4.3.2Operating Segments and Directional Reporting

Operating segments

The Company ’s reportable operating segments as defined by IFRS 8 ‘Operating segments’ are:

  • Lease and Operate;
  • Turnkey.

Directional reporting

Strictly for the purposes of this note, the operating segments are measured under Directional reporting, which in essence follows IFRS, but deviates on two main points:

  • All lease contracts are classified and accounted for as if they were operating lease contracts under IFRS 16. Some lease and operate contracts may provide for defined invoicing (‘upfront payments’) to the client occurring during the construction phase or at first-oil (beginning of the lease phase), to cover specific construction work and/or services performed during the construction phase. These ’upfront payments’ are recognized as revenues and the costs associated with the construction work and/or services are recognized as ’Cost of sales’ with no margin during the construction. As a consequence, these costs are not capitalized in the gross value of the assets under construction. 
  • All investees related to Lease and Operate contracts are accounted for at the Company’s share as if they were classified as Joint Operation under IFRS 11, using the proportionate consolidation method (where all lines of the income statement, statement of financial position and cash flow statement are consolidated for the Company’s percentage of ownership). Yards and installation vessel related joint ventures remain equity accounted.
  • All other accounting principles remain unchanged compared with applicable IFRS standards.

The above differences to the consolidated financial statements between Directional reporting and IFRS are highlighted in the reconciliations provided in this note on revenue, gross margin, EBIT and EBITDA as required by IFRS 8 ’Operating segments’. The Company also provides the reconciliation of the statement of financial position and cash flow statement under IFRS and Directional reporting. The statement of financial position and the cash flow statement under Directional reporting are evaluated regularly by the Management Board in assessing the financial position and cash generation of the Company. The Company believes that these additional disclosures should enable users of its financial statements to better evaluate the nature and financial effects of the business activities in which it engages, while facilitating the understanding of the Directional reporting by providing a straightforward reconciliation with IFRS for all key financial metrics.

Segment highlights

In 2019, the Turnkey segment was not impacted by any non-recurring material item and benefited from the progress made on the Johan Castberg Turret Mooring System EPC project, in addition to a general ramp-up of Turnkey activities. This includes (i) the construction activities on FPSO Sepetiba, which started to contribute to Directional revenue thanks to the disposal of the minority share of 35.5% to MC and NYK and ii) the contribution of upfront payments related to specific construction work before the commencement of the lease on the Liza projects.

The Lease and Operate segment was impacted by a total impairment of US$(25) million in 2019 relating to two, individually not material, impairments of property, plant and equipment (please refer to note  4.3.13 Property, Plant and Equipment . Safe from any impact of impairment, Directional Lease and Operate revenue and EBITDA increased versus the year ago period. The impact of units leaving the fleet in 2018 (Turritella (FPSO), FSO Yetagun and FSO N'Kossa II) was indeed more than offset by a reduction in planned maintenance, an overall improvement in performance of the fleet and the first contribution of FPSO Liza Destiny after achieving first oil at the end of 2019.

The non-recurring gain of US$90 million on the purchase of additional shares in the five Brazilian vessels is presented in 'Other'. Refer to note4.3.1 Financial Highlights for the full details on the treatment of this transaction under Directional reporting.

2019 operating segments (Directional)

Lease and Operate

Turnkey

Reported
segments

Other

Total Directional reporting

Third party revenue

1,315

856

2,171

-

2,171

Cost of sales

(921)

(726)

(1,647)

-

(1,647)

Gross margin

394

130

524

-

524

Other operating income/expense

1

6

6

881

94

Selling and marketing expenses

(1)

(47)

(48)

(0)

(48)

General and administrative expenses

(19)

(45)

(64)

(64)

(128)

Research and development expenses

(3)

(22)

(24)

(0)

(24)

Net impairment gains/(losses) on financial and contract assets

(3)

3

0

(0)

(0)

Operating profit/(loss) (EBIT)

369

25

395

23

418

Net financing costs

(142)

Share of profit of equity-accounted investees

1

Income tax expense

(42)

Profit/(Loss)

235

Operating profit/(loss) (EBIT)

369

25

395

23

418

Depreciation, amortization and impairment2

473

28

500

3

503

EBITDA

842

53

895

26

921

Other segment information :

Impairment charge/(reversal)

25

-

25

(0)

25

  • 1 Mainly includes a gain of US$90 million on the purchase of additional shares in Cidade de Paraty, Cidade de Ilhabela, Cidade de Marica, Cidade de Saquarema and Capixaba.
  • 2 Includes net impairment losses on financial and contract assets.

