ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was organized as a corporation under the laws of Canada pursuant to
Articles of Incorporation dated February 18, 1987. The Company's registered
office is Hangar No. 1, St. John's Airport, P.O. Box 5188, St. John's,
Newfoundland, Canada, A1C 5V5 (telephone number 709 570 0700).
In the United States, our agent for service of process is CT Corporation System,
111 Eighth Avenue, 13th Floor, New York, New York, 10011 (telephone number
1-800-223-7567).
The Company was created in 1987 as a holding company to combine the operations
of Sealand Helicopters Limited and Toronto Helicopters Limited (both of which
were Canadian companies controlled by Mr. Craig L. Dobbin, Chairman of the Board
and Chief Executive Officer of the Company and a principal shareholder) and to
acquire Okanagan Helicopters Ltd., a Canadian company that operated 125
helicopters at the time of its acquisition. Since its formation, the Company has
grown internally as well as through acquisitions, the most significant of which
were the acquisition in 1988 of the majority of the assets of Ranger Helicopters
Limited, which was then operating 37 helicopters; the acquisition in 1989 of all
the outstanding shares of Viking Helicopters Limited, which was then operating
60 helicopters; the acquisition in 1993 and 1994 of all the outstanding shares
of Brintel, which was then operating approximately 25 heavy helicopters; the
acquisition in August 1999 of all the outstanding shares of HSG, which was then
operating 115 helicopters; and the acquisition in February 2004 of all the
assets of Schreiner Luchtvaart Groep B.V. which was then operating 43 aircraft.
PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES
The Company has undergone significant restructuring in recent years.
On February 16, 2004 we completed our acquisition of Schreiner, located in The
Netherlands, for total consideration of $143.9 million (€87.1 million),
including the settlement of $41.5 million (€25.2 million) of Schreiner's debt.
At April 30, 2004 Schreiner's fleet of 38 aircraft consisted of 28 helicopters
and 10 fixed-wing aircraft. In addition, Schreiner operates nine aircraft
belonging to its 40% owned equity investee in Nigeria.
On August 11, 1999, through a public tender offer in Norway by our Norwegian
subsidiary, Vinland Helicopters AS, we acquired shares of HSG for a total
purchase price of NOK 696.9 million (approximately $135.0 million). These
shares, when combined with the shares of HSG we already owned, gave us ownership
of approximately 91.3% of the outstanding shares of HSG. On September 30, 1999,
we completed the purchase of the remaining shares of HSG through a mandatory
offer and compulsory acquisition for a purchase price of NOK 108.1 million
(approximately $20.9 million). The aggregate purchase price of all the shares of
HSG acquired in earlier transactions, the tender offer and the mandatory offer
and compulsory acquisition was NOK 1,185.0 million ($229.5 million) including
acquisition costs.
14
In August and September 1999, subsequent to the acquisition of HSG, we sold
seven heavy and two medium helicopters owned by HSG to OLOG for gross proceeds
of $51.7 million. We subsequently leased back three of the heavy helicopters to
continue performing a search and rescue contract in Ireland. On September 30,
1999, we finalized the sale of two heavy helicopters owned by HSG to General
Electric Capital Services EEF Limited for proceeds of $27.2 million in a
sale-leaseback transaction.
On January 28, 2000, we sold our 33.3% interest in Helicopteros SA, a Spanish
company providing helicopter transportation services, for net proceeds of
approximately $6.8 million, which included the repayment of an inter-company
loan. The amount realized from the sale was approximately equal to the book
value of our ownership interest.
In April 2000, we sold our 46.7% ownership interest in Airlift AS ("Airlift") to
another major shareholder for a nominal amount. Airlift is a Norwegian onshore
helicopter service company that does not compete in the Norwegian offshore
helicopter market. We had acquired our ownership interest in Airlift prior to
our acquisition of HSG with the intention that we would use Airlift to compete
for Norwegian offshore oil and gas contracts. We recorded a pre-tax loss of $5.2
million on the sale.
In May 2000, we sold certain primarily UK based non-oil and gas related
operations for total proceeds of approximately $74.3 million, which included a
two year 9% note for £2.0 million and an insurance receivable of £0.9 million.
These operations included the scheduled passenger service at Penzance, England;
operations for the UK Ministry of Defense in Plymouth, England and the
Falklands; and light helicopter operations based in Cardiff, Wales for civil
police support services. We sold six heavy helicopters, two medium helicopters
and one light helicopter as part of this transaction. The book value of the
assets sold was approximately $31.0 million. We recorded a pre-tax gain of $28.8
million on the sale.
In May 2000, we also sold our Swedish subsidiary, Heliflyg AB ("Heliflyg"), for
gross proceeds of $6.0 million, which was approximately equal to the appraised
value of its fleet and the fair market value of its other assets. Heliflyg
provided onshore helicopter services in Sweden through the operation of two
medium and 12 light helicopters, of which four were owned and 10 were leased.
Heliflyg had a net asset book value at the time of sale of approximately
$5.0 million. We recorded a pre-tax gain of $1.3 million on the sale.
On June 30, 2000, we sold a Norwegian subsidiary, Lufttransport AS
("Lufttransport"), for approximately $14.7 million. Lufttransport provided
onshore air ambulance services in Norway through the operation of three medium
helicopters, one light helicopter and ten fixed-wing aircraft, of which seven
fixed-wing aircraft were leased. We recognized a pre-tax gain of $8.0 million on
the sale.
Effective October 31, 2000, we sold our Canadian onshore helicopter operations
and assets to a new company now known as Canadian Helicopters Limited ("CHL").
Under the terms of the sale we received gross proceeds of $128.5 million for the
assets and operations. We acquired a 45% common equity interest (42.75% at April
30, 2004) in CHL for cash consideration of $4.5 million. The remaining shares
are owned by management of CHL and an equity investor. In addition, we invested
$15 million in CHL through preferred shares. In order to facilitate debt
financing for the new company on a timely basis, we advanced $10.0 million to
CHL as part of the syndication of its term debt. This loan has been fully
repaid. We recorded an after-tax loss of $12 million on the sale of our Canadian
onshore helicopter business in fiscal 2001. In addition, we had a write-off of
goodwill of $9.1 million in fiscal 2001 recorded on the initial acquisition of a
portion of the operations that were sold.
Capital asset additions of $249.1 million were incurred during the year ended
April 30, 2004. Of this amount $99.0 million related to aircraft additions and
modifications and $17.9 million related to other property and equipment. Capital
expenditures for helicopter major components totaled $123.0 million. We also
spent $9.2 million on helicopter major inspections. Proceeds on disposal of
capital assets were $126.9 million for the year ended April 30, 2004.
Capital asset additions of $168.4 million were incurred during the year ended
April 30, 2003. Of this amount, $18.4 million related to aircraft additions and
modifications and $26.3 million related to other property and equipment. Capital
expenditures for helicopter major components totaled $110.3 million. We also
spent $13.4 million on helicopter major inspections. Proceeds on disposal of
capital assets were $74.9 million for the year ended April 30, 2003.
15
Capital asset additions of $175.6 million were incurred during the year ended
April 30, 2002. Of this amount, $20.6 million related to aircraft additions and
modifications and $13.5 million related to other property and equipment. Capital
expenditures for helicopter major components totaled $131.6 million. We also
spent $9.9 million on helicopter major inspections. Proceeds on disposal of
capital assets were $49.8 million for the year ended April 30, 2002.
BUSINESS OVERVIEW
General
We are the world's largest global commercial helicopter operator and, through
our subsidiaries, have been providing helicopter transportation services for
more than 50 years. We currently operate in over 30 countries, on all seven
continents and in most of the major offshore oil and gas producing regions of
the world. Our operations are concentrated in Europe, Africa, Australia and
Asia. Our services also include helicopter repair and overhaul, helicopter
transportation for search and rescue operations and emergency medical services
and ancillary helicopter services including flight training.
