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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-31983
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TODCO
(Exact name of registrant as specified in its charter)
DELAWARE 76-0544217
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2000 W. SAM HOUSTON PARKWAY SOUTH, SUITE 800
HOUSTON, TEXAS 77042-3615
(Address, of registrant's principal executive offices)
(713) 278-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ( ) No (X)
The number of outstanding shares of each class of the registrant's common
stock as of November 1, 2004, was 32,047,140 shares of Class A common stock and
28,260,000 shares of Class B common stock.
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TABLE OF CONTENTS
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 2
Item 6. Exhibits and Reports on Form 8-K................................ 35
1
EXPLANATORY NOTE
We are amending in full Item 2 of this Quarterly Report to correct the
following data for the three and nine months ended September 30, 2004:
o the number of operating days,
o our utilization, and
o our average rig revenue per day.
We also have clarified our discussion of total operating and maintenance
expenses for the first nine months of 2004. Except for these changes, no other
information included in the original Quarterly Report on Form 10-Q is changed by
this amendment.
2
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes included in Item 1 of
this report. Except for the historical financial information contained herein,
the matters discussed below may be considered "forward-looking" statements.
Please see " -- Cautionary Statement About Forward-Looking Statements," for a
discussion of the uncertainties, risks and assumptions associated with these
statements.
OVERVIEW OF OUR BUSINESS
We are a leading provider of contract oil and natural gas drilling
services, primarily in the United States ("U.S. Gulf of Mexico") shallow water
and inland marine region, an area that we refer to as the U.S. Gulf Coast. We
provide these services primarily to independent oil and natural gas companies,
but we also service major international and government-controlled oil and
natural gas companies. Our customers in the U.S. Gulf Coast typically focus on
drilling for natural gas.
We provide contract oil and gas drilling and other support services and
report the results of those operations in four business segments which, for our
contract drilling services, correspond to the principal geographic regions in
which we operate:
- U.S. Inland Barge Segment -- Our barge rig fleet in this market
segment consists of 12 conventional and 18 posted barge rigs. These
units operate in marshes, rivers, lakes and shallow bay or costal
waterways that are known as the "transition zone". This area along
the U.S. Gulf Coast, where jackup rigs are unable to operate, is the
world's largest market for this type of equipment.
- U.S. Gulf of Mexico Segment -- We currently have 20 jackup and three
submersible rigs in the U.S. Gulf of Mexico shallow water market
segment which begins at the outer limit of the transition zone and
extends to water depths of about 350 feet. Our jackup rigs in this
market segment consist of independent leg cantilever type units,
mat-supported cantilever type rigs and mat-supported slot type
jackup rigs that can operate in water depths up to 250 feet.
- Other International Segment -- Our other international operations
are currently conducted in Mexico, Trinidad and Venezuela. In
Mexico, we operate two jackup rigs and are preparing our platform
rig to operate for PEMEX, the Mexican national oil company.
Additionally, we have two jackup rigs in Trinidad and nine land rigs
and three lake barges in Venezuela. From December 2003 to September
2004, we operated a jackup rig offshore Venezuela which has been
relocated to the U.S. Gulf of Mexico. We may pursue selected
opportunities in other regions from time to time.
- Delta Towing Segment -- We have a partial interest in a joint
venture that operates a fleet of U.S. marine support vessels
consisting primarily of shallow water tugs, crewboats and utility
barges ("Delta Towing"). We are also a substantial creditor of Delta
Towing.
Our operating revenues for our drilling segments are based on dayrates
received for our drilling services and the number of operating days during the
relevant periods. The level of our operating revenues depends on dayrates, which
in turn are primarily a function of industry supply and demand for drilling
units in the market segments in which we operate. Supply and demand for drilling
units in the U.S. Gulf Coast, which is our primary operating region, has
historically been volatile. During periods of high demand, our rigs typically
achieve higher utilization and dayrates than during periods of low demand.
Our operating and maintenance costs for our drilling segments represent
all direct and indirect costs associated with the operation and maintenance of
our drilling rigs. The principal elements of these costs are direct and indirect
labor and benefits, freight costs, repair and maintenance, insurance, general
taxes and licenses, boat and helicopter rentals, communications, tool rentals
and services. Labor, repair and maintenance and insurance costs represent the
most significant components of our operating and maintenance costs.
3
Operating and maintenance expenses may not necessarily fluctuate in
proportion to changes in operating revenues because we seek to preserve crew
continuity and maintain equipment when our rigs are idle. In general, labor
costs increase primarily due to higher salary levels, rig staffing requirements
and inflation. Equipment maintenance expenses fluctuate depending upon the type
of activity the unit is performing and the age and condition of the equipment.
Our current deductible level under our hull and machinery and protection and
indemnity policies is $1.0 million and $5.0 million per occurrence,
respectively. Prior to October 2004, our deductible level under each of these
policies was $10.0 million per occurrence.
INDUSTRY BACKGROUND, TRENDS AND OUTLOOK
The drilling industry in the U.S. Gulf Coast is highly cyclical and is
typically driven by general economic activity and changes in actual or
anticipated oil and gas prices. We believe that both our earnings and demand for
our rigs will typically be correlated to our customers' expectations of energy
prices, particularly natural gas prices, and that sustained energy price
increases will generally have a positive impact on our earnings.
There are several trends that should benefit our operations, including:
- Redeployment of Jackup Rigs. Greater demand for jackup rigs in
international areas over the last two years has reduced the
overall supply of jackups in the U.S. Gulf of Mexico. This has
created a more favorable supply environment for the remaining
jackups, including ours. This favorable supply environment has
led to increased jackup dayrates.
- High Natural Gas Prices. While U.S. natural gas prices are
volatile, the rolling twelve-month average price of natural
gas has increased from $2.11 in January 1994 to $5.59 in
September 2004. We believe high natural gas prices in the
United States, if sustained, should result in more exploration
and development drilling activity and higher utilization and
dayrates for drilling companies like us.
- Need for Increased Natural Gas Drilling Activity. From 1994 to
2003, U.S. demand for natural gas grew at an annual rate of
0.6% while its supply grew at an annual rate of 0.2%. We
believe that this supply and demand growth imbalance will
continue if demand for natural gas continues to increase and
production decline rates continue to accelerate. Even though
the number of U.S. gas wells drilled has increased overall in
recent years, a corresponding increase in production has not
been realized. We believe that an increase in U.S. drilling
activity will be required for the natural gas industry to meet
the expected increased demand for, and compensate for the
slowing production of, natural gas in the United States.
- Trend Towards Drilling Deeper Shallow Water Gas Wells. A
current trend by oil and gas companies is to drill deep gas
wells along the U.S. Gulf Coast in search of new and
potentially prolific untapped natural gas reserves. We believe
that this trend towards deeper drilling will benefit premium
jackup rigs as well as barge rigs and submersible rigs that
are capable of drilling deep gas wells. In addition, we
believe this trend will indirectly benefit conventional jackup
fleets as the use of premium rigs in the U.S. Gulf Coast to
drill deep wells should reduce the supply of rigs available to
drill conventional wells.
We believe that the drilling industry in the U.S. Gulf Coast has emerged
from a cyclical low point, and we expect further strengthening in the near term.
Market conditions for our U.S. Gulf Coast jackup fleet improved beginning in the
third quarter of 2003 and continuing through the first nine months of 2004. As
shown in the following table, from the third quarter of 2003 through the third
quarter of 2004, our average revenue per day for U.S. Gulf of Mexico jackups and
submersibles improved by 48%. During the same period, average revenue per day
for our U.S. inland barges improved by 25%. As of November 1, 2004, our 12
jackup rigs working in the U.S. Gulf Coast were contracted at dayrates ranging
from $33,800 to $38,800. As of November 1, 2004, our 13 operating inland barges
were contracted at dayrates ranging from $15,000 to $27,800. We anticipate that
the declining jackup rig supply in the U.S. Gulf Coast and the trend towards
more deep gas well drilling will continue to result in improved utilization and
higher dayrates.
4
With respect to our Venezuelan operations, political unrest has continued
to negatively impact our results of operations there. As a result, we have
experienced some decrease in utilization in Venezuela during the second half of
2003 and the first nine months of 2004. Beginning in the third quarter of 2004,
two of our land rigs began operating under one-year contracts, and another two
land rigs began operating under one-year contracts in October and November 2004.
The following table shows our average rig revenue per day and utilization
for the quarterly periods ending on or prior to September 30, 2004 with respect
to each of our three drilling segments. Average rig revenue per day is defined
as operating revenue earned per revenue earning day in the period. Utilization
in the table below is defined as the total actual number of revenue earning days
in the period as a percentage of the total number of calendar days in the period
for all drilling rigs in our fleet, as adjusted to include calendar days
available for rigs that were held for sale during the periods ended on or prior
to December 31, 2002.
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2002 2002 2003 2003 2003
------------- ------------ --------- -------- ------------
AVERAGE RIG REVENUE PER DAY:
U.S. Gulf of Mexico
Jackups and Submersibles $22,400 $21,000 $22,600 $20,200 $22,900
U.S. Inland Barges 20,700 19,600 19,100 17,600 18,300
Other International 23,500 19,400 19,700 19,100 21,000
UTILIZATION:
U.S. Gulf of Mexico
Jackups and Submersibles 32% 34% 31% 44% 54%
U.S. Inland Barges 47% 44% 47% 39% 38%
Other International 23% 27% 35% 44% 38%
THREE MONTHS ENDED
---------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2003 2004 2004 2004
------------ --------- -------- -------------
AVERAGE RIG REVENUE PER DAY:
U.S. Gulf of Mexico
Jackups and Submersibles $26,700 $30,600 $30,700 $33,800
U.S. Inland Barges 18,700 20,300 22,500 22,900
Other International 25,600 40,000 37,500 34,600
UTILIZATION:
U.S. Gulf of Mexico
Jackups and Submersibles 50% 43% 50% 54%
U.S. Inland Barges 40% 40% 42% 45%
Other International 28% 29% 29% 33%
In the third quarter of 2003, we were awarded contracts with PEMEX, the
Mexican national oil company, for two of our jackup rigs and a platform rig.
After upgrades to comply with contract specifications, one rig began operating
on a 720-day contract in early November 2003 at a contract dayrate of
approximately $42,000. The other jackup rig began operating in early December
2003 on a 1,081-day contract at a contract dayrate of approximately $39,000. The
cost to prepare the two jackup rigs to work in Mexico, including mobilization
costs, which are deferred and will be recognized over the primary contract term,
was approximately $22 million in the aggregate. The platform rig contract is
1,289 days in duration and is anticipated to begin operations in late 2004 at a
contract dayrate of approximately $29,000. We have upgraded the platform rig to
comply with PEMEX contract specifications at an aggregate cost of approximately
$8 million to $9 million. Each of the contracts can be terminated by PEMEX on
five days' notice, subject to certain conditions.
In the third quarter of 2004, two of our land rigs began working in
Venezuela under one-year term contracts at dayrates of approximately $22,200 and
$23,800 and another two land rigs were re-deployed during October and November
2004 under one-year contracts with PDVSA at contract day rates of approximately
$22,000. Our jackup rig, THE 156 which began operating in Venezuela in
mid-December 2003, completed its contract in September 2004 and has been
relocated to the U.S. Gulf of Mexico.
Prior to October 2004, our principal insurance coverages for property
damage, liability and occupational injury and illness were included in
Transocean's insurance program in accordance with the master separation
agreement. Effective October 15, 2004, we changed our insurance program to an
independent, stand-alone insurance program, that provides for significantly
lower deductibles than those in our previous insurance program. Our current
deductible level under the new hull and machinery and protection and indemnity
policies is $1.0 million and $5.0 million per occurrence, respectively. Prior to
October 2004, our deductible level under each of these policies was $10.0
million per occurrence. Insurance premiums under the new program will be
approximately $8 million for the
5
twelve-month policy period, or approximately $3.5 million higher than those
under the previous program with Transocean. We expect that the increased premium
cost will be more than offset by the benefit of the lower deductibles, primarily
with respect to hull and machinery claims.
IPO AND SEPARATION FROM TRANSOCEAN
We were incorporated in Delaware on July 7, 1997 as R&B Falcon
Corporation. On January 31, 2001, we became an indirect wholly owned subsidiary
of Transocean Inc. ("Transocean") as a result of the merger transaction between
us and Transocean (the "Transocean Merger"). On December 13, 2002, we changed
our name from R & B Falcon Corporation to TODCO.
In July 2002, Transocean announced plans to divest its Gulf of Mexico
shallow and inland water ("Shallow Water") business through an initial public
offering of TODCO. During 2003, we completed the transfer to Transocean of all
assets not related to our Shallow Water business ("Transocean Assets"),
including the transfer of all revenue-producing Transocean Assets. Accordingly,
the Transocean Assets and related operations have been reflected as discontinued
operations in our historical financial statements. See " -- Related Party
Transactions -- Asset Transfers to Transocean" and " -- Relationship between Us
and Transocean -- Master Separation Agreement -- TODCO Business" and " --
Transfer of Assets and Assignment of Liabilities" for a description of the
separation of our respective businesses.
In February 2004, we completed an initial public offering, with Transocean
selling 13,800,000 shares of our Class A common stock (the "IPO") as part of our
separation from Transocean. Transocean sold an additional 17,940,000 shares of
our Class A common stock in September 2004 in a secondary offering. We did not
receive any proceeds from either offering.
Transocean currently owns 28,260,000 shares, or 100% of our outstanding
Class B common stock which represents 47% of our outstanding common stock.
Transocean has 82% of the combined voting power of our outstanding common stock
due to the five votes per share of Class B common stock, as compared to the one
vote per share of Class A common stock. Transocean does not own any of our
outstanding Class A common stock. Transocean has advised us that its current
long term intent is to dispose of our Class B common stock owned by it.
CHANGES IN FINANCIAL REPORTING OF FUTURE RESULTS OF OPERATIONS
As a result of our separation from Transocean, including the transfer of
the Transocean Assets to Transocean in 2003 and the completion of our IPO in
February 2004, our reporting of certain aspects of our results of operations
differ from our historical reporting of results of operations. The following
discussion describes these and other differences.