Reconciliation of 2019 operating segments (Directional to IFRS)

Reported segments under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

Revenue

Lease and Operate

1,315

(261)

273

1,327

Turnkey

856

1,202

6

2,064

Total revenue

2,171

941

279

3,391

Gross margin

Lease and Operate

394

(4)

177

567

Turnkey

130

240

(3)

367

Total gross margin

524

236

174

934

EBITDA

Lease and Operate

842

(257)

197

783

Turnkey

53

238

(1)

290

Other

26

-

(90)1

(63)

Total EBITDA

921

(18)

107

1,010

EBIT

Lease and Operate

369

4

176

549

Turnkey

25

236

(2)

259

Other

23

-

(90)

(66)

Total EBIT

418

240

84

742

Net financing costs

(142)

(31)

(70)

(243)

Share of profit of equity-accounted investees

1

-

42

43

Income tax expense

(42)

6

5

(31)

Profit/(loss)

235

216

60

511

Impairment charge/(reversal)

25

2

1

28

  • 1 Includes the removal of a gain of US$90 million on purchase of shares in Cidade de Paraty, Cidade de Ilhabela, Cidade de Marica, Cidade de Saquarema and Capixaba.

The reconciliation from Directional reporting to IFRS comprises two main steps:

  • In the first step, those lease contracts that are classified and accounted for as finance lease contracts under IFRS are restated from an operating lease accounting treatment to a finance lease accounting treatment.
  • In the second step, the consolidation method is changed i) from proportional consolidation to full consolidation for those Lease and Operate related subsidiaries over which the Company has control and ii) from proportional consolidation to the equity method for those Lease and Operate related investees that are classified as joint ventures in accordance with IFRS 11.

Impact of lease accounting treatment

For the Lease and Operate segment, the restatement from an operating to a finance lease accounting treatment has the main following impacts for the 2019 period:

  • Revenue is reduced by US$261 million. During the lease period, under IFRS, the revenue from finance leases is limited to that portion of charter rates that is recognized as interest using the interest effective method. Under Directional reporting, in accordance with the operating lease treatment, the full charter rate is recognized as revenue, on a straight-line basis. Lease and Operate EBITDA is similarly impacted (reduction of US$257 million) for the same reasons.
  • Gross margin decreased by US$4 million and EBIT increased by US$4 million. As the current Company’s finance lease fleet is still relatively young, the amount of the (declining) interest recognized under IFRS is still in line with the linear gross margin recognized under Directional for the related vessels. Under IFRS, gross margin and EBIT from finance leases equal the recognized revenue, therefore following the declining profile of the interest recognized using the interest effective method. On the other side, under the operating lease treatment applied under Directional, the gross margin and the EBIT correspond to the revenue and depreciation of the recognized PP&E, both accounted for on a straight-line basis over the lease period.

For the Turnkey segment, the restatement from operating to finance lease accounting treatment had the following impacts over the 2019 period:

  • Revenue and gross margin increased by US$1,202 million and US$240 million respectively, mainly due to the accounting treatment of FPSO Liza Destiny, Liza Unity and Sepetiba as a finance lease under IFRS: under IFRS, a finance lease is considered as a virtual sale of the asset leading to recognition of revenue during the construction of the asset corresponding to the present value of the future lease payments. This (non-cash) revenue is recognized within the Turnkey segment.
  • The basic impact on Turnkey EBIT and EBITDA is largely in line with the impact on gross margin.

As a result, the restatement from operating to finance lease accounting treatment results in an increase of net profit of US$216 million under IFRS when compared with Directional reporting.

Impact of consolidation methods

The impact of consolidation methods in the above table describes the net impact from:

  • Proportional consolidation to full consolidation for those Lease and Operate related subsidiaries over which the Company has control, resulting in an increase of revenue, gross margin, EBIT and EBITDA;
  • Proportionate consolidation to the equity accounting method for those Lease and Operate related investees that are classified as joint ventures in accordance with IFRS 11, resulting in a decrease of revenue, gross margin, EBIT and EBITDA.