We provide helicopter transportation services to a broad base of major energy
companies and independent and state-owned oil and gas companies to transport
personnel and, to a lesser extent, parts and equipment, to, from and among
offshore production platforms, drilling rigs and other facilities. In general,
we target opportunities with long-term contracts and where customers require
sophisticated medium and heavy helicopters operated by highly trained pilots. We
are a market leader in most of the regions we serve, with an established
reputation for quality and reliable service. We are the largest operator in the
North Sea, one of the world's largest oil producing regions, and a global
operator servicing the oil and gas industry in the Caspian Sea, South America,
Africa, Australia and Asia. 59.9% of our revenue for the year ended April 30,
2004 was attributable to oil and gas production, a more stable revenue source
than exploration and development activity, which represented 12.1%. Oil and gas
operations, search and rescue and emergency medical services, and other
ancillary helicopter services, including flight training, are the components of
our flying operations and represented approximately 72.0%, 8.5%, and 2.6% of our
revenue for the year ended April 30, 2004, respectively. Additionally, repair
and overhaul, parts sales and composites manufacturing represented 9.9%, 6.0%
and 1.0%, respectively.
We believe that our repair and overhaul and flight training capabilities reduce
our costs and give us control over the quality of our maintenance and pilot
training. We believe these capabilities enhance our competitive position,
further diversify our revenue stream and solidify our worldwide reputation as a
full-service, high-quality helicopter operator. Furthermore, helicopters must be
serviced or overhauled on a scheduled basis and we believe that our repair and
overhaul capabilities provide us with a growing source of relatively stable
third-party revenue.
Our divisional headquarters in Australia, Canada, The Netherlands, Norway,
Scotland and South Africa oversee bases located in over 30 countries and
coordinate our flight operations and customer service. Our global customer base
consists of a broad range of oil and gas companies and governmental bodies and
includes operating subsidiaries of and governmental bodies in:
Agip DeBeers Republic of Ireland
Apache Exxon Mobil Royal Dutch/Shell Group
bp Kerr-McGee Statoil
Chevron Maersk Talisman
Commonwealth of Australia Norsk Hydro TotalFinaElf
Conoco Phillips Premier Unocal
16
We service the majority of our customers under contracts that typically contain
some combination of fixed and hourly rates and have terms ranging from two to
five years with one or more one-year renewal options. We derived approximately
75% of our revenue for the year ended April 30, 2004 from such long-term
contracts. We estimate that the aggregate market value of the 141 aircraft we
owned as of April 30, 2004 was approximately $572.1 million, compared to their
net book value of $469.8 million.
Competitive Strengths
We believe that we have the following competitive advantages:
· Global Coverage. We currently provide helicopter transportation services in
over 30 countries and on all seven continents. Our broad geographic coverage
and decentralized management structure enable us to respond quickly and cost
effectively to customer needs and new business opportunities while adhering
to local market regulations and customs. Since new contract start-up costs,
including equipment and crew transportation and base set-up costs, can
represent a significant portion of operating expenses, our global network of
bases allows us to reallocate equipment and crews efficiently and bid on new
contracts at competitive rates. Additionally, as the multinational oil and
gas companies seek service providers who can serve them in many locations
around the world, our geographic coverage makes us one of only two global
providers who can effectively compete for many of these contracts.
· Focus on Safety. In over 50 years of operations, we have developed
sophisticated safety and training programs and practices that have resulted
in a strong safety record. We have never failed the stringent safety and
performance audits conducted by most of our customers, including oil and gas
companies, before providers are permitted to bid on new projects. Our
advanced flight training facility in Norway provides a wide variety of
training services to our employees as well as civil and military
organizations around the world. Providing these advanced training services
enhances our global reputation for leadership and excellence in helicopter
services.
· Low Cost Operator. We believe that we have significant cost advantages over
our competition with respect to our medium and heavy helicopter services,
which increase our likelihood of winning new contracts. We believe that our
economies of scale and in-house repair and overhaul capabilities gives us a
cost advantage over competitors who must incorporate higher third-party
repair and overhaul costs into their bids. Furthermore, our broad network of
regional bases allows us to efficiently deploy our existing helicopters to
service contracts worldwide.
· Long-Term Customer Relationships. We have worked successfully for many years
with major oil and gas companies, some of which have been our customers for
more than 20 years. As a result of our established long-term customer
relationships, our focus on safety and flight training, our crews'
experience and the quality of our services, we consistently meet or exceed
our customers' standards and are invited to bid on new projects. In addition
to standard helicopter transportation services, certain of our customers
rely on us for ancillary services, including our computerized logistics
systems for crew scheduling and passenger handling services, all of which
help strengthen our customer relationships.
· Large, Modern and Diversified Fleet of Aircraft. To meet the diverse
operational requirements of our customers, we maintain a large fleet that
includes some of the most sophisticated helicopters in the world. As of
April 30, 2004 we operated 192 helicopters (including 74 heavy, 106 medium
and 12 light helicopters) and 14 fixed-wing aircraft. Our fleet includes 16
Super Puma MkIIs which we believe is the most advanced civilian heavy
helicopter in service, and our other major global competitor operates three.
Our diversified fleet consists of nine types of helicopters, including
helicopters manufactured by Eurocopter, Sikorsky and Bell.
· Retention of Asset Value. We estimate that the aggregate market value of the
aircraft we owned as of April 30, 2004 was approximately $572.1 million.
Since approximately 70-80% of a helicopter's value resides in its dynamic
components, including engines, gearboxes and transmissions, which are
replaced or upgraded on a regular basis, older models of helicopters that
have been upgraded are capable of meeting many of the same performance
standards as newer models of these helicopters. As a result, when
helicopters are sold as part of our ongoing fleet management, we often
receive prices in excess of net book value. For example, between May 1, 2000
and April 30, 2004 we disposed of helicopters for gross proceeds of $250.4
million, approximately 25.2% higher than their aggregate net book value of
$200.0 million as at the dates of disposition.
17
· In-house Repair and Overhaul Business. We believe that our repair and
overhaul activities reduce our costs, position us as a full-service, high
quality helicopter operator and further diversify our revenue streams. We
are a market leader in repair and overhaul capability because we are the
only licensed commercial engine and major component repair and overhaul
facility in the world for the Eurocopter Super Puma helicopter (including
the MkII), other than the original equipment manufacturer. This capability
allows us to control the quality and the cost of our helicopter maintenance,
repair and refurbishment.
· Proven and Experienced Management Team. Our senior management team,
including our executive management, the divisional presidents and managing
directors, have an average of over 20 years of experience in the helicopter
operations industry. Our management team has introduced a series of
strategic initiatives in recent years that have focused managers in each of
our operating divisions on cost reduction and improved fleet utilization. In
addition, we have successfully integrated 10 acquisitions (excluding
Schreiner) during the past 17 years.
Business Strategy
Our goal is to enhance our leadership position in the global helicopter services
industry by continuing to provide value-added services to our customers while
maximizing our return on assets and cash flows. In our pursuit of this goal, we
intend to focus on the following key initiatives:
· Strengthen Competitive Position in Existing Markets.We intend to increase
our ability to win new, and renew existing, contracts, strengthen our
existing customer relationships and enhance our competitive position by
improving our focus on customer needs and reducing costs while maintaining
our high standards for safety and reliability. For example, we have recently
combined our UK and Norwegian operating units into a single European
division with an integrated management team. We are also examining our
worldwide operations for similar opportunities.
† Growth Through Acquisition. On February 16, 2004 we completed our
acquisition of Schreiner, which is based in The Netherlands. We intend to
seek additional acquisition opportunities to further strengthen our position
in our existing markets and to extend our reach into new markets.
† Selectively Expand International Operations.We intend to capitalize on our
broad geographic coverage, our long-term customer relationships and our
fleet capabilities to pursue new opportunities in Africa, Asia and other
developing oil and gas regions which we expect to be the fastest growing
markets for offshore helicopter transportation services.
· Continue to Expand Repair and Overhaul Business. We plan to expand our
repair and overhaul business by further penetrating the Super Puma major
component and engine overhaul market. Our licenses with Eurocopter and
Turbomeca allow us to provide repair and overhaul services worldwide for all
Super Pumas, including the Super Puma MkII. With over 500 Super Pumas
operating in the worldwide civilian and military markets, we believe there
are significant growth opportunities for our repair and overhaul operations.
With the expiration on June 25, 2003 of our non-compete agreement with
Vector Aerospace Corporation ("Vector"), a leading provider of repair and
overhaul services for medium and light helicopters, we also intend to expand
our repair and overhaul services offering to other types of helicopters.
· Pursue Profitable New Business Beyond the Oil and Gas Sector. We believe
that we have a competitive advantage in the search and rescue and emergency
medical services sectors by virtue of our experience in servicing the oil
and gas industry. We believe that this advantage stems from our ability to
operate sophisticated twin-engine medium and heavy helicopters with
highly-trained pilots in complex situations for large customers. Typically
search and rescue and emergency medical services customers require the
operator to meet stringent quality standards on a long-term basis, excluding
from the bidding process operators who would otherwise compete primarily on
the basis of price.
