petrochemical and fertilizer sectors.
The capital structure of these investments (characterized through a single debt-equity ratio) is likely to be 53% debt and 47% equity for the period 2007-2011. This structure, which is underpinned by a more highly leveraged downstream industry, highlights new challenges for securing the appropriate amount and mix of debt financing. APICORP has established that to successfully attract the needed capital, further improvement of the energy investment climate, particularly in the non-GCC area, should remain a key focus of policy.
Conclusions
Notwithstanding a moderate growth outlook for the global economy, the strong regional economic trend across the Arab world is likely to continue providing a supportive environment for the region’s energy investment. However, with a persistent weakening of the oil producers’ purchasing power and the sharp increase in energy project costs, which is the factor most responsible for the continuing upsurge in capital investment requirements, the region’s energy investment outlook and policy are likely to become more challenging and demanding than ever before.
Arab Petroleum Investments Corporation 13 Annual APICORP’s Report 2006
APICORP continued to play an instrumental role in the financing of most of the oil, gas and petrochemical projects launched in the Arab region in 2006
14 Arab Petroleum Investments Corporation Board of Directors’ Report
APICORP ACTIVITIES IN 2006
Project and Trade Finance
2006 has set up another historical record for the project and trade financing activities at APICORP in terms of business volume as well as arranging mandates and bank roles awarded to APICORP. In addition, we have increased our involvement in financings based on Islamic principles in Project Finance as well as in Trade Finance transactions.
We have had an exceptional year in terms of transactions progressed, allowing us to keep a steady asset growth, from US$ 1.1 billion at the end of 2005 to US$ 1.3 billion by year end 2006, despite substantial prepayments.
Indeed, investments in the energy sector have been massively supported by high oil prices and steady foreign demand for hydrocarbon products. In such a dynamic but also highly competitive environment, the Corporation has continued to play an instrumental role in the financing of most of the oil, gas and petrochemical projects launched in the Arab World, focusing on projects that are entrepreneurial and viable.
As a result, the Corporation has closed in 2006 more than 20 transactions totaling US$ 13 billion, with underwriting and final take commitments amounting in aggregate to US$ 1.4 billion and US$ 970 million respectively. This compares to the 19 transactions closed in 2005, totaling around US$ 10 billion, with final take commitments amounting in aggregate to US$ 800 million.
Our net income for 2006 has reached US$18.8 million, slightly above the 2005 net income (US$ 17.2 million).
Project Finance
Project Finance has remained the most active and profitable segment of the Corporation’s lending activities in 2006. The number of mandates awarded to APICORP for Project Finance transactions has reached this year the number of 8 arranging mandates, including in particular 2 bookrunner roles, 1 technical bank role and 1 agency role in some landmarks transactions.
As further evidenced in the following table, which provides a sample of the deals concluded during the year, the Corporation continued in 2006 to play a leading role in the arrangement of most of these financings.
Arab Petroleum Investments Corporation 15 Board of Directors’ Report
Amount, Date of Client Main Sponsors Purpose APICORP Role Signing & Type
SHUAIBAH Saudi Malaysia Water US$ 947 million Power Generation Senior Arranger & Electric Co. Ltd. January 2006 PIF SEC ACWA Power
RABIGH Saudi Aramco US$ 2.34 billion Integrated Refinery Mandated Lead Sumitomo Chemical March 2006 Arranger, Co. Ltd. Underwriter, Bookrunner
NAKILAT Qatar Petroleum US$ 500 million Shipping Mandated Lead Qatar Navigation March 2006 Arranger Company Qatar Shipping Company
AMPTC OAPEC US$ 326 million Shipping Mandated Lead March 2006 Arranger, Underwriter Bookrunner
EQUATE Union Carbide US$2.5 billion Expansion of Mandated Lead Corporation May 2006 petrochemical Arranger, Underwriter Petrochemical facilities Industries Company (PIC)
SHARQ SABIC US$780 million Expansion of Mandated Lead SPDC May 2006 petrochemical Arranger, Underwriter facilities
YANSAB SABIC US$1,197 million Petrochemical Mandated Lead Saudi Private June 2006 facilities Arranger, Onshore Investors Security Agent Public Shareholders
AOL Oman Oil Company US$ 625 million Petrochemical Mandated Lead (OOC) August 2006 facilities Arranger, Underwriter, Oman Refinery Technical Bank Company (ORC) LG International Corporation (LGI)
GNMTC General National US$ 172 million Shipping Co-Arranger Maritime Transport August 2006 Company (GNMTC)
SABIC EURO SABIC Euro1,250 million Expansion of Lead Arranger November 2006 petrochemical
16 Arab Petroleum Investments Corporation Board of Directors’ Report
Trade Finance
In 2006, very good progress of the plan launched the previous year to revitalize and expand the Trade Finance activity of the Corporation has been made and has translated into a further increase of the volume of business and some senior roles in that field, as shown in the following table, which provides a sample of the deals concluded during the year.
Amount, Date of Client Main Sponsors Purpose APICORP Role Signing & Type
EGPC EGPC / IDB US$ 50 million Oil trading Co-Arranger with IDB April 2006
VITOL Vitol Holding B.V. US$ 300 million General corporate Mandated Lead May 2006 purposes Arranger, Underwriter, Documentation Bank, Bookrunner
TRAFIGURA Trafigura US$ 300 million General Corporate Lead Arranger November 2006 purposes
SAMIR Corral Petroleum Oil purchases. Participant Holding US$ 100 million April 2006
Advisory
The Corporation has remained committed to provide specialized advisory services in the field of structured finance for the hydrocarbon industry within the region. However, due to the high level of activity on the lending side, the Corporation has had to adopt a highly selective approach in order to preserve the quality of its services. The two advisory mandates won in 2005 for NAMA as well as for Ibn Zahr were still in progress at the end of 2006.
Research
Research Unit has continued to make significant progress in improving the frameworks and methodologies for scanning the Corporation environment, framing its business strategy and assessing industry and country risks. In addition to their in-house applications, the research findings have provided original materials for presentations to regional and international conferences and workshops, which greatly enhanced the Corporation’s profile. Furthermore, the unit has continued preparing and dispatching externally its monthly Economic Commentary, which is becoming the Corporation’s brand in the field.
Arab Petroleum Investments Corporation 17 APICORP’s mission is to contribute to the development and the transformation of the Arab hydrocarbon and energy industries through equity and debt financing, advisory and research.
18 Arab Petroleum Investments Corporation Board of Directors’ Report
APICORP ACTIVITIES IN 2006 Direct Equity Investments
As at end-2006, APICORP has equity investments in 14 companies situated in seven Arab countries. That portfolio of investments was valued at US$ 256.7 million, based on the net asset values at the end of 2006. The operations of these companies cover a wide array of activities: drilling and related services, seismic services, extraction of LPG, production of methanol, polyethylene, ethylene glycol, polypropylene, methyl tertiary butyl ether, aromatics, purified terephathalic acid, polyester fibres, linear alkyl benzene, carbon black, urea, NPK fertilizer, storage of petroleum products, and production acrylic fiber.
A brief summary on each of our direct equity investment is provided below:
(1) - Bahrain National Gas Company (BANAGAS) APICORP share: 12.5%
BANAGAS was established in 1978 to extract and market LPG and light naphtha from associated gas. Total production in 2006 was 81,650 tons of propane, 89,374 tons of Butane and 186,192 tons of light naphtha. At year-end 2006, BANAGAS reported net income of BD 12 million (versus BD 11.4 million in 2005).
(2) - Arab Drilling & Workover Company (ADWOC) APICORP share: 20%
ADWOC was established in 1978 to provide drilling and related operation services in Libya and nearby Arab markets. In 2006, ADWOC has achieved an average utilization rate of 97% for its 15 rigs, an increase of 4% over 2005. In 2006, ADWOC posted net income of LD 16.8 million (versus LD 7.2 million in 2005).
(3) - Arab Company For Detergent Chemicals (ARADET) APICORP share: 32%
ARADET was established in 1981 to produce 50,000 tons/yr of linear alkyl benzene (LAB). The LAB complex at Baiji, in operation since 1987, also includes an aromatics line with a capacity of 30,000 tons/yr of benzene and Toluene. In 2006, the Company produced approximately 18,000 tons of LAB, all of which was sold on the regional markets. At end 2006, ARADET generated net loss of US $ 5 million (versus a net loss of US $ 2.6 million in 2005).
4) - Tankage Méditerranée (TANKMED) APICORP share: 20%
TANKMED was established in 1984 to provide storage services for petroleum products at La Skhira terminal in Tunisia. TANKMED’s total storage capacity stands at 300,000 cubic meters. As at the end of 2006, TANKMED maintained a capacity utilization rate of 99%, compared with a utilization rate of 95% for year 2005 achieving an income of TD 9.2 million and a net profit of TD 3.6 million versus a net profit of TD 2.5 million for year of 2005.
Arab Petroleum Investments Corporation 19 Board of Directors’ Report
(5) - Arab Geophysical Exploration Services Company (AGESCO) APICORP share: 10%
AGESCO was established in 1985 to provide advanced seismic services in Libya and the Arab world. The company maintains three seismic crews and was able to achieve operation rate of 92% in 2006. AGESCO recorded an unpredicted net profit of LD 11.2 million at the end of 2006 (versus LD 0.45 million in 2005).
(6) - The Saudi European Petrochemical Company (Ibn Zahr) APICORP share: 10%
Ibn Zahr, established in 1985 in Jubail, can produce 1.3 million tons/yr of methyl tertiary butyl ether (MTBE), a gasoline octane booster and 640,000 tons/yr polypropylene. In 2006, MTBE production was about 1.67 million tons and polypropylene output totaled about 561,000 tons. At end 2006, Ibn Zahr reported a net income of SR 1,785 million versus a net income of SR 2,156 million in 2005.
(7) - Alexandria Carbon Black Company (ACBC) APICORP share: 12%
ACBC was established in 1993 to produce and market carbon black, an oil based material. ACBC currently has a design capacity of about 150,000 tons/yr. The company, at the end of 2006, produced over 190 thousand tons of Carbon Black and posted a net income of about LE 206.5 million versus LE 171 million in 2005.
(8) - The Arabian Industrial Fibres Company (Ibn Rushd) APICORP share: 8.26%
Ibn Rushd was established in 1993 in Yanbu on the west of Saudi Arabia. Ibn Rushd is an integrated petrochemical complex composed of three plants for the production of aromatics (730,000 tons/yr), purified terephthalic acid (PTA, 350,000 tons/yr) and polyester (146,000 tons/yr). In 2006, Ibn Rushd produced a total of 921,000 tons of products; 140.000 tons polyester; 482.000 tons aromatics; and 300.000 tons of PTA. Ibn Rushd recorded a net loss of SR 522 million in 2006 versus a net loss of SR 384 million in 2005.
(9) - Oriental Petrochemicals Company (OPC) APICORP share: 14%
OPC was established in 1996 with an initial capacity of 120,000 tons/yr polypropylene that later can be expanded to 162,000 tons/yr. The company announced the successful commissioning of its plant at the beginning of 2002, and since then it has become the main producer and supplier of polypropylene in the local market. During 2006, OPC produced over 142,000 tons and marketed 143,000 tons of polypropylene, and was able to generate a net profit of LE 24.7 million (versus 31.7 million in 2005).