The impact of the changes in consolidation methods results in a net increase of revenue, gross margin, EBIT, EBITDA and net profit under IFRS when compared Directional reporting. This reflects the fact that the majority of the Company’s FPSOs, that are leased under finance lease contracts, are owned by subsidiaries over which the Company has control and which are consolidated using the full consolidation method under IFRS.

2018 operating segments (Directional)

Lease and Operate

Turnkey

Reported
segments

Other

Total Directional reporting

Third party revenue

1,298

406

1,703

-

1,703

Cost of sales

(884)

(313)

(1,197)

-

(1,197)

Gross margin

413

93

506

-

506

Other operating income/expense

(0)

2341

234

(45)2

189

Selling and marketing expenses

(0)

(36)

(36)

0

(36)

General and administrative expenses

(17)

(43)

(60)

(62)

(122)

Research and development expenses

(1)

(19)

(21)

(2)

(23)

Net impairment gains/(losses) on financial and contract assets

23

(3)

19

0

19

Operating profit/(loss) (EBIT)

418

225

642

(109)

533

Net financing costs

(166)

Share of profit of equity-accounted investees

(26)

Income tax expense

(40)

Profit/(Loss)

301

Operating profit/(loss) (EBIT)

418

225

642

(109)

533

Depreciation, amortization and impairment

406

54

460

2

463

EBITDA

824

278

1,102

(107)

995

Other segment information :

Impairment charge/(reversal)

(34)

28

(6)

(0)

(6)

  • 1 Mainly includes net gain on disposal of Turritella (FPSO) for US$217 million and net impact of additional settlement reached with insurers on Yme project claim for US$37 million.
  • 2 Mainly relates to the additional provision of US$43 million (200 million Brazilian Reais) for settlement with the Brazilian Federal Prosecutor’s Office (Ministério Público Federal – 'MPF') approved by the Fifth Chamber of the MPF.

Reconciliation of 2018 operating segments (Directional to IFRS)

Reported segments under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

Revenue

Lease and Operate

1,298

(238)

242

1,302

Turnkey

406

528

4

938

Total revenue

1,703

290

246

2,240

Gross margin

Lease and Operate

413

7

159

579

Turnkey

93

133

(3)

223

Total gross margin

506

140

156

801

EBITDA

Lease and Operate

824

(248)

185

761

Turnkey

278

(86)1

(8)

184

Other

(107)

-

(0)

(107)

Total EBITDA

995

(335)

178

838

EBIT

Lease and Operate

418

3

158

579

Turnkey

225

(85)1

(6)

134

Other

(109)

-

(0)

(109)

Total EBIT

533

(82)

152

603

Net financing costs

(166)

(0)

(67)

(233)

Share of profit of equity-accounted investees

(26)

-

40

13

Income tax expense

(40)

(8)

8

(40)

Profit/(loss)

301

(90)

132

344

Impairment charge/(reversal)

(6)

4

(0)

(2)

  • 1 Includes the removal of a gain on disposal of Turritella (FPSO) for US$217 million.

Reconciliation of 2019 statement of financial position (Directional to IFRS)

Reported under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

ASSETS

Property, plant and equipment and Intangible assets1

5,8492

(4,896)

76

1,028

Investment in associates and joint ventures

14

-

312

325

Finance lease receivables

(0)

5,214

1,481

6,694

Other financial assets

290

(180)

23

134

Construction work-in-progress

125

803

44

973

Trade receivables and other assets

633

(0)

(50)

583

Derivative financial instruments

43

-

(0)

43

Cash and cash equivalents

458

-

48

506

Assets held for sale

1

-

-

1

Total Assets

7,414

940

1,933

10,287

EQUITY AND LIABILITIES

Equity attributable to parent company

1,179

1,532

36

2,748

Non-controlling interests

0

0

864

865

Equity

1,179

1,532

901

3,613

Borrowings and lease liabilities

3,9183

-

1,004

4,922

Provisions

428

(150)

5

283

Trade payable and other liabilities

1,213

(68)

(123)