18
· Continue to Focus on Long-Term Contracts. We seek to enter into long-term
contracts with our major customers in order to maximize the stability of our
revenue. Operations under long-term contracts represented approximately 75%
of our April 30, 2004 revenue.
Industry
Helicopter Operations
Helicopters in use today may be divided into two general categories.
Single-engine (light) aircraft, which have a passenger capacity of three to six,
operate under visual flight rules ("VFR") (daylight and good weather flying
only) and can be operated with one pilot. Given their low passenger capacity and
inability to fly in poor weather conditions, these aircraft are generally
limited to onshore operations. In recent years, we have sold most of our
operations and aircraft in this category and at April 30, 2004, we had only 12
light helicopters in the fleet.
Twin-engine (heavy and medium size) aircraft require two pilots, have a
passenger capacity of nine to 26 and can operate under instrument flight rules
("IFR") (daytime and nighttime flying under a variety of weather conditions).
The greater passenger capacity, longer range, and ability to operate in adverse
weather conditions make these aircraft more suitable than single-engine aircraft
for offshore support. The high cost of these larger aircraft and their limited
availability tend to lessen competition from smaller operators. We operated 180
helicopters in this category (74 heavy and 106 medium helicopters) at April 30,
2004.
Over the years, the use of helicopters has expanded from the oil and gas
industry to include many other areas where urgency or difficulty of access
combined with ease of unloading (vis-à-vis airplanes) justifies the cost of
helicopter transportation. These areas include forestry, mining, search and
rescue, emergency medical services, construction, mapping and recreation.
Various types of helicopters are required to meet the diverse needs of the
industries they serve. Heavy and medium helicopters are generally utilized to
support the oil and gas, construction and forestry industries, and for search
and rescue support and emergency medical services. They are also used for
transporting larger numbers of passengers and supplies or for lifting
heavy loads and are capable of operating during the night and in adverse weather
conditions. Typically equipped with IFR equipment, medium and heavy helicopters
are capable of long distance flights to offshore oil platforms. Where
appropriate, specialized equipment is installed for providing emergency medical
service support or for use in certain challenging environments such as the North
Sea. Light and medium helicopters are used to support the utility and mining
sectors, as well as some areas of the construction and forestry industry, where
transporting a smaller number of passengers or carrying light loads is required.
The level of worldwide offshore oil and gas exploration and production has
traditionally influenced demand for helicopter transportation services. After a
period of decline, there was an improvement and stabilization in oil prices in
1999, which has continued into 2004. While oil and gas prices have remained high
since 2002, activity levels in the North Sea have decreased. This decrease was
in part due to the decision by a number of large oil and gas producers to sell
older assets in the North Sea to allow them to focus on non-North Sea
properties. Asset sales have continued during fiscal 2004, with producers such
as Chevron, Shell and bp selling assets to smaller producers such as Perenco,
Energy North Sea, Apache, Talisman, Centrica and Venture. We provide helicopter
services to many of these smaller producers in the North Sea.
We contract with customers to provide aircraft for various periods of time.
Contracts for helicopter services in support of oil and gas exploration
activities are generally short-term, usually 12 months or less. Contracts for
transport of personnel and equipment to oil and gas production sites are
generally long-term with terms typically ranging from two to 10 years, averaging
approximately 3.5 years. Such contracts are ordinarily awarded following a
competitive bidding process among pre-qualified bidders. Contracts may be based
on a fixed monthly fee with an additional hourly charge for actual flight time,
or solely on an hourly charge for actual flight time. Typically, we supply crew
and maintenance personnel in addition to aircraft. However, we have a limited
number of contracts under which we supply aircraft only, often in conjunction
with repair and overhaul and training services. We will continue to pursue this
latter type of contract as such arrangements may allow us to partner with other
local operators to effectively penetrate new markets.
19
A substantial number of our long-term contracts contain provisions permitting
early termination by the customers without penalty. However, with the exception
of contracts that were transferred to another operator due to the merger of oil
and gas producers and a contract with the U.N. Monitoring, Verification and
Inspection Commission that was cancelled upon the start of the war in Iraq,
during the last six fiscal years, no customer has exercised that right. Prior
to the expiration of a contract, our customers typically solicit new bids for
the next contract period. Contracts are typically awarded based on a number of
factors, including price, long-term relationships, safety record of the
helicopter service provider and quality of customer service. Generally, an
incumbent operator has a competitive advantage in the bidding process stemming
from its relationship with the customer, its knowledge of site characteristics,
its understanding of the cost structure for the specific operations and its
proven ability to meet service level requirements and provide the necessary
aircraft and services.
On July 31, 2004, our North Sea contract with bp in Aberdeen, Scotland expired.
As a result of our efforts to redeploy the helicopters used to service bp, we
have been awarded a contract by Apache to service a North Sea oilfield that
Apache recently purchased from bp that we previously serviced under a contract
with bp. Furthermore, we have been awarded a contract for the provision of two
Super Puma aircraft for oil and gas operations in Brazil, and have redeployed a
Super Puma to Angola for oil and gas operations.
Our contracts generally require that fuel be provided directly by the customer
or be charged directly to the customer based on our actual fuel costs. As a
result, we have no significant exposure to changes in fuel prices.
New contract start-up costs, including equipment and crew transportation and
base set-up costs, can represent a significant portion of operating costs. We
therefore believe that our global network of bases and operating licenses give
us a competitive advantage in bidding on new contracts throughout most of the
world. With bases in over 30 countries and on all seven continents, we are
positioned to meet the requirements of our customers in most regions within
short periods of time at competitive rates. We have long-term working
relationships with most of the major oil and gas companies, including the
operating subsidiaries of bp, ExxonMobil, ConocoPhillips, Shell, Statoil, Norsk
Hydro, TotalFinaElf, Chevron, Maersk and Unocal, many of which have been our
customers for more than 20 years.
The following tables break down our revenues for helicopter operations by
industry sector and geographic area respectively and indicate revenue for each
sector or area as a percentage of total revenue from helicopter operations for
each of the fiscal years ended April 30, 2004, 2003, and 2002. Revenue from
helicopter operations does not include revenue from repair and overhaul,
composites and flight training.
Revenue by Industry
Sector 2004 2003 2002
(in millions) % (in millions) % (in millions) %
Oil and gas $ 528.5 81.7 $ 523.3 82.3 $ 481.8 85.7
Search and
Rescue/Emergency Medical
Services 62.0 9.6 57.0 9.0 37.8 6.7
Helicopter Passenger
Transport and Other 56.4 8.7 55.5 8.7 42.5 7.6
Total $ 646.9 100 % $ 635.8 100 % $ 562.1 100 %
Revenue by Geographic
Area 2004 2003 2002
(in (in (in
millions) % millions) % millions) %
European Operations
Norway $ 177.2 27.4 $ 181.9 28.6 $ 151.1 26.9
UK 248.3 38.4 269.7 42.4 244.2 43.4
Total 425.5 65.8 451.6 71.0 395.3 70.3
International Operations
Australia 72.3 11.2 63.0 9.9 51.7 9.2
Africa 39.9 6.2 33.7 5.3 25.7 4.6
Other 78.4 12.0 87.5 13.8 89.4 15.9
Total 190.6 29.4 184.2 29.0 166.8 29.7
Schreiner Operations 30.8 4.8 - - - -
TOTAL $ 646.9 100 % $ 635.8 100 % $ 562.1 100 %
20
European Operations
We are one of the leading providers of helicopter services in Europe. We provide
offshore services to customers located primarily in the UK, Norwegian and Danish
sectors of the North Sea. We also provide helicopter services (primarily search
and rescue) in Ireland. Our primary European bases are located in Aberdeen,
Scotland and Stavanger, Norway, where we conduct our operations in the UK and
Norwegian sectors of the North Sea, respectively. We operate 71 helicopters in
Europe, including 41 Super Pumas, the most modern heavy commercial helicopter
currently servicing the major oil and gas companies in the North Sea. During
fiscal 2004 we undertook a comprehensive review of our European operations, in
conjunction with our labor unions. The result of this review was a decision to
combine the management of our UK and Norwegian operating divisions. This should
result in an improved focus on the customer and make our European operations
more competitive.