20 Arab Petroleum Investments Corporation Board of Directors’ Report
10)- Alexandria Acrylic Fibres Company (AFCO) APICORP share: 10%
AFCO was established late 2003 in Egypt, and its plant with a nameplate capacity of 18,000 t/yr was completed in September 2005. The plant was commissioned in December 2005, to produce poly acrylic fibers, which is used mainly in manufacturing carpets and blankets. In October 2006, production capacity reached 104% and it is forecasted to achieve a net operating income of LE 2.5 million and LE 17.8 million in 2006 and 2007 respectively. The issued capital in cash was increased with an amount of LE 136.55 million to become LE 286.55 million in 2006, with a main purpose to double plant capacity to 36,000 t/yr.
11)- Yanbu National Petrochemical Company (Yansab) APICORP share: 1.57%
Yansab was established in early 2005 by SABIC with a paid up capital of SR 5,625 million (US$ 1.5 billion), of which SABIC owns 55%, SABIC partners in Ibn Rushd and Taif own 10%, and the remainder percentage was offered to the Saudi public. Currently, the company has become listed on the Saudi Stock Market (Tadawul).
Yansab petrochemical complex, which costs US $ 5.6 billion, is being built in Yanbu Industrial area and expected to be completed in late 2008. The complex will produce 900,000 tons per year of polyethylenes 700,000 tons per year of ethylene glycols, 400,000 tons per year of poly propylene, in addition to some other by products.
12) Egyptian Methanol Company (EMethanex) APICORP share: 7%
Metanex Corporation, Egyptian Petrochemicals Holding Company (ECHEM), Egyptian Natural Gas Holding Company (EGAS), Egyptian Natural Gas Company (GASCO) and APICORP established EMethanex in 2005 with an initial paid up capital of US $ 30 million to build a US $ 950 million cost methanol production facility in Damietta, Egypt with a nameplate capacity of 3,600 ton per day. The start of commercial operation is planned in April 2010 and the target markets are Europe, and Asia.
13) The Egyptian Bahraini Gas Derivative Company (EBGDCO) EBGDCO APICORP share: 20%
The Egyptian Natural Gas Company, Danagaz of Bahrain and APICORP established EBGDCO in 2005 in Egypt with a share capital of US $ 23 million. The objective of the company will be to construct a US $ 75 million facility for propane and butane recovery from associated natural gas. The plant will be located at Ras Shakair on the Suez Gulf.
Arab Petroleum Investments Corporation 21 Board of Directors’ Report
APICORP ACTIVITIES IN 2006 APICORP EQUITY PARTICIPATIONS AS AT 31 DECEMBER 2006
Company Name Paid-up Capital Participation Other Major Shareholders Activities
Bahrain National Gas BD 8 million 12.5% Bahrain National Oil Co. (BANOCO), Extraction and marketing Company (BANAGAS) Bahrain of LPG and condensates from Bahrain Caltex Trading & Transport Co., Bahrain associated gas.
Arab Drilling and LD 12 million 20% Arab Petroleum Services Co. (APSC), Drilling and related operations Workover Company Libya in the Arab world. (ADWOC) Santa Fe, USA Libyan Arab Jamahiriya
Arab Company for Government of the Republic of Iraq Production and marketing Detergent Chemicals ID 36 million 32% Government of the Kingdom of Saudi of linear alkyl benzene and (ARADET) Arabia sodium tripolyphosphate Iraq Government of the State of Kuwait (STPP). STPP project is being Arab Mining Company, Jordan implemented. The Arab Investment Co., Riyadh
Tankage Mediterranee TD 12 million 20% I’Entreprise Tunisienne d’Activities Storing, trans-shipping and (TANKMED) Petrolieres (ETAP), Tunisia handling petroleum and Tunisia Societe Tuniso Seoudienne petrochemical products at La d’Investissement et de Developpement Skhirra terminal. (STUSID) Banque Tunisio-Koweitienne de Developpement (BTKD)
Arab Geophysical LD 4 million 10% Arab Petroleum Services Co. (APSC), Providing advanced seismic Exploration Services Libya services in the Arab world. Company (AGESCO) Halliburton, USA Libyan Arab Jamahiriya National Oil Co., Libya
Saudi European SR 1,025 million 10% Saudi Basic Industries Corp. (SABIC), Production of gasoline octane Petrochemical Company Ecofuel, Italy booster MTBE, and (IBN ZAHR) Saudi Arabia Polypropylene (PP).
JD 75 million 0.76% Government of the Kingdom of Jordan Mining phosphate rock, Jordan Phosphate Government of the State of Kuwait production and marketing Mining Company (JPMC) Investment Agency - Brunei of chemical fertilizer Jordan Islamic Development Bank, Saudi compounds. Arabia Others
22 Arab Petroleum Investments Corporation Board of Directors’ Report
APICORP ACTIVITIES IN 2006 APICORP EQUITY PARTICIPATIONS AS AT 31 DECEMBER 2006
Company Name Paid-up Capital Participation Other Major Shareholders Activities
Alexandria Carbon Black LE 150 million 12% Indian Industrial Investment Group (BIRLA), India Production and marketing Company (ACBC) Transport and Engineering Company (El Nesser of carbon black. Egypt Tire Co.), Egypt Pirelli Tire Company, Italy Al-Nasr Coke Company, Egypt Saudi Egyptian Industrial Investment Company, Egypt International Finance Corporation (IFC), USA Continental Carbon Company, USA
The Arabian Industrial SR 3,550 million 8.3% Saudi Basic Industries Corp. (SABIC), Saudi Arabia Production of Aromatics, PTA Fibers Company Gulf Investment Corporation, GIC, Kuwait and Polyester Fibers. (IBN RUSHD) Saudi Pharmaceuticals Co., Saudi Arabia Saudi Arabia SAFCO, Saudi Arabia, Others
Oriental Petrochemical LE 120 million 14% Oriental Weavers Group, Egypt Production and marketing Company (OPC) Arab International Investments Co., Libya of Polypropylene. Egypt National Bank of Egypt (Al-Ahli Bank), Egypt Egyptian Petrochemicals Co., Egypt Misr Insurance Co., Egypt Orient Insurance Co. (Al-Sharq), Egypt
Alexandria Acrylic Fibers LE 286.5 million 10% Aditya Birla Group, India Production and marketing Company (AFCO) Sidikrier Petrochemical Co., Egypt of Acrylic Fibers Egypt Alexandria Carbon Black Co., Egypt Saudi Egyptian Industrial Investment Co., Egypt
Yanbu National SR 5,625 million 1.57% SABIC Production and marketing Petrochemical Company SABIC Partners in Ibn Rushd and Taif of PE, EG, PP and other by (Yansab)* Saudi Public products Saudi Arabia
Egyptian Methanol US $ 30 million 7% Egyptian Petrochemicals Holding Company Production of and Marketing Company (EMethanex)* (Echem), Egypt of Methanol Egypt Egyptian Natural Gas Holding Company (Egas), Egypt Egyptian Natural Gas Company (GASCO), Egypt MethanexCorporation, Canada
The Egyptian Bahraini US $ 23 million 20% The Egyptian Natural Gas Holding Company Fractionation of natural gas Gas Derivative Company ( Egas) liquids (NGL) to recover (EBGDCO)** Danagaz of Bahrain propane and butane. Bahrain
* Under construction. ** Under formation Arab Petroleum Investments Corporation 23 Annual APICORP’s Report 2006
Treasury & Capital Markets activities in 2006
The conservative strategies adopted by the management towards the Treasury & Capital Markets investment and funding operations has had a positive impact on overall performance of the corporation. Treasury & Capital Markets has maintained its focus on high quality investments to ensure high liquidity and stable returns.
In 2006, Treasury & Capital Markets operations achieved a net income of US$ 19.8 million, compared to US $ 20.7 million for the year 2005. Treasury & Capital Markets assets grew from US$ 910 million as at 31st December 2005 to US$ 1001 million as at 31st December 2006. Fixed Income securities portfolio has maintained a high standard of credit profile and had an average of AA Rating as at 31st December 2006.
During last quarter of 2006, the foreign branch of APICORP started operations as an Investment Bank in Bahrain. The Bahrain branch now complements all the Treasury & Capital Markets activities of APICORP’s head office.
The strong global growth coupled with increased earnings of corporate and financial sectors positively impacted the investments in managed funds and bonds during 2006.
Disclosure of the Activities of the Strategy Review Committee According to Section 5 of its statutes (Reporting and Disclosure), the Strategy Review Committee’s activities during any one calendar year should be disclosed, as appropriate, in the Corporation’s Annual Report. The following is a proposed draft for 2006.
DRAFT 1
Pursuant to the deliberations of the Board of Directors dated 1st July 2006 on the formulation of a new corporate strategy, the Chief Executive and General Manager resolved to establish a Strategy Review Committee. The Committee’s main functions and responsibilities include :
• Providing oversight and guidance to the formulation and implementation of the corporate business strategy with the aim of achieving profitable growth and delivering acceptable shareholder returns in line with the Corporation’s policy guidelines.
• Ensuring proper resource allocation and/or re-allocation in support of the business strategy.
• Monitoring the timely implementation of the strategy as approved by the Board of Directors and translated into action plans.
Since its establishment in September 2006, the Committee, met twice during the year 2006. First to review the terms of reference for the formulation of a corporate business strategy for the 5-year period 2007-2011. Then to deliberate on the preliminary content and articulation of the strategy to be presented to the Board of Directors during their first meeting of 2007.
24 Arab Petroleum Investments Corporation Board of Directors’ Report
Conferences and Seminars:
During the course of the year, APICORP participated in a number of conferences and seminars in relation to financing of the energy industry and it presented research and study papers in most of these conferences:
- The 8th Arab Energy Forum, held in Aman, Jordan during the period between 14-17 May 2006.
- Paris International Oil Summit (as a special guest) (Paris, 7 April 2006).
- Fleming Gulf 2nd Project Finance Forum (Dubai, 29-30 May 2006).
- CERA Annual Energy Executive Conference (Istanbul, 20-22 June 2006).
- Asia/China Petrochemicals & Refining Summit (6 December 2006).
- The Sudan Development Programme (11 – 15 February 2006) Dubai, UAE.
- Meed Conference: (28 February – 1 March 2006) Doha, Qatar.
- MEED Conference, November 29, 2006, Dubai, UAE.
- A delegation from APICORP visited Kuwait on 30-31 May 2006 to attend the annual meeting of Board of Trustees of the Islamic Development Bank.
Arab Petroleum Investments Corporation 25 FINANCIAL STATEMENTS for the year ended 31 December 2006 Contents
Introduction The formation, status and activities of APICORP 28
Significant Accounting policies applied in the 2006 financial statements A General 29 B Financial assets 29-30 C Cash and cash equivalents 31 D Repurchase and resale agreements 31 E Property and equipment 31-32 F Investment property 32 G Income recognition 32 H Employees’ end of service benefits 33
Significant accounting judgements and estimates I Judgements 33 J Estimation Uncertainty 33-34 K New international financial reporting standards and interpretations not yet adopted 34
Primary financial statements for the year ended 31 December 2005 Income statement 35 Balance sheet 36 Statement of changes in equity 37-38 Statement of cash flows 39
Notes to the 2006 financial statements 1 Net interest and similar income 40 2 Net fee income 40 3 Dividend income 41 4 Gains on trading securities 41 5 Realised gains on available-for-sale securities 41 6 Realised gains on Available-for-sale direct equity investments 41 7 Other operating income 41 8 General administrative expenses 42 9 Impairment losses 42 10 Other operating expenses 43 11 Trading securities 43 12 Available-for-sale securities 43 13 Deposits with banks 43 14 Syndicated and direct loans 44-45 15 Available-for-sale direct equity investments 46-47 16 Property and equipment 47 17 Other assets 48 18 Due to banks 48 19 Term financing 48-49 20 Other liabilities 49 21 Employee retirement benefits 49 22 Off-balance sheet exposures 50 23 Related party transactions 50 24 Cash flows from operating activities 51 25 Capital adequacy 51-52 26 Financial instruments and risk management 52-53 27 Effective interest rates 54 28 Fair value information 54 29 Maturity profile of assets and liabilities 55 30 Repricing profile of financial assets and liabilities 56 31 Currency exposures 57-58 32 Industry distribution of assets and liabilities 59-60 33 Geographical distribution of risk 60-61
Report of the auditors to the shareholders 62 The financial statements consist of pages 26 to 61 INTRODUCTION
The formation, status and activities of APICORP
The information on this page is presented in order to provide the reader with background information about APICORP that is essential to the understanding of the financial statements, as set out in pages 28 to 61. Similarly, the significant accounting policies as explained in pages 29 to 34 are intended to acquaint the reader with the International Financial Reporting Standards (IFRS) and the methodology followed by the Corporation in the presentation of its financial statements, and the classification and measurement of assets and liabilities therein.