1,022

Deferred income

486

(374)

95

207

Derivative financial instruments

190

-

51

241

Total Equity and Liabilities

7,414

940

1,933

10,287

  • 1 Under Directional, the cost related to the Brazilian local content penalty is capitalized in line with construction progress of related assets and presented in the statement of financial position under 'Property, plant and equipment and Intangible assets'.
  • 2 Includes US$1,537 million related to (i) FPSO Liza Destiny (ii) units under construction (i.e. FPSO Liza Unity, Prosperity and Sepetiba) and (iii) Gene tanker.
  • 3 Includes US$2,851 million non-recourse debt and US$173 million lease liability

Consistent with the reconciliation of the key income statement line items, the above table details:

  • The restatement from the operating lease accounting treatment to the finance lease accounting treatment for those lease contracts that are classified and accounted for as finance lease contracts under IFRS; and
  • The change from proportional consolidation to either full consolidation or equity accounting for investees related to Lease and Operate contracts.

Impact of lease accounting treatment

For the statement of financial position, the main adjustments from Directional reporting to IFRS as of December 31, 2019 are:

  • For those lease contracts that are classified and accounted for as finance lease contracts under IFRS, de-recognition of property, plant and equipment recognized under Directional reporting (US$4,896 million) and subsequent recognition of (i) finance lease receivables (US$5,214 million) and (ii) construction work-in-progress (US$803 million) for those assets still under construction.
  • For operating lease contracts with non-linear bareboat day rates, a deferred income provision is recognized to show linear revenues under Directional reporting. This balance (US$374 million) is derecognized for the contracts that are classified and accounted for as finance lease contracts under IFRS.
  • Restatement of the provisions for demobilization and associated non-current receivable assets, mainly impacting other financial assets (US$180 million) and provisions (US$150 million).

As a result, the restatement from operating to finance lease accounting treatment gives rise to an increase of equity of US$1,532 million under IFRS compared with Directional reporting. This primarily reflects the earlier margin recognition on finance lease contracts under IFRS compared to Directional reporting.

Impact of consolidation methods

The above table also describes the net impact of moving from proportionate consolidation to either full consolidation, for those lease related investees in which the Company has control, or equity accounting, for those investees that are classified as joint ventures under IFRS 11. The two main impacts are:

  • Full consolidation of asset specific entities that mainly comprise finance lease receivables (representing the net present value of the future lease payments to be received) and non-recourse project debts.
  • Derecognition of the individual line items from the statement of financial positions for those entities that are equity accounted under IFRS, rolling up in the line item ’Investment in associates and joint ventures’.

Reconciliation of 2019 cash flow statement (Directional to IFRS)

Reported under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

EBITDA

921

(18)

107

1,010

Adjustments for non-cash and investing items

(71)1

21

87

37

Changes in operating assets and liabilities

(414)

(901)

(121)

(1,435)

Reimbursement finance lease assets

(0)

196

2

197

Income taxes paid

(35)

-

7

(29)

Net cash flows from (used in) operating activities

401

(703)

81

(220)

Capital expenditures

(764)

725

(0)

(39)

Acquisition of shares in co-owned entities

(125)2

-

125

(0)

Other investing activities

93

(0)

228

321

Net cash flows from (used in) investing activities

(796)

725

353

282

Equity payment from/(repayment to) partners

-

-

82

82

Additions and repayments of borrowings and lease liabilities

627

-

(276)

351

Dividends paid to shareholders and non-controlling interests

(74)

-

(34)

(108)

Interest paid

(150)

(23)

(71)

(244)

Share repurchase program

(196)

-

-

(196)

Payments to non-controlling interests for change in ownership

(0)

-

(149)

(149)3

Net cash flows from (used in) financing activities

207

(23)

(448)

(264)

Net cash and cash equivalents as at 1 January

657

-

62

718

Net increase/(decrease) in net cash and cash equivalents

(189)

0

(13)

(202)

Foreign currency variations

(10)

(0)

1

(9)

Net cash and cash equivalents as at 31 December

458

-

48

506

  • 1 Includes a gain of US$90 million on the purchase of additional shares in Cidade de Paraty, Cidade de Ilhabela, Cidade de Marica, Cidade de Saquarema and Capixaba.
  • 2 Includes US$149 million for the purchase of shares in Cidade de Paraty, Cidade de Ilhabela, Cidade de Marica, Cidade de Saquarema and Capixaba net of aquired cash.
  • 3 Includes US$149 million for the purchase of shares in Cidade de Paraty, Cidade de Ilhabela, Cidade de Marica, Cidade de Saquarema and Capixaba.