General and administrative expense includes costs related to our corporate
executives, corporate accounting and reporting, engineering, health, safety and
environment, information technology, marketing, operations management, legal,
tax, treasury, risk management and human resource functions. Prior to June 30,
2003 and the transfer of the Transocean Assets to Transocean, general and
administrative expense also included an allocation from Transocean for certain
administrative support. After June 30, 2003, general and administrative expense
includes costs for services provided to us under our transition services
agreement with Transocean. In 2004, we expect to incur approximately $3 million
of additional general and administrative expense as a result of additional costs
associated with being a separate public company. In addition, we are incurring
additional general and administrative expense associated with the vesting of
stock options and restricted stock granted in conjunction with the IPO.
In February 2004, we adopted a long term incentive plan for certain of our
employees and non-employee directors in order to provide additional incentives
through the grant of awards (the "Plan"). In conjunction with the closing of the
IPO, we granted restricted stock and stock options to certain employees and
non-employee directors. Based upon the IPO price of $12.00 per share, the value
of these awards that we will recognize as compensation expense is approximately
$17.2 million. We recognized $9.3 million of compensation expense related to
these awards and grants in the first nine months of 2004. We will amortize the
remaining $7.9 million to compensation expense over the vesting period of the
awards and options with $1.4 million recognized during the remainder of 2004,
$4.8 million in 2005 and $1.7 million in 2006 and thereafter. In addition to
these initial grants under the Plan,
6
we may elect to make additional grants of restricted stock and stock options.
The value of any additional awards under the Plan will be recognized as
compensation expense over the vesting period of the awards.
In addition, certain of our employees held options to acquire Transocean
ordinary shares that were granted prior to the IPO. In accordance with the
employee matters agreement, the employees holding such options were treated as
terminated for the convenience of Transocean on the IPO date. As a result, these
options became fully vested and were modified to remain exercisable over the
original contractual life. In connection with the modification of the options,
we recognized $1.5 million in additional compensation expense in the first
quarter of 2004. No further compensation expense will be recognized related to
the Transocean options.
Interest income consists of interest earned on our cash balances and, for
periods before December 31, 2003, on notes receivable from Delta Towing. Because
of the adoption of the Financial Accounting Standards Board's ("FASB")
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin No. 51 ("FIN 46") (see " --
Relationships with Variable Interest Entities"), and the resulting consolidation
of Delta Towing in our consolidated balance sheet effective December 31, 2003,
in the future we expect interest income to consist of interest earned on our
cash balances. For periods before the IPO, interest expense consisted of
financing cost amortization and interest associated with our senior notes, other
debt and other related party debt as described in the notes to our condensed
consolidated financial statements. We expect our debt levels and,
correspondingly, our interest expense to be substantially lower in 2004 than
historical debt levels and interest expense reflected in our historical
operating results as a result of the retirement of notes payable to Transocean
prior to the IPO. After the closing of the IPO, interest expense primarily
includes interest on the approximately $24 million face value of our senior
notes payable to third parties and any borrowings under our credit facility,
commitment fees on the unused portion of our line of credit and the amortization
of financing costs.
In conjunction with the IPO, we entered into a tax sharing agreement with
Transocean Holdings, whereby, Transocean will indemnify us against substantially
all pre-IPO income tax liabilities. However, we must pay Transocean for
substantially all pre-closing income tax benefits utilized subsequent to the
closing of the IPO. As of September 30, 2004, we had approximately $535 million
of estimated pre-closing income tax benefits subject to this obligation to
reimburse Transocean of which approximately $173 million of the tax benefits
were reflected in our historical financial statements at December 31, 2003. The
additional estimated tax benefits resulted from the closing of the IPO,
specified ownership changes, statutory allocations of tax benefits among
Transocean's consolidated group members and other events. Depending upon certain
tax planning strategies executed by Transocean during 2004 and actual Transocean
taxable income for the current year, this pre-closing tax benefit amount will
change and is currently estimated to be approximately $360 million.
As part of the tax sharing agreement, we must pay Transocean for
substantially all pre-closing income tax benefits which the Company may utilize
or be deemed to have utilized subsequent to the closing of the IPO. Accordingly,
we recorded an equity transaction in February 2004 to reflect this liability to
Transocean of approximately $174 million, equal to the pre-closing income tax
benefits, as a corresponding obligation within the deferred income tax asset
accounts and a reduction in additional paid-in capital. In September 2004, as a
result of a 2003 return-to-provision adjustment, the liability to Transocean was
revised to approximately $182 million, and we recorded an equity adjustment of
$7.7 million and the additional liability to Transocean as a reduction in
additional paid-in capital and an obligation within the deferred income tax
asset accounts. This adjustment had no effect on our results of operations.
In addition, Transocean agreed to indemnify us for certain tax liabilities
that existed as of the IPO date of $10.3 million. The tax indemnification by
Transocean was recorded as a credit to additional paid-in capital with a
corresponding offset to a related party receivable from Transocean.
We currently anticipate that we will be in a net tax liability position at
the end of 2004 and expect to utilize a portion of the pre-closing income tax
benefits to offset our federal income tax obligation. As of September 30, 2004
we have utilized $3.7 million of these pre-closing income tax benefits to offset
our current federal income tax obligation for the nine months then ended. The
liability to Transocean for the utilization of these pre-closing income tax
benefits of $1.3 million is presented within accrued income taxes - related
party in our condensed consolidated balance sheet at September 30, 2004 and is
payable January 15, 2005.
7
Additionally, the tax sharing agreement provides that if any person other
than Transocean or its subsidiaries becomes the beneficial owner of greater than
50% of the total voting power of TODCO's outstanding voting stock, we will be
deemed to have utilized all of these pre-closing tax benefits, and we will be
required to pay Transocean an amount for the deemed utilization of these tax
benefits adjusted by a specified discount factor. This payment is required even
if we are unable to utilize the pre-closing tax benefits. If an acquisition of
beneficial ownership had occurred on September 30, 2004, the estimated amount
that we would have been required to pay to Transocean would have been
approximately $290 million based upon Transocean's tax planning strategies and
estimated 2004 taxable income. See " -- Relationship Between Us and Transocean
-- Tax Sharing Agreement".
We had an "ownership change" for purposes of Section 382 of the Internal
Revenue Code of 1986, as amended, in connection with our secondary stock
offering. As a result, our ability to utilize certain of our tax benefits is
subject to an annual limitation. However, we believe that, in light of the
amount of the annual limitation, it should not have a material effect on our
ability to utilize these tax benefits for the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
operating revenues, expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to bad debts, materials and supplies obsolescence, investments,
property, equipment and other long-lived assets, income taxes, workers' injury
claims, employment benefits and contingent liabilities. We base our estimates on
historical experience and on various other assumptions we believe are reasonable
under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following are our most critical accounting policies. These
policies require significant judgments and estimates used in the preparation of
our consolidated financial statements.
Property and Equipment. Our property and equipment represent approximately
79% of our total assets as of September 30, 2004. We determine the carrying
value of these assets based on our property and equipment accounting policies,
which incorporate our estimates, assumptions and judgments relative to
capitalized costs, useful lives and salvage values of our rigs. We review our
property and equipment for impairment when events or changes in circumstances
indicate that the carrying value of these assets or asset groups may be impaired
or when reclassifications are made between property and equipment and assets
held for sale as prescribed by the FASB's Statement of Financial Accounting
Standards ("SFAS") 144, Accounting for Impairment or Disposal of Long-Lived
Assets. Asset impairment evaluations are based on estimated undiscounted cash
flows for the assets being evaluated. Our estimates, assumptions and judgments
used in the application of our property and equipment accounting policies
reflect both historical experience and expectations regarding future industry
conditions and operations. Using different estimates, assumptions and judgments,
especially those involving the useful lives of our rigs and expectations
regarding future industry conditions and operations, would result in different
carrying values of assets and results of operations. For example, a prolonged
downturn in the drilling industry in which utilization and dayrates were
significantly reduced could result in an impairment of the carrying value of our
drilling rigs.
Allowance for Doubtful Accounts. We establish reserves for doubtful
accounts on a case-by-case basis when we believe the collection of specific
amounts owed to us is unlikely to occur. Our operating revenues are principally
derived from services to U.S. independent oil and natural gas companies and
international and government-controlled oil companies and our receivables are
concentrated in the United States. We generally do not require collateral or
other security to support customer receivables. If the financial condition of
our customers deteriorates, we may be required to establish additional reserves.
Provision for Income Taxes. Our tax provision is based on expected taxable
income, statutory rates and tax planning opportunities available to us in the
various jurisdictions in which we operate. Determination of taxable income in
any jurisdiction requires the interpretation of the related tax laws. Our
effective tax rate is expected to fluctuate from year to year as our operations
are conducted in different taxing jurisdictions and the amount of pre-
8
tax income fluctuates. Currently payable income tax expense represents either
nonresident withholding taxes or the liabilities expected to be reflected on our
income tax returns for the current year while the net deferred tax expense or
benefit represents the change in the balance of deferred tax assets or
liabilities as reported on the balance sheet.
Valuation allowances are established to reduce deferred tax assets when it
is more likely than not that some portion or all of the deferred tax assets will
not be realized in the future. While we have considered estimated future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowances, changes in these estimates and assumptions,
as well as changes in tax laws could require us to adjust the valuation
allowances for our deferred tax assets. These adjustments to the valuation
allowance would impact our income tax provision in the period in which such
adjustments are identified and recorded.
Contingent Liabilities. We establish reserves for estimated loss
contingencies when we believe a loss is probable and we can reasonably estimate
the amount of the loss. Revisions to contingent liabilities are reflected in
income in the period in which different facts or information become known or
circumstances change that affect our previous assumptions with respect to the
likelihood or amount of loss. Reserves for contingent liabilities are based upon
our assumptions and estimates regarding the probable outcome of the matter.
Should the outcome differ from our assumptions and estimates, we would make
revisions to the estimated reserves for contingent liabilities, and such
revisions could be material.
9
RESULTS OF CONTINUING OPERATIONS
The following table sets forth our operating days, average rig utilization
rates, average rig revenue per day, revenues and operating expenses by operating
segment for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
(IN MILLIONS EXCEPT PER DAY DATA)
U.S. GULF OF MEXICO SEGMENT:
Operating days 1,097 1,239 2,944 3,294
Available days(a) 2,024 2,300 6,028 7,730
Utilization(b) 54% 54% 49% 43%
Average rig revenue per day(c) $ 33,800 $ 22,800 $ 31,800 $ 21,800
Operating revenues $ 37.1 $ 28.3 $ 93.7 $ 71.9
Operating and maintenance expenses(d) 22.3 22.9 67.7 77.3
Depreciation 12.4 14.1 37.0 42.8
Impairment loss on long-lived assets -- -- -- 10.6
Gain on disposal of assets, net -- -- (1.5) (0.1)
Operating income (loss) 2.4 (8.7) (9.5) (58.7)
U.S. INLAND BARGE SEGMENT:
Operating days 1,254 1,049 3,491 3,463
Available days(a) 2,760 2,760 8,220 8,341
Utilization(b) 45% 38% 43% 42%
Average rig revenue per day(c) $ 22,900 $ 18,400 $ 21,900 $ 18,400
Operating revenues $ 28.7 $ 19.3 $ 76.6 $ 63.7
Operating and maintenance expenses(d) 20.9 25.3 63.2 77.3
Depreciation 5.6 5.7 16.8 17.4
Gain on disposal of assets, net (0.6) (0.1) (1.6) (0.1)
Operating income (loss) 2.8 (11.6) (1.8) (30.9)
OTHER INTERNATIONAL SEGMENT:
Operating days 549 520 1,491 1,592
Available days(a) 1,656 1,380 4,932 4,095
Utilization(b) 33% 38% 30% 39%
Average rig revenue per day(c) $ 34,600 $ 21,000 $ 37,200 $ 19,900
Operating revenues $ 19.0 $ 10.9 $ 55.5 $ 31.7
Operating and maintenance expenses(d) 15.9 8.4 46.1 24.0
Depreciation 4.7 3.0 14.5 9.0
Impairment loss on long-lived assets -- -- -- 1.0
Gain on disposal of assets, net -- -- (0.3) (0.3)
Operating loss (1.6) (0.5) (4.8) (2.0)
DELTA TOWING SEGMENT:
Operating revenues $ 8.3 $ -- $ 21.9 $ --
Operating and maintenance expenses(d) 6.3 -- 16.4 --
Depreciation 1.1 -- 3.7 --
General and administrative expenses 1.2 -- 3.0 --
Gain on disposal of assets (0.2) -- (2.0) --
Operating loss (0.1) -- (0.8) --
TOTAL COMPANY:
Rig operating days 2,900 2,808 7,926 8,349
Rig available days(a) 6,440 6,440 19,180 20,166
Rig utilization(b) 45% 44% 41% 41%
Average rig revenue per day(c) $ 29,200 $ 20,000 $ 28,500 $ 20,000
Operating revenues $ 93.1 $ 58.5 $ 247.7 $ 167.3
Operating and maintenance expenses(d) 65.4 56.6 193.4 178.6
Depreciation 23.8 22.8 72.0 69.2
General and administrative expenses 7.0 4.0 26.6 12.6
Impairment loss on long-lived assets -- -- -- 11.6
Gain on disposal of assets, net (0.8) (0.1) (5.4) (0.5)
Operating loss (2.3) (24.8) (38.9) (104.2)
----------
See notes on following page.
10
Notes to preceding table.
(a) Available days are the total number of calendar days in the period
for all drilling rigs in our fleet.
(b) Utilization is the total number of operating days in the period as a
percentage of the total number of calendar days in the period for
all drilling rigs in our fleet.
(c) Average rig revenue per day is defined as revenue earned per
operating day for the applicable segment, and as total U.S. Gulf of
Mexico, U.S. Inland Barge and Other International revenues per rig
operating days for "Total Company".