Arab Petroleum Investments Corporation (APICORP - the Corporation) is an Arab joint stock company established on 23 November 1975 in accordance with an international agreement signed and ratified by the ten member states of the Organisation of Arab Petroleum Exporting Countries (OAPEC). The agreement defines the objectives of the Corporation as:
· participation in financing petroleum projects and industries, and in fields of activity which are derived therefrom, ancillary to, associated with, or complementary to such projects and industries; and
· giving priority to Arab joint ventures which benefit the member states and enhance their capabilities to utilise their petroleum resources and to invest their funds to strengthen their economic and financial development and potential.
Domicile and taxation
The Corporation is an international entity, and operates from its registered head office in Dammam, Kingdom of Saudi Arabia. The establishing agreement states that APICORP is exempt from taxation in respect of its operations in the member states.
Share capital
The capital is denominated in shares of US$ 1,000 and is owned by the governments of the ten OAPEC states as follows:
US$ 000 Issued and Authorised Percentage fully paid capital
United Arab Emirates 93,500 204,000 17% Kingdom of Bahrain 16,500 36,000 3% Democratic and Popular Republic of Algeria 27,500 60,000 5% Kingdom of Saudi Arabia 93,500 204,000 17% Syrian Arab Republic 16,500 36,000 3% Republic of Iraq 55,000 120,000 10% State of Qatar 55,000 120,000 10% State of Kuwait 93,500 204,000 17% Socialist Peoples’ Libyan Arab Jamahiriya 82,500 180,000 15% Arab Republic of Egypt 16,500 36,000 3%
550,000 1,200,000 100%
Activities
APICORP is independent in its administration and the performance of its activities, and operates on a commercial basis with the intention of generating net income. During 2005 corporation was granted an investment-banking licence by the Central Bank of Bahrain (CBB). The operations of the Bahrain Banking unit will start from early 2007, currently the Corporation has no subsidiaries, branches or divisions, and operates only from its head office in the Kingdom of Saudi Arabia, hence no business or geographical segmental information is reported in the current financial statements.
Currently the Corporation's project-financing activities take the form of loans and direct equity investments in projects. These activities are funded by shareholders’ equity, medium-term financing and short-term deposits from banks.
28 The financial statements consist of pages 26 to 61 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2006
A- GENERAL
A-1 Compliance with International Financial Reporting Standards The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS)
A-2 Basis of preparation APICORP presents its financial statements in United States dollars (rounded to the nearest thousand) because it is a supranational organisation with its capital and the majority of its transactions and assets denominated in that currency.
The financial statements have been prepared on the historical cost convention except for the measurement at fair value of trading securities, certain available-for-sale investments and investment property.
The preparation of financial statements in conformity with the IFRS, that requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Corporation’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in notes I and J.
The accounting policies have been consistently applied by the Corporation and are consistent with those used in the previous year.
A-3 Foreign currency transactions Transactions in currencies other than US dollars (foreign currencies) are translated at the exchange rates ruling at the date of the transaction. All monetary assets and liabilities denominated in foreign currencies are translated into US dollars at rates prevailing at the balance sheet date. Differences arising from changes in exchange rates are recognised in the income statement.
Available-for-sale direct equity investments (non-monetary assets) denominated in foreign currencies, that are stated at fair value, are translated to US dollars at prevailing exchange rates. Differences arising from changes in rates are included in the fair value reserve in equity. Capital expenditure on property and equipment is stated at the historical rates of exchange. There are no other foreign currency denominated non-monetary assets or liabilities.
Share capital originally contributed in Saudi Riyals is maintained at the historical rates of exchange.
B- FINANCIAL ASSETS
B-1 Classification Trading securities are those that the Corporation purchased principally for the purpose of gains over the short-term. These consist of managed funds and equity securities.
Loans arise when the Corporation provides money to a debtor, other than those created with the intention of gains over the short-term. Loans comprise deposits placed with banks, and syndicated and direct loans.
Available-for-sale investments are non-derivative financial assets that are not classified as held for trading or loans provided by the Corporation. Available-for-sale investments include certain debt securities, managed funds and direct equity investments.
APICORP has available-for-sale direct equity investments in the quoted and unquoted ordinary share capital of companies established for specific start-up projects in the petroleum and petrochemical industries, mostly in partnership with governments or quasi-governmental entities. The Corporation is represented on the boards of most of the investee companies.
The three companies in which the Corporation holds 20% or more of the equity are not treated as associates under IAS 28 - Investments in Associates because APICORP's philosophy is that it should act in a fiduciary and advisory capacity and not exercise significant influence over the management and operations of the companies.
Once the companies become established and begin paying dividends, it is the Corporation's intention to profitably dispose of its holdings in order to recycle the funds to new projects. Accordingly, these investments are classified as available-for-sale assets, and are recorded initially at cost, including transaction costs.
The financial statements consist of pages 26 to 61 29 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006
B-2 Recognition Available-for-sale and held for trading financial assets are recognised on a settlement date basis.
Loans are recognised on the day on which they are drawn down by the borrower.
B-3 Measurement Financial assets are measured initially at fair value plus transaction costs. In case of financial assets held for trading transaction costs are recognised in the income statement. Subsequent to initial recognition, all trading and available-for-sale investments are measured at fair value.
Loans are carried at amotised cost using the effective interest method, less allowances for impairment, if any. The unamortised portion of deferred participation and commitment fees received is deducted from the carrying cost of the loans.
B-4 Amortisation Where financial assets, mainly bonds, have been purchased at a premium or a discount, the premiums and discounts are amortised through the income statement over the period from the date of purchase to the date of maturity.
B-5 Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using discounted cash flow techniques, or other methods, as appropriate .Financial assets for which there is no quoted market price or other appropriate methods from which to derive reliable fair values, are stated at cost less impairment allowances, if any.
B-6 Gains and losses on subsequent measurement Gains and losses arising from changes in the fair value of available-for-sale financial assets are recognised directly in a fair value reserve in equity. When the assets are sold, collected or otherwise disposed of, or are impaired, the cumulative gain or loss recognised in equity is transferred to the income statement.
Gains and losses arising from a change in the fair value of trading securities are recognised in the income statement.
B-7 Derecognition A financial asset is derecognised when the Corporation loses control over the contractual rights attached to that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished.
Available-for-sale and trading financial assets are derecognised on a settlement date basis.
Loans are derecognised on the date on which they are repaid.
B-8 Impairment Financial assets are reviewed at each balance sheet date to determine whether there is objective evidence of impairment. If any such indication exists, the assets' recoverable amounts are estimated. The recoverable amount of an equity instrument is its fair value. The recoverable amount of loans and debt instruments remeasured to fair value is calculated as the present value of the related expected future cash flows discounted at the current market rate of interest for such an instrument.
Where a financial asset remeasured to fair value directly through equity is impaired, and a write-down was previously recognised directly in equity, the write-down is transferred to the income statement and is recognised as part of the impairment loss. Any subsequent additional impairment loss is also recognised in the income statement. Similarly the increase in the fair value of financial asset, previously been recognised in equity is reversed to the extent, it is impaired.
30 The financial statements consist of pages 26 to 61 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006
Allowances for Loans uncollectibility (impairment) consist of:
- Specific allowances for individual loans when circumstances are identified that may lead to significant, possibly permanent, losses. The most common occurrences are failure to meet interest or repayment commitments.
- Loans not found to be individually impaired are grouped on similar credit characteristics, each group is collectively evaluated for impairment and collective impairment allowance is calculated.
Increases and decreases in allowances for uncollectibility are recognised in the income statement.
When a loan is known to be uncollectible, and the final loss has been determined, the loan is written off after receiving specific approval to do so from the Board of Directors.
If in a subsequent period the amount of an impairment loss decreases, and the decrease is due to a change in estimates, or can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement, except for available-for-sale equity investments, which is reversed through the equity.
C- CASH AND CASH EQUIVALENTS
For the purpose of the statement of cash flows, cash and cash equivalents comprise cash balances on hand and cash in call accounts.
D- REPURCHASE AND RESALE AGREEMENTS
Assets sold with a simultaneous commitment to repurchase at a specified future date (repos) are not derecognised. Amounts received under these agreements are treated as liabilities and the difference between the sale and repurchase price treated as interest expense using the effective yield method.
Assets purchased with a corresponding commitment to resell at a specified future date (reverse repos) are not recognised in the balance sheet. Amounts paid under these agreements are treated as assets and the difference between the purchase and resale price treated as interest income using the effective yield method.
E- PROPERTY AND EQUIPMENT
E-1 Classification Items of property and equipment are stated at cost less accumulated depreciation (see below) and impairment losses (if any).
Where an item of property and equipment comprises major components having different useful lives (for example: the Corporation's head office building), these components are accounted for as separate items of property and equipment. No borrowing costs have been capitalised.
E-2 Subsequent expenditure Expenditure incurred subsequently to replace a major component of an item of property and equipment that is accounted for separately is capitalised. Other subsequent expenditure is capitalised only when it increases the future economic benefits expected to accrue from the item of property and equipment.
All other expenditure, for example on maintenance and repairs, is expensed in the income statement as incurred.
The financial statements consist of pages 26 to 61 31 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006
E-3 Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the items of property and equipment, and of the major components that are accounted for separately. Land is not depreciated.
The estimated useful lives of the Corporation's property and equipment are as follows:
· Head office building (civil works and other major components) 20 to 40 years
· Head office building (finishes, systems and equipment) 5 to 20 years
· Housing compound buildings (including extension completed in 2000) 15 years (from 2000)
· Housing compound equipment, furniture and fittings 5 to 10 years
· Office furniture, equipment and computer hardware (and related software) 3 to 10 years
The property and equipment residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
F- INVESTMENT PROPERTY
The Corporation's investment property, being land that is no longer required for the development of the head office building, is included in other assets in the balance sheet and is carried at fair value. Fair value is determined by an independent, professional property valuer based on open market prices. Any gain or loss arising from a related change in fair value is recognised in income.
G- INCOME RECOGNITION
G-1- Interest and similar income Interest income and interest expense for all interest-bearing financial instruments except those classified as held-for-trading are recognised within interest and similar income” and interest and similar expense” in the income statement using the effective interest rate method. The effective interest rate method is a method of calculating the amorised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the asset or liability. The effective interest rate is the rate that exactly discounts estimated future cash flows through the expected life of the financial asset or liability or, where appropriate, a shorter period, to the net carrying amount of the financial asset or liability. The application of the effective interest rate method has the effect of recognising interest income and interest expense evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating the effective interest rate, cash flows are estimated taking into consideration all contractual terms of the financial instrument but excluding future credit losses. Fees, including loan origination less and early redemption fees, are included in the calculation of the effective interest rate to the extent that they are considered to be an integral part of the effective interest rate.