Impact of lease accounting treatment

At net cash level, the difference in lease accounting treatment is neutral. The impact of the different lease accounting treatment under Directional reporting versus IFRS is limited to reclassifications between cash flow activities.

Capital expenditures (US$725 million) are reclassified from investing activities under Directional, to net cash flows from operating activity under IFRS, where finance lease contracts are accounted for as construction contracts. Furthermore the interest expense which is capitalized under Directional as part of asset under construction (and therefore presented in investing activities) is reclassified to financing activities under IFRS.

The impact of the change of lease accounting treatment at EBITDA level is described in further detail in the earlier reconciliation of the Company’s income statement.

Impact of consolidation methods

The impact of the consolidation method on the cash flow statement is in line with the impact described for the statement of financial position. The full consolidation of asset specific entities, mainly comprising finance lease receivables and the related non-recourse project debts, results in increased repayments of borrowings under IFRS versus Directional.

Reconciliation of 2018 statement of financial position (Directional to IFRS)

Reported under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

ASSETS

Property, plant and equipment and Intangible assets

4,799

(3,699)

117

1,217

Investment in associates and joint ventures

10

(0)

411

421

Finance lease receivables

0

3,993

1,954

5,947

Other financial assets

356

(146)

102

312

Construction work-in-progress

43

652

(0)

695

Trade receivables and other assets

626

(0)

7

633

Derivative financial instruments

44

-

2

46

Cash and cash equivalents

657

-

62

718

Assets held for sale

2

(0)

-

2

Total Assets

6,535

800

2,656

9,992

EQUITY AND LIABILITIES

Equity attributable to parent company

1,317

1,334

(17)

2,634

Non-controlling interests

0

(0)

978

978

Equity

1,317

1,334

961

3,612

Loans and borrowings

3,0101

-

1,527

4,536

Provisions

601

(145)

11

467

Trade payable and other liabilities

935

45

18

998

Deferred income

575

(433)

121

263

Derivative financial instruments

98

-

18

116

Total Equity and Liabilities

6,535

800

2,656

9,992

  • 1 Including US$2,821 million non-recourse debt and US$189 million lease liabilities.

Reconciliation of 2018 cash flow statement (Directional to IFRS)

Reported under Directional reporting

Impact of lease accounting treatment

Impact of consolidation methods

Total Consolidated IFRS

EBITDA

995

(335)

178

838

Adjustments for non-cash and investing items

(126)1

218

10

102

Changes in operating assets and liabilities

(209)2

(408)

102

(515)

Reimbursement finance lease assets

(0)

7773

475

1,2524

Income taxes paid

(35)

(0)

6

(30)

Net cash flows from (used in) operating activities

625

252

770

1,647

Capital expenditures

(332)

290

(6)

(48)

Other investing activities

5245

(542)

5

(13)

Net cash flows from (used in) investing activities

192

(252)

(1)

(61)

Equity payment from/repayment to partners

-

-

(165)

(165)

Additions and repayments of borrowings and loans

(783)6

-

(485)

(1,268)

Dividends paid to shareholders non-controlling interests

(51)

-

(52)

(103)

Interest paid

(176)

-

(81)

(257)

Payments to non-controlling interests for change in ownership

0

-

(5)

(5)

Net cash flows from (used in) financing activities

(1,010)

-

(787)

(1,797)

Net cash and cash equivalents as at 1 January

878

-

79

957

Net increase/(decrease) in net cash and cash equivalents

(193)

-

(18)

(211)

Foreign currency variations

(29)

-

1

(28)

Net cash and cash equivalents as at 31 December

657

-

62

718

  • 1 Mainly includes net gain on disposal of Turritella (FPSO) for US$(217) million.
  • 2 Includes US$(196) million payment for the settlement with Brazilian authorities and Petrobras and US$(80) million compensation paid to the partners in the investee owning the Turritella (FPSO) before acquisition by Shell.
  • 3 Includes the Company 55% share in purchase price acquisition of Turritella (FPSO) by Shell for US$543 million reclassified from investing activities.
  • 4 Includes US$987 million purchase price acquisition of Turritella (FPSO) by Shell.
  • 5 Mainly includes the Company 55% share in the proceeds from the sale of Turritella (FPSO) for US$544 million.
  • 6 Includes the Company 55% share in the redemption of Turritella (FPSO) project financing loan for US$(398) million.