(d) Excludes depreciation, amortization and general and administrative
expenses.
Our consolidated results of operations for the first nine months of 2004
reflect the consolidation of our 25% ownership interest in Delta Towing
effective January 1, 2004 in accordance with FIN 46. Accordingly, our results
for 2004 include revenues and expenses for Delta Towing. Prior to the adoption
of FIN 46, we recorded our 25% interest in the results of Delta Towing as equity
in income (loss) of joint ventures in our consolidated statements of operations
and also recognized interest income -- related party related to Delta Towing's
notes payable to us. See " -- Relationships with Variable Interest Entities" for
a discussion of the effects of FIN 46 on our investment in Delta Towing.
THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Revenues. Total revenues increased $34.6 million, or 59%, during the third
quarter of 2004, as compared to the same period in 2003. The increase in revenue
is primarily attributable to higher overall average rig revenue per day earned
in 2004, as compared to the prior year period, and the inclusion of revenues
from the operation of Delta Towing's fleet of marine support vessels. Overall
average rig revenue per day increased from $20,000 for the three months ended
September 30, 2003 to $29,200 for the three months ended September 30, 2004. The
increase in average rig revenue per day reflects the continued improvement of
market conditions in the U.S. Gulf of Mexico and transition zone along the U.S.
Gulf Coast, as well as the addition of two of our jackup rigs which began
operating offshore Mexico in late 2003 and a jackup rig that recently completed
drilling operations offshore Venezuela. Average rig utilization of 45% for the
three months ended September 30, 2004 increased slightly from utilization levels
achieved for the same period in 2003. Increased utilization in our U.S. Inland
Barge segment, was offset by lower utilization in our Other International
segment.
Revenues for our U.S. Gulf of Mexico segment increased $8.8 million, or
31%, in the three months ended September 30, 2004, as compared to the same
period in 2003. In the third quarter of 2004, we achieved higher average rig
revenue per day for our jackup and submersible drilling fleet. Average rig
revenue per day increased from $22,800 in the third quarter of 2003 to $33,800
in the third quarter of 2004, which resulted in an additional $12.9 million in
operating revenues for the three months ended September 30, 2004, as compared to
the same period in 2003. The increase in average rig revenue per day is the
result of our success in obtaining contracts with our customers at higher day
rates in response to a decreased supply of jackup drilling rigs in the U.S. Gulf
of Mexico. After giving effect to the transfers of the jackup drilling units THE
156, THE 205 and THE 206 to our Other International segment in the fourth
quarter of 2003, utilization for our current rig fleet in this market for the
third quarter of 2004, as compared to the third quarter of 2003, remained
relatively unchanged. The drilling units transferred to our Other International
segment generated revenues of $4.1 million in the three months ended September
30, 2003.
Revenues for our U.S. Inland Barge segment increased $9.4 million, or 49%,
in the third quarter of 2004, as compared to the same period in 2003, primarily
as a result of higher average rig revenue per day achieved in 2004, as compared
to the third quarter of 2003. Average rig revenue per day increased from $18,400
for the third quarter of 2003 to $22,900 for the third quarter of 2004, as a
result of our successful marketing efforts in negotiating higher day rates for
our inland barge fleet. The increase in average rig revenue per day resulted in
additional revenue of $5.6 million for the three months ended September 30,
2004, as compared to the same period in 2003. This market continues to improve
with utilization in this segment approaching the levels attained in early 2003.
Utilization of our inland barge fleet was 45% for the third quarter of 2004, as
compared to 38% for the same period in 2003. The increase in utilization in this
segment resulted in $3.8 million higher operating revenues for the three months
ended September 30, 2004, as compared to the three months ended September 30,
2003.
Revenues for our Other International segment were $19.0 million for the
three months ended September 30, 2004, as compared to $10.9 million for the same
period in 2003. The $8.1 million, or 74%, increase in operating revenues
reported in the third quarter of 2004, as compared to the third quarter of 2003,
reflects the operation of two
11
of our jackup rigs (THE 205 and THE 206), which began working offshore Mexico in
late 2003 under long-term contracts with PEMEX and the operation of THE 156 on a
multi-well contract with ConocoPhillips offshore Venezuela, which was completed
in September 2004. The operation of these rigs in the third quarter of 2004
contributed an additional $12.1 million in operating revenues during the three
months ended September 30, 2004. The favorable contribution by these jackup
drilling rigs was partially offset by lower utilization for our land rigs in
Venezuela and a platform rig in Trinidad that completed its drilling contract in
the third quarter of 2003. The lower utilization of our land rigs in Venezuela
resulted in $1.3 million lower operating revenues for the three months ended
September 30, 2004, as compared to the same period in 2003. Our platform rig in
Trinidad generated $2.7 million in revenues in the third quarter of 2003.
Our revenues for the three months ended September 30, 2004 included $8.3
million related to the operation of Delta Towing's fleet of U.S. marine support
vessels.
Operating and Maintenance Expenses. Total operating and maintenance
expenses increased $8.8 million, or 16%, during the three months ended September
30, 2004, as compared to the same period in 2003. A decrease in operating
expenses for our U. S. Gulf of Mexico and Inland Barge segments in the third
quarter of 2004, as compared to the third quarter of 2003, was offset by higher
operating expenses in our Other International segment, primarily due to the
transfer of three jackup drilling rigs from the U.S. Gulf of Mexico to
international locations in the fourth quarter of 2003 and the inclusion of $6.3
million in operating expenses related to Delta Towing. Operating expenses for
the third quarter of 2003, included $3.8 million in one-time charges related to
a well-control incident and a fire on two of our barge rigs.
Operating costs for our U.S. Gulf of Mexico segment for the three months
ended September 30, 2004 declined $0.6 million to $22.3 million, as compared to
$22.9 million for the same period in 2003. The decline in operating costs in
2004, as compared to 2003, is primarily related to the transfer of three of our
jackup rigs to locations in Mexico and Venezuela in the fourth quarter of 2003
($4.8 million), which was partially offset by higher personal injury and
property damage claims costs ($1.4 million), higher write-downs, net of
recoveries, of other receivables ($1.9 million) and higher mobilization costs
($0.6 million) associated with well-to-well rig moves for the three months ended
September 30, 2004, as compared to the three months ended September 30, 2003.
Operating and maintenance costs for our U.S. Inland Barge segment declined
$4.4 million, or 17%, during the third quarter of 2004, as compared to the third
quarter of 2003, primarily due to the absence of $3.8 million in one-time
charges related to a fire and a well-control incident on two of our inland barge
rigs. In addition, other net decreases in other operating costs and lower
write-downs of other receivables $(1.8 million) were partly offset by higher
personal injury and property damage claims costs ($1.2 million) during the third
quarter of 2004, as compared to the same period in 2003.
Operating costs for our Other International segment were $15.9 million for
the three months ended September 30, 2004, as compared to $8.4 million for the
three months ended September 30, 2003. The $7.5 million increase in operating
and maintenance costs is primarily attributable to $9.4 million of additional
operating expense related to our jackup drilling operations in Mexico and a
jackup rig working offshore Venezuela in the third quarter of 2004, partly
offset by the absence of operating costs related to our platform rig in
Trinidad, which completed its operations in the third quarter of 2003, and lower
operating costs for our land drilling operations in Venezuela as a result of
lower utilization in the third quarter of 2004, as compared to the same period
in 2003. Our results for this segment for the three months ended September 30,
2003 included $2.3 million of operating costs associated with the platform rig
in Trinidad.
General and Administrative Expenses. General and administrative expenses
were $7.0 million for the three months ended September 30, 2004, as compared to
$4.0 million for the comparable period in 2003. The $3.0 million increase in
general and administrative expenses is primarily attributable to the inclusion
of $1.3 million in stock compensation expense associated with post-IPO grants of
stock options and restricted stock awards, $1.2 million in general and
administrative expenses for Delta Towing and higher fees for professional
services in the third quarter of 2004, compared to the third quarter of 2003.
12
Interest Expense. Third party interest expense and interest
expense-related party decreased $7.9 million in the third quarter of 2004, as
compared to the same period in 2003, primarily due to lower debt balances owed
to third parties and Transocean. In 2003, we repaid $15.2 million of third party
debt and, in conjunction with the transfer of the Transocean Assets, we retired
$529.7 million in related party debt payable to Transocean. Additionally, prior
to the closing of our IPO, we completed a debt-for-equity exchange of all our
remaining outstanding related party debt payable to Transocean.
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Revenues. Total revenues increased $80.4 million, or 48%, during the first
nine months of 2004, as compared to the same period in 2003. The increase in
revenues is primarily attributable to higher overall average rig revenue per day
earned in 2004, as compared to the prior year period, and the inclusion of
revenues from the operation of Delta Towing's fleet of marine support vessels.
Overall average rig revenue per day increased from $20,000 for the nine months
ended September 30, 2003 to $28,500 for the nine months ended September 30,
2004. The increase in average rig revenue per day reflects the continued
improvement of market conditions in the U.S. Gulf of Mexico and transition zone
along the U.S. Gulf Coast, as well as the addition of two of our jackup rigs
which began operating offshore Mexico in late 2003 and a jackup rig that
recently completed its contract offshore Venezuela. Average rig utilization of
41% for the nine months ended September 30, 2004 remained unchanged from the
comparable period in 2003 due to a decrease in total available rig operating
days in the 2004 period as a result of the removal of five jackup rigs from our
actively marketed fleet in the second quarter of 2003, combined with the effect
of lower land rig utilization in Venezuela during 2004.
Revenues for our U.S. Gulf of Mexico segment increased $21.8 million, or
30%, during the nine months ended September 30, 2004, as compared to the first
nine months of 2003. In 2004, we achieved higher average rig revenue per day for
our jackup and submersible drilling fleet as a result of our success in
obtaining contracts with our customers at higher day rates in response to
increased market demand and decreased jackup drilling rig supply in the U.S.
Gulf of Mexico. Average revenue per day increased to $31,800 for the nine months
ended September 30, 2004, up from $21,800 for the same period in 2003, which
resulted in an additional $29.6 million in operating revenues for the nine
months ended September 30, 2004, as compared to the same period in 2003. Results
for the first nine months of 2004 also reflect higher utilization for our
current rig fleet in this market, after giving effect to the transfers of the
jackup drilling units THE 156, THE 205 and THE 206 to our Other International
segment in the fourth quarter of 2003. This increase in utilization resulted in
$6.3 million in additional rig revenues in the nine months ended September 30,
2004, as compared to the same period in 2003. The drilling units transferred to
our Other International segment generated revenues of $14.1 million in the nine
months ended September 30, 2003.
Revenues for our U.S. Inland Barge segment increased $12.9 million, or
20%, in the nine months ended September 30, 2004, as compared to the same period
of the prior year, primarily due to higher average rig revenue per day achieved
in 2004, as compared to 2003. Average rig revenue per day increased from $18,400
for the nine months ended September 30, 2003 to $21,900 for the nine months
ended September 30, 2004, as a result of our successful marketing efforts in
negotiating higher day rates for our fleet of inland barges during 2004. The
increase in average rig revenue per day resulted in additional revenues of $12.4
million for the nine months ended September 30, 2004, as compared to the same
period in 2003. This market has continued to improve in 2004 resulting in
improved utilization of our inland barge fleet compared to utilization levels
experienced beginning in the last half of 2003. Utilization of our inland barge
fleet was 43% for the nine months ended September 30, 2004, as compared to 42%
for the first nine months of 2003, which resulted in $0.5 million higher
operating revenues in the first nine months of 2004, as compared to the same
period in 2003.
Revenues for our Other International segment were $55.5 million for the
nine months ended September 30, 2004. The $23.8 million, or 75%, increase over
operating revenues reported for the nine months ended September 30, 2003
reflects the operation of two of our jackup rigs, (THE 205 and THE 206), which
began working offshore Mexico in late 2003 under long-term contracts and the
operation of THE 156, which began operating under a multi-well contract with
ConocoPhillips in late December 2003. The operation of these rigs in 2004
contributed an additional $38.3 million in operating revenues during the nine
months ended September 30, 2004. The favorable contribution by these jackup rigs
was partially offset by lower utilization for our land rigs in Venezuela and a
platform rig in Trinidad that completed its contract in the third quarter of
2003. The lower utilization for our land rigs in Venezuela resulted in a $7.4
million decrease in operating revenues for the nine months ended September 30,
13
2004, as compared to the same period in 2003. Our platform rig, which was
operating in Trinidad until the third quarter of 2003, generated $7.4 million of
operating revenues in the nine months ended September 30, 2003.
Our revenues for the first nine months of 2004 included $21.9 million
related to the operation of Delta Towing's fleet of U.S. marine support vessels.
Operating and Maintenance Expenses. Total operating and maintenance
expenses increased $14.8 million, or 8%, in the first nine months of 2004, as
compared to operating expenses of $178.6 million for the same period in 2003. A
decrease in operating expenses for our U.S. Gulf of Mexico and Inland Barge
segments was partly offset by higher operating expenses in our Other
International segment, primarily as a result of the three additional jackup rigs
working in international locations in 2004, and the inclusion of $16.4 million
in operating expenses related to Delta Towing. The decrease in operating
expenses for our domestic segments for the nine months ended September 30, 2004,
as compared to the same period in 2003, is primarily due to the transfer of
three jackup drilling rigs from the U.S. Gulf of Mexico to international
locations, the absence of one-time charges related to a well-control incident
and fire on two of our barge rigs and an insurance provision for damages
sustained to the mat finger on one of our jackup rigs in 2003.
Operating costs for our U.S. Gulf of Mexico segment declined $9.6 million,
or 12%, in the first nine months of 2004, as compared to the same period in
2003, primarily due to the transfer of three of our jackup rigs to locations in
Mexico and Venezuela in the fourth quarter of 2003 ($14.6 million) and an
insurance provision in 2003 for damages sustained to one of our jackup rigs
($2.2 million). These favorable variances in operating costs were partly offset
by higher costs for maintenance of our jackup rig fleet in the U.S. Gulf of
Mexico ($3.2 million), personal injury claims ($1.2 million), personnel-related
charges for labor and health benefits claims ($2.2 million), and write-downs,
net of recoveries, of accounts and other receivables ($0.5 million) in the first
nine months of 2004, as compared to the comparable period in 2003.
