Project1:Layout 1 17/4/08 12:32 Page 1 Wellstream Holdings PLC Annual Report & Accounts 2007 48723 MG Annual Report - Front 17/4/08 11:39 Page 2 Contents Financial Highlights 1 Chairman’s Statement 2 Chief Executive’s Review 4 Financial Review 30 Board of Directors 34 Directors’ Report 36 Corporate Governance Report 44 Audit Committee Report 49 Directors’ Remuneration Report 51 Statement of Directors’ Responsibilities 57 Independent auditors’ report to the members of Wellstream Holdings PLC 58 Group Income Statement 60 Statements of Recognised Income and Expense 60 Balance Sheets 61 Cash Flow Statements 62 Notes to the Accounts 63 Historical Results 90 Shareholder Information 91 Glossary 92 Notice of Annual General Meeting 93 48723 MG Annual Report - Front 17/4/08 11:39 Page 1 Wellstream Holdings PLC Annual Report & Accounts 2007 | 1 Financial Highlights Revenue £m 266.8 147.2 Revenue up 81.2% 2006 2007 Profit before Tax £m 41.7 25.4 Profit before Tax up 64.1% 2006 2007 Backlog £m 335.9 226.8 Backlog up 48.1% 2006 2007 Revenue Backlog is the aggregate of revenue that has not yet been recognised in the accounts from contracts that have been entered into and from contracts that the directors are confident will be entered into. 48723 MG Annual Report - Front 17/4/08 11:39 Page 2 2 | Chairman’s Statement Chairman’s Statement Wellstream has achieved a record financial performance during 2007. 48723 MG Annual Report - Front 17/4/08 11:39 Page 3 Wellstream Holdings PLC Annual Report & Accounts 2007 | 3 Chairman’s Statement Establishment of Seastream JV I am pleased to announce that Wellstream In July 2007, we successfully established has achieved a record financial a Joint Venture called Seastream. It has performance during 2007. secured a major contract from BHP Billiton, In addition, we successfully completed in which we offered our products on the Initial Public Offering (IPO) and an installed basis for the first time. listed our shares on the London Stock This project is progressing to plan Exchange on 1 May 2007. and we look forward with confidence to securing additional contracts for Financial performance installation of our flexible pipe products. In the 12 months to 31 December 2007, Revenue increased by 81% to £266.8m Board additions (2006: £147.2m), Adjusted EBITDA I welcome the addition to the board of increased by 136% to £56.9m (2006: three industry specialists, Neil Gaskell, £24.1m), and adjusted earnings per the former Treasurer of Royal Dutch Shell, share reached 34.7p against 11.4p for Francisco Gros, former CEO of Petrobras 2006. We maintain a strong backlog and Pat Murray the former CEO of which has increased by £109.1m during Dresser Inc. I also welcome Chris Gill as 2007, ending the year at £335.9m. Finance Director, who joined us on 7 January 2008. Marek Gumienny, of Improved utilisation in Newcastle Candover Partners, resigned as a non- High utilisation rates have been achieved executive director at the IPO and Andrew throughout the year in Newcastle and we Turk, Finance Director, left the Company achieved a record throughput of 237 nkm. on 31 December 2007. I thank them both This contributed substantially to our for their contribution during a period of buoyant performance this year. Following rapid growth and considerable change a programme of process improvements, in the Company. we also revised our capacity in Newcastle to 260 nkm and plan to further expand Outlook that capacity. With our new investment in capacity, we have set the foundations to take Successful start-up of our new advantage of the anticipated demand for production plant in Brazil flexible pipe. The market fundamentals We officially opened the Niterói plant in remain strong and we have confidence July 2007 having started production in that we are well positioned to capture a May and I am pleased to report that the significant share of this growing market. plant is already making a contribution in excess of our expectations. In total we Finally, I pay tribute to the professionalism achieved a throughput of 52 nkm, which of our staff, whose hard work and was ahead of our ramp-up plan. On dedication have helped bring about these 29 November 2007 we announced plans record breaking results. to further expand capacity at Niterói, recognising the Board’s confidence in future demand for our products. John Kennedy Chairman 48723 MG Annual Report - Front 17/4/08 11:39 Page 4 4 | Chief Executive’s Review Chief Executive’s Review I am delighted to deliver my first Chief Executive’s Review for Wellstream as a newly listed Public Company. Financial Highlights 2007 2006 Change Revenue £266.8m £147.2m +81.2% Adjusted EBITDA (b) £56.9m £24.1m +136% Backlog (a) £335.9m £226.8m +48.1% 2007 was a remarkable year for In 2007 Wellstream had approximately “In 2007 Wellstream Wellstream. Several records were broken 30% of the global offshore flexible pipe had approximately and strong foundations were set for