G-2 Fee income Fee income arises from financial services provided by the Corporation including project and structured finance transactions, for example advising on underwriting and arranging syndicated loan facilities, and is recognised when the service is provided.
Fees that are analagous to interest and are considered to be part ot the overall yield on loans, specifically participation and commitment fees, are initially deferred and then amortised over the lives of the related loans. The amortised income is included in interest income.
G-3 Dividend income Dividend income is recognised in the income statement from the date on which the dividend is declared.
32 The financial statements consist of pages 26 to 61 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006
H- EMPLOYEES' END OF SERVICE BENEFITS
The Corporation provides end of service benefits to its employees. The entitlement to these benefits is based upon the employees’ final salary and length of service subject to the completion of a minimum service period. Provision for the unfunded commitment (which is a defined benefit scheme under IAS 19) has been made by calculating the notional liability, had all the employees left at the balance sheet date.
I- JUDGEMENTS
In the process of applying the Corporation’s accounting policies, management has made the following judgements, apart from those involving estimations, which have the most significant effect in the amounts recognised in the financial statements:
I-1 Classification of investments Management decides on acquisition of an investment whether it should be classified as trading, or available for sale.
I-2- Impairment of investments The Corporation treats available for sale and direct equity securities as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires considerable judgement. The Corporation treats “significant” generally as 50% and “prolonged” as greater than 3 years. In addition, the Corporation evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.
J- ESTIMATION UNCERTAINTY
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet 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:
J-1 Impairment losses on loans and advances The Corporation reviews its loans portfolio on a quarterly basis to assess whether a provision for impairment should be recorded in the income statement. In particular, considerable judgement by Corporation is required in the estimation of the amount and timing of future cash flows when determining the level of provisions required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgment and uncertainty, and actual results may differ resulting in future changes to such provisions.
J-2 Collective impairment provisions on loans and advances In addition to specific provisions against individually significant loans and advances, the Corporation also makes a collective impairment provision against loans and advances which although not specifically identified as requiring a specific provision have a greater risk of default than when originally granted. This collective provision is based on any deterioration in the internal grade of the loan, since it was granted. The amount of the provision is based on the historical loss pattern for loans within each grade and is adjusted to reflect current economic changes.
These internal gradings take into consideration factors such as any deterioration in country risk, industry, technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows.
The financial statements consist of pages 26 to 61 33 SIGNIFICANT ACCOUNTING POLICIES APPLIED IN THE FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 31 DECEMBER 2006
J-3 Valuation of unquoted available-for-sale direct equity investments Fair values of unquoted available-for-sale direct equity investments is normally based on one of the following:
- recent arm’s length market transactions; - current fair value of another instrument that is substantially the same; - the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or - other valuation models.
Available-for-sale direct equity investments for which there is no quoted market price or other appropriate methods from which to derive reliable fair values, are stated at cost less impairment allowances, if any.
K- NEW INTERNATIONAL FINANCIAL REPORTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED
During the year the following relevant new/amended IFRS standards and interpretations have been issued, which are not yet mandatory for adoption by the Corporation:
- IFRS 7 Financial instruments: Disclosures – Effective for financial years beginning on or after 1 January 2007 - IAS 1 Presentation of Financial Statements (amended) – Effective for financial years beginning on or after 1 January 2007 - IFRIC 10 Interim Financial Reporting and Impairment – Effective for financial periods beginning on or after 1 November 2006
The adoption of these standards and interpretations are not expected to have a material impact on the financial statements.
34 The financial statements consist of pages 26 to 61 INCOME STATEMENT Year ended 31 December
US$ 000 Notes 2006 2005 2004
INTEREST AND SIMILAR INCOME 1,23 116,684/ 71,500/ 42,925/ Interest expense and similar charges 1 (87,195) (49,484) (23,778)
NET INTEREST AND SIMILAR INCOME 29,489/ 22,016/ 19,147/
Fee income 23 2,318/ 2,461/ 4,297/ Fee expense (159) (122) (120) Net fee income 2 2,159/ 2,339/ 4,177/
Dividend income 3, 23 30,103/ 16,382/ 10,697/ Realised and unrealised gains on trading securities 4 5,640.. 9,941/ 9,026/ Realised gains on available-for-sale securities 5 1,331/ 3,802/ 124/ Realised gains on available-for-sale direct equity investments 6 -/ 58,755/ -/ Other operating income 7 698/ 2,119/ 5,404/
General administrative expenses 8 (20,326) (16,731) (17,327) Impairment reversals ( 2005 : net losses) 9 1,914/ (3,692) 7,968/ Other operating expenses 10 (30) (345) (364)
NET INCOME FOR THE YEAR BEFORE APPROPRIATIONS 50,978/ 94,586/ 38,852/
Appropriations of net income: 2006 2005 2004 Proposed Actual Actual
Legal reserve 5,100 9,500 3,900 Dividend to shareholders (see below) 20,000 40,000 20,000 Retained earnings 25,878 45,086 14,952
NET INCOME AS ABOVE 50,978 94,586 38,852
Appropriations of net income for dividends are proposed by the Directors and are then subject to approval by the Annual General Assembly of the shareholders.
Per US$ 1,000 share information 2006 2005 2004
· Earnings (based on weighted average number of shares outstanding) US$ 92.69 US$ 171.97 US$ 70.64
· Proposed dividend (2005 and 2004: actual) US$ 36.36 US$ 72.73 US$ 36.36
· Net asset value US$ 1,630 US$ 1,543 US$ 1,353
The financial statements consist of pages 26 to 61 35 BALANCE SHEET 31 December 2006
US$ 000 Notes 2006 2005 2004
ASSETS Cash and cash equivalents 10,264 18,288 16,079 Trading securities 11 63,698 68,718 75,858 Available-for-sale securities 12 582,087 558,328 420,713 Deposits with banks 13 345,000 264,920 193,669 Syndicated and direct loans 14 1,304,554 1,141,372 1,149,413 Available-for-sale direct equity investments 15 256,731 234,318 208,111 Property and equipment 16 38,300 40,473 42,734 Other assets 17 34,090 15,433 14,019
TOTAL ASSETS 2,634,724 2,341,850 2,120,596
LIABILITIES Due to banks 18 1,160,668 982,440 858,674 Term financing 19 549,045 498,478 499,098 Other liabilities 20 28,496 12,473 18,408
Total liabilities 1,738,209 1,493,391 1,376,180
EQUITY Share capital (see page 37) 550,000 550,000 550,000 Legal and general reserves (see page 37) 118,100 113,000 103,500 Fair value reserve (see page 37) 134,594 97,516 68,059 Retained earnings (see page 38) 93,821 87,943 22,857
Total equity 896,515 848,459 744,416
TOTAL LIABILITIES AND EQUITY 2,634,724 2,341,850 2,120,596
OFF-BALANCE SHEET EXPOSURES 22 807,722 563,873 563,494 Commitments, guarantees and derivatives
The financial statements were approved by the Board of Directors on 6 April 2007 and were signed by:
Abdullah A. Al-Zaid Ahmad Bin Hamad Al Nuaimi Chairman Chief Executive and General Manager
36 The financial statements consist of pages 26 to 61 STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2006
US$ 000 Notes 2006 2005 2004
SHARE CAPITAL (see page 28 and 36) Issued and paid up share capital at 31 December 550,000 550,000 550,000
LEGAL RESERVE 98,000 88,500 84,600 Legal reserve at the beginning of the year 5,100 9,500 3,900 Appropriation from net income (see page 35) 103,100 98,000 88,500
GENERAL RESERVE General reserve 15,000 15,000 15,000
Legal and general reserves at 31 December 118,100 113,000 103,500
FAIR VALUE RESERVE - available for sale investments Securities Balance at the beginning of the year (3,564) (5,442) (4,071) Increase in fair value (market value) in the year (2004:decrease) 11,087 5,783 (1,011) Gains realised on sales transferred to income 5 (1,331) (3,802) (124) Impairments released on realisation of losses 9 - (101) (236) Exchange rate movements (2) (2) - Balance at 31 December 6,190 (3,564) (5,442) Direct equity investments Balance at the beginning of the year 101,080 73,501 53,465 Increase in fair value in the year 15 33,993 50,060 20,036 Gains realised on sales - Egyptian Fertilisers Company (EFC) 15 - (14,572) - Transfer to income statement on impairment - Arabian Industrial Fibers Co (Ibn Rushd) 15 - (7,909) - Transfer of unrealised gains on impairments 15 (6,669) - - Balance at 31 December 128,404 101,080 73,501
Total fair value reserve at 31 December 134,594 97,516 68,059
The financial statements consist of pages 26 to 61 37 STATEMENT OF CHANGES IN EQUITY (CONTINUED) Year ended 31 December 2006
US$ 000 2006 2005 2004
RETAINED EARNINGS Opening retained earnings as adjusted 87,943. 22,857 7,905 Dividends to the shareholders for the previous year (refer page 35) (40,000) (20,000) (20,000) Net income for the year before appropriations (refer page 35) 50,978. 94,586 38,852 Transfer to legal reserve (see below) (5,100) (9,500) (3,900)
93,821 87,943 22,857 Retained earnings at 31 December
TOTAL EQUITY at 31 December (as in page 36) 896,515 848,459 744,416
Legal and general reserves Under Article 35 of APICORP's statutes, 10% of annual net income is to be transferred to a legal reserve until such reserve equals the subscribed share capital. The legal reserve is not available for distribution.
Article 35 also permits the creation of other reserves such as the general reserve. The general reserve may be applied as is consistent with the objectives of the Corporation, and as may be resolved by the General Assembly, on the recommendation of the Board of Directors.
Retained earnings Included in retained earnings are fair value gains of US$ 57 million related to available for sale direct equity investments recognised on initial adoption of IAS 39 (revised 2000) – Financial Instruments: Recognition and Measurement, on 1 January 2001.