Operating and maintenance expenses for our U.S. Inland Barge segment were
$63.2 million for the nine months ended September 30, 2004, as compared to $77.3
million for the same period in 2003. Our results for the first nine months of
2003 included one-time charges of $7.5 million and $3.5 million related to a
June 2003 well-control incident and September 2003 fire on two of our inland
barge rigs, respectively. The further decrease in operating expenses for this
segment in the first nine months of 2004, as compared to the comparable period
in 2003, was primarily the result of lower personnel-related charges ($2.2
million) due primarily to lower labor and health benefits costs, lower
write-downs of other receivables ($0.8 million) and lower other operating costs,
including costs related to support vessels and other equipment rentals ($2.2
million). These favorable decreases were partly offset by $2.1 million in higher
maintenance costs in the first nine months of 2004.
Operating costs for our Other International segment for the first nine
months of 2004 increased $22.1 million, as compared to the same period in 2003,
primarily due to $19.8 million of additional operating expenses as a result of
our jackup drilling operations in Mexico. Operating expenses in the first nine
months of 2004 also included $10.3 million of costs related to the operation of
THE 156 offshore Venezuela, partly offset by lower operating costs of $2.7
million as a result of lower utilization of our land rigs in Venezuela. Our
results for this segment in the first nine months of 2003 included $5.3 million
of additional operating costs related to our platform rig in Trinidad, which
completed its contract in the third quarter of 2003.
General and Administrative Expenses. General and administrative expenses
were $26.6 million for the nine months ended September 30, 2004, as compared to
$12.6 million for the comparable period in 2003. The $14.0 million increase in
general and administrative expenses was due primarily to the inclusion of $9.3
million of stock compensation expense associated with post-IPO grants of stock
options and restricted stock awards, $1.5 million in stock compensation expense
related to the modification of Transocean stock options held by some of our
employees, $3.0 million in general and administrative expenses for Delta Towing
and $1.3 million in higher other overhead costs, primarily related to corporate
insurance policies and professional fees. These unfavorable variances in general
and administrative expenses in the first nine months of 2004, as compared to the
same period in 2003, were partly offset by lower administrative charges of $1.1
million for the nine months ended September 30, 2004 under our transition
services agreement with Transocean, which became effective in the third quarter
of 2003. See " -- Related Party Transactions -- Allocation of Administrative
Costs."
Impairment Loss on Long-Lived Assets. During the second quarter of 2003,
we recorded a non-cash impairment charge of $10.6 million resulting from our
decision to take five jackup rigs out of drilling service and market the rigs
14
for alternative uses. We do not anticipate returning these rigs to drilling
service, as we believe it would be cost prohibitive to do so. As a result of
this decision, and in accordance with SFAS 144, the carrying value of these
assets was adjusted to fair market value. The fair market value of these units
as non-drilling rigs was based on third party valuations. Additionally in the
second quarter of 2003, we recorded a $1.0 million non-cash impairment resulting
from our determination that assets of entities in which we had an investment did
not support our recorded investment. The impairment was determined and measured
based upon the remaining book value of the assets and our assessment of the fair
value at the time the decision was made. The entities were liquidated in early
2004.
Gain on Disposal of Assets, Net. During the nine months ended September
30, 2004, we realized gains on disposal of assets of $5.4 million, primarily
related to the sale of five marine support vessels by Delta Towing ($2.0
million), the settlement of an October 2000 insurance claim for one of our
jackup rigs ($1.5 million), and sales and disposals of used drill pipe ($1.5
million). Net gains (losses) on disposal of assets were not significant in the
first nine months of 2003.
Interest Expense. Third party interest expense and interest
expense-related party decreased $30.9 million in the nine months ended September
30, 2004, as compared to the same period in 2003, primarily due to lower debt
balances owed to third parties and Transocean, partly offset by $1.0 million in
bank commitment fees related to our $75 million line of credit entered into in
December 2003. In 2003, we repaid $15.2 million of third party debt and, in
conjunction with the transfer of the Transocean Assets, we retired $529.7
million in related party debt payable to Transocean. Additionally, prior to the
closing of our IPO, we completed a debt-for-equity exchange of all our remaining
outstanding related party debt payable to Transocean.
Loss on Retirement of Debt. In conjunction with the retirement of debt
held by Transocean in 2003, we recorded losses on retirement of related party
debt for the nine months ended September 30, 2003 of $79.5 million. In the first
quarter of 2004, we wrote off the remaining balance of unamortized fees of
approximately $1.9 million associated with the exchange of Transocean debt for
our outstanding senior notes in March 2002 due to the retirement of the debt in
conjunction with the IPO. See " -- Related Party Transactions -- Long-Term Debt
-- Transocean."
Impairment of Investment in and Advance to Joint Venture. Based on cash
flow projections and industry conditions, we recorded a $21.3 million impairment
of our notes receivable from Delta Towing during the second quarter of 2003. See
" -- Relationships with Variable Interest Entities."
Other, Net. Other expense, net was $2.3 million for the nine months ended
September 30, 2003, including a $2.4 million loss on revaluation of our local
currency in Venezuela. In January 2003, Venezuela implemented foreign exchange
controls that limit our ability to convert local currency into U.S. dollars and
transfer excess funds out of Venezuela. The exchange controls caused an
artificially high value to be placed on the local currency. As a result, we
recognized a loss on revaluation of the local currency into functional U.S.
dollars during the second quarter of 2003. Other income, net was $1.3 million
for the nine months ended September 30, 2004 and related primarily to a $0.7
million reduction of the excess reserve for revaluation of Venezuelan local
currency due to a sustained decrease in the net carrying value of assets
denominated in local currency in 2004 and other foreign currency translation
gains recognized during the period.
Income Tax Benefit. The income tax benefit of $13.4 million for the nine
months ended September 30, 2004 reflects an effective tax rate ("ETR") of 29.4%,
as compared to $50.4 million for the comparable period in 2003, based on an ETR
of 10.6%. The increased ETR is primarily the result of providing a valuation
allowance on net operating losses generated in 2003. During the first nine
months of 2003, we recorded a valuation allowance on net operating loss carry
forwards and foreign tax credits generated during the period.
DISCONTINUED OPERATIONS
In July 2002, Transocean announced plans to divest its Shallow Water
business through an initial public offering of TODCO. During 2003, we completed
the transfer to Transocean of the Transocean Assets, including all
revenue-producing Transocean Assets. Accordingly, the Transocean Assets and
related operations have been reflected as discontinued operations in our
historical financial statements. See Note 15 to our condensed consolidated
financial statements, for a discussion of discontinued operations. See " --
Related Party Transactions -- Asset Transfers to Transocean" for a description
of the separation of our respective businesses.
15
FINANCIAL CONDITION
At September 30, 2004 and December 31, 2003, we had total assets of $750.7
million and $778.2 million, respectively. The $27.5 million decrease in assets
during the first nine months of 2004 is primarily attributable to normal
depreciation of $72.0 million, $2.7 million in net amortization of deferred
preparation and mobilization costs, the write-off of $1.9 million in unamortized
consent fees associated with the Transocean senior note exchange and other net
decreases in assets of $0.9 million. These decreases in assets were partly
offset by $5.9 million in deferred income tax assets recognized in the first
nine months of 2004, a $10.3 million increase in amounts receivable from
Transocean in recognition of the post-IPO business and tax indemnities, and
$33.8 million in higher cash and cash equivalents (see " -- Liquidity and
Capital Resources").
Working capital at September 30, 2004 was $54.9 million, as compared to a
working capital deficit of $2.6 million at December 31, 2003. The increase in
working capital during the nine months ended September 30, 2004 is primarily
attributable to our operating results for the year-to-date period in 2004,
combined with the effect of lower cash interest payments as the result of the
retirement of debt in 2003 and the pre-IPO debt-for-equity exchanges with
Transocean.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES AND USE OF CASH
The following discussion relates to our historical sources and uses of
cash, which includes components from both continuing operations and discontinued
operations during 2003.
Nine Months Ended September 30, 2004 Compared to Nine Months Ended
September 30, 2003. Net cash provided by operating activities was $30.9 million
for the nine months ended September 30, 2004, as compared to $94.6 million for
the same period in 2003. The $63.7 million decrease in net cash provided by
operating activities is primarily attributable to lower adjustments to reconcile
net loss as reported to net cash used in operating activities and less cash
provided by changes in operating assets and liabilities, partly offset by a
lower reported net loss in the first nine months of 2004 as compared to the same
period of 2003. We reported a $226.5 million lower net loss in the first nine
months of 2004, as compared to the first nine months of 2003, primarily due to
the absence of net losses attributable to the Transocean Assets ($65.0 million)
which were transferred to Transocean during 2003, a lower operating loss from
continuing operations, lower net interest expense ($30.9 million) and lower
other non-cash charges in the first nine months of 2004. Total non-cash
adjustments decreased $83.9 million for the nine months ended September 30,
2004, as compared to the first nine months of 2003, primarily related to
depreciation ($7.6 million), (gain) loss on disposal of assets ($14.8 million),
loss on retirement of debt and impairment losses on long-lived assets and our
investment in and advances to Delta Towing ($98.9 million). Non-cash adjustments
for the first nine months of 2004 also included favorable adjustments of $19.7
million for deferred income taxes, $10.8 million related to stock-based
compensation expense associated with our post-IPO stock option grants and
restricted stock awards, as well as the modification of the Transocean stock
options held by TODCO employees, and $7.3 million for deferred revenue. Cash
provided by changes in operating assets and liabilities, net of effect of
distributions to affiliates, was $2.9 million for the first nine months of 2004
as compared to $209.2 million for the same period in 2003. The $206.3 million
decrease in cash provided by changes in operating assets and liabilities is
primarily the result of the transfer of the Transocean Assets to Transocean and
the related settlement of outstanding balances with Transocean.
Net cash provided by investing activities amounted to $3.2 million for the
first nine months of 2004 compared to $67.2 million for the same period in 2003.
The $64.0 million decrease in net cash provided by investing activities relates
primarily to the sales of the Transocean Assets to Transocean which were
completed by the end of the second quarter of 2003.
Net cash used in financing activities amounted to $0.3 million for the
first nine months of 2004, as compared to $235.0 million for the same period in
2003. Financing activities for the 2004 period included $0.7 million in net
short-term borrowings under our Venezuela line of credit, offset by $1.0 million
in net retirements of capital lease obligations. Cash used in financing
activities in the first nine months of 2003 included $103.9 million in cash
16
balances transferred to Transocean in connection with the sale and distribution
of subsidiaries to Transocean, the net repayment of long-term advances from
Transocean of $54.0 million and $78.8 million in repayments of other debt. See "
-- Related Party Transactions".
SOURCES OF LIQUIDITY AND CAPITAL EXPENDITURES
Our cash flows from operations and asset sales were our primary sources of
liquidity for the nine months ended September 30, 2004. Our primary sources of
liquidity for the nine months ended September 30, 2003 were our cash flows from
continuing and discontinued operations. For the nine months ended September 30,
2004, our primary uses of cash were capital expenditures of $8.3 million related
to upgrades and replacements of equipment and the retirement of amounts owed
under capital lease obligations. Primary uses of cash for the first nine months
of 2003 were debt repayments, including amounts due to Transocean, the transfer
of cash balances in conjunction with the sale or distribution of Transocean
Assets to Transocean and capital expenditures of $7.4 million for upgrades and
replacements of equipment. At September 30, 2004, we had $53.8 million in cash
and cash equivalents.
We anticipate that we will rely primarily on internally generated cash
flows to maintain liquidity. From time to time, we may also make use of our
revolving line of credit for cash liquidity. In December 2003, we entered into a
two-year $75 million floating-rate secured revolving credit facility that will
decline to $60 million in December 2004.
The facility is secured by most of our drilling rigs, our receivables, and
the stock of most of our U.S. subsidiaries and is guaranteed by some of our
subsidiaries. Borrowings under the facility bear interest at our option at
either (1) the higher of (A) the prime rate and (B) the federal funds rate plus
0.5%, plus a margin in either case of 2.50% or (2) the Eurodollar rate plus a
margin of 3.50%. Commitment fees on the unused portion of the facility are 1.50%
of the average daily balance and are payable quarterly. Borrowings and letters
of credit issued under the facility are limited by a borrowing base equal to the
lesser of (A) 20% of the orderly liquidated value of the drilling rigs securing
the facility, as determined from time to time by a third party selected by the
agent under the facility, and (B) the sum of 10% of the orderly liquidated value
of the drilling rigs securing the facility plus 80% of the U.S. accounts
receivable outstanding less than 90 days, net of any provision for bad debt
associated with such U.S. accounts receivable.
Financial covenants include maintenance of the following:
- a ratio of (1) current assets plus unused availability under the
facility to (2) current liabilities (excluding specified
subordinated liabilities owed to Transocean) of at least 1.2 to 1,
- a ratio of total debt to total capitalization of not more than 20%
(excluding specified subordinated liabilities owed to Transocean
from debt but including those liabilities in total capitalization),
- tangible net worth plus specified subordinated liabilities owed to
Transocean of not less than the sum of (1) $425 million plus (2) to
the extent positive, 50% of net income after December 31, 2003,
- a ratio of (1) the orderly liquidation value of the drilling rigs
securing the facility to (2) the amount of borrowings and letters of
credit outstanding under the facility of not less than 3 to 1, and
- in the event liquidity (defined as working capital (excluding
specified subordinated liabilities owed to Transocean) plus
availability under the facility) is less than $25 million, a ratio
of (1) EBITDA minus capital expenditures during the preceding 12
fiscal months to (2) interest expense (excluding interest on
specified subordinated debt owed to Transocean) during such period
of not less than 2 to 1.