Norwegian Operations: While the focus on the oil and gas sector in Norway is
substantially the same as in the UK, differences in regulatory regimes and
territorial issues make it more appropriate to service the Norwegian sector of
the North Sea from Norway. These regulatory differences also limit somewhat our
operational flexibility and impact our costs.
Our Norwegian operations primarily service oil and gas customers in the North
Sea including Statoil, Phillips, bp and Norsk Hydro.
We operate 28 helicopters in Norway consisting of 24 heavy helicopters,
including 19 Super Pumas (of which nine are Super Puma MkIIs) and four medium
helicopters. Super Puma helicopters are frequently requested by major oil and
gas companies and, in our opinion, are currently in short supply within both the
new helicopter and helicopter resale markets.
During the year we were awarded expanded, multi-year contract renewals by
Statoil and Norsk Hydro for the provision of heavy helicopter transportation
services in the Norwegian North Sea. The combined annual revenue from these
contracts is approximately $86 million over the contract terms ranging from
three to 11 years. We believe we will continue to be a leader in the Norwegian
helicopter services market as a result of our long-term relationships and our
reputation for safe, high-quality service. The other major helicopter service
provider in the Norwegian sector of the North Sea is Norsk Helicopters.
UK Operations: Our UK operations primarily service oil and gas customers in the
UK sector of the North Sea, including operating subsidiaries of bp, Mobil,
Talisman, Conoco Phillips, Apache, Kerr-McGee and TotalFinaElf, some of which we
have serviced for more than 10 years. Our UK operations also manage our
operations in Denmark, where we signed a long-term contract in 1999 with Maersk
to provide offshore helicopter support and in Ireland, where we perform search
and rescue as well as oil and gas support.
We operate 43 helicopters in our UK operations, primarily in the UK sector of
the North Sea. Our UK fleet consists of 29 heavy helicopters and 14 medium
helicopters, many of which are specially equipped for the North Sea. Included in
our heavy helicopter fleet are 22 Super Pumas, including seven Super Puma MkIIs.
During the year we were successful in being awarded new contracts for the
provision of Super Puma helicopter services to (1) Apache North Sea, (2) Technip
Offshore UK and Venture Production, and (3) a combined group consisting of Eni
UK, BG Group and Conoco Phillips Petroleum UK.
21
We believe we will continue to have opportunities to obtain new contracts in the
UK portion of the North Sea. The other major helicopter service providers in the
UK sector of the North Sea are Bristow Helicopters Ltd and Bond Offshore
Helicopters Limited.
New Business Opportunities in Europe: There is potential for new oil and gas
developments off the west coasts of Scotland and Ireland, around the Shetland
and Faroe Islands, and in the North Sea off the northern coast of Norway. These
opportunities are expected to lead to additional helicopter service
requirements. We believe we are well positioned to compete for these new
contracts as a result of: (1) our long-standing relationships with many of the
major oil and gas companies which are expected to play a significant role in
these projects; and (2) the need for long-range Super Puma MkIIs and Sikorsky
S-92 helicopters to reach more remote regions.
International Operations
Our international operations provide helicopter services in 24 countries in
Africa, Asia, Australia, the Middle East, South America and offshore Canada,
principally to customers in the oil and gas sector. We believe that the
collective international experience we have gained over the last 46 years
enables us to draw upon our knowledge of local conditions to provide high levels
of customer service in diverse operating environments. Our international
operations consist of CHC International, based in Vancouver, Canada; CHC
Australia, based in Adelaide, Australia; and CHC Africa, based in Cape Town,
South Africa.
In some of the countries in which we operate, local regulations impose certain
nationality requirements. As a result, we often obtain a license to operate in
that country in conjunction with a local representative or partner. Our
representatives or partners typically receive a small percentage of local
revenues or a fixed fee but generally do not provide any personnel or assume any
of the liabilities related to performance of the contract. We currently have
representatives or partners in a number of countries including Azerbaijan,
Ecuador, Equatorial Guinea, Libya, Myanmar, Namibia, Saudi Arabia and Thailand.
We believe we have a competitive advantage in securing contracts in these areas
due to our established local partnerships. In other jurisdictions such as India,
Angola, Brazil and Malaysia, we provide aircraft and maintenance services to
other local helicopter operators.
CHC International: CHC International provides helicopter services through 18
bases in 14 countries around the world. These bases are coordinated through our
division based in Vancouver, Canada, which operates a fleet of 37 aircraft,
including eight heavy helicopters, 27 medium helicopters and two fixed-wing
aircraft. In the fiscal year ended April 30, 2004, CHC International conducted
business with major oil and gas companies including operating subsidiaries of
Shell, bp, ExxonMobil, Unocal, Chevron, Triton and TotalFinaElf. Our strong
customer relationships, established reputation, ability to operate in various
environments and commitment to quality, safety and cost efficiency have proven
to be extremely important in the international markets. We have been serving
Unocal in Thailand for 30 years. Since our establishment in Azerbaijan over 10
years ago, we have been working on long-term projects in the Caspian Sea with a
consortium led by bp and another consortium led by TotalFinaElf and ExxonMobil.
In the Philippines, we are under contract until 2005, with an additional
two-year extension option. We are also established in Saudi Arabia, where we are
currently providing services to the Arabian Oil Company under contract until
December 2005. We are well established on the east coast of Canada, having
contracts with ExxonMobil. We also maintain contracts for ongoing work in such
countries as Malaysia and Ecuador. During this year we were able to penetrate
the oil and gas industry in India and commencing May 1, 2004 we began providing
Super Pumas in Brazil.
During fiscal 2004 we were awarded contracts to provide helicopter services in
support of oil and gas operations of (1) Total Exploration and Production in
Myanmar, (2) Petrobras in Brazil, (3) Unocal in Thailand, (4) Encana in Ecuador,
(5) Kuwait Gulf Oil Company and Aramco Gulf Operations, (6) United Helicharters
in India, (7) PTT Exploration and Production in Thailand, and (8) Chevron in
Thailand.
22
CHC Australia: Our Australian operations, as well as a small portion of our
Southeast Asian operations, (principally East Timor) are conducted by CHC
Australia, with headquarters in Adelaide, Australia which operates a fleet of 32
helicopters, including five heavy, 21 medium and six light helicopters. We are a
leading commercial helicopter operator in Australia. Our customers include
Coogee Resources and Phillips Petroleum, which, along with other oil and gas
companies, represents approximately 37% of our Australian revenues in 2004. In
addition, we operate emergency medical services in South Australia, Western
Australia, Queensland, the Australian Capital Territory and Victoria, perform
search and rescue services for the Royal Australian Air Force, and provide
various functions supporting the utility and construction industries, such as
pipeline inspection. We also work with the United Nations in East Timor using
two helicopters for personnel transportation and medical evacuation. We also
perform helicopter support services for police forces in Victoria and South
Australia.
During the year we were awarded a new five-year contract (with extension options
of up to an additional five years) by the Western Australia Government Fire and
Emergency Services Authority and a 10-year renewal (plus extension options of
four years) to supply search and rescue helicopters and crews and to provide
additional support helicopters to the Royal Australian Air Force.
CHC Africa: Our African operations are headquartered in Cape Town, South Africa,
with nine bases in seven countries in Africa that support oil and gas
exploration and mining activities, as well as provide emergency medical and
other services. With a fleet of 24 helicopters and two fixed-wing aircraft, CHC
Africa services a variety of customers, including Shell, ExxonMobil, Sonair,
Triton/Hess, DeBeers, Soekor, the government of South Africa and the city of
Cape Town. During the year we were awarded a five-year contract renewal for the
Mobil Equatorial Guinea operations off the coast of West Africa, commencing
March 1, 2004.
New Business Opportunities for our International Operations: Our geographic
coverage enables us to serve multinational oil and gas customers on a worldwide
basis. We see potential growth opportunities through our international
operations in regions such as South America, West Africa, Thailand, Angola,
Malaysia, India, and offshore Eastern Canada. Each of the regions includes
potential helicopter service contract opportunities linked to oil and gas
exploration and production projects.