38 The financial statements consist of pages 26 to 61 STATEMENT OF CASH FLOWS Year ended 31 December 2006 US$ 000 Notes 2006 2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES 24 Interest received 114,525 76,058 49,191 Interest paid (75,969) (44,516) (20,733) Fees received 4,272 2,461 4,296 Fees paid (159) (122) (119) Other income received 14 77 72 Net receipts from trading activities 11,206 16,333 4,500 Interest recovery from restructured loans - - 4,120 Operating expenses paid (15,846) (14,388) (13,646)
Cash inflows before changes in operating assets 38,043 35,903 27,681
DECREASE (INCREASE) IN OPERATING ASSETS Increase in deposits with banks (2004: decrease) (80,080) (71,251) 16,021 Syndicated and direct loans drawn down 14 (745,369) (414,645) (380,484) Loan repayments and prepayments received - performing loans 14 611,342 411,533 386,272 Net impairments recovery 14 (22,687) 4,457 13,337 Increase in deposits from banks (2004: decrease) 178,228 123,766 (15,701) Net payments from other operating assets and liabilities (Net proceeds: 2005) (11,650) 4,566 (1,816)
Cash outflows from operating activities (2005 and 2004 inflows) (32,173) 94,329 45,310 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from redemptions and sales of available-for-sale securities 238,175 28,180 76,192 Purchases of available-for-sale securities (255,544) (167,858) (111,449) Dividends from available-for-sale direct equity investments 30,095 16,348 10,669 Payments for available-for-sale direct equity investments (2,573) (23,645) (2,427) Proceeds from sales of available-for-sale direct equity investments - 72,732 - Rent received 692 716 678 Capital expenditure on property and equipment paid (696) (593) (458)
Cash inflows from investing activities (2005 and 2004 outflows) 10,149 (74,120) (26,795)
CASH FLOWS FROM FINANCING ACTIVITIES Term financing drawn down 50,000 200,000 - Term financing repaid 19 - (200,000) - Dividends paid in respect of the previous year 19 (36,000) (18,000) (18,000)
Cash inflows from financing activities (2005 and 2004 outflows) 14,000 (18,000) (18,000)
TOTAL CASH OUTFLOWS IN THE YEAR (2005 AND 2004 INFLOWS) (8,024) 2,209 515
CASH AND CASH EQUIVALENTS At the beginning of the year 18,288 16,079 15,564 Total cash outflows in the year as above (2005 and 2004 inflows) (8,024) 2,209 515
Cash and cash equivalents at 31 December 10,264 18,288 16,079 (as on the balance sheet - see page 36)
The financial statements consist of pages 26 to 61 39 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
1- NET INTEREST AND SIMILAR INCOME US$ 000 2006 2005 2004 Interest and similar income from: Cash and cash equivalents 133 123 102 Deposits with banks - Islamic 143 170 102 - Conventional 11,592 6,331 2,661 Available-for-sale securities - coupon interest 27,179 20,100 15,136 Available-for-sale securities - amortisation of purchase premiums Syndicated and (5,372) (7,494) (7,900) direct loans - interest and similar income excluding amortisation of fees - Islamic 2,817 530 122 - Conventional 76,308 48,260 29,521 Amortisation of loan participation and commitment fees 3,884 3,480 3,405
116,684 71,500 43,149
The increase in interest income in 2006 is as a consequence of the higher interest rates prevailing during current year compared to 2005 and 2004, as most of the Corporation's interest-bearing assets are floating-rate instruments rather than fixed-rate instruments (refer note 27 - Effective interest rates). The level of interest-bearing assets has increased marginally in the three years presented.
Interest income does not include any interest accrued on non-performing securities or loans.
Interest expense and similar charges Interest expense arises from: Due to banks (38,109) (20,290) (9,895) Term financing (29,813) (18,601) (9,678) Amortisation of term financing front-end fees and commitment fees (623) (697) (575) Unpaid dividends (refer note 14) (2,014) (1,189) (490) Total interest (70,559) (40,777) (20,638) Other charges arise from: Morabaha payable (see note 18) (16,636) (8,707) (3,140)
(87,195) (49,484) (23,778)
The increase in interest expense in 2006 is as a consequence of the higher interest rates prevailing during current year compared to 2005 and 2004, as all of the Corporation's interest-bearing liabilities are either short-term fixed-rate instruments or floating-rate instruments (refer note 27 - Effective interest rates).
Net interest and similar income 29,489 22,016 19,371
2- NET FEE INCOME US$ 000
Fee income 2006 2005 2004 Fee income derived from the Corporation's lending activities: Underwriting and arranging services 1,622 1,072 2,489 Agency, advisory and other services 668 1,349 1,782 Fees from securities lending activities 28 40 26 2,318 2,461 4,297 Fee expense Custody fees and other charges paid to banks (159) (122) (120)
Net fee income 2,159 2,339 4,177
40 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
3-DIVIDEND INCOME US$ 000 2006 2005 2004
Dividend income is generated from: Trading securities 8 34 28 Available-for-sale direct equity investments 30,095 16,348 10,669
Total dividend income 30,103 16,382 10,697
4-GAINS ON TRADING SECURITIES US$ 000 2006 2005 2004
Realised and unrealised gains on trading securities arise from: Listed equities 156 643 1,043 Managed funds 5,484 9,298 7,983
Total realised and unrealised gains on trading securities 5,640 9,941 9,026
5- REALISED GAINS ON AVAILABLE-FOR-SALE SECURITIES US$ 000 2006 2005 2004
Realised gains on available-for-sale securities arise from: Fixed-rate bonds - - 142 Managed funds 1,331 3,802 28 Losses on impaired fixed-rate bonds - - (46)
Total realised gains on available-for-sale securities 1,331 3,802 124
6- REALISED GAINS ON AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS US$ 000 2006 2005 2004
Sale proceeds-Egyptian Fertilizers Company (EFC) - 72,733 - Carrying value - net of fair value reserve - (13,978) -
Realised gain on available-for-sale direct equity investments - 58,755 -
7- OTHER OPERATING INCOME US$ 000 2006 2005 2004
Rent - head office building and housing compound 692 716 678 Exchange gains - - 562 Restructured interest of delinquent loans - - 4,120 Write off recovery-(SK Global) - 1,360 - Miscellaneous income 6 43 44
Total other operating income 698 2,119 5,404
The financial statements consist of pages 26 to 61 41 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
8- GENERAL ADMINISTRATIVE EXPENSES US$ 000 2006 2005 2004
Human resources costs (11,216) (10,335) (9,366) Staff retirement fund contributions (see note 21) (1,836) (965) (857) Premises costs, including depreciation (2,670) (2,686) (2,599) Equipment and communications costs (907) (853) (811) General assembly, Board of Directors' & Key Management’s benefits, fees and expenses (1,583) (1,265) (1,303) Key Management's post employment benefits (19) (31) (58) Donations (303) - (1,000) Consultancy (1,010) (18) - Other corporate expenses (782) (578) (1,333)
Total general and administrative expenses (20,326) (16,731) (17,327)
9- IMPAIRMENT LOSSES / REVERSALS US$ 000
Write-downs 2006 2005 2004 Syndicated and direct loans (see note 14) Specific impairment allowance (2,801) (1,206) - Collective impairment allowance (187) - (312) Available-for-sale direct equity investments (see note 15) (7,482) (11,039) Payments under guarantees recoverable from third parties Net effect of changes in value of machinery and discount rates - - (2,688) Net recoverable value in respect of machinery derecognised on settlement - (970) - Other receivables-net - (445) - (10,470) (13,660) (3,000) Reversals of write-downs Available-for-sale securities - transfer from the revaluation reserve (see page 37) - 101 236 Syndicated and direct loans (see note 14) Government of Iraq - reduction against increase in unpaid dividends 6,013 3,190 2,489 Specific impairment allowance 1,018 339 388 Collective impairment allowance - 3,238 - Payments under guarantees - Recovery from Aradet, Iraq (see below) 5,000 3,100 7,855 Other receivables - net 353 - - 12,384 9,968 10,968
Net decrease in impairment losses (2005 : increase ) 1,914 (3,692) 7,968
Payments under guarantees - Aradet, Iraq
Following the lifting of the United Nations sanctions against Iraq, APICORP was successful in negotiating terms for the settlement of amounts paid on behalf of Aradet under guarantees. The balance due till date, under the 2005 settlement agreement of guarantees was duly received and the related provisions were released, accordingly.
42 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
10- OTHER OPERATING EXPENSES US$ 000 2006 2005 2004
Exchange losses (30) (247) - Investment property - decrease in fair value - - (364) Term finance - arrangement costs - (98) -
Total other operating expenses (30) (345) (364)
11- TRADING SECURITIES US$ 000 2006 2005 2004 Trading securities (carried at market value) consist of: Listed equities - mostly USA corporations - denominated in US$ 497 1,812 3,347 Managed funds - mostly denominated in US$ 63,201 66,906 72,511
Total trading securities at 31 December 63,698 68,718 75,858
12- AVAILABLE-FOR-SALE SECURITIES US$ 000 2006 2005 2004 Available-for-sale securities consist of: Fixed-rate bonds (carried at market value) issued by : Governments and other public sector issuers 63,418 239,626 248,550 Other issuers - mainly US and EU corporates 8,919 34,236 28,010 Floating-rate bonds (carried at market value) mainly issued by GCC other issuers 291,342 150,039 36,854 Structured notes (carried at market value) 117,874 87,660 78,727 Managed funds (carried at market value) 100,534 46,767 28,572
Total available-for-sale securities at 31 December 582,087 558,328 420,713
13- DEPOSITS WITH BANKS US$ 000 2006 2005 2004 Deposits with banks (maturing within three months) consist of: Morabaha deposits with Islamic financial institutions - - 14,169 Other conventional deposits 345,000 264,920 179,500
Total deposits placed with banks at 31 December 345,000 264,920 193,669
The financial statements consist of pages 26 to 61 43 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
14- SYNDICATED AND DIRECT LOANS US$ 000 2006 2005 2004
Unimpaired (performing) loans Syndicated, direct and revolving loans and trade finance facilities (at cost) - Islamic 40,387 16,511 5,833 - Conventional 1,251,570 1,137,208 1,161,121 1,291,957 1,153,719 1,166,954 Unamortised participation and commitment fees (see page 32) (10,549) (9,424) (10,174) Collective impairment allowance (4,316) (4,129) (7,367) 1,277,092 1,140,166 1,149,413 Impaired loans Non-performing - Syndicated, direct and revolving loans and trade finance facilities (see below) 26,395 32,858 36,387 Performing - Syndicated facilities 30,901 2,412 - Allowance for specific impairments (29,834) (34,064) (36,387) 27,462 1,206 -
Total net loans outstanding at 31 December 1,304,554 1,141,372 1,149,413
Impaired (non-performing) loans - Fully provided Iraqi companies fully owned by Government of Iraq 51,848 51,848 51,848 Unpaid dividends and interest due to Government of Iraq, offset against the defaulted loans (42,764) (36,751) (33,561) Net Iraqi loans, after dividends offset (see below) 9,084 15,097 18,287 Others 17,311 17,761 18,100
Total impaired loans at 31 December 26,395 32,858 36,387
Impaired loans to companies fully owned by Government of Iraq As a result of the 1990-1991 second Gulf war, certain Government of Iraq controlled companies defaulted on loans from the Corporation. Consequently, since 1992 dividends (and non contractual accrued interest thereon) due to the Government of Iraq (a shareholder in APICORP) have not been paid.
With effect from 1998, the Corporation reduced impairment allowances against the defaulted loans by the amount of the unpaid dividends, while still carrying the dividends as liabilities in the balance sheet upto 2003.
In May 2003, APICORP Board of Directors adopted a resolution authorizing management, in cases where no settlement is reached, to set-off bad debts owed to the Corporation by companies and public corporations fully owned by any of APICORP's shareholder governments, against accounts held by the Corporation belonging to such bodies and governments including dividends, provided all legal requirements are satisfied and complied with.
Accordingly, and until negotiation is undertaken with the Government of Iraq, the Corporation starting from 2003, has made a primary offset of the unpaid dividends (and non contractual accrued interest thereon) due to the Government of Iraq, against the principal amounts of the defaulted loans due from Government of Iraq controlled companies.
Since the beginning of default during 1990-92, the Corporation had kept memorandum record for contractual interest and fee on the defaulted Iraqi loans. Total contractual over due interest and fee on these impaired Iraqi loans as on 31 December 2006 amounts to US $ 96.9 million.
44 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
14- SYNDICATED AND DIRECT LOANS (continued) US$ 000 2006 2005 2004
Movements in performing loans in the year Outstanding at the beginning of the year 1,153,719 1,166,954 1,162,891 Draw-downs on new and existing loans 745,369 414,645 380,484 Repayments and prepayments received (583,303) (411,533) (386,272) Net loans reclassified as impaired (28,039) (2,412) - Exchange rate movements (euro and swiss franc-denominated loans) 4,211 (13,935) 9,851
Outstanding at 31 December 1,291,957 1,153,719 1,166,954
Undrawn loan commitments and guarantees At the beginning of the year 488,732 480,484 447,307 New underwriting and commitment agreements signed 1,090,902 501,559 523,339 Drawdowns in the year (745,369) (414,645) (380,484) Expired commitments, syndication sell-downs and other movements - net (123,754) (78,666) (109,678)
Undrawn commitments at 31 December 710,511 488,732 480,484
There were three open underwriting commitments of approximately US$ 225 million at the year end.