The revolving credit facility provides, among other things, for the
issuance of letters of credit that we may utilize to guarantee our performance
under some drilling contracts, as well as insurance, tax and other obligations
in various jurisdictions. The facility also provides for customary fees and
expense reimbursements and includes other covenants (including limitations on
the incurrence of debt, mergers and other fundamental changes, asset sales and
dividends) and events of default (including a change of control) that are
customary for similar secured non-investment grade facilities.
17
In the third quarter of 2004, we entered into an unsecured line of credit
with a bank in Venezuela that provides for a maximum of 4.5 billion Venezuela
Bolivars ($2.3 million U.S. dollars at the current exchange rate at September
30, 2004) in order to establish a source of local currency to meet our current
obligations in Venezuela Bolivars. Each draw on the line of credit is
denominated in Venezuela Bolivars and is evidenced by a 30-day promissory note
that bears interest at the then market rate as designated by the bank. The
promissory notes are pre-payable at any time; however, if not repaid within 30
days, the promissory notes automatically renew for an additional 30-day period
at the then designated interest rate. There are no commitment fees payable on
the unused portion of the line of credit, and the facility is reviewed annually
by the bank's board of directors.
At September 30, 2004, we had $0.7 million (1.4 billion Venezuela
Bolivars) in borrowings outstanding with respect to the line of credit, which
bears interest at 17% per annum.
We expect capital expenditures to be approximately $14 million in 2004,
primarily for rig refurbishments and the purchase of capital equipment. The
timing and amounts we actually spend in connection with our plans to upgrade and
refurbish other selected rigs, including rigs requiring substantial
refurbishment, is subject to our discretion and will depend on our view of
market conditions and our cash flows. We would expect capital expenditures to
increase as market conditions improve. From time to time we may review possible
acquisitions of drilling rigs or businesses, joint ventures, mergers or other
business combinations and may in the future make significant capital commitments
for such purposes. Any such transactions could involve the issuance of a
substantial number of additional shares or other securities or the payment by us
of a substantial amount of cash. We would likely fund the cash portion, if any,
of such transactions through cash balances on hand, the incurrence of additional
debt, sales of assets, shares or other securities or a combination thereof. In
addition, from time to time we may consider possible dispositions of drilling
rigs. Our ability to fund capital expenditures would be adversely affected if
conditions deteriorate in our business, we experience poor results in our
operations or we fail to meet covenants under the revolving credit facility
described in the previous paragraph.
We anticipate that our available funds, together with our cash generated
from operations and amounts that we may borrow, will be sufficient to fund our
required capital expenditures, working capital and debt service requirements for
the foreseeable future. Future cash flows and the availability of outside
funding sources, however, are subject to a number of uncertainties, especially
the condition of the oil and natural gas industry. Accordingly, these resources
may not be available or sufficient to fund our cash requirements.
As of September 30, 2004, our scheduled debt maturities and other
contractual obligations are presented in the table below with debt obligations
presented at face value:
FOR THE TWELVE MONTH PERIODS ENDING SEPTEMBER 30,
-------------------------------------------------------------
2006 2008
TO TO
TOTAL 2005 2007 2009 THEREAFTER
------- ------- ------- ------- ----------
(IN MILLIONS)
CONTRACTUAL OBLIGATIONS
Debt $ 23.6 $ 7.7 $ -- $ 12.4 $ 3.5
Debt -- Related Party 3.0 3.0 -- -- --
Operating Leases 4.8 1.5 1.9 0.8 0.6
Accrued Income Taxes -- Related Party 1.3 1.3 -- -- --
Other 1.5 1.2 0.3 -- --
------- ------- ------ ------- ------
Total Contractual Obligations $ 34.2 $ 14.7 $ 2.2 $ 13.2 $ 4.1
======= ======= ====== ======= ======
Prior to our IPO in February 2004, we exchanged $488.1 million principal
amount of our outstanding senior note obligations payable to Transocean for
shares of our Class B common stock. See "- Related Party Transactions -
Long-Term Debt - Transocean."
18
At September 30, 2004, we had other commitments that we are contractually
obligated to fulfill with cash should the obligations be called. These
obligations represent surety bonds that guarantee our performance as it relates
to our drilling contracts, insurance, tax and other obligations in various
jurisdictions. These obligations could be called at any time prior to their
expiration dates. The obligations that are the subject of these surety bonds are
geographically concentrated in the United States and Mexico.
FOR THE TWELVE MONTH PERIODS ENDING SEPTEMBER 30,
-----------------------------------------------------------
2006 2008
TO TO
TOTAL 2005 2007 2009 THEREAFTER
------- ------ ------ ------ ----------
(IN MILLIONS)
OTHER COMMERCIAL COMMITMENTS
Surety Bonds (a) $ 12.3 $ 0.4 $ 3.3 $ 8.6 $ --
----------
(a) Relates to bonds issued primarily in connection with our contracts with
PEMEX. These bonds have been issued under a Transocean facility. Our
master separation agreement with Transocean requires us to use our best
efforts to replace this facility with our own and to indemnify Transocean
for any claims related to the bonds. Transocean has agreed to leave these
bonds in place, subject to certain conditions.
DERIVATIVE INSTRUMENTS
We have established policies and procedures for derivative instruments
that have been approved by our board of directors. These policies and procedures
provide for the prior approval of derivative instruments by our board of
directors. From time to time, we may enter into a variety of derivative
financial instruments in connection with the management of our exposure to
fluctuations in foreign exchange rates and interest rates. We do not plan to
enter into derivative transactions for speculative purposes; however, for
accounting purposes, certain transactions may not meet the criteria for hedge
accounting.
Gains and losses on foreign exchange derivative instruments that qualify
as accounting hedges are deferred as accumulated other comprehensive income and
recognized when the underlying foreign exchange exposure is realized. Gains and
losses on foreign exchange derivative instruments that do not qualify as hedges
for accounting purposes are recognized currently based on the change in market
value of the derivative instruments. At September 30, 2004, we did not have any
outstanding foreign exchange derivative instruments.
From time to time, we may use interest rate swaps to manage the effect of
interest rate changes on future income. Interest rate swaps would be designated
as a hedge of underlying future interest payments and would not be used for
speculative purposes. The interest rate differential to be received or paid
under the swaps is recognized over the lives of the swaps as an adjustment to
interest expense. If an interest rate swap is terminated, the gain or loss is
amortized over the life of the underlying debt. At September 30, 2004, we did
not have any outstanding interest rate swaps.
RELATIONSHIPS WITH VARIABLE INTEREST ENTITIES
We own a 25% equity interest in Delta Towing, which was formed to own and
operate our U.S. marine support vessel business consisting primarily of shallow
water tugs, crewboats and utility barges. We contributed this business to Delta
Towing in return for a 25% ownership interest and secured notes issued by Delta
Towing with a face value of $144.0 million. No value was assigned to the
ownership interest in Delta Towing. The note agreement was subsequently amended
to provide for a $4.0 million, three-year revolving credit facility which has
since been cancelled. Delta Towing's property and equipment, with a net book
value of $41.6 million at September 30, 2004, are collateral for our notes
receivable from Delta Towing. The remaining 75% ownership interest is held by
Beta Marine Services, L.L.C. ("Beta Marine"), which also loaned $3.0 million to
Delta Towing. See "- Related Party Transactions - Long-Term Debt - Beta Marine".
As a result of restrictions on the ownership or operation of vessels
involved in the coastwise trade by non-U.S. citizens, our ability to take
ownership of the assets owned by Delta Towing in connection with its default
under its notes issued to us would be restricted. These restrictions apply to us
because Transocean, a company organized under the laws of the Cayman Islands,
currently owns a majority voting interest in our common stock.
19
As a result of its issuance of notes to us, Delta Towing is highly
leveraged. In January 2003, Delta Towing defaulted on the notes by failing to
make its scheduled quarterly interest payments and remains in default as a
result of its continued failure to make its quarterly interest payments, as well
as a scheduled principal repayment due in January 2004. As a result of our
continued evaluation of the collectibility of the notes, we recorded a $21.3
million impairment of the notes in June 2003 based on Delta Towing's discounted
cash flows over the terms of the notes, which deteriorated in the second quarter
of 2003 as a result of the continued decline in Delta Towing's business outlook.
As permitted in the notes in the event of default, we began offsetting a portion
of the amount owed by us to Delta Towing against the interest due under the
notes. Additionally, in the third quarter of 2003, we established a $1.6 million
reserve for interest income earned during the quarter on the notes receivable.
In January 2003, the FASB issued FIN 46 which requires that an enterprise
consolidate a variable interest entity ("VIE") if the enterprise has a variable
interest that will absorb a majority of the entity's expected losses and/or
receives a majority of the entity's expected residual returns as a result of
ownership, contractual or other financial interests in the entity, if such loss
or residual return occurs. If one enterprise absorbs a majority of a VIE's
expected losses and another enterprise receives a majority of that entity's
expected residual returns, the enterprise absorbing a majority of the expected
losses is required to consolidate the VIE and will be deemed the primary
beneficiary for accounting purposes.
Under FIN 46, Delta Towing is considered a VIE because its equity is not
sufficient to absorb the joint venture's expected future losses. TODCO is deemed
to be the primary beneficiary of Delta Towing for accounting purposes because we
have the largest percentage of investment at risk through the secured notes held
by us and would thereby absorb the majority of the expected losses of Delta
Towing. We have consolidated Delta Towing as of December 31, 2003.
As of September 30, 2004 and December 31, 2003, we have eliminated in
consolidation all intercompany account balances with Delta Towing as a result of
the adoption of FIN 46, as amended, as well as the elimination of all
intercompany transactions during the three and nine months ended September 30,
2004.
Prior to December 31, 2003, we accounted for our investment in Delta
Towing under the equity method and recorded $0.1 million and $2.6 million in
equity losses for the three and nine months ended September 30, 2003,
respectively, as a reduction in the carrying value of Delta Towing's notes
receivable held by us. In addition, during the three and nine months ended
September 30, 2003, we earned interest income of $0 million and $3.3 million,
respectively, on interest-bearing debt due from Delta Towing.
As part of the formation of the joint venture on January 31, 2001, we
entered into a charter arrangement with Delta Towing under which we committed to
charter for a period of 2.5 years from date of delivery 10 crewboats then under
construction, all of which were in service as of September 30, 2004. We also
entered into an alliance agreement with Delta Towing under which we agreed to
treat Delta Towing as a preferred supplier for the provision of marine support
services. During the three and nine months ended September 30, 2003, we incurred
charges totaling $3.4 million and $9.2 million, respectively, from Delta Towing
for services rendered which were reflected in operating and maintenance --
related party expense.
The creditors of Delta Towing have no recourse to the general credit of
the Company.
RELATED PARTY TRANSACTIONS
LONG-TERM DEBT -- BETA MARINE
In connection with the acquisition of the marine business, Delta Towing
entered into a $3.0 million note agreement with Beta Marine dated January 30,
2001. The note bears interest at 8%, payable quarterly. In January 2004, Delta
Towing failed to make its scheduled principal payment to Beta Marine. The $3.0
million principal amount of the note payable has been classified as a current
obligation in our consolidated balance sheet. In the first half of 2004, Delta
Towing repaid a portion of accrued interest payable to Beta Marine from proceeds
from the sales of four marine vessels. We have no obligation to fund this debt
on behalf of Delta Towing. Interest expense related to the note payable to Beta
Marine was $0.1 million and $0.2 million of the three and nine months ended
September 30, 2004, respectively.
20
ALLOCATION OF ADMINISTRATIVE COSTS
Transocean has historically provided specified administrative support to us.
Transocean has charged us a proportional share of its administrative costs based
on estimates of the percentage of work each Transocean department performs for
us. The amount of expense allocated to us was $0.1 million and $1.4 million for
the three and nine months ended September 30, 2003, respectively, and was
classified as general and administrative -- related party expense. Following the
IPO, some of these functions are provided to us under the transition services
agreement with Transocean. Charges under the transition services agreement
amounted to $0.1 million and $0.3 million for the three and nine months ended
September 30, 2004, respectively, and are reported as general and administrative
-- related party expense.
LONG-TERM DEBT -- TRANSOCEAN
We were party to a $1.8 billion two-year revolving credit agreement (the
"Transocean Revolver") with Transocean, dated April 6, 2001. During the first
quarter of 2003, we recognized $0.8 million in interest expense related to the
Transocean Revolver. On April 6, 2003, the approximately $81.2 million then
outstanding under the Transocean Revolver was converted to a 2.76% fixed rate
promissory note issued by us to Transocean which was scheduled to mature on
April 6, 2005. This note was cancelled in 2003 in connection with a series of
transactions.
In March 2002, together with Transocean, we completed exchange offers and
consent solicitations for our 6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior
Notes (the "Exchange Offer"). As a result of the Exchange Offer, Transocean
exchanged approximately $234.5 million, $342.3 million, $247.8 million, $246.5
million, $76.9 million and $289.8 million principal amount of our outstanding
6.5%, 6.75%, 6.95%, 7.375%, 9.125% and 9.5% Senior Notes, respectively, (the
"Exchanged Notes") for newly issued Transocean notes having the same principal
amount, interest rate, redemption terms and payment and maturity dates.
During 2003, we sold to Transocean, in separate transactions, our investment
in Arcade Drilling AS, Cliffs Platform Rig 1, our 50% interest in Deepwater
Drilling LLC, our 60% interest in Deepwater Drilling II LLC and our membership
interests in R&B Falcon Drilling (International & Deepwater) Inc. LLC. As
consideration for the sale of these assets, Transocean cancelled $529.7
principal amount outstanding of our senior notes held by Transocean. See " --
Asset Transfers to Transocean" for a further description of these transactions.