Deferred income (Directional)

31 December 2019

31 December 2018

Within one year

98

100

Between 1 and 2 years

93

94

Between 2 and 5 years

188

241

More than 5 years

108

140

Balance at 31 December

486

575

The deferred income is mainly related to the revenue of those lease contracts which include a decreasing day-rate schedule. As income is shown in the income statement on a straight-line basis with reference to IFRS 16 ‘Leases’, the difference between the yearly straight-line revenue and the contractual day rates is included as deferred income. The deferral will be released through the income statement over the remaining duration of the relevant lease contracts.

Geographical Information

The classification by country is determined by the final destination of the product for both revenues and non-current assets.

The revenue by country is analyzed as follows:

2019 geographical information (revenue by country and segment)

Directional

IFRS

Lease and Operate

Turnkey

Reported
segments

Lease and Operate

Turnkey

Reported
segments

Brazil

759

42

801

1,050

117

1,167

Guyana

8

293

300

5

1,417

1,422

Norway

-

246

246

-

246

246

Angola

178

8

186

0

13

13

Canada

135

1

136

135

1

136

The United States of America

41

71

112

41

71

112

Malaysia

85

18

103

0

22

22

China

-

95

95

-

95

95

Equatorial Guinea

88

1

89

74

0

75

Virgin Islands

-

13

13

-

13

13

Nigeria

-

23

23

-

23

23

Other

22

46

67

22

46

67

Total revenue

1,315

856

2,171

1,327

2,064

3,391

2018 geographical information (revenue by country and segment)

Directional

IFRS

Lease and Operate

Turnkey

Reported
segments

Lease and Operate

Turnkey

Reported
segments

Brazil

716

7

723

1,019

(0)

1,019

Angola

200

11

211

1

17

18

Canada

127

8

135

127

8

135

The United States of America

61

31

92

63

31

94

Norway

-

88

88

-

88

88

Guyana

-

88

88

-

616

616

Equatorial Guinea

87

0

87

76

-

76

Malaysia

77

8

86

1

14

15

Great Britain

-

32

32

-

32

32

China

-

31

31

-

31

31

Nigeria

-

24

24

-

24

24

Congo

15

3

18

-

3

3

Australia

-

12

12

-

12

12

Myanmar

11

0

11

12

0

12

Other

3

62

65

3

61

64

Total revenue

1,298

406

1,703

1,302

938

2,240

The non-current assets by country are analyzed as follows:

Geographical information (non-current assets by country)

31 December 2019

31 December 2018

IFRS

DIR

IFRS

DIR

Brazil

6,050

3,656

6,343

3,311

Angola

242

323

412

435

Canada

182

182

245

245

The United States of America

87

65

130

109

Malaysia

93

61

128

84

Equatorial Guinea

106

160

121

181

Guyana

873

1,432

-

530

Monaco

66

67

78

78

Switzerland

49

50

-

-

Other

142

170

184

174

Total

7,891

6,166

7,641

5,148

Reliance on Major Customers

Under Directional, three customers each represent more than 10% of the consolidated revenue. Total revenue from these three major customers amounts to US$ 1,339 million (US$703 million, US$385 million and US$250 million, respectively). In 2018 the revenue related to the two major customers was US$673 million (US$454 million and US$219 million, respectively). In 2019 and 2018, the revenue of these major customers was predominantly related to the Lease and Operate segment.

Under IFRS, two customers each represent more than 10% of the consolidated revenue. Total revenue from these major customers amounts to US$ 2,393 million (US$1,450 million and US$943 million respectively). In 2018 three customers accounted for more than 10% of the consolidated revenue (US$1,254 million), respectively for US$615 million, US$334 million and US$305 million.