Schreiner Operations
Schreiner's operations include a fleet of 38 aircraft, including 28
helicopters and 10 fixed-wing aircraft, providing aviation services primarily to
the offshore oil and gas industry in Europe, Africa and Asia. We are, through
Schreiner, the largest helicopter operator in the Dutch sector of the North Sea,
with helicopters providing support to the offshore oil and gas industry and
emergency medical services. We are also a major operator in Africa, providing
helicopter and fixed-wing aviation support services to the oil and gas industry,
with significant offshore helicopter support services in Nigeria and Cameroon,
and longstanding pipeline construction and maintenance/surveillance support in
Chad. In Nigeria we support offshore and onshore oil and gas operations. In
addition to the aircraft that we own, we also operate nine aircraft owned by our
40% owned equity investee in Nigeria, in support of oil and gas operations. In
addition, we operate scheduled domestic flights in Nigeria utilizing our fleet
of primarily DeHavilland fixed-wing aircraft. In Cameroon and Chad, we utilize
helicopters and fixed-wing aircraft to support a major pipeline project linking
oil fields in southern Chad with terminal facilities off the Cameroon coast. We
also own, through Schreiner, an aircraft parts business, and we hold a 37.8%
investment in Inaer, Inversiones Aereas S.R.L. ("Inaer") the largest onshore and
offshore helicopter operator in Spain. We began consolidating the operations of
Schreiner into our consolidated financial statements effective February 16, 2004
and report its results as a separate segment.
Through Schreiner, we also operate a fixed-wing maintenance center in The
Netherlands and a military target manufacturing business in Canada and The
Netherlands, all of which we consider non-core and may divest.
Canadian Operations
Effective October 31, 2000, we sold CHL, our Canadian onshore helicopter
operations, retaining only a 42.75% interest.
23
The sale did not include our offshore oil and gas operations on the east coast
of Canada. The results of these operations are included in the international
flying segment results. CHL has agreed not to compete with us for offshore oil
and gas work in Canada until at least October 31, 2005.
Competition
We are one of only two global providers of helicopter transportation services to
the offshore oil and gas industry. Both we and our global competitor have a
modern fleet of helicopters, a global presence, long-term relationships with
major oil and gas companies and a reputation for providing safe, high-quality,
reliable service. There are other competitors, but they are smaller, regional
operators. During 2003, a new competitor entered the UK sector of the North Sea
market. This competitor has established operations in Aberdeen, Scotland and on
August 1, 2004 commenced providing helicopter services that were previously
performed by us under a long-term contract with bp that was not renewed. During
the year ended April 30, 2004, we renewed all five of the contracts in the North
Sea that were previously up for renewal representing combined average annual
revenue of approximately $91.0 million over their terms, which, including option
periods, range from five years to 11 years.
We have a significant market position in all global offshore oil and gas
markets, with the exception of the Gulf of Mexico, where we do not have a
presence. Our absence in that market stems from the fact that the oil and gas
companies operating in the Gulf of Mexico utilize primarily light and medium
helicopters under short-term contracts. We estimate that we have a market share
of approximately 65% in the combined Norwegian, UK, Danish and Dutch sectors of
the North Sea, the world's largest area of offshore oil and gas development. We
believe we are well positioned to capitalize on future growth opportunities. As
oil and gas wells are depleted, it is expected that oil companies will go
further offshore to develop deep-water reserves. Our global presence, long-term
customer relationships and modern fleet of aircraft position us to participate
in new oil and gas developments in most offshore oil and gas regions.
The limited supply of helicopters available for use in the offshore oil and gas
industry is a competitive advantage for us. In our experience, the Super Puma is
the aircraft most requested by the major oil and gas companies operating in the
North Sea, our major market, due to its superior range and payload. At present,
we and our major competitor operate approximately 90% of the worldwide fleet of
commercial Super Pumas configured for offshore work. The manufacturer of the
Super Puma does not stock new aircraft. The current lead time to acquire a new
Super Puma ranges from 18-24 months. There is no substitute for the Super Puma
in commercial operation that is currently acceptable to major customers
operating in the North Sea and certain other regions where large numbers of
passengers are transported long distances offshore. During the next year, both
we and our major competitor will introduce the Sikorsky S-92 aircraft in Norway.
The S-92 is a heavy helicopter that has similar capabilities to the Super Puma
MkII and is now being requested by some of our customers.
In our international markets services are usually provided by medium
helicopters. However, as oil and gas production and exploration in the
international markets move further offshore, there will be an increasing need
for newer heavy helicopters.
Our fleet includes the newest model of the Super Puma, the MkII, the most
advanced heavy helicopter in operation in our markets. We had 16 Super Puma
MkIIs in our fleet as at April 30, 2004. We believe that another competitor in
the UK has a number of MkIIs on order.
In our medium and heavy helicopter operations, we compete against a number of
helicopter operators including OLOG, the other global commercial helicopter
operator, and numerous local and regional operators. In addition, many of our
customers in the oil and gas industry have the financial capability to perform
their own helicopter flying operations in-house should they elect to do so. The
technical requirements of operating helicopters offshore have increased as oil
and gas activities have moved further offshore and more sophisticated aircraft
are required to service the market, which increases the costs of assets required
to be deployed.
24
Repair and Overhaul
All aircraft include engines, components and accessories that are required by
their manufacturers and government regulations to be serviced and overhauled
after a pre-determined number of flying hours. The repair and overhaul process
includes the disassembly, cleaning, inspection, repair and reassembly of
engines, components and accessories, which have a limited time-life, including
the testing of complete engines and components. The choice of whether to perform
a given task in-house or to outsource to a third party depends on the complexity
and cost of the task and the capabilities and reliability of the operator in
question. Companies engaged in the repair and overhaul business are required to
obtain licenses from government regulatory bodies and, in many cases, the
manufacturers. Companies active in this industry include the manufacturers of
helicopters, components, and accessories; repair facilities authorized by the
manufacturers to repair and overhaul their products; and small workshops not
typically authorized by the manufacturers. The low cost of transporting
components relative to the total cost of the repair and overhaul services has
resulted in the development of a worldwide market for repair and overhaul
services.
Through our wholly-owned subsidiary, Astec Helicopter Services ("Astec"), we
currently operate the only licensed commercial major component repair and
overhaul facility in the world for the Eurocopter Super Puma helicopter, other
than the original equipment manufacturer. Our facility, located in Stavanger,
Norway, is also an authorized customer service facility for Bell Helicopter
Textron and has been designated by engine manufacturer General Electric as an
approved repair and overhaul facility for the GE CT-58 engine used in the
Sikorsky S-61 helicopter and other types of aircraft. We also operate an
authorized customer service facility for Turbomeca's Makila engines, which are
used to power Super Pumas. In January 2000, we entered into an agreement to
expand our license with Eurocopter into a worldwide license for the repair and
overhaul of Super Puma major components and to include the Super Puma MkII model
in the license. In February 2001, we entered into an agreement with Turbomeca to
expand our licenses for the repair and overhaul of Makila engines to include
civilian and military helicopters in regions outside of Scandinavia. In
addition, our facility has been certified to repair and overhaul helicopters by
the joint European approval system for aircraft maintenance organizations and is
ISO-9001 certified. Through Astec we also operate repair and overhaul facilities
in Aberdeen, Scotland.
In addition to providing repair and overhaul services for our fleet of 48 Super
Pumas, our facilities, experience and reputation position us to increase our
market share of repair and overhaul services for the world's approximately 500
Super Pumas, of which approximately 80% are employed in non-civil and military
operations. In October, 2003 we entered into an agreement with Sikorsky by
virtue of which our repair and overhaul facilities will be considered a
manufacturer approved maintenance center for the provision of modification and
logistics support for certain Sikorsky S-92 aircraft when that aircraft type
enters commercial operation. At that time we also established the capability in
our repair and overhaul operations to perform repair and overhaul services on
Super Puma MkII dynamic components, and are currently performing such work on
the Super Puma MkIIs in our existing fleet.
Our repair and overhaul facilities have a staff of highly skilled mechanics and
engineers with an average of approximately 15 years of service. Repair and
overhaul services provided by our facilities include (1) airframe inspections,
designs and modifications, (2) engine overhauls, repair and testing,
(3) dynamic, hydraulic, mechanical, and other component overhauls, repairs and
testing, (4) avionics overhaul and repair, (5) other miscellaneous equipment
repair and maintenance and (6) logistical and technical support to helicopter
operators. These services are performed through numerous workshops at the
Stavanger, Norway facility, which include sheet metal, interior, and safety
equipment workshops and paint facilities in addition to engine and parts
workshops to provide customers with full service capabilities.