In February 2004, prior to the closing of our IPO, we exchanged $45.8 million
in principal amount of our outstanding 7.375% Exchanged Notes held by Transocean
Holdings Inc. (a wholly owned subsidiary of Transocean), plus accrued interest
thereon, for 359,638 shares of our Class B common stock (4,367,714 shares of
Class B common stock after giving effect to the stock dividend, see " -- Other
Transactions Between Us and Transocean"). Immediately following this exchange,
we exchanged $152.5 million and $289.8 million principal amount of our
outstanding 6.75% and 9.5% Exchanged Notes, respectively, held by Transocean,
plus accrued interest thereon, for 3,580,768 shares of our Class B common stock
(43,487,535 shares of Class B common stock after giving effect to the stock
dividend). The determination of the number of shares issued in the exchange
transactions was based on a method that took into account the IPO price of
$12.00 per share. The net effect of these transactions was to decrease notes
payable -- related party and interest payable -- related party by $528.9 million
with an offsetting increase in common stock of $0.5 million and additional
paid-in capital of $528.4 million. There were no Exchanged Notes payable to
Transocean outstanding at September 30, 2004. We recognized $3.1 million in
interest expense - related party associated with these notes prior to their
cancellation in February 2004. For the three and nine months ended September 30,
2003, we recognized $8.4 million and $34.2 million, respectively, in interest
expense - related party with respect to the Exchanged Notes.
ASSET TRANSFERS TO TRANSOCEAN
We transferred the Transocean Assets to Transocean primarily as in-kind
dividends and transfers in exchange for the cancellation of debt to Transocean
and, in some instances, for cash. Specified contracts were assigned to
Transocean for no consideration. These transactions had no effect on our results
of continuing operations except to the extent that debt was retired and any gain
or loss was recognized.
21
The following describes transfers of certain of our assets to Transocean
during the first half of 2003. None of the drilling rigs transferred to
Transocean were currently involved in the business activities that fall within
the TODCO business as defined in the master separation agreement with
Transocean.
In January 2003, we assigned to Transocean for no consideration a 12.5%
undivided interest in an aircraft at net book value of $1.0 million. The
transaction was recorded as a decrease to additional paid-in capital.
Also in January 2003, we distributed to Transocean as an in-kind dividend for
no consideration some accounts receivable balances from related parties in the
amount of $200.9 million. The transaction was recorded as a decrease to
additional paid-in capital.
In February 2003, we distributed to Transocean for no consideration the stock
of our subsidiaries R&B Falcon (A) Pty. Ltd., which owns the drilling unit Ron
Tappmeyer and Cliffs Drilling do Brazil Servicios de Petroleo S/C Ltda. a
dormant Brazilian entity. The aggregate net book value of $44.6 million for
these transfers was recorded as a decrease to additional paid-in capital.
In March 2003, we assigned the drilling contract for the Deepwater Frontier
to Transocean for no consideration. Additionally, in March 2003, we distributed
to Transocean miscellaneous deepwater assets with a value of $1.4 million for no
consideration. The transactions were recorded as a decrease to additional
paid-in capital.
In March 2003, we sold to Transocean the stock of Arcade Drilling AS, a
subsidiary that owns and operates the Paul B. Loyd, Jr. and owns the Henry
Goodrich, for net proceeds of $264.1 million and recorded a net pre-tax loss of
$11.0 million. The sales price was determined based on an independent appraisal.
In consideration for the sale of the subsidiary, Transocean cancelled $233.3
million principal amount of our 6.95% Exchanged Notes due April 2008. The market
value attributed to the notes, 113.21% of the principal amount, was determined
based on available market information. We recorded a net pre-tax loss on
retirement of debt of approximately $30 million.
In May 2003, we sold Cliffs Platform Rig 1 to Transocean in consideration for
the cancellation of $13.9 million of the 6.95% Exchanged Notes. We recorded the
excess of the sales price over the net book value of $1.6 million as an increase
to additional paid-in capital and a pre-tax loss on the retirement of debt of
$1.5 million in the second quarter of 2003.
Also in May 2003, we sold our 50 percent interest in Deepwater Drilling
L.L.C. ("DD LLC"), and our 60 percent interest in Deepwater Drilling II L.L.C.
("DDII LLC") in consideration for the cancellation of $43.7 million principal
amount of our debt held by Transocean. The value of our interests in DD LLC and
DDII LLC was determined based on a similar third party transaction. We recorded
the excess of the sales price over the net book value of our membership
interests of $21.6 million as an increase to additional paid-in capital.
In June 2003, we sold our membership interests in our wholly-owned
subsidiary, R&B Falcon Drilling (International & Deepwater) Inc. LLC. As
consideration for the stock sold, Transocean cancelled $238.8 million of our
outstanding debt held by them. The sales transaction was based on a valuation
which took into account valuations of the drilling units owned by the entities
sold. We recorded the excess of the net book value over the sales price of our
membership interests of $60.9 million as a loss on sale of assets, which we
included in the results of discontinued operations, and a pre-tax loss on the
retirement of debt of $48.0 million in the second quarter of 2003.
At the time of the transactions, some of the drilling units discussed above
were being utilized in connection with drilling contracts between our
subsidiaries and customers. These contracts were not transferred and we secured
the use of the drilling units for the purpose of performing these contracts
through charters or other arrangements. The costs of these charters or other
arrangements were included in discontinued operations and totaled $0.4 million
and $1.2 million for the three and nine months ended September 30, 2003.
22
OTHER TRANSACTIONS BETWEEN US AND TRANSOCEAN
In August 2003, we received $11.4 million from Transocean in order for us to
have the amount of cash and cash equivalents agreed to in the master separation
agreement between us and Transocean, as more fully described in " --
Relationship Between Us and Transocean -- Master Separation Agreement -- Working
Capital".
In February 2004, Transocean made equity contributions to us totaling $2.8
million, including $1.0 million in intercompany payable balances that we owed to
Transocean as of the IPO date.
In February 2004, prior to the IPO, we exchanged $45,784,000, $152,463,000
and $289,793,000 in principal amount of our outstanding 7.375%, 6.750% and
9.500% notes, respectively, held by Transocean for 3,940,406 shares of our Class
B common stock. Immediately following this exchange, we declared a dividend of
11.145 shares of our Class B common stock with respect to each share of our
Class B common stock outstanding immediately following the exchange. As a
result, 60,000,000 shares of our Class B common stock were issued and
outstanding immediately prior to the IPO. Transocean currently holds 46,200,000
shares of our Class B common stock. The Class B common stock is convertible at
any time into shares of our Class A common stock on a share per share basis at
the sole option of Transocean. The stock for debt exchange was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In February 2004, we recorded an increase in equity related to net
liabilities attributable to Transocean's business of $0.4 million for which
legal title had not been transferred to Transocean as of the IPO date in
accordance with the business indemnity between us and Transocean. The
indemnification by Transocean was recorded as a credit to additional paid-in
capital and a corresponding related party receivable from Transocean. See " --
Relationship Between Us and Transocean -- Indemnification and Release".
As part of the tax sharing agreement, we must pay Transocean for
substantially all pre-closing income tax benefits utilized or deemed to have
been utilized subsequent to the closing of the IPO. Accordingly, we recorded an
equity transaction in February 2004 to reflect this liability to Transocean of
approximately $174 million, equal to the pre-closing income tax benefits, as a
corresponding obligation within the deferred income tax asset accounts and a
reduction in additional paid-in capital. In September 2004, as a result of a
2003 return-to-provision adjustment, the liability to Transocean was revised to
approximately $182 million, and we recorded an equity adjustment of $7.7 million
and the additional liability to Transocean as a reduction in additional paid-in
capital and an obligation within the deferred income tax asset accounts.
In addition, Transocean agreed to indemnify us for certain tax liabilities
that existed as of the IPO date, which are currently estimated to be $10.3
million. We recorded the tax indemnification by Transocean as a credit to
additional paid-in capital with a corresponding offset to a related party
receivable from Transocean. See " -- Relationship Between Us and Transocean --
Tax Sharing Agreement".
At the closing of the IPO, we completed the following transactions:
- We assigned to Transocean for no consideration any other agreements
relating to drilling units and other assets not owned by us or our
subsidiaries upon the closing of the IPO.
- We assigned to Transocean the rights to any receivables outstanding
upon the closing of the IPO which were not related to the "TODCO
business" as that term is used in the master separation agreement.
We will remit the proceeds from those receivables as they are
collected.
- We transferred to Transocean any remaining miscellaneous equipment
and other assets that did not relate to our business following the
closing of the IPO.
To the extent the transfer of legal title to any of the above assets could
not be completed prior to the closing of the IPO, beneficial ownership of such
assets was transferred to Transocean, and we or our applicable subsidiary will
hold such asset as agent for the other party until such time as legal title can
be transferred.
23
RELATIONSHIP BETWEEN US AND TRANSOCEAN
We have provided below a summary description of the material terms and
conditions of a master separation agreement and several other important related
agreements between Transocean and us.
MASTER SEPARATION AGREEMENT
The master separation agreement between Transocean and us provided for the
completion of the separation of our assets and businesses from those of
Transocean. In addition, it contains several agreements governing the
relationship between us and Transocean following the IPO and specifies the
ancillary agreements that we and Transocean signed.
TODCO BUSINESS
The master separation agreement defines the TODCO business to mean the
following businesses and activities:
- contract drilling, workover, production and similar services for oil
and gas wells using jackup, submersible, barge (including workover)
and platform drilling rigs in the U.S. Gulf of Mexico and U.S.
inland waters, including maintenance and mobilization activities to
the extent related to rigs providing these services,
- contract drilling, workover, production and similar services for oil
and gas wells in and offshore Mexico, Trinidad, Colombia and
Venezuela (including the turnkey drilling services formerly provided
by our subsidiaries in Venezuela), including maintenance and
mobilization activities to the extent related to rigs providing
these services,
- construction activities (including construction activities involving
an upgrade to, or modification of, a rig) in connection with rigs
owned by us or our subsidiaries after the closing of the IPO,
- office or yard facilities owned or used by us and our subsidiaries
to the extent related to the services and activities described in
this definition,
- our joint venture interest in Delta Towing Holdings, LLC, the
operation of the business transferred to Delta Towing prior to that
transfer and the notes issued in connection with that transfer,
- our investment in Energy Virtual Partners, Inc. and Energy Virtual
Partners, LP (which has been liquidated),
- activities that were related primarily to the above activities at
the time those activities ceased, and
- any business conducted by TODCO or any of its subsidiaries after the
closing of the IPO.
The following businesses and activities are excluded from the definition of
the TODCO business to the extent they were conducted prior to the closing of the
IPO:
- contract drilling, workover, production or similar services for oil
and gas wells using semisubmersibles and drillships in the U.S. Gulf
of Mexico, including maintenance and mobilization activities to the
extent related to rigs providing these services,
- contract drilling, workover, production or similar services for oil
and gas wells in geographic regions outside of the U.S. Gulf of
Mexico, U.S. inland waters, Mexico, Colombia, Trinidad and
Venezuela, including maintenance and mobilization activities to the
extent related to rigs providing these services and such services
using land rigs,
24
- construction activities (including construction activities involving
an upgrade to, or modification of, a rig) in connection with rigs or
other assets owned by (1) Transocean or its subsidiaries (excluding
us) after the closing of the IPO or (2) neither Transocean nor us
after the closing of the IPO,
- oil and gas exploration and production activities (but not including
our ownership interest in Energy Virtual Partners, which has been
liquidated),
- coal production activities, and
- the turnkey drilling business that we formerly operated in the U.S.
Gulf of Mexico and offshore Mexico, except that contract drilling
services provided to that business which otherwise fall within the
definition of TODCO business are not excluded.
TRANSFER OF ASSETS AND ASSIGNMENT OF LIABILITIES
We have transferred the stock of various subsidiaries and other assets to
Transocean and Transocean has assumed liabilities associated with the
transferred assets and businesses. See " -- Asset Transfers to Transocean." The
master separation agreement provides for any additional transfers of assets and
assumptions of liabilities necessary to effect the separation of the TODCO
business from the business of Transocean. The master separation agreement
provides that assets or liabilities that could not legally be transferred or
assumed prior to the closing of the IPO would be transferred or assumed as soon
as practicable following receipt of all necessary consents of third parties and
regulatory approvals. In any such case, the master separation agreement provides
that the party retaining the assets or liabilities will hold the assets in trust
for the use and benefit of, or retain the liabilities for the account of, the
party entitled to the assets or liabilities (at the expense of that party),
until the transfer or assumption can be completed. The party retaining these
assets or liabilities will also take any action reasonably requested by the
other party in order to place the other party in the same position as would have
existed if the transfer or assumption had been completed. We refer to all of
these transfers of assets and assumptions of liabilities together as the
"separation."
Except as set forth in the master separation agreement, no party is making
any representation or warranty as to the assets or liabilities transferred or
assumed as a part of the separation and all assets were and will be transferred
on an "as is, where is" basis. As a result, we and Transocean each have agreed
to bear the economic and legal risks that any conveyances of assets are
insufficient to vest good and marketable title to such assets in the party who
should have title under the master separation agreement.
The parties also agreed that for a period of one year following the IPO, if
Transocean determines in its good faith judgment that:
- any assets owned by us or our subsidiaries were used primarily
during the prior 12 months in Transocean's business, we will
transfer those assets to Transocean without additional
consideration, or
- any assets owned by Transocean were used primarily during the prior
12 months in our business, Transocean will transfer those assets to
us without additional consideration.
WORKING CAPITAL
The master separation agreement contains an acknowledgement that our cash and
cash equivalents as of June 30, 2003 were $25.0 million after giving effect to a
subsequent payment by Transocean to us of $11.4 million. The amount paid to us
by Transocean equaled the difference between $25.0 million and the amount of our
cash and cash equivalents as of June 30, 2003, prior to giving effect to the
payment by Transocean. The master separation agreement provided that we retain
all cash and cash equivalents generated by our business following June 30, 2003.
Transocean will not be required to make any additional payments to us for our
working capital needs under the master separation agreement.