Allowance for specific impairments At the beginning of the year Allowance for specific impairments - gross (70,815) (69,948) (70,336) Unpaid dividends and interest due to Government of Iraq 36,751 33,561 31,072 (34,064) (36,387) (39,264)
Write-downs (see note 9) (2,801) (1,206) - Reversals of write-downs (see note 9) - Increase in unpaid dividends and interest due to the Government of Iraq 6,013 3,190 2,489 - Partial recoveries received 1,018 339 388 Net reduction in the year 4,230 2,323 2,877
Allowance for specific impairments at 31 December - gross (72,598) (70,815) (69,948) Unpaid dividends and interest due to the Government of Iraq 42,764 36,751 33,561
Allowance for specific impairments at 31 December - net (29,834) (34,064) (36,387)
Allowance for collective impairment
At the beginning of the year (4,129) (7,367) (7,055) Movements in the year (see note 9) Unrecognised interest - - (312) Charge (2005:Reversal) (187) 3,238 -
Allowance for cumulative impairment at 31 December (4,316) (4,129) (7,367)
The financial statements consist of pages 26 to 61 45 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
15- AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS US$ 000 2006 2005 2004
APICORP has the following available-for-sale direct equity investments in companiesin the Arab petroleum and petrochemical industries (and the related percentage participation):
Unlisted investments - Carried at cost (2005 and 2004 at fair value, see below) Kingdom of Bahrain Bahrain National Gas Company (Banagas) - liquefied petroleum gas - 12.5% 11,491 11,491 9,056 Kingdom of Saudi Arabia Saudi European Petrochemical Co (Ibn Zahr) - MTBE and polypropylene - 10% 142,219 142,219 99,717 Arabian Industrial Fibers Co (Ibn Rushd) - polyester fibres - 8.3% (see below) - 5,613 24,561 Republic of Iraq Arab Company for Detergent Chemicals (Aradet) - linear alkyl benzene - 32% (see below) 6,720 15,258 13,673 Socialist Peoples' Libyan Arab Jamahiriya Arab Drilling and Workover Company (Adwoc) - drilling and related services - 20% 11,686 11,686 12,133 Arab Geophysical Exploration Services Company (Agesco) - seismic services - 10% 594 594 626 Arab Republic of Egypt Alexandria Carbon Black Company - carbon black - 12% 10,996 10,996 7,557 Alexandria Fiber Co. SAE (AFC) - acrylic fiber - 10% 2,101 2,101 2,470 Egyptian Fertilisers Company (EFC) - ammonia and urea - 10% - - 29,322 Oriental Petrochemicals Company - polypropylene - 14% 6,151 6,151 5,567 Egyptian Methanex - Methanol Company-7% 2,571 - - Non-shareholder countries Tankage Mediterranee (Tankmed), Tunisia - storage facilities - 20% 1,112 1,112 823
Listed investments - Carried at fair value Kingdom of Saudi Arabia Yansab Petrochemical Complex (YANSAB)- Olefin derivaties-1.57 % 58,494 23,645 - Non-shareholder countries Jordan Phosphate Mining Company, Jordan - fertilisers - 0.8% 2,596 3,452 2,606
Net carrying value at 31 December 256,731 234,318 208,111
The fair value of the unlisted available for sale direct equity investments as on 1st January 2006 is the new cost of these investments, as the reliable measure of fair values for these investments is no longer available.
Movements in the year Net carrying value at the beginning of the year 234,318 208,111 185,648 New amounts invested-Egyptian Methanex Methanal Company (2005 : YANSAB, 2004 : AFC ) 2,571 23,645 2,427 Net increase in fair value in the year 19,842 31,112 20,036 Disposal of investments EFC - (28,550) - Net carrying value at 31 December 256,731 234,318 208,111
46 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006 15- AVAILABLE-FOR-SALE DIRECT EQUITY INVESTMENTS (continued) US$ 000
Arabian Industrial Fibers Co (Ibn Rushd) 2006 2005 2004 Fair value at the beginning of the year 5,613 24,561 23,678 Changes in the fair value and impairment (5,613) (18,948) 883
Carrying value at 31 December - 5,613 24,561
Arab Company for Detergent Chemicals (Aradet) Fair value at the beginning of the year 15,258 13,673 16,576 Changes in the fair value and impairment (8,538) 1,585 (2,903)
Carrying value at 31 December 6,720 15,258 13,673
Commitments - uncalled share capital At the beginning of the year 4,649 4,649 4,649 New commitments 24,400 23,645 2,427 Commitments fulfilled (2,571) (23,645) (2,427)
Commitments at 31 December 26,478 4,649 4,649
16-PROPERTY AND EQUIPMENT US$ 000 2006 2005 2004
Cost Land at Rakah - head office building and housing compound 4,004 4,004 4,004 Head office building, equipment, décor and furnishings 37,287 37,250 36,945 Housing compound buildings, equipment, decor and furnishings 28,121 27,851 27,713 Computer hardware and other office equipment 1,841 1,756 1,664 Computer systems software 809 795 743 Bahrain Banking unit office equipment, décor and furnishings 214 - - Total cost at 31 December 72,276 71,656 71,069 Accumulated depreciation (33,976) (31,183) (28,335)
Net carrying value at 31 December 38,300 40,473 42,734
Movements in the year Net carrying value at the beginning of the year 40,473 42,734 45,048 Additions at cost Head office building, operating equipment, décor and furnishings 38 304 89 Housing compound buildings, operating equipment, décor and furnishings 294 144 208 Core computer systems software - acquisition and implementation 11 52 50 Other 366 93 112 Depreciation charge (2,869) (2,854) (2,771) Disposals at net carrying value - mostly fully depreciated (13) - (2)
Net carrying value at 31 December 38,300 40,473 42,734
Capital commitments Contracted for 333 92 131 Approved by the Board of Directors, but not yet contracted for 1,314 954 660
The financial statements consist of pages 26 to 61 47 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
17- OTHER ASSETS US$ 000 2006 2005 2004
Payments made under guarantees to creditors of Aradet Recoverable value -Aradet - 970 970 De-recognition of recoverable value on settlement - (970) - Net recoverable value -Aradet (see below) - - 970
Investment property - land at Dammam at estimated fair value 1,995 1,995 1,995 Advance to purchase available-for-sale investments (managed funds) 7,500 - - Other Receivables Accrued interest receivable 19,217 12,514 10,328 Employee loans and advances 409 336 68 Miscellaneous receivables and advance payments 4,969 588 658
Carrying value at 31 December 34,090 15,433 14,019
18- DUE TO BANKS US$ 000 2006 2005 2004
Short-term US dollar deposits from banks 714,557 608,506 502,471 Short-term non-dollar deposits from banks (EURO, CHF and SAR) 121,614 77,521 102,450 Short-term US dollar Morabaha payable to Islamic financial institutions 269,717 197,552 149,129 Short-term non-dollar Morabaha payable to Islamic financial institutions (EURO and SAR) 54,780 98,861 104,624
Total at on 31 December 1,160,668 982,440 858,674
19- TERM FINANCING US$ 000 2006 2005 2004
US$ 200 million loan 2000-2005 - fully repaid - - 200,000 Interest rate: US$ LIBOR plus 40 basis points US$ 300 million loan 2002-2007 - fully drawn 300,000 300,000 300,000 Interest rate: US$ LIBOR plus 45 basis points US$ 250 million loan 2005-2010 -fully drawn 250,000 200,000 - Interest rate: US$ LIBOR plus 37.5 basis points Unamortised front-end fees for all current facilities (955) (1,522) (902)
Total amortised cost at 31 December 549,045 498,478 499,098
48 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006 19- TERM FINANCING (continued) The agreement for the US$ 300 million (to refinance the two facilities that matured in 2002) was signed on 30 May 2002 with a consortium of 20 international banks, with a maturity date on 30 May 2007. The agent is Credit Agricole Indosuez, Paris, France.
The agreement for the US$ 250 million loan was signed on 27 April 2005 with a maturity date on 27 April 2010. This facility would be partially utilised to replace the US$ 200 million loan, which matured on 9 July 2005.
The mandated lead arrangers for the USS 250 facility were Arab Banking Corporation, The Bank of Tokyo-Mitsubishi Ltd, BNP Paribas, CALYON, Gulf International Bank BSC, Mizhuho Corporate Bank Ltd, Standard Chartered Bank and Sumitomo Mitsui Banking Corporation Europe Limited. Nine other international and regional banks participated in the syndication. The agent for the banks is Sumitomo Mitsui Banking Corporation Europe Limited.
The loans are subject to similar financial covenants, with which the Corporation has complied:
. The ratio of total shareholders' funds to total assets shall at all times be equal to or greater than 0.2; and
. The amount of total shareholders' funds shall at all times be greater than US$ 500 million.
20- OTHER LIABILITIES US$ 000 2006 2005 2004
Accrued interest payable 18,603 9,957 5,558 Staff Retirement Fund current account - 446 - Employees’ end of service benefits 6,330 92 30 Accrued expenses 2,188 1,846 1,265 Other payables 1,375 132 11,555
Total other liabilities at 31 December 28,496 12,473 18,408
21- EMPLOYEE RETIREMENT BENEFITS Up till 31 December 2006, Corporation was providing a contributory defined-benefit retirement plan (The Staff Retirement Fund - the Fund) for most of its employees. During the Year Corporation's Board of Directors decided to liquidate the Fund.
Further its was decided to pay member employees entitlements from the Fund's resources, after deduction of the end of service benefits. Liabilities of the Fund to its ben- eficiaries were adequately covered by the fair values of the Fund's assets on liquidation.
As a result of this decision, an End of service Benefits liability of US $ 4.9 million is transferred from the Staff Retirement Fund related to employees that were member of liquated Staff Retirement Fund.
Employees’ End of service Benefits US$ 000 2006 2005 2004 The movement on the provision is as follows: Balance as at 1 January 92 30 - Charge for the year 1,358 62 30 Transferred from Staff Retirement Fund 4,910 - - Paid during the year (30) - -
Balance as at 31 December 6,330 92 30
Current service cost The Corporation's contributions to the Fund in respect of current service cost, as charged in 1,836 965 857 the income statement
The financial statements consist of pages 26 to 61 49 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
22- OFF-BALANCE SHEET EXPOSURES The Corporation has off-balance sheet exposures as follows: 2006 2005 2004
Commitments to underwrite and fund loans (see note 14) 710,511 488,732 480,484 Commitments to subscribe capital to available-for-sale direct equity investments 26,478 4,649 4,649 Guarantees as shareholder (see below) 70,400 70,400 75,230 Contracted capital expenditure commitments (see note 16) 333 92 131 Credit default swap commitments - - 3,000
Total exposures at 31 December 807,722 563,873 563,494
Guarantees as shareholder APICORP is an 8.28% shareholder in The Arabian Industrial Fibers Company (Ibn Rushd) (see note 15), which in turn had a senior debt facility from a consortium of banks (including the Corporation) of US$ 850 million. The shareholders had given a guarantee whereby they would be severally liable to repay the loan to the banks in full, should the borrower fail to comply with certain conditions. In September 2002 this loan was prepaid and replaced by a similar loan from the Public Investment Fund, Saudi Arabia, similarly guaranteed by the shareholders. The Corporation's contingent liability thereunder remains at US$ 70.4 million.