We have developed a unique "one stop shop" concept for helicopter support
whereby we directly support operators who are either setting up a remote
operation, or expanding into the Sikorsky S-61 or Super Puma markets. We are
also becoming positioned to offer airframe repair and overhaul services for the
Boeing Chinook CH-47 heavy military helicopter.
Our repair and overhaul facilities currently provide a range of helicopter
support services for our own helicopter operations and for third-party military
and commercial helicopter operators in the UK, Spain, Denmark, Ireland, Canada,
Brazil, The Netherlands, Australia and Indonesia. Third-party customers include
the Royal Norwegian Air Force, Royal Netherlands Airforce, Swedish Airforce,
Finnish Frontier Guard, German Border Guard, Brunei Shell and Cougar
Helicopters.
25
We and Vector (and certain others) entered into a non-competition agreement on
June 25, 1998, in connection with the sale of the repair and overhaul segment of
our business at that time to Vector, whereby we agreed that until June 25, 2003,
we would not engage in certain repair and overhaul activities that were
competitive with certain activities of Vector. We currently perform work for our
own helicopters, third-party work involving the scope of services and customer
base as they existed when we acquired HSG, and continuation of, and any
territorial expansion of, our licenses for repairing and overhauling Eurocopter
Super Puma helicopter components and their Turbomeca Makila engines for third
parties. With the expiration of the non-compete agreement, we are reviewing our
options for the repair and overhaul of our medium aircraft previously provided
by Vector, including the possibility of performing a portion or all of this work
in our own repair and overhaul facilities.
During the year ended April 30, 2004, we were awarded a contract with the German
Ministry of the Interior to upgrade 10 Super Puma AS332L helicopters during
fiscal 2005 through 2008. Five of the aircraft will come from our fleet of Super
Pumas as part of our ongoing fleet modernization program. The aircraft that we
will be selling will range in age from 20-25 years.
Competition
Our main competitors within the repair and overhaul business are the
original equipment manufacturers of helicopters and their components. As such,
our main competitors are also our main parts suppliers. To minimize issues
related to the availability and pricing of parts that we need to perform our
business, we generally have long-term supply arrangements with the original
equipment manufacturers and work closely with them on items such as
modifications and approvals of parts and components.
Factors that affect competition within the repair and overhaul market
include price, quality and customer service. We believe that we have a
competitive advantage over original equipment manufacturers in that we focus on
supporting commercial operators. Original equipment manufacturers provide
services to governments and military customers as well, who we believe have
traditionally not been as cost and time conscious as commercial operators. We
believe that our focus helps reduce the amount of time that the helicopter or
component is out of service due to maintenance and modification programs, which
provides an advantage for bidding on contracts. These down time reduction
benefits are not only attractive to commercial operators, but also military and
government helicopter operators due to increasing pressure on their budgets.
With over 500 Super Pumas and other heavy helicopters operating in the worldwide
civilian and military markets, we believe there are significant growth
opportunities for our repair and overhaul operations.
Composites
CHC Composites Inc. ("Composites") is a subsidiary that manufactures composite
aerospace components and bonded panels. Composites was established in fiscal
1999 and commenced commercial production on May 1, 2002. During fiscal 2003 we
were awarded a five-year contract, to 2008, with Aero Vodochody of the Czech
Republic for the manufacture of aerospace components for the Sikorsky S-76
helicopter. The contract is expected to generate estimated annual revenues of $5
million. Production commenced in early calendar 2004. In addition, we also have
a contract to manufacture components for Bombardier and for other helicopter
manufacturers.
Flight Training
We operate an advanced flight training facility in Norway that provides
additional revenue and enhances our global reputation for excellence and
leadership in helicopter services. The facility enables us to satisfy fully the
Super Puma training requirements for our pilots in addition to selling training
services to external pilots.
Our experienced instructors provide a wide variety of training services to our
employees as well as civil and military organizations around the world.
Technical ground school courses are taught to both pilots and technicians. Our
Norwegian flight training operation, based in Stavanger, Norway has two full
flight simulators and is certified and approved by the Norwegian Civil Aviation
Authority as well as several other national aviation authorities. Since its
inception, this facility has trained more than 22,100 pilots and mechanics from
over 40 countries.
26
Seasonality
There is some impact of seasonality in our operations. The seasonal variations
are due primarily to variations in the activity levels of our oil and gas
industry customers' exploration and development activities. Generally, the third
quarter is most negatively impacted by seasonality. The second quarter, which
includes a portion of the peak summer period, has historically been the
strongest. Typically, our net earnings also follow this pattern.
Safety and Insurance
Operation of helicopters involves some degree of risk. Hazards, such as aircraft
accidents, collisions and fire, are inherent in providing helicopter services.
We maintain a flight safety organization that is responsible for ensuring
compliance with safety standards within our organization and the requisite
proficiency among flight crews. Our safety organization is responsible for
training flight crews, conducting regular safety audits and seminars for all
flight personnel, and generally ensuring safe operating techniques and standards
consistent with Canadian and other government regulations and customer
requirements. In addition, aviation regulatory bodies and customers conduct
safety audits to ensure that our standards meet their requirements.
During the two fiscal years ended April 30, 2004, we experienced two accidents
involving injury, death or significant property damage: (1) an EMS helicopter
crashed in Australia, resulting in the deaths of three crew members; and (2) a
hard landing of a helicopter during training exercises in Azerbaijan resulting
in the total loss of the helicopter with only minor injuries to the crew.
In addition, a helicopter owned and operated by Inaer, a company of which
Schreiner owns 37.8% but does not manage, recently crashed in the Canary Islands
during an emergency medical services operation, resulting in the death of five
passengers and crew members. Insurance for Inaer's aircraft is provided directly
by Inaer, not by Schreiner or us.
An incident occurred on September 8, 1997, when an HSG Super Puma, on contract
with Statoil, crashed into the sea over the Norne oil field, resulting in the
deaths of the two crew members and all ten passengers on board. Claims arising
in connection with the Norne accident have been divided into three types: loss
of hull, search and rescue costs and workers' compensation. The claim for loss
of hull was settled during 1997 for U.S. $11.8 million, with HSG and third-party
insurers each bearing some costs. The Norwegian workers compensation board has
paid NOK 2 million per person killed in the accident to their respective
families. HSG has not had to pay any amounts with respect to liability claims
arising under this accident and does not anticipate any future claims at this
time. In July 2003 we reached an agreement with the aircraft manufacturer and
our insurers under which the manufacturer would pay U.S. $6.25 million to settle
this cost recovery claim. The net proceeds of this claim of approximately U.S.
$5.0 million were allocated between us and our insurers.
We maintain liability insurance coverage against general and aircraft liability,
including personal injury, subject to a self-insured retention. In addition, we
have separate hull policies that generally insure against physical loss of, or
damage to, our helicopters in certain circumstances, subject to a self-insured
retention, including losses due to war, expropriation, confiscation and
nationalization. We are not insured for loss of profit or loss of use of our
helicopters.
27
Government Regulation
European Aviation Licenses
Companies wishing to hold a license to operate helicopters in the European
Union or the European Economic Area must be owned and controlled by a citizen of
a country of the European Union or the European Economic Area. Our ability to
hold aviation licenses in Europe is contingent on our controlling shareholder,
Mr. Craig L. Dobbin, who is a citizen of both Canada and the Republic of
Ireland, a European Union Member State, owning and controlling us. As required
by our senior credit facility, we have developed a proposal for steps that we
may take, including through a restructuring of our European operations, so that
our operating licenses in Europe are not dependent on the citizenship of Mr.
Craig L. Dobbin. The proposal must be capable of being implemented within six
months of a request by the lenders under the facility. During fiscal 2002 Mr.
Dobbin's five adult children were granted Irish citizenship, thereby providing a
further succession alternative to ensure our long-term eligibility to operate in
Europe.
UK Regulation
Requirements for Operating License
Our UK operating subsidiary, Scotia, has been issued an operating license by the
UK Civil Aviation Authority. Formerly, operating licenses were held by two of
our UK subsidiaries, Brintel and Scotia (previously Bond Helicopters Limited
("Bond")), but as of June 30, 2000 the helicopter operating business and assets
of Brintel were transferred, for value, to Bond. Bond was renamed CHC Scotia
Limited and is now the only operating subsidiary in the UK in our group, and
therefore our only subsidiary holding a UK operating license. Without this
operating license, we would not be able to operate helicopter services through
our UK subsidiary. Under applicable European law, all of our European
subsidiaries that operate helicopter services must be "effectively controlled"
and "majority owned" by nationals of Member States of the European Union or the
European Economic Area to maintain their operating licenses. We are controlled
by Mr. Craig L. Dobbin, a citizen of both Canada and the Republic of Ireland (a
Member State of the European Union).