market and was the world’s second 30% of the global future growth. largest supplier. Our portfolio includes offshore flexible pipe dynamic risers, static flowlines, subsea market and was the Significant highlights included the strong and topside jumpers, fluid transfer lines world’s second performance from the Newcastle and well service lines for use in the operation, on-time start up of the new offshore oil and gas market. Onshore largest supplier.” Niterói plant in Brazil, further growth of we produce FlexSteel™ a flexible the onshore FlexSteelTM business and pipeline product. Our success is based the launch of an installation capability on strong technology supported by through the Seastream JV. Towards the continuous research and development, end of the year the Company decided to excellent customer relationships and a further expand its future offshore focus on working collaboratively with flexible capacity by some 40% through customers and partners. an investment programme in the Niterói and Newcastle offshore production Wellstream’s core business addresses facilities. the needs of the floating production and subsea sectors of the offshore oil Scope of the business and gas industry. This is a fast growing With over 20 years’ experience, segment, where deepwater applications Wellstream is a leading designer and are becoming more common and for supplier of high quality unbonded which flexible pipe is often a critical flexible pipeline products and systems. element of the development solution. 48723 MG Annual Report - Front 17/4/08 11:39 Page 5 Wellstream Holdings PLC Annual Report & Accounts 2007 | 5 Year End Annualised Offshore Capacity Offshore Flexible Pipeline Throughput In normalised km of 8 inch ID pipe. In normalised km of 8 inch ID pipe. A mechanism for determining the equivalent length of A mechanism for determining the equivalent length of any pipe to a ‘standard’ product. any pipe to a ‘standard’ product. +14% 410 +39% +64% 360 289.1 +23% +10% 220 208.0 200 169.5 2005 2006 2007 2008(F) 2005 2006 2007 Revenue & Backlog Growth Adjusted EBITDA (in £ millions) (in £ millions) +136% +81% 56.9 335.9 266.8 226.8 +63% +165% 24.1 147.2 90.1 78.6 Revenue 9.1 Revenue Backlog 2005 2006 2007 2005 2006 2007 (a) Blue arrows represent year-on-year revenue growth. (b) Adjusted EBITDA represents operating profit before Revenue Backlog is the aggregate of revenue that has depreciation and excludes the share option expense as not yet been recognised in the accounts from contracts defined on page 30 of the Financial Review. Adjusted that have been entered into and from contracts that the EBITDA is not a measure of profit or operating performance directors are confident will be entered into. Revenue recognised under IFRS. Backlog is not a measure of profit or operating performance recognised under IFRS. 48723 MG Annual Report - Front 17/4/08 11:39 Page 6 6 | Chief Executive’s Review Offshore Market Overview World Marketed Energy Use by Fuel Type, Nuclear 1980-2030(1) Renewables Oil and gas are expected to continue as Natural Gas the world’s dominant energy sources for Coal Liquids the foreseeable future. As many of the 250 more easily accessible offshore hydrocarbon deposits have now been 200 discovered and produced, the industry has to explore in progressively more 150 remote locations, often in deeper water depths. This has increased the capital 100 intensity of the newer developments and Quadrillion BTU sparked an evolution in development 50 concepts from fixed platforms to floating 0 production facilities such as FPSO 1980 1995 2004 2015 2030 (Floating Production, Storage and Offloading) vessels. Industry analysts, Infield Systems Ltd, have estimated that capital expenditure on deepwater developments has increased from approximately $9bn in 2004 to $19bn in 2007. Over the next five years, they expect this expenditure to increase further to in excess of $25bn per annum. As oil companies move in to more remote areas, and deeper water depths, the use of floating production facilities has become more prevalent. Flexible pipelines are a critical element of the majority of FPSO developments; connecting the wellheads to the surface via flexible risers. Thus, the increased use of FPSOs worldwide has been one of the drivers for rapid growth in Wellstream’s business. (1) Source: Energy Information Administration (EIA) 2007. 48723 MG Annual Report - Front 17/4/08 11:39 Page 7 Wellstream Holdings PLC Annual Report & Accounts 2007 | 7 Capital expenditure on deepwater developments has increased from approximately $9bn in 2004 to $19bn in 2007. Over the next 5 years expenditure is expected to increase further to in excess of $25bn per annum. (Courtesy: Subsea 7 and Chevron) 48723 MG Annual Report - Front 17/4/08 11:39 Page 8 8 | Chief Executive’s Review There are now approximately 200 floating 30 Year Development of the Worldwide FPSO Inventory(1) production systems in service worldwide, (no.