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LETTERS OF CREDIT AND GUARANTEES
The master separation agreement requires that we and Transocean use our
reasonable best efforts to terminate (or have us or one of our subsidiaries
substituted for Transocean, or Transocean or one of its subsidiaries substituted
for us, as applicable) all existing guarantees by one party of obligations
relating to the business of the other party, including financial, performance
and other guarantee obligations. We have also agreed with Transocean that each
party will use its reasonable best efforts to have the other party substituted
under letters of credit or other surety instruments issued by third parties for
the account of either party or any of its subsidiaries issued on behalf of the
other party's business.
As of September 30, 2004, we have various surety bonds in place totaling
$12.3 million that were issued under a Transocean facility. These bonds secure
customs obligations and certain performance and other obligations, which were
issued principally in connection with our contracts with PEMEX. Our master
separation agreement with Transocean requires that we use our best efforts to
replace this facility with our own and to indemnify Transocean for any claims
related to the bonds. Transocean has agreed to leave these bonds in place,
subject to certain conditions.
INDEMNIFICATION AND RELEASE
The master separation agreement provides for cross-indemnities that will
generally place financial responsibility on us and our subsidiaries for all
liabilities associated with the businesses and operations falling within the
definition of TODCO business, and that will generally place financial
responsibility for liabilities associated with all of Transocean's businesses
and operations with Transocean and its subsidiaries, regardless of the time
those liabilities arise. The master separation agreement also contains
indemnification provisions under which we and Transocean each indemnify the
other with respect to breaches of the master separation agreement or any
ancillary agreements.
In connection with our separation from Transocean, the allocation of
liabilities related to taxes and employment matters will be governed separately
in a tax sharing agreement and an employee matters agreement. See " -- Tax
Sharing Agreement" and " -- Employee Matters Agreement."
Under the master separation agreement, we generally released Transocean and
its affiliates, agents, successors and assigns, and Transocean generally
released us and our affiliates, agents, successors and assigns, from any
liabilities between us or our subsidiaries on the one hand, and Transocean or
its subsidiaries on the other hand, arising from acts or events occurring on or
before the closing of the IPO, including acts or events occurring in connection
with the separation or the IPO. The general release does not apply to
obligations under the master separation agreement or any ancillary agreement or
to specified debt and other ongoing contractual arrangements.
Under the master separation agreement, we will be strictly liable to
Transocean for any misstatements or omissions in information supplied to
Transocean in connection with SEC filings and other public disclosures.
NONCOMPETITION AND OTHER COVENANTS
The master separation agreement includes provisions that restrict us from
competing with Transocean in specified business activities. These provisions do
not restrict us from engaging in any contract drilling, workover, production or
similar services for oil and gas wells using jackup, barge, platform or land
rigs in the following geographic locations: U.S. onshore, U.S. inland water,
U.S. Gulf of Mexico and offshore or onshore Mexico, Trinidad, Venezuela or
Colombia. However, except for the activities described in the foregoing
sentence, we are restricted from engaging in any contract drilling, workover,
production or similar services for oil and gas wells using any type of drilling
unit in the following geographic locations: offshore North America, offshore
South America, offshore Europe, offshore Africa, offshore Middle East, offshore
India, offshore Southeast Asia, offshore Asia, offshore Australia, the Gulf of
Mexico, the North Sea, the Mediterranean Sea, the Red Sea, the Persian Gulf and
the Caspian Sea. These provisions remain in effect so long as Transocean
beneficially owns at least a majority of the voting power of our outstanding
voting stock.
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The master separation agreement required us to use reasonable commercial
efforts to satisfy the conditions precedent for the closing of the IPO. The
master separation agreement also includes provisions relating to a tax-free
distribution by Transocean of the remainder of our common stock it owns, but
does not obligate Transocean to effect such a distribution. If Transocean
chooses to conduct a tax-free distribution, we have agreed to take all action
reasonably requested by Transocean to facilitate that transaction at our own
expense.
The master separation agreement also contains provisions relating to the
exchange of information, provision of information for financial reporting
purposes, the preservation of legal privileges, dispute resolution, and
provision of corporate records.
Some of the rights granted to Transocean in the master separation agreement
would apply to and be binding upon any entity that acquires control of us.
INSURANCE
The master separation agreement provides that we will continue to be eligible
for coverage under substantially all current insurance policies of Transocean
(other than employee welfare or benefit plan policies, which are addressed in
the employee matters agreement) and future insurance policies determined jointly
by us and Transocean. We have agreed to reimburse Transocean for premium
expenses related to those insurance policies. Transocean has agreed not to
terminate our coverage under the insurance policies unless it provides us prior
notice. However, we will cease to be eligible coverage under Transocean's
insurance policies when Transocean ceases to own at least a majority of the
voting power of our outstanding voting stock, and no prior notice will be
required in that case. In no event will Transocean be liable to us in the event
of the termination of any insurance policy (unless in the case of termination by
Transocean, Transocean failed to provide us the notice required by the master
separation agreement), the failure of insurance policies to cover our
liabilities or the non-renewal of insurance policies beyond their expiration
dates as of the date of the master separation agreement.
In October 2004 we obtained separate, stand-alone insurance policies for hull
and machinery, property and indemnity and directors and officers liability
coverage.
CORPORATE GOVERNANCE
The master separation agreement also contains several provisions regarding
our corporate governance that apply as long as Transocean owns specified
percentages of our common stock. As long as Transocean owns shares representing
a majority of the voting power of our outstanding voting stock, Transocean will
have the right to:
- nominate for designation by our board of directors, or a nominating
committee of the board, a majority of the members of the board, as
well as the chairman of the board, and
- designate at least a majority of the members of any committee of our
board of directors.
If Transocean's beneficial ownership of our common stock is reduced to a
level of at least 10% but less than a majority of the voting power of our
outstanding voting stock, Transocean will have the right to:
- designate for nomination a number of directors proportionate to its
voting power, and
- designate one member of any committee of our board of directors.
In the master separation agreement, we have also agreed to use our best
efforts to cause Transocean's nominees to be elected.
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The master separation agreement specified the form of our amended and
restated certificate of incorporation and bylaws to be in effect at the time of
the IPO. It also provides that for so long as Transocean beneficially owns
shares representing at least 15% of the voting power of our outstanding voting
stock, we will not, without the prior consent of Transocean, adopt any
amendments to our amended and restated certificate of incorporation or bylaws or
take any action to recommend to our stockholders certain actions which would,
among other things, limit the legal rights of Transocean, or deny any benefit to
Transocean or any of its subsidiaries as our stockholders in a manner not
applicable to our stockholders generally.
We have also agreed that for so long as Transocean and its subsidiaries own
50% or more of the voting power of our outstanding voting stock, we will
maintain the same accounting principles and practices as Transocean, and we will
not select a different accounting firm than Transocean's, which is currently
Ernst & Young LLP, to serve as our independent certified public accountants.
We have also agreed that for so long as Transocean owns at least a majority
of the voting power of all the outstanding shares of voting stock, we will not
take any action or enter into any commitment or agreement that could result in a
contravention or default by us or any of our affiliates, of or under any
provisions of applicable law, any provision of Transocean's memorandum of
association or articles of association or any credit agreement or other material
agreement by which Transocean is bound. Also, for so long as Transocean owns at
least a majority of the voting power of our outstanding voting stock, we will
not enter into any commitment or agreement that contains provisions triggering a
default or material payment when Transocean exercises its right to convert its
shares of our Class B common stock into shares of our Class A common stock or
otherwise disposes of its shares of our Class B common stock.
We have agreed to grant to Transocean a continuing right to purchase from us,
at the times set forth in the master separation agreement,
- such number of shares of our voting stock as is necessary to allow
Transocean to maintain its then-current percentage following the
IPO, and
- 80% of the shares of each other class of capital stock that we
issue.
These rights terminate if at any time Transocean owns less than 80% of the
voting power of our outstanding voting stock.
TAX SHARING AGREEMENT
Until the closing of our IPO, we were included in Transocean Holdings'
consolidated group for U.S. federal income tax purposes. As of the
closing of the IPO, we are not included in Transocean Holdings' U.S.
federal consolidated group because no U.S. subsidiary of Transocean owns
at least 80% of the aggregate voting power and value of our outstanding
stock.
We have entered into a tax sharing agreement with Transocean Holdings which
governs Transocean Holdings' and our respective rights, responsibilities and
obligations with respect to taxes and tax benefits. References in this summary
description of the tax sharing agreement to the terms "tax" or "taxes" mean
taxes and any interest, penalties, additions to tax or additional amounts in
respect of such taxes. The general principles of the tax sharing agreement
include the following:
- Except for special tax items discussed in the bullet below, all U.S.
federal, state, local and foreign income taxes and income tax
benefits (including income taxes and income tax benefits
attributable to the TODCO business) that accrued on or before the
closing of the IPO generally will be for the account of Transocean
Holdings. Accordingly, we generally will not be liable for any
income taxes accruing on or before the closing of the IPO, but we
generally must pay Transocean Holdings for the amount of any income
tax benefits, calculated as described below, created on or before
the closing of the IPO ("pre-closing tax benefits") that we use or
absorb on a return with respect to a period after the closing of the
IPO. We will have no obligation to pay Transocean Holdings for any
pre-closing tax benefits arising out of or relating to the
alternative minimum tax provisions of Sections 55 through 59 of the
U.S. Internal
28
Revenue Code, but we will be required to pay Transocean Holdings for
any pre-closing tax benefits we use that are alternative minimum tax
credits described in Section 53 of the Internal Revenue Code. Our
obligation to pay Transocean Holdings for the use of pre-closing tax
benefits and our potential obligation to pay alternative minimum tax
to the Internal Revenue Service may result in our paying more, in
the aggregate, to the Internal Revenue Service and to Transocean
Holdings than we would otherwise have paid if we had utilized no
pre-closing tax benefits. For purposes of the tax sharing agreement,
deferred tax liabilities reflected in our financial statements,
which represent future tax effects of temporary differences between
the financial statement basis and the tax basis of our assets and
liabilities, are not considered to constitute income tax liabilities
accrued on or before the closing of the IPO. As of September 30,
2004, we had approximately $535 million of income tax benefits
subject to our obligation to reimburse Transocean Holdings. See Note
10 to our condensed consolidated financial statements. The amount of
these tax benefits will be calculated as follows:
(1) in the case of a deduction used or absorbed, by
multiplying the deduction by the highest applicable
statutory tax rate in effect, and
(2) in the case of a credit used or absorbed, by allowing
100% of the credit.
However, if the use or absorption of a pre-closing tax benefit
defers or precludes our use or absorption of any income tax benefit
created after the closing of the IPO ("post-closing tax benefit"),
our payment obligation with respect to the pre-closing tax benefit
generally will be deferred until we actually use or absorb such
post-closing tax benefit. This payment deferral will not apply with
respect to, and we will have to pay currently for the use or
absorption of pre-closing tax benefits to the extent of:
(1) up to 20% of any deferred or precluded post-closing tax
benefit arising out of our payment of foreign income
taxes, and
(2) 100% of any deferred or precluded post-closing tax
benefit arising out of a carryback from a subsequent
year.
If any person other than Transocean or its subsidiaries becomes the
beneficial owner of greater than 50% of the aggregate voting power
of our outstanding voting stock, we will be deemed to have used or
absorbed all pre-closing tax benefits, and we generally will be
required to pay Transocean Holdings an amount for the deemed use or
absorption of these pre-closing tax benefits. The amount paid for
the deemed use of these tax benefits will be calculated by:
(1) in the case of a deduction (including, for these
purposes, all pre-closing income taxes, whether claimed
as a deduction or credit), multiplying the deduction by
the highest applicable statutory tax rate in effect,
(2) in the case of a credit other than a pre-closing foreign
tax credit, allowing 100% of such credit, and
(3) multiplying the amounts by a specified discount factor.
The specified discount factor will vary depending on the year in
which another person becomes the beneficial owner of greater than
50% of the voting power of our stock: if in 2003, 2004, 2007 or
2008, then the factor is 0.80; if in 2005 or 2006, then the factor
is 0.70; if in 2009, then the factor is 0.85; if in 2010, then the
factor is 0.90; if in 2011 or 2012, then the factor is 0.95; and if
in 2013 or a later year, then the factor is 1.00). Moreover, if any
of our subsidiaries that join with us in the filing of consolidated
returns ceases to join in the filing of such returns, we will be
deemed to have used that portion of the pre-closing tax benefits
attributable to that subsidiary following the cessation, and we
generally will be required to pay Transocean Holdings the amount of
this deemed tax benefit, calculated as described above with regard
to an acquisition of beneficial ownership, at the time such
subsidiary
29
ceases to join in the filing of such returns. In the case of any of
our payments to Transocean resulting from another person becoming
the owner of greater than 50% of our voting stock or a subsidiary
ceasing to join in the filing of a consolidated return with us, the
payment will in no case be deferred, regardless of whether the
existence of the related pre-closing tax benefit would or could
defer or preclude our use or absorption of any post-closing tax
benefit. Moreover, the payment will not be subsequently adjusted for
any difference between the tax benefits that we are deemed to use or
absorb in such case and the tax benefits that we actually use or
absorb, and the difference between those amounts could be
substantial. Among other considerations, applicable tax laws may, as
a result of another person becoming the owner of greater than 50% of
our voting power significantly limit our use of such tax benefits,
and these limitations are not taken into account in determining the
amount of the payment to Transocean. A substantial portion of the
pre-closing tax benefits are net operating losses, most or all of
which should be eligible to be carried forward at least fourteen
more years.
- We are responsible for all special tax items accruing on or after
the date on which we issued shares of our common stock to Transocean
in repayment of our notes, as described in " -- Debt Retirement and
Debt Exchange Offers." For this purpose, special tax items means
taxes with respect to items specified in U.S. Treasury regulation
section 1.1502-76(b)(2)(ii)(C) (generally referring to transactions
outside the ordinary course of our business). However, special tax
items do not include taxes with respect to transactions to effect
the separation of the TODCO business from the business of
Transocean. See " -- Master Separation Agreement." Moreover, there
were no special tax items that accrued during the period beginning
on the date of issuance of such shares to Transocean and ending on
the date of the closing of the IPO.
