4.3.13Property, Plant and Equipment

The line item ’Property, plant and equipment’ consists of property, plant and equipment owned by the Company and right-of-use assets:

Property, plant and equipment (summary)

Property, Plant and Equipment owned by the Company

The movement of the property, plant and equipment during the year 2019 is summarized as follows:

2019

2018

During the 2019 period the following main events occurred:

• Additions to property, plant and equipment include the capitalization of dry dock and other capital expenditures related to the IT infrastructure upgrade project.
• Impairment of Thunder Hawk semi-submersible production facility in the US Gulf of Mexico. Thunder Hawk is the only facility in the Company lease fleet portfolio for which revenues are linked to volumes produced. During the routine review in the first half of 2019, the Company received an update of the long term production profile from the current reserves. Based on this, the revised estimates of future deliverable volumes, and associated cash flows, will be insufficient to sustain the asset’s current book value. During the period, an updated value-in-use calculation was prepared using the revised production profile and a discount rate of 6%. As a result, an impairment charge of US$16 million has been accounted for in the 2019 half year results. If the revenue, which is based on production, varies by +/- 5% the impairment would vary by +/- US$4 million respectively. If the discount rate varies by +/- 1% the impairment would vary by +/- US$2 million respectively.
• An impairment assessment of Deep Panuke MOPU was performed following a reassessment of the towing and scrapping costs. This resulted in adverse cash flows related to the unit and in consequence an impairment of US$9 million. The impairment assessment was performed assuming that the client will continue with the lease until the end of the contract. The impact of an early termination is disclosed below in the section 'Operating leases as a lessor'. If the discount rate used in the impairment test would vary by +/- 1%, the impairment would change by -/+ US$2 million.
• US$214 million of annual depreciation charges.

Property, plant and equipment at year-end comprises of:

• Three (2018: three) integrated floating production, storage and offloading systems (FPSOs) (namely FPSO Espirito Santo, FPSO Capixaba and FPSO Cidade de Anchieta) each consisting of a converted tanker, a processing plant and one mooring system. These three FPSOs are leased to third parties under an operating lease contract.
• One second-hand tanker (2018: one).
• One semi-submersible production platform, the Thunder Hawk (2018: one), leased to third parties under an operating lease contract.
• One MOPU facility, the Deep Panuke (2018: one), leased to a third party under an operating lease contract.  

The depreciation charge for the semi-submersible production facility Thunder Hawk is calculated based on its future anticipated economic benefits, resulting in a depreciation plan based on the unit of production method. All other property, plant and equipment is depreciated on a straight-line basis.

Company-owned property, plant and equipment with a carrying amount of US$479 million (2018: US$569 million) has been pledged as security for liabilities, mainly for external financing.

No interest has been capitalized during the financial year as part of the additions to property, plant and equipment (2018: nil).

Right-of-use Assets

The Company leases buildings, cars and an installation vessel. The most significant lease contract relates to the installation vessel SBM Installer. The charter contract is for a fixed period of twelve years with the option to acquire the vessel during the charter period. The other significant contracts relate to the lease of offices. The contract periods of the Company’s office rentals vary between two to fourteen years and most of the contracts include extension options between three to fifteen years. The extension options are taken into account in the measurement of lease liabilities when the Company is reasonably certain to exercise these options. The lease agreements do not impose any covenants.

The movement of the right-of-use assets during the year 2019 is summarized as follows:

2019

2018

Operating Leases as a Lessor

The category ’Vessels and floating equipment’ mainly relates to facilities leased to third parties under various operating lease agreements which terminate between 2021 and 2030. Leased facilities included in the ’Vessels and floating equipment’ amount to:

Leased facilities included in the vessels and floating equipment

The nominal values of the future expected bareboat receipts (undiscounted lease payments) in respect of those operating lease contracts are:

Nominal values of the future expected bareboat receipts

A number of agreements have extension options, which have not been included in the above table.

Purchase and termination options in operating lease contracts

The operating lease contracts of FPSO Espirito Santo and MOPU Deep Panuke, where the Company is the lessor, include call options for the client to (i) purchase the underlying asset or (ii) terminate the contract early without obtaining the underlying asset. The operating lease contract of semi-submersible Thunder Hawk includes a call option for the client to purchase the underlying asset. The exercise of any of the purchase options would have resulted in a gain for the Company as of December 31, 2019. The exercise of the early termination option for FPSO Espirito Santo as of December 31, 2019 would have resulted in a gain for the Company, while exercising the early termination option for MOPU Deep Panuke as of December 31, 2019 would have resulted in a non-material loss.