In January 1994, two competitors of Brintel (at that time the only UK operating
company in our group) complained to the European Commission and the UK Civil
Aviation Authority that the ownership structure of CHC and Brintel did not
comply with the requirements of European licensing regulations and one
competitor brought an application in the English courts for judicial review of
the UK Authority's decision not to revoke Brintel's operating license following
the acquisition of Brintel by CHC. Subsequently, Brintel received notice that,
as a result of communications with the European Commission, the UK Civil
Aviation Authority believed that Brintel may not satisfy the nationality
requirements of applicable European law. The UK Civil Aviation Authority
subsequently informed the UK Secretary of State on December 4, 1997 that it had
reason to believe that Brintel did not comply with the ownership requirements of
applicable European law. The UK Secretary of State had the ability to direct the
UK Civil Aviation Authority to withdraw Brintel's operating license for failure
to comply with such requirements.
To resolve the ownership issues with the UK Civil Aviation Authority and the
European Commission, we entered into an agreement with the UK Department of the
Environment, Transport and the Regions to effect a transaction that was approved
by our shareholders on December 9, 1997. Pursuant to that agreement, we created
and issued 11 million ordinary shares, a new class of restricted voting
securities, to a corporation indirectly wholly-owned by Mr. Dobbin for
$33 million. We loaned that corporation the $33 million to purchase the ordinary
shares. The loan is secured by a lien on the ordinary shares. The ordinary
shares are entitled to one vote for every 10 ordinary shares held and to
dividends equivalent on a per share basis to any dividend paid on our
subordinate voting shares, but each dividend paid on the ordinary shares
requires prior minority shareholder approval.
In connection with these transactions, Mr. Dobbin and related corporations
entered into an agreement with us under which they agreed, among other things:
† not to directly or indirectly sell or transfer any of the ordinary shares,
except for transfers that have been approved by a committee of independent
directors of CHC; and
† not to take any action to cause or support our dissolution, liquidation or
winding-up or other distribution of our assets unless the dissolution,
liquidation or winding-up or other distribution has received minority
shareholder approval.
28
As a result of these transactions, we were advised by the UK Civil Aviation
Authority that it did not intend, in the absence of any further change in
circumstances or any information available to it, to take any further action in
relation to Brintel in the context of the ownership requirements of applicable
European licensing law. Although discussions and correspondence with the
European Commission, the UK Department of Environment, Transport and the Regions
and the UK Civil Aviation Authority confirmed that the issuance of the ordinary
shares to Mr. Dobbin in December 1997 allowed us to satisfy the nationality
requirements, this will not necessarily preclude further challenges of Scotia's
right to maintain its operating license on this or any other basis. Further,
Scotia's eligibility to maintain its license could be adversely affected if
Mr. Dobbin were to dispose of the shares he holds in CHC, if his percentage
ownership of CHC was otherwise decreased or if he were to die and no alternative
arrangement acceptable to the UK Civil Aviation Authority were implemented.
While we do not believe this is probable, the revocation of the license would
have a material adverse effect on our business, financial condition and results
of operations.
Following our acquisition on August 11, 1999 of over 90% of the shares of HSG,
including its subsidiary Bond, which operated in the UK, we disclosed the
details of the transaction to the UK Civil Aviation Authority and obtained
written confirmation from the UK Civil Aviation Authority that the licensing of
Bond would not be adversely affected by its acquisition by us.
Norwegian Regulation
Requirements for Operating License
Our Norwegian subsidiaries are, through Norway's status as a Member State of the
European Economic Area, subject to the same European Union nationality
requirements with regard to ownership and control as our UK subsidiaries. On
May 9, 1999, in response to objections initiated by the previous management of
HSG, the Norwegian Ministry of Transport confirmed in writing that it had
adopted the same position as the UK Civil Aviation Authority with regard to our
satisfaction of the European Union (and European Economic Area) nationality
requirements and therefore would not challenge HSG's eligibility to hold
helicopter operating licenses in Norway after our acquisition of HSG.
Dutch Regulation
Requirements for Operating License
Our Dutch subsidiary is, through the operations of its subsidiaries, subject to
the same European Union and European Economic Area nationality requirements with
regard to ownership and control as are our UK and Norwegian subsidiaries. The
Dutch Civil Aviation Authority advised Schreiner in writing prior to our
acquisition of Schreiner that Schreiner was in compliance with applicable
European ownership and control requirements and, based on information provided
by us, would continue to be so following its acquisition by us. In accordance
with Dutch Civil Aviation Authority procedures, we were required to submit
certain information regarding our ownership and control to the Dutch Civil
Aviation Authority following our acquisition of Schreiner to formally
demonstrate that Schreiner continues to meet the European ownership and control
requirements. We have submitted the required information to the Dutch Civil
Aviation Authority.
Canadian Regulation
Requirements for Operating License
Our helicopter operations in Canada are regulated under the provisions of the
Aeronautics Act (Canada) (the "Aeronautics Act"). Air operator certificates are
issued by the Minister of Transport (Canada) pursuant to the Aeronautics Act and
related regulations and orders. To receive an air operator certificate, an
applicant must satisfy certain requirements with respect to its operations.
We have an air operator certificate. Our ability to conduct business is
dependent on our ability to maintain our air operator certificate. We no longer
directly carry on light helicopter operations in Canada, but we operate heavy
helicopters off Canada's east coast in support of the oil and gas industry.
29
Australian Regulation
Requirements for Operating License
The helicopter industry in Australia is regulated by various authorities, the
most significant of which is the Australian Civil Aviation Safety Authority
("CASA"). Pursuant to the Civil Aviation Act, 1988, CASA is primarily
responsible for safety regulations for (1) civil air operations within
Australian territory and (2) Australian registered aircraft operating outside of
Australian territory.
To operate an aircraft in Australia, it must be registered with CASA and a valid
Certificate of Airworthiness must be obtained and be valid and in effect. The
operation of an aircraft for a commercial purpose into, out of or within
Australian territory can only be undertaken as authorized by an Air Operators'
Certificate. CHC Australia has been licensed by CASA to conduct charter
operations within, into, out of and outside of Australian territory and to
engage in the maintenance of aircraft and maintenance of aircraft components.
South African Regulation
Requirements for Operating License
Aviation services in South Africa are regulated under the Air Services Licensing
Act for domestic service and the International Air Services Act for
international services. Additionally, aircraft used in such services must be
registered under the Aviation Act, 1962. The Air Services Licensing Council
issues domestic licenses if satisfied that (a) the service will be safe and
reliable, (b) the applicant is a resident of South Africa or, if a corporation
is incorporated in South Africa and 75% of the voting rights are held by South
African residents, (c) the applicant will be in control of the service and
(d) the aircraft is registered in South Africa. Upon acquiring its interest in
Court Air, HSG obtained a letter from the Ministry of Transport in South Africa,
confirming its approval of HSG's indirect acquisition of Court Air on the basis
that Court Air's immediate parent, Court Air Holdings (Pty) Ltd., was a South
African registered company. Legal advice from our South African counsel has
confirmed that Court Air's licenses for helicopter operations in South Africa
should not be adversely affected by our acquisition of HSG, but cautioned that
there is some continuing risk that the South African Ministry of Transport could
reverse its prior decision. No action with respect to these licenses has been
taken since our acquisition of HSG in 1999. While we do not believe this is
probable, any such action could materially and adversely affect our business,
financial condition and results of operations. There are also requirements for
an operating certificate, uninterrupted operation and insurance. The
requirements for an international license are similar, with an additional
requirement that the service can be operated within the structure of existing
air service in South Africa. The International Air Services Council may also
take into account the financial capability of the applicant, economic and other
national interests of South Africa and the effect on existing services. Domestic
fares are unregulated but international fares are governed by international
agreements between governments.
Black Empowerment
Black Empowerment legislation in South Africa requires that we have a local
partner that satisfies the black empowerment requirements in order to be able to
bid on contracts in South Africa. We have entered into an arrangement with a
black empowerment partner that will enable us to bid on future contracts.