- We and Transocean Holdings are not currently members of a U.S.
federal consolidated group or state, local or foreign combined
group. If we and Transocean Holdings (or any affiliate of Transocean
Holdings other than us) were to become members of a U.S. federal
consolidated group or state, local or foreign combined group for any
period after the closing of the IPO, we would be responsible for all
income taxes attributable to us for that period, determined as if we
had filed separate U.S. federal, state, local or foreign income tax
returns. We would be entitled to reimbursement by Transocean
Holdings for any income tax benefits realized by Transocean Holdings
or any of its affiliates as a result of our being a member of any
such consolidated or combined group.
- We must pay Transocean Holdings for any tax benefits attributable to
us resulting from (1) the payment by Transocean Holdings, after the
closing of the IPO, of any additional taxes of the TODCO business
that are not U.S. federal income taxes or (2) the delivery by
Transocean or its subsidiaries, after the closing of the IPO, of
stock of Transocean to an employee of ours in connection with the
exercise of an employee stock option. We will generally be required
to pay the deemed value of these tax benefits within 30 days of the
payment of such additional taxes or the delivery of Transocean
stock, whether or not we ever actually use or absorb such tax
benefits. However, items in excess of $1.0 million will be subject
to the same rules as discussed above for pre-closing tax benefits,
and therefore the payment of these items may be deferred in some
circumstances.
- Apart from (1) income taxes and income tax benefits that accrued on
or before the closing of the IPO and (2) tax benefits resulting from
Transocean's payment of our taxes that are not U.S. federal income
taxes or delivery of stock to our employees, described above,
Transocean Holdings will be responsible for all income taxes, and
will be entitled to all income tax benefits, attributable to
Transocean Holdings or its affiliates (other than us), and we will
be responsible for all income taxes, and will be entitled to all
income tax benefits, attributable to us.
- Our ability to obtain a refund from a carryback to a year in which
we and Transocean Holdings joined in a consolidated or combined
return will be at the discretion of Transocean Holdings. Moreover,
any refund that we may obtain will be net of any increase in taxes
resulting from the carryback that are otherwise for the account of
Transocean Holdings.
- We will have the right to be notified of tax matters for which we
are responsible under the terms of the tax sharing agreement,
although Transocean Holdings will have sole authority to respond to
and conduct all tax proceedings, including tax audits, relating to
any Transocean Holdings consolidated, or Transocean combined, income
tax returns in which we are included.
30
- Transocean Holdings will have substantial control over our filing of
tax returns with respect to (1) any period in which Transocean or
Transocean Holdings possess greater than 50% of the voting power of
all of our outstanding stock or (2) any period after the closing of
the IPO so long as there remains a present or potential obligation
for us to pay Transocean Holdings for pre-closing tax benefits.
- We will also be responsible for all taxes, other than income taxes,
attributable to the TODCO business, whether accruing before, on or
after the closing of the IPO.
- We generally will be required to pay Transocean Holdings for the
amount of pre-closing tax benefits that we use in determining the
amount of any installment of estimated taxes we pay to Transocean
Holdings or any tax authority within thirty days after the
installment of estimated taxes is or would have been paid. If, after
any installment payment of estimated taxes or after the relevant
return is due (with or without any extensions), the estimated amount
of pre-closing tax benefits for which we have previously paid
differs from the most recent estimate or actual amount of
pre-closing tax benefits that we use or absorb on that return, we
and Transocean Holdings must make appropriate true-up payments
between us. However, under some circumstances, payments by us for
the use of pre-closing tax benefits, whether estimated or actual,
may be deferred (subject to an interest charge) under a
subordination agreement between us and Transocean in favor of our
third-party lenders.
The tax sharing agreement further provides for cooperation between Transocean
Holdings and us with respect to tax matters, the exchange of information and the
retention of records that may affect the income tax liability of the parties to
the agreement. However, if we fail to cooperate with Transocean Holdings in any
tax contest with respect to taxes that are otherwise for the account of
Transocean Holdings, any additional taxes resulting from such tax contest will
be for our account, notwithstanding any other provision in the tax sharing
agreement.
Notwithstanding the tax sharing agreement, under U.S. treasury regulations,
each member of a consolidated group is severally liable for the U.S. federal
income tax liability of each other member of the consolidated group.
Accordingly, with respect to periods in which we have been included in
Transocean Holdings' consolidated group, we could be liable to the U.S.
government for any U.S. federal income tax liability incurred, but not
discharged, by any other member of Transocean Holdings' consolidated group.
However, if any such liability were imposed, we would generally be entitled to
be indemnified by Transocean Holdings for tax liabilities allocated to
Transocean Holdings under the tax sharing agreement.
REGISTRATION RIGHTS AGREEMENT
Because our shares of common stock held by Transocean are deemed "restricted
securities" as defined in Rule 144, Transocean may only sell a limited number of
shares of our common stock into the public markets without registration under
the Securities Act. We entered into a registration rights agreement with
Transocean under which, at the request of Transocean, we would use our best
efforts to register shares of our common stock that were held by Transocean
after the closing of the IPO, or were subsequently acquired, for public sale
under the Securities Act. As long as Transocean owns a majority of the voting
power of our outstanding common stock, there is no limit to the number of
registrations that it may request. Once Transocean owns less than a majority of
the voting power of our outstanding common stock, it can request a total of
three additional registrations. If Transocean sells more than 10% of our
outstanding shares of common stock to a transferee, Transocean may transfer all
or a portion of its rights under the agreement, except that a transferee that
acquires a majority of our outstanding common stock can only request two
additional registrations after it owns less than a majority of our outstanding
common stock, and a transferee of less than a majority of our outstanding common
stock can only request either one or two registrations, depending on the
percentage of our outstanding common stock it acquires. The transfer of rights
under the agreement to a transferee does not limit the number of registrations
Transocean may request. We also provide Transocean and its permitted transferees
with "piggy-back" rights to include its shares in future registrations of our
common stock under the Securities Act. There is no limit on the number of these
"piggy-back" registrations in which Transocean may request its shares be
included. These rights will terminate once Transocean or a permitted transferee
is able to dispose of all of its shares of our common stock within a three-month
period pursuant to the exemption from registration provided under Rule 144 of
the Securities Act. We have agreed to cooperate in these
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registrations and related offerings. We and Transocean have agreed to
restrictions on the ability of each party to sell securities following
registrations requested by either party.
TRANSITION SERVICES AGREEMENT
We entered into a transition services agreement with Transocean under which
Transocean provides specified administrative support during the transitional
period following the closing of the IPO. Transocean may provide specified
information technology and systems, financial reporting, accounting, human
resources, treasury and claims administration services to us in exchange for
agreed fees based on Transocean's actual costs. We are required to use specified
services so long as Transocean owns at least 50% of the voting power of our
outstanding shares of voting stock. However, we expect to replace the
computerized accounting system provided by Transocean with our own system by
January 1, 2005. Only in limited circumstances will Transocean be liable to us
with respect to the provision of services under the transition services
agreement.
EMPLOYEE MATTERS AGREEMENT
We entered into an agreement with Transocean and Transocean Holdings to
allocate specified assets, liabilities, and responsibilities relating to our
current and former employees and their participation in Transocean's benefit
plans.
Benefits under our U.S. pension plan ceased to accrue as of July 1, 1999. As
of August 1, 2001, our employees' existing accrued benefits under that plan were
fully vested. Sponsorship of that plan has been assumed by Transocean Holdings
effective August 1, 2002. Effective as of the date that we no longer are a part
of a controlled group of companies with Transocean for U.S. federal income tax
purposes, affected employees will be entitled to take a distribution from that
plan, subject to the provisions of the plan and to taxation and possible early
withdrawal penalties. We do not expect to establish a new pension plan for our
employees.
Our employees became eligible to participate in our U.S. savings plan
effective November 1, 2002. Our employees may make pre-tax contributions to that
plan. Employees who are not considered highly compensated for tax purposes may
also make post-tax contributions. We provide matching contributions up to 100%
of the first 3% of participant contributions, plus 50% of the next 3% of
participant contributions for a total 4.5% in matching contributions.
Additionally, the plan allows for a discretionary annual contribution allocable
to all eligible employees, subject to a two-year vesting requirement. We have
agreed that we will make an annual contribution of 1.5% of compensation for all
eligible employees (as defined in the plan) for so long as we are part of a
controlled group of companies with Transocean for U.S. federal income tax
purposes. Annual contributions were made in 2002 and 2003. On or about January
1, 2003, liabilities for our employees' accounts under the Transocean U.S.
Savings Plan, and assets associated with those liabilities, were transferred to
our U.S. savings plan. Our employees who have invested in Transocean ordinary
shares under the Transocean U.S. Savings Plan may retain that investment, if
they choose to do so, until December 31, 2005, but will not be eligible to
acquire additional Transocean ordinary shares under our U.S. savings plan.
Under the terms of the Transocean stock option awards granted prior to the
closing of the IPO, our employees will continue to retain outstanding options to
acquire Transocean ordinary shares for the duration of their original term.
With some exceptions, we have agreed to indemnify Transocean for employment
liabilities arising from any acts of our employees or from claims by our
employees against Transocean and for liabilities relating to benefits for our
employees. Transocean has agreed to similarly indemnify us.
SERVICE AND SECONDMENT AGREEMENT
We have entered into an agreement with Transocean under which we provide to
Transocean specified administrative services and seconded personnel in
connection with a drilling contract Transocean has for drilling oil and gas
wells offshore Trinidad and Tobago for a fee of $2,750 per day for an expected
duration of 60 to 100 days, beginning in early September 2004. In connection
with the provision of these services, we have agreed to indemnify
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Transocean for liabilities pertaining to our employees (excluding the seconded
personnel), and Transocean has agreed to indemnify us for liabilities pertaining
to its employees (including the seconded personnel).
CAUTIONARY STATEMENT ABOUT FORWARD -- LOOKING STATEMENTS
This report contains both historical and forward-looking statements. All
statements other than statements of historical fact are, or may be deemed to be,
forward-looking statements. Forward-looking statements include information
concerning our possible or assumed future financial performance and results of
operations, including statements about the following subjects:
- our strategy,
- improvement in the fundamentals of the oil and gas industry,
- the supply and demand imbalance in the oil and gas industry,
- the correlation between demand for our rigs and our earnings and
customers' expectations of energy prices,
- our plans, expectations and any effects of focusing on agreements
and marine assets and drilling for natural gas along the U.S. Gulf
Coast, pursuing efficient, low-cost operations and a disciplined
approach to capital spending, maintaining high operating standards
and maintaining a conservative capital structure,
- the emergence of the drilling industry from a low point in the
cycle,
- expected revenues, operating income (loss) and net income (loss)
from continuing operations for the remainder of 2004,
- estimated tax benefits,
- expected capital expenditures,
- expected general and administrative expense,
- refurbishment costs,
- our ability to take advantage of opportunities for growth and our
ability to respond effectively to market downturns,
- sufficiency of funds for required capital expenditures, working
capital and debt service,
- deep gas drilling opportunities,
- operating standards,
- payment of dividends,
- competition for drilling contracts,
- matters relating to derivatives,
- matters related to our letters of credit and surety bonds,
- future restructurings,
- matters relating to our future transactions, agreements and
relationship with Transocean,
- payments under agreements with Transocean,
- interests conflicting with those of Transocean,
- liabilities under laws and regulations protecting the environment,
- results and effects of legal proceedings,
- future utilization rates,
- future dayrates, and
- expectations regarding improvements in offshore drilling activity,
demand for our drilling rigs, our plan to operate primarily in the
U.S. Gulf Coast, operating revenues, operating and maintenance
expense, insurance expense and deductibles, interest expense, debt
levels and other matters with regard to outlook.
33
Forward-looking statements in this Form 10-Q/A are identifiable by use of
the following words and other similar expressions:
- "anticipate,"
- "believe,"
- "budget,"
- "could,"
- "estimate,"
- "expect,"
- "forecast,"
- "intent,"
- "may,"
- "might,"
- "plan,"
- "potential,"
- "predict,"
- "project," and
- "should."
The following factors could affect our future results of operations and
could cause those results to differ materially from those expressed in the
forward-looking statements included in this Form 10-Q/A:
- worldwide demand for oil and gas,
- exploration success by producers,
- demand for offshore and inland water rigs,
- our ability to enter into and the terms of future contracts,
- labor relations,
- political and other uncertainties inherent in non-U.S. operations
(including exchange controls and currency fluctuations),
- the impact of governmental laws and regulations,
- the adequacy of sources of liquidity,
- uncertainties relating to the level of activity in offshore oil and
gas exploration and development,
- oil and natural gas prices (including U.S. natural gas prices),
- competition and market conditions in the contract drilling
- work stoppages,
- the availability of qualified personnel,
- operating hazards,
- war, terrorism and cancellation or unavailability of insurance
coverage,
- compliance with or breach of environmental laws,
- the effect of litigation and contingencies,
- our inability to achieve our plans or carry out our strategy, and
- other factors discussed in this Form 10-Q/A.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those indicated. Shareholders should not place undue reliance on forward-looking
statements. Each forward-looking statement speaks only as of the date of the
particular statement, and we undertake no obligation to publicly update or
revise any forward-looking statements.
34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
EXHIBIT FILED HEREWITH OR INCORPORATED
NO. DESCRIPTION BY REFERENCE FROM:
--- ----------- ------------------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed herewith
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Filed herewith
Officer
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Houston, Texas, on
this 15th day of December, 2004.
TODCO
/s/ T. Scott O'Keefe
-------------------------------------------------------
T. Scott O'Keefe
Senior Vice President and Chief Financial Officer
(on behalf of TODCO and as Principal Financial Officer)
36
EXHIBIT INDEX
EXHIBIT
EXHIBIT FILED HEREWITH OR INCORPORATED
NO. DESCRIPTION BY REFERENCE FROM:
--- ----------- ------------------
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Filed herewith
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Filed herewith
Officer