23- RELATED PARTY TRANSACTIONS APICORP's principal related parties are its shareholders. Although the Corporation does not transact any commercial business directly with the shareholders themselves, it does finance companies which are either controlled by the shareholder governments or over which they have significant influence.
US$ 000 2006 2005 2004
Loans to related parties Loans outstanding at 31 December - gross 914,907 890,689 907,129 Impairment allowances at 31 December (4,132) (10,145) (13,335) Dividends offset against Iraq direct loans at 31 December (42,764) (36,751) (33,652)
Commitments to lend at 31 December 616,855 384,294 367,097
Interest from loans during the year 54,987 36,612 23,585 Loan fees earned during the year 5,244 2,655 5,305
Loans to related parties are made at ruling market interest rates and subject to normal commercial negotiation as to terms. The majority of loans to related parties are syndicated, which means that participation and terms are negotiated by a group of arrangers, of which the Corporation may, or may not, be a member. No loans to related parties were written off in 2004-2006.
Available-for-sale direct equity investments in related parties Investments at 31 December - at fair value 232,317 211,617 160,589 Guarantees as shareholder at 31 December (see note 22) 70,400 70,400 75,230 Commitments to invest at 31 December 26,478 4,649 4,649
Dividends received during the year 29,046 14,583 9,287
For key management’s compensation refer note 8
50 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
24- CASH FLOWS FROM OPERATING ACTIVITIES US$ 000 2006 2005 2004
Cash flows from operating activities are reconciled to net income for the year as follows:
Net income for the year (as page 35) 50,978 94,586 38,852 Adjustments for non-cash items Gains on trading securities (5,521) (10,843) (8,766) Realised gains on sale of available-for-sale securities (1,331) (3,802) (124) Realised gains on sale of available-for-sale direct equity investments - (58,755) - Depreciation of property and equipment 2,869 2,854 2,771 Investment property - decrease in fair value - - 364 Net reversals of impairment losses - loans (3,212) (3,530) (2,877) Impairment losses - payments under guarantees - 970 3,530 Impairment reversals- available-for-sale securities - - (236) Impairment losses - available-for-sale direct equity investments 7,482 11,039 - Amortisation and exchange differences, net (180) 23,328 (2,540) Other non-cash items (36,663) (960) 2,633 14,422 54,887 33,607
Net sales of trading securities 11,206 16,333 4,500 Dividends from available-for-sale direct equity investments (included in investing activities) (30,095) (16,348) (10,669) Rent received (included in investing activities) (692) (716) (678) (5,159) 54,156 26,760 Changes in operating assets and liabilities Increase in deposits with banks (2004:decrease) (80,080) (71,251) 16,021 Syndicated and direct loans drawn down (745,369) (414,645) (380,484) Loan repayments and prepayments received - performing loans 611,342 411,533 386,272 Recoveries in respect of impaired loans 3,173 340 4,640 Increase in other operating assets (2005 and 2004: decrease) (77) 385 782 Increase in due to banks (2004:decrease) 178,228 123,766 (15,701) Increase in other operating liabilities (2005 : decrease) 5,769 (9,955) 7,020
Cash outflows from operating activities (2005 and 2004 inflows) (as page 39) (32,173) 94,329 45,310
25- CAPITAL ADEQUACY The risk asset ratio at 31 December 2006, calculated in accordance with the capital adequacy guidelines of the Basle Committee on Banking Supervision, is as follows:
US$ 000 2006 2005 2004
Carrying values On-balance sheet assets (refer page 36) 2,634,724 2,341,850 2,120,596 Off-balance sheet exposures (refer note 22) 807,722 563,873 563,494
3,442,446 2,905,723 2,684,090
The financial statements consist of pages 26 to 61 51 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
25- CAPITAL ADEQUACY (continued) US$ 000 2006 2005 2004
Risk-weighted exposures On-balance sheet assets 2,268,511 1,869,084 1,698,904 Off-balance sheet exposures 794,483 561,549 543,400
Total risk-weighted exposures 3,062,994 2,430,633 2,242,304
Capital adequacy ratio Qualifying capital base expressed as a percentage of total risk-weighted exposures:
Capital base - Tier-1 capital: Equity at balance sheet (refer page 36) 896,515 848,459 744,416
Capital adequacy ratio 29.3% 34.9% 33.2%
26- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Financial instruments A financial instrument is any contract that gives rise to both a financial asset in one enterprise and a financial liability or equity instrument in another enterprise.
. APICORP’s financial assets are principally trading securities (note 11), available-for-sale securities (note 12), deposits placed with banks (note 13), syndicated and direct loans (note 14), available-for-sale direct equity investments (note 15) and certain other assets (note 17).
. Financial liabilities consist of commitments to lend (note 14) and invest (note 15), deposits from banks (note 18), term financing (note 19), other liabilities (note 20), and guarantees (note 22).
These financial instruments expose APICORP to varying degrees of price risk (including currency, interest rate and market risks), credit risk and liquidity risk.
Price risk management Price risk is the risk that interest rates, foreign exchange rates or market prices will move relative to positions taken, exposing APICORP to potential losses and potential gains.
. Market risk is the risk that the value of a financial instrument will vary as a result of changes in market prices, whether caused by factors specific to the individual security or its issuer or by factors affecting all securities traded in the market. It arises both on financial instruments valued at current market prices (mark-to-market basis) as well as those valued at cost-plus-accrued-interest (accruals basis).
APICORP holds (but currently does not actively trade) debt and equity securities. Treasury activities are controlled by the Assets and Liabilities Committee and are also subject to a framework of Board-approved currency, industry and geographical limits and ratings by agencies including Standard & Poors.
. Interest rate risk Syndicated and direct loans are normally denominated in United States dollars, as is the Corporation’s funding, and interest rates for both are normally linked to LIBOR.
Exposure to interest rate risk is restricted by permitting only a limited mismatch between the repricing of the main components of the Corporation’s assets and liabilities. The repricing profile of assets and liabilities is set out in note 30.
. Currency risk is minimised by regular review of exposures to currencies other than United States dollars to ensure that no significant positions are taken which may expose APICORP to undue risks. Currently there is no trading in foreign exchange. The Corporation’s net currency exposures are set out in note 31.
52 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
26- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
Credit risk management Credit risk is the risk that a borrower or counter-party of APICORP will be unable or unwilling to meet a commitment that it has entered into with the Corporation. It arises from the lending, treasury and other activities undertaken by the Corporation. Policies and procedures are in place for the control and monitoring of all such exposures.
Proposed loans and available-for-sale direct equity investments are subject to systematic investigation, analysis and appraisal before being reviewed by the Credit Committee (consisting of the General Manager and senior managers), which makes appropriate recommendations to the Board of Directors, who have the ultimate authority to sanction commitments.These procedures, plus the fact that most of the loans are backed by sovereign guarantees and export credit agency cover, limit APICORP’s exposure to excessive credit risk.
The Corporation faces a credit risk on undrawn commitments because it is potentially exposed to loss in an amount equal to the total unused commitments. However the eventual loss, if any, will be considerably less than the total unused commitments, since most commitments to extend credit are contingent upon borrowers maintaining specified credit standards.
All loan commitments, whether drawn or undrawn, are subject to systematic monitoring so that potential problems may be detected early and remedial action taken.
With one exception, APICORP representatives are on the boards of companies in which the Corporation has available-for-sale direct equity investments and thus are in a position to monitor circumstances that may expose the Corporation to risk.
Treasury activities are controlled by means of a framework of limits and credit ratings. Dealing in marketable securities is primarily restricted to United States and major European stock exchanges. Dealings are only permitted with approved internationally rated banks, brokers and other counter-parties. Securities portfolios and investing policies are review from time to time by the Assets and Liabilities Committee.
Liquidity risk and funding management Liquidity risk is the risk of being unable to raise funds at a reasonable price to meet commitments when they fall due, or to take advantage of investment opportunities when they arise. Liquidity risk management ensures that funds are available at all times to meet the funding requirements of the Corporation.
APICORP’s liquidity management policies are designed to ensure that even under adverse conditions, the Corporation has access to adequate funds to meet its obligations, and to service its core investment and lending functions. This is achieved by the application of prudent but flexible controls, which provide security of access to liquidity without undue exposure to increased costs from the liquidation of assets or to bid aggressively for deposits.
Liquidity controls also provide for an adequately diversified deposit base in terms of maturities and the range of counter-parties. The asset and liability maturity profile based on contractual repayment terms is set out in note 29.
The financial statements consist of pages 26 to 61 53 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
27- EFFECTIVE INTEREST RATES The effective interest rates of the Corporation's financial instruments at the balance sheet date were: 2006 2005 2004
Interest-bearing financial assets Fixed-rate bonds - weighted average 2.60% 2.06% 2.08% Zero coupon bonds 4.66% - - Floating-rate bonds - weighted average 5.78% 5.02% 3.06% Structured notes 5.75% 4.18% 2.80% Deposits placed with banks - weighted average 5.19% 4.32% 2.73% Syndicated and direct loans - weighted average 5.97% 5.07% 3.20% US dollar denominated 6.15% 5.18% 3.21% Non-dollar - mainly denominated in euros 3.33% 3.27% 3.08%
Interest bearing financial liabilities Deposits from banks - weighted average 5.17% 4.20% 2.19% US dollar denominated 5.40% 4.37% 2.30% Non-dollar - Euros, Swiss francs and Saudi riyals 3.91% 3.45% 2.02% Term financing - weighted average 5.83% 4.77% 2.75%
US$ LIBOR at 31 December was: One-month 5.37% 4.39% 2.39% Three-month 5.38% 4.53% 2.56% Six-month 5.34% 4.69% 2.79%
28- FAIR VALUE INFORMATION The following financial assets and liabilities are not carried at fair value in the Corporation's balance sheet:
US$ 000 2006 2005 2004 Financial assets Syndicated and direct loans Carrying value - amortised cost less impairments (see note 14) 1,304,554 1,141,372 1,149,413
Fair value - based on current market prices 1,296,290 1,172,774 1,175,781
Available-for-sale direct equity investments Carrying value - amortised cost less impairments (see note 15) 256,731 234,318 208,111
Estimated fair value 291,471 234,318 208,111
Financial liabilities - term financing Carrying value - amortised cost (see note 19) 549,045 498,478 499,098
Fair value - based on current market rates for similar remaining maturity 532,303 486,013 499,224
54 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
29- MATURITY PROFILE OF ASSETS AND LIABILITIES The maturity profile of the Corporation's assets and liabilties as at 31 December, based on contractual repayment arrangements, is set out below. The apparent significant short-term mismatch between maturities of assets and liabilities is substantially reduced in practice because the majority of deposits from banks are routinely rolled over on maturity.