Other International Regulation
Helicopter operations in other foreign countries are regulated to various
degrees by their governments and must be operated in compliance with those
regulations. These regulations may require us to obtain a license to operate in
that country, may favor local companies or require operating permits that can
only be obtained by locally registered companies and may impose other
nationality requirements. To conduct helicopter operations in these countries,
we may operate in conjunction with a local representative or partner. Our
representatives or partners typically receive a small percentage of local
revenues or a fixed fee but generally do not provide any personnel or assume any
of the liabilities related to the performance of the contract. We currently have
representatives or partners in a number of countries including Azerbaijan,
Ecuador, Equatorial Guinea, Libya, Myanmar, Namibia, Saudi Arabia and Thailand.
30
Environmental
We are subject to extensive laws, rules, regulations and ordinances relating to
pollution and protection of the environment, including those relating to
emissions to the air, discharges to waters, the use, storage and disposal of
petroleum and other regulated materials and the remediation of contaminated
sites.
Our operations sometimes involve the use, handling and storage of material that
may be classified as environmentally hazardous. Laws protecting the environment
have become more stringent in Canada and certain other countries in recent years
and may, in certain circumstances, impose liability for cleanup of releases of
regulated materials and related environmental damage without regard to
negligence or fault. These laws also may expose us to liability for the conduct
of, or conditions caused by, others such as historic spills of regulated
materials at our facilities or for our acts that were in compliance with all
applicable laws at the time these acts were performed. We believe we are in
substantial compliance with applicable environmental requirements and that
ensuring compliance has not, to date, had a material adverse effect on our
financial position. We cannot, however, predict the likelihood of change to
these laws or in their enforcement nor the impact of any such change, or
discovery of previously unknown conditions which may require unanticipated
costs, on our financial position.
ORGANIZATIONAL STRUCTURE
As of April 30, 2004, we had the following significant subsidiaries:
Percentage
Jurisdiction of Ownership
Company name Incorporation (common
equity)
------------------------------------------------------------
CHC Helicopters International Canada 100%
Inc.
CHC Helicopters (Barbados) Barbados 100%
Limited
CHC Leasing (Barbados) Limited Barbados 100%
CHC Capital (Barbados) Limited Barbados 100%
Canadian Helicopters (UK) Scotland 100%
Limited
CHC Scotia Limited England and 100%
Wales
Vinland Denmark AS Denmark 100%
Vinland Helicopters AS Norway 100%
Helicopter Services Group AS Norway 100%
CHC Helikopter Service AS Norway 100%
Astec Helicopter Services AS Norway 100%
Heliwest AS Norway 100%
CHC Helicopters (Australia) Australia 100%
(through Lloyd Helicopter
Services Pty. Ltd.)
CHC Helicopters (Africa) Pty. Africa 100%
Ltd. (formerly Court Helicopters
Pty. Ltd.)
Court Helicopters Limited Mauritius 100%
(Mauritius)
CHC Composites Inc. Canada 100%
CHC Denmark ApS Denmark 100%
CHC Ireland Limited Ireland 100%
Brintel Holdings Limited Scotland 100%
4083423 Canada Inc. Canada 100%
CHC Netherlands BV The Netherlands 100%
CHC Sweden AB Sweden 100%
Schreiner Luchtvaart Groep BV The Netherlands 100%
Schreiner North Sea Helicopters The Netherlands 100%
BV
Schreiner Airways, BV The Netherlands 100%
Schreiner Aircraft Maintenance The Netherlands 100%
Company BV
Schreiner & Co., BV The Netherlands 100%
Schreiner Chad SA Chad 100%
Whirly Bird Services Limited UK 100%
|
31
PROPERTY, PLANT AND EQUIPMENT
Fleet
During fiscal 2004, we completed six sale-leaseback transactions and seven
"lease-out lease-in" ("LOLI") transactions. We also entered into operating
leases for two new additional aircraft, returned one aircraft to the lessor and
purchased one aircraft from a lessor.
The composition of our fleet at April 30, 2004, and some of the characteristics
of the individual types of aircraft we own or lease are as follows:
Number in Fleet Passenger Approximate
Fleet Composition Owned Leased Type of Engine Capacity (1) Range (2)
Light Helicopters
Bell 206 Series 7 - Turbine 6 326 nm.
MD 902 2 - Twin Turbine 7 461 nm.
Eurocopter 350 Series 1 - Turbine 5 370 nm.
Eurocopter BO 105 1 - Twin Turbine 4 307 nm.
Eurocopter 355 Twin Star 1 - Twin Turbine 4 360 nm.
Total 12 -
Medium Helicopters
Bell 212 Series 9 5 Twin Turbine 14 238 nm.
Bell 214 1 - Twin Turbine 19 418 nm.
Bell 412 6 3 Twin Turbine 14 349 nm.
Eurocopter 365 Series 19 9 Twin Turbine 10 435 nm.
Sikorsky S-76 Series 43 11 Twin Turbine 9 391 nm.
Total 78 28
Heavy Helicopters
Eurocopter Super Puma 19 13 Twin Turbine 20 455 nm.
332L/L-1
Eurocopter Super Puma 332 - 16 Twin Turbine 19 461 nm.
MkII
Sikorsky S-61N 23 3 Twin Turbine 26 125 nm.
Total 42 32
Fixed Wing Aircraft
Twin Otter 5 3 Twin Turboprop 19 690 nm.
Convair 580 2 - Twin Turboprop 55 1200 nm.
Dash 8 2 2 Twin Turboprop 47 790 nm
Total 9 5
TOTAL 141 65
(1) Excludes pilots and assumes standard seating of only one pilot.
(2) Assumes no auxiliary fuel tanks and maximum payload.
Of our fleet of 206 aircraft, we owned 141, operated 53 under long-term
operating leases and operated 12 under short-term operating leases at April 30,
2004.
Based on an appraisal as of April 2004 by an independent helicopter valuation
company, the aggregate estimated resale value of the aircraft we owned at April
30, 2004 was approximately $572.1 million which exceeded net book value by
approximately $102.3 million. At April 30, 2004, we had spare parts and
components with a book value of approximately $111 million.
32
Facilities
We currently operate from approximately 80 bases worldwide, including 26 in
Europe, using facilities that include hangars, supply and service centers,
engineering support facilities and offices. In Norway, the UK, Canada, The
Netherlands and Australia, we generally own the hangars we use in our helicopter
operations, which are located primarily on leased airport lands. We generally
lease supply and service centers, engineering support facilities and offices
from third parties.
The principal properties from which we now conduct our operations are:
Buildings Owned or Leased/Lease
Expiration Date
Location Operations (Square Land Buildings
Feet)
St. John's, Corporate 45,000 Leased Owned
Newfoundland and Headquarters;(1) August 31,
Labrador, Canada Helicopter Operations 2011
Capability
Gander, CHC Composites Inc.; 60,000 Leased Owned
Newfoundland and Composites July, 2018
Labrador, Canada Manufacturer
Richmond, International 10,000 Leased Owned
British Headquarters; September
Columbia, Helicopter Operations 30, 2004
Canada (2)
Aberdeen, CHC Scotia Limited; 42,000 Leased Leased
Scotland Helicopter Operations April 16, April 16,
CHC Scotia Limited; 25,000 2030 2030
Terminal Building Leased Owned
June 30,
2027
Stavanger, CHC Helikopter 199,000 Leased Owned
Norway Service AS; March 1, Leased
Helicopter Operations 179,000 (3) 2012 April 30,
Astec Headquarters; Leased 2010
Repair and Overhaul April 30,
2010
Cape Town, South CHC Africa; 15,000 Leased Leased
Africa Helicopter Operations April 30, May 31,
2010 2010
Adelaide, CHC Australia; 10,000 Owned Owned
Australia Helicopter Operations
Hoofddorp, The Schreiner; 41,000 Owned Owned
Netherlands Helicopter Operations
DenHelder, The Schreiner; 5,200 Leased Leased
Netherlands Helicopter Operations June 30, June 30,
2008 2008
(1) Corporate headquarters will be relocating to Richmond,
British Columbia by December 31, 2004.
(2) In August 2004, International Headquarters moved to a
new, 63,000 square foot facility in Richmond owned by the
company and situated on leased land.
(3) Leased from CHC Helicopter Services AS and included
within the 199,000 square feet shown in the table
above for that company.
33
|