US$ 000 Up to 3 months 1 year 5 years 2006 3 months to 1 year to 5 years and over Total ASSETS Cash and cash equivalents 10,264 - - - 10,264 Trading securities - - - 63,698 63,698 Available for sale securities 54,972 26,821 334,712 165,582 582,087 Deposits with banks 345,000 - - - 345,000 Syndicated and direct loans 104,645 137,296 617,520 445,093 1,304,554 Available-for-sale direct equity investments - - - 256,731 256,731 Property and equipment - - - 38,300 38,300 Other assets 13,233 11,061 301 9,495 34,090
Total assets 528,114 175,178 952,533 978,899 2,634,724
LIABILITIES AND EQUITY Due to banks (1,090,168) (70,500) - - (1,160,668) Term financing - (249,696) (299,349) - (549,045) Other liabilities (22,783) (3,257) (1,227) (1,229) (28,496) Equity - (30,000) - (866,515) (896,515)
Total liabilities and equity (1,112,951) (353,453) (300,576) (867,744) (2,634,724)
MATURITY GAP (584,837) (178,275) 651,957 111,155 -
CUMULATIVE MATURITY GAP - 31 December 2006 (584,837) (763,112) (111,155) -
31 December 2005 Total assets 283,907 287,986 754,924 1,015,033 2,341,850 Total liabilities and equity (959,025) (55,324) (499,042) (828,459) (2,341,850)
Maturity gap (675,118) 232,662 255,882 186,574 -
Cumulative maturity gap - 31 December 2005 (675,118) (442,456) (186,574) -
31 December 2004 Total assets 218,260 40,610 919,183 942,543 2,120,596 Total liabilities and equity (651,429) (245,244) (299,507) (924,416) (2,120,596)
Maturity gap (433,169) (204,634) 619,676 18,127 -
Cumulative maturity gap - 31 December 2004 (433,169) (637,803) (18,127) -
The financial statements consist of pages 26 to 61 55 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
30- REPRICING PROFILE OF FINANCIAL ASSETS AND LIABILITIES The repricing profile of the Corporation's interest bearing financial assets and liabilities at 31 December was as follows:
US$ 000 Effective 2006 Up to Between Between Between More than interest Total 3 months 3 months 1 year 2 years 5 years rate and 1 year and 2 years and 5 years ASSETS Available for sale securities Fixed-rate bonds 2.60% 72,337 67,400 4,937 - - - Floating-rate bonds 5.78% 291,342 273,537 17,805 - - - Structured notes 5.75% 117,874 29,546 88,328 - - - Deposits with banks 5.19% 345,000 345,000 - - - - Syndicated and direct loans US$ denominated 6.15% 1,254,979 803,102 451,877 - - - Euro and Swiss francs 3.33% 67,879 39,905 27,974 - - -
LIABILITIES Due to banks US$ denominated 5.40% (984,274) (913,774) (70,500) - - - Saudi riyal and Euro 3.91% (176,394) (176,394) - - - - Term financing 5.83% (549,045) (449,859) (99,186) - - -
Interest rate sensitivity gap 439,698 18,463 421,235 - - -
Cumulative Interest Rate Sensitivity Gap - 31 Dec 2006 18,463 439,698 439,698 439,698 439,698
ASSETS 2005 Available for sale securities Fixed-rate bonds 2.06% 273,862 98,625 175,237 - Floating-rate bonds 5.02% 150,039 132,277 17,762 - - - Structured notes 4.18% 87,660 19,546 68,114 - - - Deposits with banks 4.32% 264,920 264,920 - - - - Syndicated and direct loans US$ denominated 5.18% 1,091,316 589,641 501,675 - - - Euro and Swiss francs 3.27% 64,814 55,399 9,415 - - -
LIABILITIES Due to banks US$ denominated 4.37% (806,058) (773,026) (33,032) - - - Saudi riyal and Euro 3.45% (176,382) (176,382) - - - Term financing 4.77% (498,478) (124,795) (373,683) - - -
Interest rate sensitivity gap 451,693 86,205 365,488 - - -
Cumulative Interest Rate Sensitivity Gap - 31 Dec 2005 86,205 451,693 451,693 451,693 451,693
56 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
30- REPRICING PROFILE OF FINANCIAL ASSETS AND LIABILITIES (continued) The repricing profile of the Corporation's interest bearing financial assets and liabilities at 31 December was as follows:
US$ 000 Effective 2004 Up to Between Between Between More than interest 3 months 3 months 1 year 2 years 5 years rate and 1 year and 2 years and 5 years ASSETS Available for sale securities Fixed-rate bonds 2.08% 276,560 - 15,336 260,238 986 - Floating-rate bonds 3.06% 36,854 36,854 - - - - Structured notes 2.80% 78,727 9,646 69,081 - - - Deposits with banks 2.73% 193,669 193,669 - - - - Syndicated and direct loans US$ denominated 3.21% 1,060,284 774,024 286,260 - - - Euro denominated 3.08% 106,670 32,902 73,768 - - -
LIABILITIES Due to banks US$ denominated 2.30% (651,600) (467,519) (184,081) - - - Saudi riyal and Euro 2.02% (207,074) (168,407) (38,667) - - - Term financing 2.75% (499,098) (249,865) (249,233) - - -
Interest rate sensitivity gap 394,992 161,304 (27,536) 260,238 986 -
Cumulative Interest Rate Sensitivity Gap - 31 Dec 2004 161,304 133,768 394,006 394,992 394,992
31- CURRENCY EXPOSURES The Corporations' currency exposures at 31 December were as follows: 2006 2006 2006 2006 2006 US$ 000 assets liabilities net net net and equity exposure exposure exposure
ASSETS, LIABILITIES AND EQUITY United States dollar 2,235,096 (2,270,958) (35,862) (51,074) (49,896) Euro 73,801 (73,182) 619 733 850 Other OECD currencies (see below) 20,251 (20,139) 112 247 2,037 Arab currencies GCC (see below) 268,878 (254,634) 14,244 31,780 27,914 Other Middle East 2,596 (1,535) 1,061 1,061 1,061 Egypt and North Africa 34,102 (14,276) 19,826 17,253 18,034
2,634,724 (2,634,724) - - - COMMITMENTS AND GUARANTEES United States dollar 802,740 497,898 511,366 Euro - 61,234 47,356 Other OECD currencies (see below) - - - Arab currencies - GCC (see below) 4,982 4,741 4,772
807,722 563,873 563,494
The financial statements consist of pages 26 to 61 57 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
31- CURRENCY EXPOSURES (continued)
Other OECD currencies The other member countries of the Organisation for Economic Co-operation and Development, excluding the United States and the twelve European Monetary Union countries are: Australia, Canada, Czech Republic, Denmark, Hungary, Iceland, Japan, Mexico, New Zealand, Norway, Poland, South Korea, Sweden, Switzerland, Turkey and the United Kingdom.
GCC The member states of the Gulf Co-operation Council are: Bahrain, Oman, Qatar, Saudi Arabia and the United Arab Emirates. Their currencies are pegged against the United States dollar.
Significant exchange rates The following year-end rates have been used in translating other currencies to United States dollars:
2006 2005 2004
Euro EUR 1 = US$ 1.3158 1.1862 1.3624 Saudi riyal US$ 1 = SAR 3.7500 3.7500 3.7500 Swiss franc US$ 1 = CHF 1.2188 1.1312 1.1334 Egyptian pound US$ 1 = EGP 5.7185 5.7388 6.1000
58 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
32- INDUSTRY DISTRIBUTION OF ASSETS AND LIABILITIES The industry distribution of the Corporation's assets and liabilities was as follows:
US$ 000 2006 2005 2004
ASSETS Petroleum and petrochemicals Refineries 113,582 83,944 78,083 Oilfield production development and services 159,027 114,852 113,259 Pipelines and distribution 10,772 31,403 43,406 Gas-to-liquids plants 38,667 33,446 24,330 Liquefied natural gas plants 216,180 196,896 195,750 Petrochemical plants 555,873 584,162 620,869 Fertilizer plants 72,294 75,238 65,222 Maritime transportation 210,785 95,918 55,953 Trade finance 65,886 22,617 14,854 Power generation 114,230 106,909 105,970 Other petroleum 14,650 8,835 9,276
Total petroleum and petrochemicals 1,571,946 1,354,220 1,326,972
Banks and financial institutions 351,879 307,237 395,540 Banks and financial institutions - managed funds 171,235 113,673 101,155 Other industries 73,495 73,045 94,258 Governments and public sector institutions 466,169 493,675 202,671
Total assets at 31 December 2,634,724 2,341,850 2,120,596
LIABILITIES AND EQUITY Banks and financial institutions 1,728,585 1,491,321 1,363,330 Other industries 9,624 2,070 12,850 Shareholders 896,515 848,459 744,416
Total liabilities and equity at 31 December 2,634,724 2,341,850 2,120,596
The financial statements consist of pages 26 to 61 59 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
32- INDUSTRY DISTRIBUTION OF ASSETS AND LIABILITIES (continued) The industry distribution of the Corporation's assets and liabilities was as follows:
US$ 000 2006 2005 2004 COMMITMENTS AND GUARANTEES Petroleum and petrochemicals Refineries 124,896 40,279 46,944 Oilfield production development and related services 1,669 - 10,000 Gas-to-liquids plants - 5,091 14,166 Liquefied natural gas plants 119,980 175,474 118,097 Petrochemical plants 403,786 173,703 179,574 Fertilizer plants 4,000 31,013 34,429 Maritime transportation 30,873 27,043 34,894 Trade finance 4,000 30,249 21,736 Power generation 47,785 10,529 30,123
Total petroleum and petrochemicals 736,989 493,381 489,963
Banks and financial institutions - - 3,000 Other industries 333 92 131 Governments and public sector institutions 70,400 70,400 70,400
Total commitments and guarantees at 31 December 807,722 563,873 563,494
33- GEOGRAPHICAL DISTRIBUTION OF RISK The geographical distribution of risk of the Corporation's assets and liabilities, after taking into account insurance and third-party guarantees, was as follows:
US$ 000 2006 2005 2004
ASSETS Kingdom of Saudi Arabia 579,712 642,173 607,364 State of Qatar 276,965 207,767 256,037 Other Gulf Cooperation Council states 610,722 441,443 378,186 Other Middle East states 59,458 32,549 17,343 Egypt and North Africa 297,256 215,301 217,135
Total Arab World 1,824,113 1,539,233 1,476,065
Western Europe 550,235 603,623 410,139 India, Bangladesh and Pakistan - - 15,126 Asia Pacific Rim 8,527 29,375 30,823 United States 162,724 121,523 110,659 Other North and South America 89,125 48,096 77,784
Total assets at 31 December 2,634,724 2,341,850 2,120,596
60 The financial statements consist of pages 26 to 61 NOTES TO THE FINANCIAL STATEMENTS for the year ended 31 December 2006
33- GEOGRAPHICAL DISTRIBUTION OF RISK (continued) US$ 000 2006 2005 2004
The industry distribution of the Corporation's assets and liabilities was as follows:
LIABILITIES AND EQUITY Kingdom of Saudi Arabia 656,254 365,134 446,672 State of Qatar 139,780 124,866 96,344 Other Gulf Cooperation Council states 954,278 989,091 780,980 Other Middle East states 135,524 127,317 100,679 Egypt and North Africa 269,963 259,176 223,259
Total Arab World 2,155,799 1,865,584 1,647,934
Western Europe 408,190 438,996 468,662 Asia Pacific Rim 20,000 35,538 4,000 United States 50,735 1,732 -
Total liabilities and equity at 31 December 2,634,724 2,341,850 2,120,596
COMMITMENTS AND GUARANTEES Kingdom of Saudi Arabia 391,271 218,993 283,800 State of Qatar 195,657 219,740 117,895 Other Gulf Cooperation Council states 122,980 53,156 78,981 Other Middle East states - - 4,830 Egypt and North Africa 52,499 26,735 64,988
Total Arab World 762,407 518,624 550,494
Western Europe 41,315 35,000 3,000 India, Bangladesh and Pakistan - - - Asia Pacific Rim 4,000 10,249 10,000
Total commitments and guarantees at 31 December 807,722 563,873 563,494
The financial statements consist of pages 26 to 61 61 REPORT OF THE AUDITORS TO THE SHAREHOLDERS
62 The financial statements consist of pages 26 to 61